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David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The shift toward cloud computing, smartphones, and tables caught many industry experts by surprise. What are the market leaders in yesterday's tech world doing to adapt? Below, I review my take on Red Hat (NYSE: RHT) and Microsoft (NASDAQ: MSFT) with a focus on analyzing how they are adapting to secular changes.
Moving to the cloud
Red Hat is better known as an operating system company that provides open-source software. Recently, however, the company has shifted attention to the more broader cloud computing space. This is a good move because the company is responding to changes in the market. However, other tech companies have established dominant positions in cloud computing a long time ago, and they are formidable forces that Red Hat has to contend with.
At the same time, Red Hat investors are in a vulnerable position right now. Large companies have not fully embraced cloud computing and are, rather, choosing to stick to the security of conventional servers despite the push. Some are arguing, however, that enterprises are buying into the "open-source" world.
As a result, cloud computing is slowly creeping in and replacing expensive servers. Red Hat has particularly been keen at becoming the preferred option when it comes to the provision of "private cloud" and "hybrid cloud" services. The acquisition of ManageIQ was part of this strategy of providing superior cloud-computing experience.
The company is also implementing some channel changes that will facilitate expansion in 2013. Red Hat closed the year with total revenue and operating cash of $988 million and $100.2 million, respectively.
A future in mobile?
Being the biggest software company in the world, Microsoft has been hit hard by the market shift from PC to mobile computing. But with many years of business experience, Microsoft has appropriately focused on the smartphone and tablet market.
It has also been keen on making mobile versions of Windows operating systems so as to adapt. A new tablet, known as the Surface Pro, was unveiled in January 2013. The tablet runs Windows 8 as the main operating system. The device debuted in Canada and in the United States on Feb. 9 at an $899 price tag.
The other version, Surface RT tablet, was launched in October 2012 and runs on an Intel processor known as the Ivy Bridge. The initial Surface RT is expected to compete with Apple’s iPad, which generally falls within the same price range of $399-$499. However, it has been met with a very poor reception.
I therefore see greater opportunity with the the Surface Pro, which is expected to compete with laptops like Apple’s MacBook Air, which costs $999, and Ultrabooks, which have a price tag between $600 and $700. Microsoft should leverage its reputation as a PC maker by emphasizing the Surface Pro as more of a comprehensive computer. The Surface Pro, after all, carries the same processor as the MacBook Air but is still much cheaper.
It is disconcerting, however, that Windows 8 has not sold as many copies as expected. Microsoft was at one point even offering promotional prices of $40, as opposed to the traditional $200 price.
I encourage hedging Microsoft with an investment in Oracle (NYSE: ORCL). This software producer trades 20% cheaper on a P/E basis despite a forecast for 100 greater basis points in EPS growth over the next five years. In addition, its stock price has underperformed Microsoft's by 3,360 basis points, year to date. This underperformance positions Oracle to deliver strong returns when the company ends up growing faster than Microsoft to take investors by surprise.
Tech can often be uncertain. However, Microsoft and Red Hat have done a reasonably strong job in diversifying into higher-growth markets. I encourage investing in Red Hat for growth and Microsoft for value.
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David Gould 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!