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Red Hat passes Microsoft's stock price, now what?

Red Hat passes Microsoft's stock price, now what?

Who said you can't make a business out of free software?

The percentage growth of Red Hat and Microsoft's share prices: source Nasdaq

The percentage growth of Red Hat and Microsoft's share prices: source Nasdaq

Not since the heady days of the dotcom boom has the share market for an open source company’s stock been brighter.

As of the last Nasdaq trade on October 19, 2009, Red Hat's share price stood at $28.46 with the mighty Microsoft in its shadow at $26.36.

With so much noise made about IT company share prices over the years -- Michael Dell said he would shut down Apple if he was in charge, but then in 2006 Apple surpassed Dell’s market capitalization -- why did such a momentous occasion go unnoticed?

Red Hat and Microsoft play in the same league. Red Hat, however, is a Linux vendor, which is a free and open source operating system. Who said you can’t make a business out of free software?

What’s more, the growth in the value of each share tells a very different story.

According to Nasdaq data, since 2001 Red Hat has experienced more than 600 per cent growth, while during the same period Microsoft has experienced negative growth of its share price.

Granted, Red Hat’s growth is also indicative of its rocky ride since its IPO. In 2001 Red Hat’s share price dropped to a measly $3, whereas Microsoft hit a low (during the past 10 years of its trading history) of around $15 earlier this year. That goes along way to qualifying the “growth” data.

At the other end of the scale, Microsoft’s price has peaked at around $57 and Red Hat -- with its IPO and the dotcom tsunami behind it -- reached more than $140 ten years ago in 1999.

So while Red Hat’s share price has been higher in the past, this time it’s organic.

Of course, there’s also the not-so-small matter of market capitalization. Microsoft’s “worth” based on its price is $US234.9 billion whereas Red Hat stands at $5.3 billion.

Should people care about share prices? That depends who you ask.

Shareholders care because they always expect growth, but industry analysts say share price is mostly about speculation. Company announcements that have nothing to do with financial results can dramatically alter the share price.

I won’t go on about company revenues. But again, there are no prizes for guessing which one is higher.

Where to now for both companies?

If a company’s share price is indicative of its performance, or “value”, where are Microsoft and Red Hat likely to go from here?

Let’s consider both companies' prospects.

Microsoft has a major release of its flagship Windows operating system, Windows 7, hitting the market this month which will invariably add a lot of cash to its coffers.

What’s more, with time running out for Windows XP, more people will be compelled to upgrade to Windows 7 than Vista.

On the server side, things are also looking good for Microsoft. Advancements in Windows Server, virtualization, SQL Server, Exchange and SharePoint all point to a growing enterprise software business. Not to mention business applications and reporting tools.

The one area where Microsoft seems to be putting in a lot of resources for little reward is with online services and cloud computing. There’s no doubt the demand for such services will continue to grow, but for Microsoft the payback could be a while away.

At Red Hat, most revenue is tied up in server support subscriptions. It’s a profitable, stable cash cow, which has stayed well ahead of any competitive threat.

The only foreseeable challenge to Red Hat’s Linux server support hegemony is whether the market will continue to value software updates to the tune of Red Hat’s pricing (a premium subscription goes for $US1299 per year for up to two sockets).

I’m not saying Red Hat is expensive or not good value, rather that other companies will come along and chip away at Red Hat’s customer base by offering lower subscription fees.

Virtualization is also a key growth area for Red Hat, as is its Java application serving business in JBoss.

On the desktop, Red Hat gave up that battle years ago. Its Fedora community project is doing well as far as free Linux distributions go, but in terms of desktop revenue it will be awhile before Red Hat has anything close to Microsoft -- or Apple for that matter.

Another growth area for Red Hat will be in high-performance and cloud computing. They are certainly areas to watch and play right into Red Hat’s core strengths.

So there you have it. An open source software vendor’s share price has over taken that of the world’s largest software company. Where to now for this David and Goliath of operating system vendors?

Sydney-based Linux consultant and director of Linux Bespoke Telford Tendys doesn’t expect Ballmer to “close the gap anytime soon”.

“[It’s a] big psychological barrier right there,” Tendys said.

We’ll have to wait and see if Microsoft can regain its share price dominance. Until then the kudos goes to Red Hat and its higher share price.

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