Red Hat Gets a Boost

Shares of Red Hat(RHAT Quote) rose on heavy trading Monday, as investors bid the stock up in anticipation of Tuesday's second-quarter earnings report.

At the close, shares of the Linux software developer were up $1.04, or 4.2%, to $26.07, although the stock was down 27 cents after hours. At more than 6 million shares, volume was 70% higher than average.

The stock was aided by a flurry of positive notes from sell-side analysts at Citigroup, Credit Suisse and Global Equities Research.

Several analysts noted that shares of Red Hat have been flat since the company reported first-quarter financials results in late June. Oracle(ORCL Quote), meanwhile, which is rumored to be preparing its own version of Linux, has appreciated by 20%, and the Goldman Sachs Software Index is up 17% in the same time period.

Along with concerns over possible competition from Oracle, the stock has been held down by worries over the company's progress integrating JBoss, a large open-source software developer purchased earlier in the year for $420 million plus an as-yet-unspecified after-payment.

But Citgroup analyst Brent Thill said in a note to clients that those concerns are overdone.

"Oracle Linux makes little sense to us given the myriad of [sic] formidable challenges and unintended consequences of such a move; [it] is more headline than business risk," Thill wrote. "While we have highlighted our integration concerns with JBoss, we think the strategic fit of the two companies will ultimately serve to significantly expand RHAT's market opportunity." His company does not have an investment-banking relationship with Red Hat.

Analyst Trip Chowdhry of Global Equities Research said his industry contacts indicate that the upcoming release of Red Hat's newest iteration of Linux, due later in the fall, should help the company raise its percentage of paying customers to about 10%, compared with the current range of about 7%.

Red Hat, along with other open-source companies, allows customers to use its basic products for free but offers no support or maintenance unless the customer agree to sign a contract. Features in the new release, Chowdhry said, will also encourage customers to use Red Hat for operations that are more central to their business, which in turn will drive subscriptions.

Global does not have an investment-banking relationship with Red Hat.

To view Robert Martorana's video preview of results from the software firm, click here.