But without better margins, it's tough to justify why Red Hat would trade at a price-to-earnings ratio that is four times that of Oracle's and three times that of Microsoft ( MSFT), which is building virtualization/cloud capabilities of its own. Although I am not a Microsoft bull per se, I believe Microsoft presents better long-term value and is a safer bet.
I'm not discounting Red Hat's solid enterprise footprint, nor am I suggesting that the company is on the verge of elimination. But I don't believe that Red Hat has differentiated itself enough from a being just a niche Linux support operation. The company has made some progress in middleware, but not enough to support its stock's current valuation or make it a threat to the likes of Oracle and IBM. And VMware and Citrix, rivals to Red Hat in the virtualization/cloud sector, have become stronger through strategic partnerships, leaving Red Hat on the outside looking in. At the time of publication, the author held no position in any of the stocks mentioned. Follow @saintssenseThis article was written by an independent contributor, separate from TheStreet's regular news coverage.