Red Hat: An Excellent Growth Stock
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Red Hat (NYSE: RHT) has been on the radar of investors for quite some time now. While, with its lofty valuations the stock might look overvalued to some investors, we believe that Red Hat commands this valuation considering that it still is only at the beginning of its product cycle. We believe that Red Hat's focus towards gaining market share and expanding its product portfolio would see incremental revenues coming in near-to-medium term and hence rate it as a buy.
Red Hat Enterprise Linux: A big opportunity following Unix-to-Linux Migration
We believe that the on-going shift from Unix to Linux provides a big opportunity for Red Hat. We believe that Linux growth will continue to be driven by re-architecting of the data center and the Unix-to-Linux migration. The Linux business is growing well ahead of Microsoft (NASDAQ: MSFT) Windows at roughly 21% versus 7% according to IDC, while the Unix business is set to deteriorate at a rate of 5%. While Linux was unable to take market share from Windows in the past, we believe that the new generation of employees in the IT organizations will bring the necessary change and a broader acceptance of RHEL open-source model. We believe that RHEL is bound to gain market share in the long term, driven by continued penetration of cloud computing and the increased need for high performance computing.
Source: Red Hat Analyst Day Presentation (IDC Estimates)
Cross sell opportunities for the middleware business:
Red Hat on its Analyst Day indicated its strong momentum in the middleware business as the middleware products continues to outpace the core business growth. We believe that this growth is being driven by a continued cross-sell into RHEL customers and a growing developer base. We expect that the company’s work in next-gen application platforms such as Java EE 6 and 7, mobile, and fabric will continue to drive strong demand from a growing developer community having an increased affinity towards open source. The company is taking the right step as it is focusing on gaining share in the J2EE market, given the large opportunity within the Java customer base. Furthermore, we believe that the company’s acquisition of FuseSource (a provider of open-source integration and messaging), whose technology will be merged into Red Hat’s existing middleware product, will generate incremental interest from the user base. The newly acquired technology would help Red Hat accelerate the delivery of application integration products and services to enterprise customers. It would also help systems integrators build applications faster, offering their customers better value. With Red Hat’s technology vision increasingly overlapping with VMware (NYSE: VMW), we remain more confident towards Red Hat’s success considering its strong position in operating system infrastructure. While VMware is gaining good traction in virtualizing windows environment, it does not offer the operating system needed to run applications. Furthermore, VMware is not having much traction with its Spring middleware stack relative to Red Hat.
Red Hat Storage-A play in the Cloud market
We believe that customers could adopt Red Hat Storage Products as they look for more cost efficient and flexible alternatives to the proprietary storage vendors like EMC (NYSE: EMC) and NetApp (NASDAQ: NTAP). While we understand that Red Hat will not be able to replace these providers for certain core mission-critical systems, such as ERP applications, as Red Hat Storage is not tuned for certain use cases. But we believe that Red Hat is positioned well to tap the hybrid Cloud storage opportunity for large files and streaming.
Source: Red Hat Analyst Day Presentation
As Red Hat looks to tap into multiple business opportunities, we believe that it is looking at a target market of $53.5 billion till 2015. As Red Hat products continue to gain traction due to the open source platform that renders low cost, we believe that Red Hat has plenty of scope to grow. We believe that Red Hat's open source solutions could serve as the core infrastructure for the world's largest Clouds like Amazon, Salesforce.com and IBM, and hence rate it as a buy.
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