You May Not See Them, But They're Everywhere...

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Think there's no money to be made in the world of open source software? Red Hat (NYSE: RHT) would like to prove you wrong. The company may work in the business of free software but with their subscription based support models, training packages and integration services they are actually making pretty decent profit. Is the profit enough though to garner our investment in the firm?

What Will the Future Bring?

Technology is always a hard field to predict. If we look five years out we know that Google, Microsoft (NASDAQ: MSFT) and Apple will still be around in some form, even if their markets expand or contract. It's harder to look at the smaller caps and call them a "sure-thing" though. With Red Hat, I like to look at two major companies to compare them to, Microsoft and Oracle (NYSE: ORCL)

Microsoft is in the enterprise business, as is Oracle. The enterprise business is where the money is for these tech firms. Red Hat also works, almost solely, for the enterprise. 

So, what makes Red Hat a better investment than Microsoft? Well, I believe that Linux will begin to take a hold of the world's businesses when they realize the amount of money that they can save by switching. Red Hat will be leading this pack, as will Oracle in some form, leaving Microsoft to drop in market share.

Before you all go wild calling me an idiot and wishing ill upon me for my comments, think about this rationally for a second. Linux is good, it could even be considered great. It runs well, it's more efficient at certain tasks, it's free and there are an army of programmers working hard, for free, to increase the feature set. Sure, Microsoft may have the legacy platform but how long can they realistically hang on to that. Microsoft Servers have a 74% market share around the globe. When businesses decide to make the switch, even at a slow rate, Red Hat will benefit. 

What About Oracle?

If you don't believe, like me, in the uprising of Linux then Oracle may be the perfect tech stock for your basket. Oracle sells software to enterprises which allows them to run massive databases on their systems. Oracle is the leader in the database space with some 35% of the market share, and they will continue to be there whether Windows, Linux or some other flavor controls the server market. 

Aside from the servers, Oracle deals a lot with the middleware market. These pieces of software are big sellers at Oracle, and they carry a pretty big margin for the company, somewhere between 90-95% for the top performers. The software enables companies to track their customers, their employees or their stock. Software is even available to help businesses create better systems for their websites and computer software. 

Oracle will thrive no matter who takes control of the enterprise space. As long as they continue to innovate and put out top quality software, they are a suitable tech company for any portfolio. 

Financials

We're on a financial site, so how are the financials of the two main companies in the article? Let's take a look at the following table:

<table> <tbody> <tr> <td> </td> <td><strong>Oracle</strong></td> <td>Red Hat</td> </tr> <tr> <td><strong>P/E</strong></td> <td><strong>16.31</strong></td> <td>74.31</td> </tr> <tr> <td><strong>Market Cap</strong></td> <td>$164.28B</td> <td>$10.62B</td> </tr> <tr> <td><strong>Debt/Equity Ratio</strong></td> <td>0.46</td> <td><strong>0</strong></td> </tr> <tr> <td><strong>Net Profit Margin</strong></td> <td><strong>28.37%</strong></td> <td>11.21%</td> </tr> <tr> <td><strong>Revenue Growth(5yr)</strong></td> <td>13.22%</td> <td><strong>19.34%</strong></td> </tr> <tr> <td><strong>Income Growth(5yr)</strong></td> <td>16.6%</td> <td><strong>16.91%</strong></td> </tr> <tr> <td><strong>Analyst Rec.</strong></td> <td>1.96</td> <td><strong>1.80</strong></td> </tr> <tr> <td><strong>CAPS Score</strong></td> <td><strong>****</strong></td> <td>**</td> </tr> </tbody> </table>

Looking at the table above you can see that Red Hat is trading at an incredibly high multiple. This is because of the expected growth of Linux. It is likely because of that high multiple that the CAPS score is only 2 out of 5 for the company. Five year average income and revenue growth for both companies looks great, and the analysts have both stocks rated a buy over the long term. A quick look at the debt shows that both companies are positioned well and won't be destroyed by any increase in interest rates. 

What's With the Title? 

The title of the article is all about Red Hat. The company, despite working with enterprise for a majority of their income has their fingers in so many pies that it's unbelievable to think about. Anything from ATM's to cell phones has somehow been shaped by the work that Red Hat does, they are a major world player and they will continue to be for some time; keep an eye out for this company!


Ash1402 has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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