Red Hat passes Microsoft's stock price, now what?
- 20 October, 2009 13:08
- Comments 8
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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Comments
Kong
1
Comparing Stock Price to gauge how the stock is performing ?
I am surprise to see such article on a web site called CIO.com, as I thought the target audience would be financial savvy.
First of all, I am not sure if the author understands that stock price is not a performance indicator when comparing two companies/stocks. There are many other indicators you should look at such as market cap, PE ratio, RONA, ROI, EBIDTA, etc. MSFT could have announced a split today, and we will observe the stock price drop by 50% with immediate effect (assuming nothing else changes), and yet the company performance remains the same, in investors' eyes.
Secondly, when we want to talk about growth, again stock price can be confusing, as there are other factors in play. MSFT has a PE ratio of 16.27 and RHT's is 63.52. MSFT is a 0.97 beta stock, RHT is 1.45. To simply put, MSFT, in investors' perception, is a stable stock that would have very little growth, provide steady and predictable returns, inline with market performance. Whereas RHT is a high growth, high risk high return counters. That's why we observe much higher growth rate on RHT, just like early days of MSFT before it's business hit the peak.
Having said all these, I agree with pretty much what you wanted to say in the article, just think that using stock price to make your point, actually kind of discredit the worthiness of this other wise fine article.
My 2 cents.
Brian Wells
2
What?
Just a couple of things threw me off with this article, such as "with time running out for Windows XP..." what does that even mean? Microsoft has stopped supporting XP for a long while now. Chances are, if people didn't upgrade yet, they won't in the foreseeable future. Unless Microsoft kicks around it's game monopoly again and makes an incredibly advanced DirectX 11...12...etc.
"On the server side, things are also looking good for Microsoft. Advancements in Windows Server, virtualization, SQL Server" are you kidding? Linux/FOSS has not only advanced into these areas further than Microsoft,it already has developed a rock solid reputation. Microsoft would have to prove itself to be better then Linux in these areas for it to be "looking good"...and also cheaper.
RattyUK
3
Comparing completely irrelevant numbers.
An Apple iPod costs a lot more than Microsoft's share price and the comparison is just as meaningful. It is dependent on how many shares exist at that price. The important number is the Market Cap which in Microsoft's case is 235.34 billion dollars while in Red Hats case it is 5.34 Billion.
Red Hat have a LONG way to go.
Anonymous
4
Looks like Mr. Gedda needs to attend a free ASX seminar on investment. Not only (like "Kong" pointed out) is share price irrelevant (Market Capitalisation is), but RHT share is far more volatile (and seasonal looks like) than MSFT and thus appeals to a different investor.
Same on the editor for letting this one through - kind of discredits the whole idea of CIO.
Anonymous
5
Worst Year
Gartner ranked it as the worst year ever in IT, so is there really a safe technology stock right now? If you want something safe invest in a bank, or a big car maker, errr, OK nothing is safe.
Splits are not an issue in this case, neither stock has had a split for over five years and neither is looking likely to right soon.
MSFT pays dividends. Last four quarterly dividends were 0.66%, 0.71%, 0.64% 0.55% so add them up to get a grand return of 2.56% PA (about the same as a 5-year US T-bill), and the few years before that were less generous.
Anonymous
6
Market Cap
Why would an investor be more interested in market cap than price? Market cap is an estimate of the size of the company, unrelated to profitability or return on investment. Market cap is no guarantee of safety either, plenty of shareholders lost money on HP.
Most investors look at price and growth more than anything else, but hey if you believe that size is what matters, it's your money to chuck away.
apexwm
7
More are migrating from Windows to Linux
I believe that the reason Red Hat is doing well is because of the tough economic times that we are facing. It has finally forced businesses to look at getting rid of proprietary software like Windows, and get free software like Linux. The entire GNU/Linux suite of software is extremely powerful, and you have the freedom to do what you want with your PC, rather than letting Microsoft restrict you.
Jack Mayhoffer
8
Amateur Hour
Horrible thesis, horrible logic, and horrible all around. This article was fitting of a high school essay from an complete market illiterate.