Bear Mistake No. 1: Never sleep on Red Hat Inc.

Red Hat, Inc. (Public, NYSE:RHT) shares just like everything else (including Apple (AAPL)) have been hurt by the recent Bear trends.  The problems facing the market are endless and one of my favorite companies and stock has taken a big beating, right down to $1 above their 52-week low.  The Company you ask?  Linux King, Red Hat Inc.

Throwing Apple's name really isn't justified but it is when you consider every company from retail to tech is getting thrown under the bus on their 2008 guidance.  "Oh no, a recession is coming.  No, the recession is already here.  We are on the cusp of another great depression.  Falling Real Estate prices.  Subprime Fallout.  Credit Crunch.  Wah, I pooped my pants."

Believe what you must and act accordingly with your investments, we already advised our subscribers to cash out their stocks and be holding 80% cash last month.  But this isn't a time for analysts and everyone else to be talking about how smart they are, it's a time to be investing with a pro-active mindset, not a "beatup I just lost 20% of my 401k and I'm never buying another stock" attitude.

Which leads me to a fantastic company that has watched it's share price fall 15% in the last 3 months.  Red Hat's last earnings call was outstanding, back in Dec. they reported Q3 07 revenues of $135.4 million. Analysts had expected earnings of 10 cents per share on revenues of $132.4 million. Net income increased 12% to $20.3 million or 10 cents a share.  In 2007 Red Hat's revenue increased 32% to $381 million and net income rose 39% from $39.4 million.

Subscription revenue was $115.8 million, up 30% year over year, with training and services revenue increasing 16% to $19.6 million following a strong increase in demand for Middleware training and consulting services. Overall gross margin was 85%, subscription gross margin was 93% while training and services gross margin was 36%.

That all sounds great, right?  Well here's what should be turning investor's heads and help them not worry about selling enough iPods, iPhones, and just overall iRecessionDontNeedCrap items:
Red Hat also raised its fiscal 2008 revenue outlook to between $521 million to $523 million, up from $510 million to $520 million.

Microsoft is still selling their Vista operating systems, good for them.  But the future ladies and gentlemen is not Microsoft, rather it's all the nerdy coders that created the Open Source wave.

Red Hat's comments on open source:

Open Source opens the opportunity to reduce the cost and delays associated with software failures from initial development through ongoing support.

- The Open Source mind for developing software in small, easily digestible increments results in high quality code and sound design processes.
- In Open Source software, innovation happens every day to produce a more highly reliable and higher quality product.
- The Linux automation architecture enables customers to deliver new levels of service while providing greater operating efficiencies.
- Linux automation reduces the cost of owning and using applications as customers can deploy the application on any type of server resource.
- Linux also bridges IT silos that RHEL-certified applications can be run virtually on any server such as RHEL, Windows, VMware, and Solaris.

Don't know enough about open source or don't care to know?  Don't buy Red Hat. 

But even if you don't know how Red Hat makes it's money, Wall Street has priced shares too low given that they killed the quarter and 2008 isn't going to be a big negative Nancy show.  Even if 2008 does slow down, because even Red Hat will feel the pinch, the shares are trading at a great entry point. Yes the P/E of 50 is scary but buying the company now rather than at $20 a share is why I'm writing this article -- it's trading at a good value.