Investors see bluer skies for Red Hat, momentum is building for the software developer as demand for its products grows, the threat from some rivals eases and consolidation reshapes the industry.
Shares of the Raleigh company have surged 15 percent this month to the highest level in a year. They rose 7 cents Wednesday to close at $16.31.
"It's the general recognition that their business continues to be pretty solid," said Steve Ashley, senior vice president with Robert W. Baird & Co. in Milwaukee. "Slowly the Street is educating themselves on what Red Hat is."
The company's recent gains, however, might not be enough to sway investors for the long term, some said.
Red Hat is the world's largest distributor of the Linux computer operating system. Linux software is similar to Microsoft's Windows, in that it makes computers run, but it can be downloaded for free on the Web.
Red Hat generally makes money selling subscriptions for service and additional features.
The company's business model, and the way it accounts for revenue, has caused confusion for investors and analysts in recent years. A management shake-up and fears of rising competition as software giants such as Novell entered the Linux business also caused some consternation.
Red Hat appears to be shaking off such issues. This month, five analysts who follow the stock have upgraded outlooks or reiterated expectations for strong performance from the company, according to Bloomberg News data.
The company completed its fiscal second quarter in August, and analysts say it likely had solid sales growth. One analyst, Mark Murphy of First Albany Capital, said in a recent report that Red Hat signed a large deal with computer maker Hewlett-Packard during the quarter that could strengthen its position.
Red Hat officials could say more when the company reports quarterly financial results Sept. 28.
What's more, Novell, which bought two Linux companies earlier this decade, hasn't turned out to be the threat once feared. It is gaining traction, but it's not growing as quickly as Red Hat.
"Novell's woes in the Linux space make ... [Red Hat] look better," said Katherine Egbert, an analyst who follows Red Hat for Jefferies & Co. in San Francisco.
Consolidation also could help. Oracle, which is expanding through acquisitions and this week announced plans to buy Seibel Systems for $5.8 billion, is a big proponent of Linux to counter Microsoft, Murphy said.
"The bigger Oracle gets and the more customers Oracle has, the better it is for Red Hat," he wrote in a research report.
That's not to say Red Hat is in the clear. The company has taken investors on a roller coaster ride. In the past two years, the stockhas risen as high as $28.73 before plummeting to a low of $7.28.
Some caution that a little skepticism remains important.
Brad Reback, an analyst with CIBC World Markets, last week upgraded his outlook for the company. But he said competitive pressures could ultimately begin to weigh on Red Hat.
"While the company's recent results are impressive, we continue to question how defensible Red Hat's long-term position is," Reback wrote.
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