Red Hat and Linux Bloggers: The Big Disconnect
When Red Hat announced financial results March 24, Linux and open source bloggers fell all over themselves praising the company’s performance, revenue and profit growth. Now here’s the twist: Instead of climbing, Red Hat’s stock fell. Why’s that? Here’s the story.
Alas, sometimes open source fanatics can’t help themselves. Spot some good open source news, and the Linux fans position it as great news. Identify a minor setback at Microsoft, and the open source fanatics Tweet it as the death of Windows and Microsoft Office.
So, what’s the real situation at Red Hat? No doubt, the company deserves credit for its continued growth, and its ability to diversify beyond Red Hat Enterprise Linux — promoting JBoss middleware and virtualization as the next big revenue opportunities for Red Hat partners. And by most accounts, Red Hat is set to become the world’s first $1 billion open source company.
Impressive. But let’s keep the celebration in perspective. While Linux fans were busy cheering and hyping Red Hat’s latest quarterly results, Wall Street expressed concern. For March 25, shares are down about 5 percent.
Why’s that?
As the Associated Press reported:
Shares of Red Hat Inc. dropped Thursday as its 2011 profit outlook fell short of analyst projections, despite a strong fourth quarter and a new plan to repurchase $300 million of its stock. [But Red Hat expects] adjusted profit of 71 cents to 74 cents per share in its fiscal 2011 year ending in February 2011. That fell short of expectations of analysts polled by Thomson Reuters, who forecast earnings of 76 cents per share, on average.
Microsoft’s Big Shadow
No doubt, Red Hat is in solid financial shape. And The VAR Guy even owns a few shares in Red Hat. But let’s not lose sight of the facts:
- Red Hat is growing nicely, and is poised to become the first $1 billion open source company.
- Microsoft’s annual revenues for 2009 were $59 billion.
Translation: Microsoft is still 60X to 100X the size of the world’s most successful open source company, depending on which financial quarter you’re tracking. That’s rather amazing.
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Whether Red Hat met expectations sort of depends on which analysts you choose to listen to:
http://www.fool.com/investing/high-growth/2010/03/25/can-red-hat-stay-red-hot.aspx
So why would the stock price go down on a good earnings report? I think this summarizes it nicely:
http://howtobuystocksforbeginners.net/2010/01/30/why-stocks-often-go-down-after-good-earnings/
Do better.
-jef
In terms of absolute numbers Microsoft is indeed quite a bit bigger. But wouldn’t it be more interesting to compare apples with apples and compare Red Hat’s revenues to Microsoft’s revenues derived from their server, virtualization and middleware products. If you stick to server amp; tools revenue the number is significantly lower than 60X to 100X. A quick google showed that Microsoft’s server and tools revenues in Q4 2009 were $3.5 Billion. Compared to Red Hat’s Q4 revenues of $195 Million the 60X to 100X should be closer to 17X.
Why are the comments setup to need moderation if they contain urls?
Lets try this again…. original comment but this time with the urls as just text to get around the moderation filter.
Whether Red Hat met expectations sort of depends on which analysts you choose to listen to. The Motley Fool article says Red Hat met expectation:
reference: http://www.fool.com/investing/high-growth/2010/03/25/can-red-hat-stay-red-hot.aspx
So why would the stock price go down on a good earnings report? Easy, there’s a long standing phenonenon in the markets which can be summed up as “Buy on bad news, sell on good news”
I think this summarizes it nicely:
reference:
howtobuystocksforbeginners.net/2010/01/30/why-stocks-often-go-down-after-good-earnings/
Do better.
-jef
Jef: We appreciate the comments but we review posts with URLs prior to approval because we want to make sure the links are business appropriate.
-jp
Jef: No doubt, share prices are based on how companies (Red Hat) set net income expectations, and whether those expectations are met.
Pieter: You raise an interesting point. But The VAR Guy thinks Microsoft’s server business is pretty darn large, too. SharePoint alone is a $1 billion operation for MSFT.
-TVG
One thing that beats me is, why, every so often, Varguy has to dedicate an entire article to keep reminding everyone about how much bigger MS is than RH. As if that’s not common knowledge?
The weird thing about the article was also how it was titled and how it linked the enthusiastic blogging about RH to its shares being down – as if the blogging had anything to do with it.
I like your posts, Varguy, but, do better next time.
Scmeeven: The VAR Guy thinks most folks have no idea about the gap between Microsoft and Red Hat revenue. Still, our resident blogger really appreciates your constructive criticism and readership. He’ll keep your thoughts in mind as future blog ideas come together.
-TVG