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This column was originally published on RealMoney on Nov. 29 at 11:24 a.m. EST. It's being republished as a bonus for readers. For more information about subscribing to RealMoney, please click here.

Recent short interest data show a big jump in the number of investors betting against enterprise-software play

Red Hat


. As of Nov. 15, short interest as a percentage of float (total shares available in the market) had increased 29% from the month-earlier level, with 11.4% of available shares now being sold short.

This is a far cry from the near-40% short-interest level at


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I noted earlier this month. However, it does illustrate the growing concern over Red Hat's ability to make headway vs.



, which teamed up with


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about a month ago, as well as


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, which announced its entrance into the Linux distribution business in late October.

Sometimes a rising short-interest level will create a buying opportunity for investors, as the balance between optimism and pessimism gets overly skewed toward the latter. But in this case, Red Hat's short bandwagon has room.

The Bulls' Case

Last week, W.R. Hambrecht initiated Red Hat with a buy rating, repeating the usual company line for Red Hat bulls. I believe 11% short interest isn't anything to get excited about, especially because this figure hasn't been below 7% since December 2005. In addition, we won't see the financial implications of the recent Novell and Oracle announcements until Red Hat's mid- to late-2007 financial results are reported.

Plus, some question Oracle's potential to significantly penetrate Red Hat's market. Oracle has numerous obstacles to overcome, including a lack of independent software vendor support and an unclear driver for convincing customers to switch suppliers. These reasons are enough to convince many investors that Red Hat's recent price declines are overdone and have created a buying opportunity.

Not So Fast

However, the real issue here is not that Oracle will suddenly bring a great service to market. Nor is it that the Microsoft-Novell combination will destroy Red Hat. The problem here -- which investors can apply to many industries outside the software space -- is that you have a bunch of big players coming to the party and mucking up the potential for everyone.

Does anyone think Microsoft and Oracle really need to generate above-average financial results in the Linux market? Would it be a big deal to anyone besides Red Hat if these two behemoths came in, helped start a pricing war and just ended up draining all the upside out of the business?

In the meantime, shares of Red Hat will effectively have a ceiling on them, as both customer and pricing uncertainty weighs on the shares. Keep an eye on the short ratio, however, as it will be interesting to see if the market eventually gets negative on Red Hat. A number closer to 20% would be a bit much, considering that Red Hat is still a good company that just happens to be in a business where competition is killing potential.

In keeping with TSC's editorial policy, Larsen Kusick doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Kusick is a research associate at, where he works closely with Jim Cramer and works on Stocks Under $10. Prior to joining, he worked in options trading and management consulting. He appreciates your feedback;

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