Red Hat Inc, a software company whose profits come from programs available for free on the Internet, has convinced some investors it can thrive against Microsoft Corp, a competitor with more than 350 times its sales.
Since October, seven money managers have each bought more than half a million shares of Red Hat, the largest distributor of the Linux computer operating system. Fidelity Investments, Wellington Management Co LLC and American Century Investments bought a combined 11.1 million shares, helping to push them up 31 percent in less than seven months to US$6.14 at yesterday's close.
Shareholders say they are betting Red Hat can capitalize on demand for computers powered by Linux instead of by Microsoft's Windows. Almost 14 percent of the server computers sold last year were Linux-equipped, up from 11 percent in 2001, according to IDC, a technology-industry research firm.
"Linux is on a wave of acceptance, and Red Hat has figured out a way to make money on it," said Walter Price, who helps manage US$35 billion at Dresdner RCM Global Investors, including about 850,000 Red Hat shares. "They've got the best chance of any company doing Linux."
Not that Red Hat is in danger of overtaking Microsoft anytime soon. The company's US$25.9 million in sales in the quarter that ended February 28 was about 0.3 percent of Microsoft's revenue in the same period. Red Hat reported its first quarterly profit in December, US$214,000, about what Microsoft made every 10 minutes.
The 10-year-old company, based in Raleigh, North Carolina, also faces competition from Linux providers such as closely held SuSE Linux AG, based in Nuremberg, Germany. Red Hat and its rivals sell and service customized versions of Linux after obtaining the program for free on the Internet as part of the so-called open source movement. The movement's adherents oppose proprietary ownership of computer codes.
"Since they're the company leading this movement, it's hard for them to charge a lot of money," said Jimmy Chang, senior technology analyst for US Trust, which has assets under management of about $81 billion, including Red Hat shares. "It's very low margin. Long-term profitability is still an open-ended question."
Red Hat's 31 percent rise since Oct. 1 outpaced the Standard & Poor's 500 Software and Services Index, which was up 18 percent in the same period. The climb was propelled by institutional investors, who hold 47 percent of Red Hat's shares, up from 5.8 percent in June 2000, according to Chief Financial Officer Kevin Thompson.
Red Hat's shares almost quadrupled to close at US$52.06 on their first day of trading, Aug. 11, 1999. They peaked at US$302.62 on Dec. 8, 1999, twelve days before the company announced a two-for-one share split. At the top, Red Hat, with 1999 sales of US$33 million, had a market value of US$23 billion.
The fall was almost as swift. On May 24, 2000, the shares closed at US$15.75. They bottomed at US$2.40 on Sept. 21, 2001, after Red Hat reported its largest-ever loss, US$55.4 million on sales of US$18.9 million. The company was then worth US$407.6 million.
"When the stock hit almost US$300 a share, it was one of my worst days," said Chief Executive Officer Matthew Szulik, 46.
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