Okay, not really-really, but this weekend’s issue of Barron’s does have an interview with a money manager who makes the case for being negative about Red Hat, the Linux vendor. In so doing he implictly makes the uber-bull case for Kim Polese’s SpikeSource:
Why do you think it’s going lower?
We expect Red Hat’s earnings growth to be curtailed significantly because they will need to increase their SG&A expense to protect their market share. Their cash flow metrics continue to disappoint. Cash flow has been disappointing every single quarter and we believe that ’06 is at risk of a disappointment as well. They lowered their cash flow guidance for 2006 to 60% of revenue versus the previous guidance, which was 60% to 70% of revenue. They also lack transparency in some of their metrics.
In the fourth quarter new metrics were introduced for bookings and billings but details were not released and there are no specifics on past quarters for comparison and no detail on the amount of off-balance-sheet or long-term deferred items. Bottom line for Red Hat’s future is that Linux is a free software and companies will buy these package versions, but the real money is in servicing and in customizing them. We view Red Hat as a services company trading at a software multiple. It has got a pretty steep multiple for a services company. The Street is looking for 30 cents in ’06 on a $13.50 stock, which puts it at 22 times earnings and it’s not growing.