Red Hat May Be a Buy After Turning the Corner

NEW YORK ( TheStreet) -- Another quarter is in the books for software giant Red Hat ( RHT) and the valuation debate lingers.

The fact that Red Hat's price-to-earnings ratio of 60 is twice the P/E of Oracle ( ORCL) and Microsoft ( MSFT) put together is tough to reconcile.

But it's been this way for a while. Although several analysts didn't give the company much of a chance ahead of Red Hat's fiscal first-quarter earnings report, management continues to do an excellent job stating their valuation case pretty strongly.

Interestingly, given the lackluster results posted by Oracle and IBM ( IBM), it's starting to look as there's a divergence within a sector that has often traded in tandem.

While I'm inclined to believe that tough IT spending environment has had an impact on both Oracle and IBM, I can no longer ignore the possibility that Red Hat is beginning to steal share in areas like middleware. Valuation concerns aside, this is beginning to look interesting.

Revenue growth has never been an issue at Red Hat; nor was it an issue this quarter, with sales climbing 15.4% year over year. The company also did well growing subscription revenue 16% year over year and 4% sequentially. Adjusted net income rose to 32 cents from 30 cents per share -- enough to beat estimates by 1 penny.

Billings, also known as deferred revenue, is the metric that indicates the strength of future sales. These were up 12%. This is a pretty significant improvement from the fourth quarter where Red Hat posted billings that were 3% shy of Street estimates, which (then) prompted management to lower guidance. Not this time. Management issued outlook for both sales and profits were in-line with analysts' expectations.

As is often the case, though, margin showed some struggles, falling off a bit for the fourth consecutive quarter. More than any other reason, this constant lack of leverage has been my biggest sticking point with Red Hat, particularly in the face of stff competition from the likes of Citrix ( CTXS) and Salesforce.com ( CRM).

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