If I am a fanboy of any stock in today’s market, it is Red Hat Inc (NYSE:RHT).
In my previous life, I covered open source software, and Red Hat has long been the flag-bearer for that movement. I have attended Red Hat Summits on their dime and was once fed a great steak lunch by a man who had just sold his company to it. CEO Jim Whitehurst and I are both proud alumni of Rice University. I also read Jim’s book, The Open Organization, and liked it a lot.
One thing I never did, because I practically felt like an insider, was to buy Red Hat stock. This was a big mistake, and it’s one I hope you don’t make. Over the last five years, Red Hat stock is up over 222% in value, rising from $47-per-share to its March 27 opening of $153.
Red Hat Stock: Nice Numbers
Whitehurst has pulled off these gains by transforming Red Hat from a company focused on the open source Linux operating system to one focused on the cloud. Its latest earnings release, completing the 2018 fiscal year, is a thing of beauty.
Revenues came in at over $772 million, up from $628 million for the same period last year. Income from operations rose to over $131 million, from $91 million a year earlier. For the year, revenues were up 21%, and operating income was up 42%. The only reason this didn’t transfer to the net income line had to do with the Trump tax cut, the company taking a $154 million provision for income taxes resulting in a loss of $12.5 million, 7-cents-per-share for the quarter.
All these numbers beat analyst estimates, and Red Hat stock soared in after-hours trading. But InvestorPlace readers know all that.
Better Strategy
Behind the numbers were simple strategic explanations from Whitehurst. (Always follow CEOs who can explain things simply.) As he said at the company’s earnings call, customers trust Red Hat “to build, deploy and manage cloud-native applications.”
Whitehurst’s move to the cloud began years ago with OpenShift. It was originally designed to help customers move Red Hat software into the cloud. It has evolved into a “container” system, a platform for deploying and managing applications in the cloud that are loaded with all their requirements the way boxcars are loaded onto a train.
At the heart of this is open source software called Kubernetes, and during the quarter, Red Hat extended its container leadership by buying CoreOS, a leading Kubernetes company, for $250 million. The deal was easy to do, because Red Hat is easy to work with. It was natural, hand in glove.
Whitehurst says his aim is for cloud tools like Kubernetes to become the standard nuts, bolts and screws that let computing fulfill its potential, much as standardization of industrial parts early in the 19th century made trains, planes and automobiles possible.
The relaxed attitude around the CEO and his company also reflects the trend of tech away from Silicon Valley. Red Hat is based in Raleigh, NC, but is comfortable with having engineers telecommute.
The Bottom Line
Open source was not supposed to be a business, but Red Hat sells support, not software, and that’s more important. Cloud, and its position as a leading cloud tool vendor, now give Red Hat a long runway of growth and profitability.
Some years ago, writing at another site, I suggested that the best move for International Business Machines Corp. (NYSE:IBM) would be to buy Red Hat and make Whitehurst its CEO. IBM’s market cap is now $141 billion, down 28% over five years, while Red Hat’s is up to $27 billion.
If present trends continue, Red Hat will be buying IBM.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.
