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Red Hat: Good Growth, Tricky Valuation

The company did make up for this in profitability, which arrived strong. Not only did net income improve, growing 19% year over year to $43 million, the company also beat on earnings per share - posting 36 cents versus estimates of 30 cents. Unfortunately, management didn't guide as if it expects this level of performance to continue. It guided for both EPS and revenue to come below Street expectations.



Here again, investors are left of reflect on what these numbers and the soft guidance might actually mean. The fact that the virtualization/cloud industry appears to always be in transition introduces doubt. This makes Oracle's results, from a relative perspective, even more critical.

However, unlike Red Hat, Oracle is more diversified. This brings us back to the issue of leverage. If Red Hat can improve that, the stock would be less risky.

Bottom Line

I've made this point once before: Despite Red Hat's strong Linux business, the company has not shown much differentiation in areas like middleware, where Red Hat still lags behind Oracle, IBM (IBM) and Salesforce.com (CRM).

What's more, in Red Hat's core business, the company still has to fight off rivals including VMware and Citrix (CTXS). In other words, the company is being attacked from all angles. At some point, investors have to decide is the double-digit growth worth the sleepless nights.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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