By all modern standards, Red Hat (NYSE: RHT) is old. Founded over 20 years ago and still heavily anchored on its core, “boring” flagship product, one would expect Red Hat’s growth to have tapered off by now - especially as it hits the $2.5 billion run rate mark.
But Red Hat’s Q2 print showed that growth tapering is far from the truth - in fact, it looks like Red Hat’s growth is still firing on all cylinders. And unlike other large-cap, multi-billion revenue software names still growing at 20% (aka, Salesforce (NYSE: CRM)), Red Hat also is generating massive year-on-year improvements in cash flow and profitability.
Red Hat’s successful quarterly reveal is a validation of its open-source business model - that a company can indeed distribute an “upgraded” version of an open-source project like Linux and sell it on a subscription basis to corporates who need professional support and enterprise features to run it, despite the core software being freely available to download and use. Red Hat’s flagship Enterprise Linux is decades old now and is a multi-billion dollar product line, and it’s still growing at double digits. We also note that Cloudera (NASDAQ: CLDR), another open-source distributor for Apache Hadoop, also is trading up after-hours in sympathy with Red Hat’s success.
Despite tremendous performance this year - Red Hat’s stock is up more than 50% - its valuation is propped up by fundamentals, not hype. Red Hat still trades at revenue and OCF multiples that are comparable, if not below, its peers in large-cap software. With Red Hat’s position as the brand-name distributor of Enterprise Linux, and with Linux a necessary OS for running many core applications, investors are encouraged to stick with Red Hat on the back of its continued growth trajectory.
See Red Hat's YTD performance in
