Trilight Zone

[tricore]

Lately, I've been getting questions about how well, or not, Red Hat is doing. My answer: I think the company's doing just fine.

Yes, I know that Oracle is coming after them. And, yes, I know that Novell and Microsoft's partnership, problems and all, has given Novell's SLES 10 (SUSE Linux Enterprise Server) some unexpected sales.

At the same time, competition for Linux to Linux migration is seeing an upsurge. Novell recently released a new training course to help systems administrators migrate from RHEL 4 (Red Hat Enterprise Linux) to Novell's SLES. Oracle has also been attempting to undercut Red Hat's pricing with its Unbreakable Linux pricing.

Still, at least one analyst, Hambrecht+Co financial analyst Robert Stimson, remains bullish on the Raleigh, NC-based Linux distributor. In his most recent report, Stimson remained "confident that Red Hat will remain the premier Linux player despite recent competitive hoopla. RHEL 5 appears to be on track for a March launch, bringing a host of improvements to the RHEL platform."

As for the competition, Stimson said, "We believe Red Hat offers the best solution in the marketplace at this time. We continue to believe that the announcements out of Oracle and Microsoft/Novell that led to weakness in Red Hat shares in recent months have had little to no effect on Red Hat's underlying fundamentals."

Therefore, "Based on our beliefs that pricing remains stable, the RHEL 5 product cycle is on track, and that Red Hat remains the de facto enterprise Linux solution in the marketplace, we are raising our price target to $26, which represents 21x our adjusted CY:08 FCF estimate of $268 million. Accordingly, our long-term investment thesis remains intact, and we are maintaining our Buy rating."

To which, I'll add that Red Hat's last quarter was an excellent one.

I'm not completely sold on Red Hat continuing to do great guns. Truth in reporting here: I own no stock in Red Hat, or in any technology company for that matter. I think, however, what's far more important than Oracle's price-cutting or competition from Novell is how well the release of RHEL 5 goes.

RHEL 5 will be an important, no, make that vital, release for Red Hat. Besides being the company's flagship product, it comes out when Red Hat is facing its most serious competition since it became the dominant Linux company. In addition, it's Red Hat's first server release that comes with full-scale virtualization support.

For over a year now, virtualization has been the hot topic in server-based computing. Businesses want to take their high-powered, multi-cored servers and run as many instances of applications on them as they can, to save money. The math works like this: if you can run five databases on one system, you'll only need the one server. Red Hat, while a leader in most Linux features, has lagged behind Novell with Xen virtualization.

Will Red Hat be able to catch up in the virtualization races with RHEL 5's release in March? I suspect they will. If that's indeed the case, I expect Novell to get still more Linux work, but Red Hat to remain the Linux company to beat in 2007.