Red Hat (RHT - Get Report) has found a winning solution for getting its software used in data centers: Just give it away for free. No, that's not charity -- Red Hat used its strategy to generate $1.3 billion in sales last year. The firm is one of the biggest providers of open source software, with its namesake enterprise Linux operating system the biggest piece of the empire.
Red Hat's product is essentially free -- and its consumer Linux distribution, Fedora, is completely free -- but the firm makes money through training, maintenance and tech support fees that it charges businesses. Red Hat has some very attractive arguments for corporate IT departments. Since the software is open source and free, licensing costs are nil and customization is far less expensive than it would be on a commercial server or workstation operating system. Selling open source software does mean that competition is stiff, but Red Hat's expertise and software packages keep customers coming back. As a result, RHT owns more than 60% of the Linux server market.
It's easiest to compare Red Hat's business to that of a technology consultancy, albeit one with a software product that's must-have for its customers. But the model means that RHT operates with low capital needs, no debt, and deep margins. As of the most recent quarter, RHT carries more than $1.3 billion in net cash and investments -- enough to cover more than 12% of the firm's market capitalization at current price levels. That's a big discount on a stock that few investors would think of as "cheap" right now.To see all of this week's Rocket Stocks in action, check out the Rocket Stocks portfolio at Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.