NEW YORK (TheStreet) -- Investors in Red Hat (RHT) can pat themselves on the back for having one of the best-performing stocks in 2014. At $70, shares are up 25% for the year to date, the highest level in 14 years. 

Deciding on which software stock was the year's top performer was not easy. Based on stock returns alone it could have gone to a number of companies including Oracle (ORCL) (up 20%), Microsoft (MSFT) (up 27%) and Adobe (ADBE) (up 24%).

But will Red Hat's top performance continue into 2015? Oracle may have a say in that.

RHT Chart  

RHT data by YCharts

Red Hat had a remarkable year. The enterprise and cloud services giant and the world's largest provider of open source solutions just reported its eleventh consecutive quarter of mid-to-high teens revenue growth. That's not an easy thing to do considering how tight corporations have been with their spending in 2014.

For some context, Red Hat's chief rivals VMware (VMW) and Citrix (CTXS) , which compete for the same corporate dollars, saw their respective share prices decline 6.04% and gain 9.6%, respectively. This occurred is in a market where both the Dow Jones Industrial Average (up 8.9%) and the S&P 500 (up 13.2%) are poised to end the year at near all-time highs.


Red Hat was one of the primary reasons for the 15.7% gain in the iShares North American Tech-Software ETF (IGV) . Whether the exchange-traded fund can outperform next year will be based on Red Hat's ability to dominate its core open source market.

The company is placing huge bets on OpenStack, a much younger part of its business, compared to its Linux segment. This is an area where VMware and Hewlett-Packard (HPQ) , which recently bought Eucalyptus, are positioning themselves to seize market share.

Analysts don't seem worried, however. Red Hat has a consensus buy rating and a high 12-month price target of $81, according to CNN Money, suggesting gains of 14% or more.

Oracle is another stock to watch in 2014. With a portfolio weighting of 9.1%, the database giant was the top holding in the iShares North American Tech-Software ETF, leading Salesforce.com and Adobe, which were tied for second, weighting at 8.34%.

Like Red Hat, Oracle had a dominant year. At around $46, its share are trading at 10-year highs, buoyed by the company's stronger-than-expected fiscal second-quarter earnings beat on Dec. 17. This came after having missed Wall Street's revenue estimates in the three prior quarters. But it wasn't just about one quarterly performance. Investors cheered Oracle's transformation into a cloud power.

The world’s second-largest software company, which has struggled to compete with nimbler rivals including Salesforce.com (CRM) , grew cloud revenue at 45% year over year, reaching $516 million. That, and the fact that software and cloud revenue grew 5% year over year to $7.3 billion, Oracle looks like a force to be reckoned with in 2015 and beyond, especially in cloud-based services.

The only shortcoming is Oracle shares are trading at just 19 times trailing earnings. For some context, that's almost 55 points below Red Hat, which trades a trailing price-to-earnings ratio of around 75. Plus, Oracle's P/E is 9 points lower than the average P/E of software companies in the iShares North American Tech-Software ETF.

On a forward-looking basis, Oracle shares are trading at just 13.5 times estimates of $3.04, compared to the average forward P/E of 17 of the companies in the S&P 500, according to The Wall Street Journal, making Oracle is one of the best bargains on the market.

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TheStreet Ratings team rates RED HAT INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate RED HAT INC (RHT) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, solid stock price performance, notable return on equity and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

You can view the full analysis from the report here: RHT Ratings Report

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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