Sell Oracle And Buy This Software Stock

| About: Red Hat, (RHT)
This article is now exclusive for PRO subscribers.

By Thomas Hughes

Redhat (NYSE:RHT) is not a new name in software, but it remains under the radar for some reason. The company has been around since before the tech bubble of the late '90s and is the world leader in open source software solutions for home and business. The firm uses linux-based software technology to deliver its packages worldwide.

The company has been growing across all industries and geographic regions and is poised to be the leader in business information and networking solutions. The firm is also a leader in the development and delivery of cloud computing, one of the fastest growing segments of business data management solutions. It is estimated that 13% of 2012 business software purchases will be in the cloud computing sphere, and Redhat is sure to profit from it.

Last year, fiscal 2011, Redhat delivered 25% revenue growth on a quarterly and full year basis. This year was no different. Redhat improved fourth quarter 2012 revenue by 21%, a little slower than last year but still an impressive double digit increase. For the full year 2012 revenue increase by 25%, echoing last year's gains. GAAP and non-GAAP earnings per share increased by 6% and 11%, respectively.

Most of the year's gains came from an increase in subscription revenues. Subscriptions increased by 22% in the fourth quarter alone. The company also increased cash flow by 35% for the year. This increase led to further approval by the board for stock repurchasing programs. The statement mentioned "strong conviction" in the long term prospects and cash generation of the business.

Oracle (NYSE:ORCL) has not been doing as well. The company is improving its sales but not in the same way as Redhat. Oracle's revenue, on a GAAP and non-GAAP basis only improved by 3%, fairly weak when compared to Redhat's 21%. Redhat saw some real strength in subscription services, but Oracle was only able to increase licensing revenue by 7% in the comparable quarter.

Oracle's revenue and profits are being dragged down by its hardware unit, which saw a drop in quarterly revenue of 16%. One bonus in Oracle's column is its operating margins. The company announced its highest operating margin ever this quarter, 37%. High margins won't matter if Oracle cannot increase its sales.

Redhat has also been profiting from its recent move to higher quality sales personnel. They have shifted to more experienced, industry professionals with detailed product knowledge. The move, which came late in my view, has been paying off in increased international sales. The company reported that the shift has "accelerated" its growth targets and that there has been an "impressive breadth and depth of demand."

Redhat is being sought after by companies in every industry as they restructure their data and management systems. Redhat's cloud computing platforms are of particular interest to these businesses. At the same time that it has been rebuilding its sales force Redhat has been improving its infrastructure in Asia. Redhat recently announced expansion of two research and development centers in India.

Redhat, in a move to return shareholder value, has also been repurchasing stock all year. The company has already bought back over 3%, or 5.8 million, of its shares and is planning on buying back another $300 million worth. The company has about 192 million shares outstanding.

Financial software provider Intuit (NASDAQ:INTU) has been able to cross the billion dollar mark in revenue but it is still lagging behind Redhat. Intuit announced earlier in the year that it had increased sales in 2012 by about 11% to just over $1 billion. A big portion of Intuit's gains are from TurboTax, which are US based and will fall off in the second half of the year. Oracle's sales of new licensing are not keeping up with the growth of Redhat's subscriptions either.

Fundamentally Redhat is much better than Oracle. Even though Redhat's margins of 14% are lagging Oracle, the business and stock are better situated. Redhat has no debt compared to Oracle's $14 billion. Redhat is also 90% owned by institutional investment portfolios. Oracle only has 57% institutional investment. Germany based SAP AG (NYSE:SAP) has 3% institutional investment and $3.7 billion in debt. SAP's Q1 2012 earnings marked its 9th consecutive quarter of double digit growth. Revenue for the quarter was up 11% but still falls short of Redhat's 25%. SAP is expecting its revenues to grow in the range of 10-12% this year. The average estimate for Redhat's fiscal 2013 growth is about 19%. This is a 6% slowdown from the last two years but is still significantly above estimates for Oracle and SAP.

Redhat is in perfect position to meet and beat its fiscal 2013 estimates. It is the leader in open source and cloud computing and is growing its global sales force. Its commitment to improving its sales force is paying off and will pay off into the future. Redhat is increasing its worldwide presence and delivering strong double digit growth that is outpacing the competition. Oracle is struggling to improve its hardware segment and increase licensing revenues.

SAP is growing faster but not as fast as Redhat. SAP also does not have the same market support as Redhat. Intuit is doing better and on a numbers basis is a close competitor. However, Intuit is limited in its customer base, especially with one of its core business segments, TurboTax. Redhat will deliver strong results in 2012 and will probably beat its own and Wall Street estimates. We think Redhat is a much better option for investors than Oracle, SAP, or Intuit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.