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Red Hat Inc (RHT), Adobe Systems Incorporated (ADBE): A Great Play on Cloud-Based Software

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The world’s leading producer of Linux software and operating systems, Red Hat Inc (NYSE:RHT) may be one of the remaining exciting growth stories left whose share price hasn’t inflated in the current bull market. In fact, shares of Red Hat Inc (NYSE:RHT)are much closer to their 52-week lows than they are to the highs. With tremendous growth projected over the next several years, a strong balance sheet, and a very well-regarded product line, is Red Hat Inc (NYSE:RHT) poised to deliver another leg up for its shareholders, or is it still a bit overpriced?

Red Hat Inc (NYSE:RHT)

About Red Hat

Red Hat Inc (NYSE:RHT) provides a variety of open source software products, including its Enterprise Linux and JBoss Middleware. Linux is an operating system for enterprises that is designed to run on servers, workstations, and PCs. The company’s JBoss Middleware is an assortment of technologies for developing and managing software applications, and the company’s product offerings can be deployed via the cloud, which is one of the fastest-growing areas in computing today.

The company operates all around the world, and splits its operations into three separate business units: The Americas; Europe, Middle East, and Africa; and Asia Pacific. The company plans of aggressively expanding its operations, particularly in Asia and Latin America, where it recently established a corporate location.

Very Expensive, or Is It?

At over 39 times last year’s earnings, Red Hat Inc (NYSE:RHT) appears to be a very expensive company, but don’t be fooled. Red Hat Inc (NYSE:RHT) has an excellent history of growth, and has barely begun to tap their full potential as companies that use their software are just beginning to upgrade to a cloud computing-based infrastructure. Also worth nothing is that Red Hat has almost $900 million in cash on its balance sheet and no debt, which is a very positive trait for a prospective long-term investment.

Red Hat is projected to earn $1.33 per share for the current fiscal year (2014), and this is expected to grow to $1.58 and $1.87 in fiscal years 2015 and 2016, respectively. This corresponds to annual earnings growth rates of over 18% each year, which along with the cash more than justifies the higher P/E multiple.

Other Plays on the Sector

As far as rapidly growing software companies, I think Red Hat is pretty much in a class by itself. As an alternative, you could invest in a larger, more established software provider such as Adobe Systems Incorporated (NASDAQ:ADBE), or even a very diversified software and hardware company such as Microsoft Corporation (NASDAQ:MSFT), both of which should provide more stability and yield at the cost of high growth potential.

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