Over the past few years, investors have been sceptical about the growth of Linux, owing to strong competition from Microsoft Corporation (NASDAQ:MSFT)’s Windows and the migration of users from Unix to Linux. However, the recent IDC report and Red Hat’s report cleared all these uncertainties. According to the latest IDC report, it expects paid Linux shipments to increase at a rate of 9%, over the period from 2012-2016, compared to 3% growth of Window’s shipments. Around two-thirds of these paid Linux shipments refer to Red Hat Linux. I think this growth is due to the changing preference of young IT professionals from Windows to an open-source model like Linux.
Regarding migration of users from Unix to Linux, for fiscal year 2013 Red Hat reported that four out of five deals worth more than $10 million were for converting Unix to Linux, compared to only one for Windows to Linux conversion. This shows that more Unix users prefer to upgrade to the Linux version as compared to Windows users.
The decreasing customer traction for Windows was reflected in the fourth quarter, in which, Windows’ EBIT decreased 16.6%, year-over-year, to $2 billion. The lower number of Unix users upgrading to Windows reflects less adoption of Windows as compared to Linux. Supporting this argument is the fact that revenue contribution of Windows is decreasing continuously for Microsoft Corporation (NASDAQ:MSFT). Windows operating system is expected to face decline in revenue from $1.8 billion in 2012 to $1.7 billion in 2013 and $1.49 billion in 2014.
Linux will continue its growth momentum with increased acceptance and increasing migration. There are approximately one million Unix servers in the market that Red Hat could easily replace. They offer market potential of $1.6 billion. If Red Hat is able to capture only 50% of this market, it will be able to double its Linux’s revenue.
Conclusion
Red Hat’s middleware segment is flourishing into a prime revenue driver of the company in the long term. It may face headwinds from market leader International Business Machines Corp. (NYSE:IBM), but its attractive rates will increase its market share in the long term.
Red Hat is the market leader in Linux. However, the growth of Linux was under a cloud of uncertainty, which recent reports cleared. Linux also faces strong competition from Windows, but it is gaining wider acceptability from IT professionals.
These strong aspects keep me positive about the company’s long term growth.
The article Can This Tech Company Maintain its Growth Momentum originally appeared on Fool.com and is written by Madhukar Dubey.
Madhukar Dubey has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. and Microsoft. Madhukar is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
