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Red Hat remains red hot on the Street on eve of next earnings report

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Note: The Skinny blog is written by Rick Smith, editor and co-founder of Local Tech Wire and business editor of WRAL.com.

RALEIGH, N.C. – Want to second guess your stock buying strategy? If you had invested $10,000 in Red Hat (NYSE: RHT) shares in the gloom of last November’s market swoon, your investment would be worth more than $30,000 today.

Shares back last winter traded at under $8. Now – well, some projections are at $28.

And those fortunate souls who own Red Hat can also expect share values to increase if Wall Street analysts are correct. Red Hat, which closed at $25.72 on Monday and recently hit a 52-week high of $26.32, reports earnings after the markets close Wednesday. Analysts expect the Hatters to report a 15-cent per share profit on revenues of $179 million and an increase of 9 percent in sales over a year ago.

Recent buying trends for more enterprise Linux and emerging cloud/virtualization markets have most analysts feeling very positive about the world’s No. 1 penguin-mascot software developer and services provider.

The depth and breadth of the recession has led to significant drops in IT spend, but the Linux sector has remained a bright spot since companies can save money by moving to open source.

Earlier this month, Goldman Sachs software analyst Sarah Friar upgraded Red Hat to “buy” from “neutral,” citing “a robust upcoming server cycle fueled by a return of IT spending and pent-up demand.” Friar also included cloud computing potential as a reason to upgrade Red Hat.

More good news came this week as Goldman Sachs revised its IT spending forecast upward for 2010 to 4 percent from 2 percent. However, the firm reiterated IT spending should drop 8 percent this year.

IBM "lurking"

Monday night, Jefferies & Company’s Katherine Egbert reiterated her “hold” rating on Red Hat but did increase her share target to $25 from $23.

“We expect good August quarter results, with potential upside from JBoss and Federal [sectors], despite weak server sales,” she wrote in a note to clients.

However, Egbert, who has cited Red Hat repeatedly in the past as a potential takeover target, seems to have cooled on that prospect a bit.

“IBM is still lurking, but a takeout does not seem imminent,” she wrote.

“Once again, we have heard talk in recent weeks of renewed interest from IBM in a possible takeover of Red Hat,” Egbert explained. “While we don't think a deal is imminent, the combination continues to make sense to us, given IBM's relatively weak offerings in server virtualization and embedded/mobile.

“The biggest overlap between the 2 firms is in middleware between Jboss and IBM's WebSphere
and Geronimo offerings. We think an acquisition of Red Hat also makes good strategic sense in front of the Oracle/Sun combination, which will probably pressure RHEL [Red Hat Enterprise Linux] pricing.”

One area of concern is server revenues. Estimating that two thirds of Red Hat’s quarterly server revenues come from IBM, HP and Dell among others, Egbert pointed to a recent IDC report that said server sales plunged 30 percent in the March-June quarter.

Countering the bad server news is growth in JBoss and in the federal sector, Egbert wrote. Noting that JBoss received recent security certification and Red Hat’s strategy to invest “significantly in the federal vertical, both from an R&D and sales perspective,” Egbert believes Red Hat will show bottom-line benefit.

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The Skinny

WRAL Local Tech Wire Publisher and Editor Rick Smith dishes out tidbits from the local technology sector. Read more articles…