Red Hat (RHAT:NASDAQ) 2005-03-09
Red Hat shares used to trade above US$200 per share in 1999. When the Tech Wreck came its shares took a nose dive, dropping to US$6 by December 2000.
But Red Hat is a company with real earnings, great products & a good customer base. Its shares have almost doubled from their December 2000 lows, but we see great value here and we believe they have much further upside ahead.
Their Linux operating system has continued momentum and support.
Red Hat, Inc. provides enterprise operating systems, and related software and services based on open source technology for various large enterprises.
Its products include Red Hat Enterprise Linux (RHEL), Red Hat Network (RHN), and Red Hat Application Solutions. RHEL is available in RHEL AS, RHEL ES, RHEL WS, and Red Hat Desktop versions, which provide an integrated operating system. RHN provides an integrated management solution that enables its Red Hat enterprise technologies, including RHEL, to be updated, configured, provisioned, and monitored. RHN services are available in hosted, proxy, and satellite architectures.
RedHat Application Solutions include software for managing Web content, software development, and availability clusters of Linux systems and storage.
In addition, the company offers various training courses, consulting services for IT deployment, production support, technical account management, and custom engineering and support services.
The company sells its products through four channels: distribution, direct sales, original equipment manufacturers, and the Web.
Red Hat offers its products in the United States, Latin America, Canada, Europe, the Middle East, Africa, and Asia Pacific. It has strategic relationships with BEA Systems, Inc.; IBM Corporation; Oracle Corporation; Sybase, Inc.; VERITAS Software Corporation; Hewlett-Packard Company; Dell, Inc.; Fujitsu Limited; Fujitsu Siemens Computers (Holding) BV; NEC Corporation; and Hitachi, Ltd.
The company was founded in 1993. It was formerly known as ACC Corp., Inc. and subsequently changed its name to Red Hat Software, Inc. Further, the company changed its name to Red Hat, Inc. in 1999. Red Hat is headquartered in Raleigh, North Carolina.
The company enjoys strong renewals from its existing customers, with 24 of its largest 25 customers renewing. Assuming that overall renewals are firm, the company can still grow its Linux business by taking share from the UNIX platform and through its partnerships with Dell and Hewlett Packard, on server sales. And, to a lesser extent, Red Hat can benefit from the sales of PCs in general.
Red Hat operates in a couple of unique ways:
First, the company collects a fair amount of income on its cash and investments (both long- and short-term), which now totals $1 billion.
Second, the company has a low 7% effective tax rate for the first nine months of its fiscal year. We haven’t looked into the details on the tax rate, and the company does have fairly substantial overseas operations that could help to keep its effective rate down. But 7% is very low and unsustainable, so we'd expect this to increase over time. Regardless, it’s a dynamic that an investor should understand before investing in the company.
On the cash flow statement, Red Hat’s performance is very strong. This is largely due to its subscription business model, through which the company collects cash in advance of providing its product support.
This company is growing like wildfire.
Buy Red Hat (RHAT:NASDAQ) up to $15