(Source: Business Week)
Software supplier Red Hat is racking up growth figures that much of techdom might envy. Sales rose 32%, to $157 million, in the quarter ended May 31, and profits climbed a respectable 7%. So why is Wall Street so bearish on the stock?
A day after Red Hat (RHT) reported results, Oppenheimer & Co. (OPY) downgraded the shares, citing few opportunities for growth. Three other investment banks had lowered their Red Hat ratings in the previous nine months, and the company's shares, which on Aug. 15 dipped 22%, to 22.75, have been parked between 21 and 23 for a year. "There's a concern that our growth rate will slow," Red Hat Chief Executive Officer Jim Whitehurst says. "We've been in that funk the last couple of years."
So have many other companies that, like Red Hat, specialize in software whose code is "open source," or freely modifiable by users and a vast community of developers. The arrangement can lead to software products that are more customizable, more readily available, and often cheaper than comparable products from the likes of Microsoft (MSFT) and Oracle (ORCL), which closely guard the underlying code to their most important products.
Yet it's tech sector titans -- companies including IBM (IBM), Hewlett-Packard (HPQ), Oracle, and Intel (INTC) -- that profit most handily from companies' desire to run open-source products by selling lucrative hardware, databases, and consulting services alongside them. Meantime, life has been rough for many of the companies that have bet their business more specifically on open source.
No "Get-Rich-Quick Scheme" Shares of Novell (NOVL), a vendor of the open-source Linux operating system, have slumped 15% this year and are trading below 6 despite the company's attempts to diversify through acquisitions [BusinessWeek.com, 2/5/08]. Open-source support company SpikeSource, headed by Silicon Valley veteran Kim Polese and backed by Kleiner Perkins Caufield & Byers, has chugged along for more than four years without breakout success. And for every MySQL, the open-source database maker that was bought by Sun Microsystems (JAVA) for $1 billion in January [BusinessWeek.com, 1/17/08], plenty of startups have failed to deliver.
"Open source is not a get-rich-quick scheme," says Marten Mickos, the former CEO of MySQL and now a senior vice-president at Sun. "You have to have patience." He adds that the company was 13 years old when it sold.
Many investors won't wait that long. Venture capitalists invested $196 million in U.S. open-source software companies last year, after pouring in $265 million in 2006, according to market researcher Dow Jones VentureSource (NWS).
