In previous articles, I have articulated my optimistic outlook on Microsoft Corporation (NASDAQ:MSFT) and pessimistic outlook on Red Hat, Inc. (NYSE:RHT). While I see the former as an unreasonably beaten-down leading software producer, I see the latter as an over-hyped cloud producer. In this article, I will attempt to look at the other side, since the best investments come from challenging the initial thesis. Below, I present the bull case on Red Hat and the bear case on Microsoft Corporation (NASDAQ:MSFT).

Red Hat, Inc. (NYSE:RHT) : The Bull Case

Red Hat is an American company that produces open source software. It is noted for being the creator of the Linux operating system. The company has been making a number of acquisitions to facilitate growth. The most significant of these was made in 2000 when Red Hat acquired Cygnus Solutions for $674 million. In this year alone the company acquired five other companies. Other leading tech companies have gained exposure to Red Hat, including International Business Machines Corp. (NYSE:IBM), Intel Corporation (NASDAQ:INTC), Novell, Compaq, Netscape and Dell Inc. (NASDAQ:DELL). They have all bought some amount of minority shares in Red Hat.

In June 2012, Red Hat reported its first quarter earnings, a 5.3% beat. It had revenue worth $315 million, which represented a 19% increase from the previous years. The operating cash was $124 million which was a 38% increase y-o-y. The second quarter earnings of 2012 were reported in August 2012. The revenues rose to $322 million which represented a 15% increase from the previous year’s second quarter. The operating cash was $104 million, a 35% increase y-o-y. Revenue from subscription was $279 million, representing a 17% increase.

Red Hat’s third quarter results indicated that the operating cash was $97 million, which represented a 36% increase compared to the same quarter in the previous year. For the fourth quarter of 2012, the revenue was $297 million, which was a 21% increase while that of the whole year was $1.13 billion, representing an increase of 25%. The operating cash was $128 million, which is a 35% increase compared to the previous year. From this data you can clearly see that Red Hat has been making quite some progress year after year.

All in all, the main benefit of investing in Red Hat is that the company rides on the backs of well established companies such as Facebook Inc (NASDAQ:FB) and Twitter, which will continue to require open source software. With strong momentum, no debt, and even some accelerating trends, Red Hat merits a premium to competitors.

Microsoft Corporation (NASDAQ:MSFT) : The Bear Case

Microsoft Corporation (NASDAQ:MSFT) is a well known software giant that is famous for making Windows operating systems. It also makes other software and is the leading software company in the world. Microsoft has acquired several companies, and the latest acquisition( also the most expensive) is that of Skype Technologies in 2011. The deal was priced at $8.5 billion and widely regarded as a waste of money. To put this into perspective, consider that Microsoft could have acquired all of Red Hat and still had some cash left over.