Red Hat Set To Surpass Sun In Market Capitalization

mytrip writes "In what may come to be seen as a deeply symbolic moment in the history of operating systems, Red Hat is on the verge of surpassing Sun Microsystems' market capitalization for the first time. Sun, perhaps unfairly, represents a fading Unix market. Red Hat, for its part, represents the rising Linux market. Given enough time for its open-source strategy to play out, Sun's market capitalization will likely recover and outpace Red Hat's."

Comments

Wrong.

[AltGrendel]

Definition - Market capitalization:
an estimation of the value of a business that is obtained by multiplying the number of shares outstanding by the current price of a share

Re:Wrong.

[Facetious]

I believe what you are missing here is the cost side of things. Sun is a software AND a hardware vendor. Margins are much thinner on hardware, meaning that Sun's $13B - [large cost] produces profits on par with Red Hat's $700M - [small cost] equation.

Re:Wrong.

[Estanislao Mart�nez]

That is largely right, except for one detail: Red Hat is producing profits, but Sun recently posted a big loss, mostly due to a 1.45B impairment of goodwill charge. (In English: they revised their estimate of the value of some of the companies they've purchased, down 1.45B).

To answer the original thread poster's question: it's not how much you sell, it's how much your keep.

Re:Wrong.

[ceoyoyo]

It's almost as silly as judging a company by it's gross sales.

What you're looking for is PROFIT. Sun's profit was 88 million, or 11 cents per share in the last quarter (down 73%) while Red Hat's profit was 24 million, or 12 cents per share, up about 7%. Sun is forecasting that they will lose money over the next year, while Red Hat is forecasting (and analysts agree) that they will continue making money.

Sun still made more money than Red Hat, but even Sun agrees that's going to change.

Re:Wrong.

[jadavis]

I was asking if looking at the market capitalization really said more about how the company was doing than its sales numbers?

It's easy to get high revenue -- just sell stuff at or below cost. You won't make a profit, but you'll have a lot of sales.

Do we now judge the success of tech companies by looking at what non-technical financial people think the company might be worth in the very short term?

There are many ways of evaluating a business as a whole, some are subjective, e.g. something "only a technical person can understand why this is good", and some are objective, e.g. something that any financial expert can understand.

You may like to think that you have a lot of insight about the value of a company because you know something about the technologies they use or produce. And that's true, to some degree.

But your ignoring the numbers outright. And the numbers mean a lot. If Sun continues to lose money, and never turns a profit, then its value is precisely the liquidation value of its assets. I'm not saying that's what will happen, but profit is clearly important to the value of a business.

And you're also ignoring all the subjective aspects that you have no ability to evaluate. How well are they targeting their value proposition in the latest advertising campaign? How competent are the executives? Are they using the right pricing model?

I don't buy for one second the idea that non-technical people are clueless about the technology business.

And I also don't buy for one second this "very short term" mentality. Investors choose investments that have some intrinsic value that they believe will hold in the long term. If they don't, they know they might be caught holding the bag, and lose everything.

There are exceptions, "irrational exuberance", etc. But most money is tied up in things with intrinsic value. Those investments may go up or down, but they generally won't go to zero.

Re:Wrong.

[tinkerghost]

And I also don't buy for one second this "very short term" mentality. Investors choose investments that have some intrinsic value that they believe will hold in the long term. If they don't, they know they might be caught holding the bag, and lose everything.

I am going to point you to the current financial meltdown of some of the biggest banks & trading houses in the US(World) as proof that a large number of "Investors" are choosing investments that have intrinsic value. Most of these "commoditiezed mortgages" were junk, that's why they were being sold. However "investors" saw a chance at a quick buck & bought them up like a 3 year old buying penny candy.

I use "investor" loosely here as they aren't investors, they are speculators. The majority of the money being moved around on any given day isn't about long term investment. It's about short term speculation - hoping to grab a 1-3% growth in 14 days or less, followed by bailing & reinvesting hoping for an annual return of 20% or more.

Investors buy for the long haul. IBM stock isn't a huge mover & isn't likely to make you rich. But it usually shows steady growth and has a dividend.

The majority of the money in the stock market may in fact be invested in long term stocks and bonds, but what people see on the news at the end of the day is how the day traders and speculators are moving. And they are always moving to maximize todays profit - even if that means destroying the long term sustainability of a company to do it.

Shareholders have ousted several boards for favoring long term profit over the quarterly report, so it's not surprising that boards & CEO's are pushing more for the quick buck & less for the sustainability for that profit.

Re:Wrong.

[Chris Burke]

Is there anyone who thinks that market cap is a good metric to judge a company's overall success by at this particular moment in time? Pretty much every stock has been hit and hit hard, and the degree to which the size of that hit has anything to do with the company itself is highly questionable. The relationship between stock price and a company's success is ephemeral in the best of times, but now?

Re:Wrong.

[civilizedINTENSITY]

I think you're right about their confusion. RH's net income last year was $403,000,000. This is down from their net income of the year before: $473,000,000. What I think is confusing people, perhaps, is their cash flow statement, which shows a negative value of $1,3B. Where did all that cash go if they have net income? Treasury Stock. A negative $2,6B went to stock repurchase.

If a corporation reacquires some of its stock and does not retire those shares, the shares are called treasury stock. Treasury stock reflects the difference between the number of shares issued and the number of shares outstanding. When a corporation holds treasury stock, a debit balance exists in the general ledger account Treasury Stock (a contra stockholders' equity account).

If the corporation were to sell some of its treasury stock, the cash received is debited to Cash, the cost of the shares sold is credited to the stockholders' equity account Treasury Stock, and the difference goes to another stockholders' equity account. Note that the difference does not go to an income statement account, as there can be no income statement recognition of gains or losses on treasury stock transactions. (This, of course, is reasonable since the corporation operates with total "insider" information.)

The trend looks better, then: Net Tangible Assets (in 1,000s): $1,808,000 $4,032,000 $2,805,000
if we took into account the buyback (as though they had bought IBM instead of themselves)
$1,808,000+2.6B=4.4B $4,032,000 $2,805,000, which is UP not down from the previous year.

Treasury stock causes the Balance sheet and Cash Flow to look negative, since the stock purchased come out of cash flow (as Sale Purchase of Stock (2,587,000)) and also shows up as a negative on the Balance sheet. Since the Income Statement doesn't show Treasury Stock, it looks good.

Market cap is speculative bullshit

[blind biker]

Anyone with a brain (ok, it takes perhaps a bit more than just half) knows that the stock market, as an entity, is an idiot.

There, I said it. I expect to be modded down by Linux fanboys (which is NOT the same as intelligent Linux users, mind you. I like to think I belong to the latter).

Re:Thank you Sun

[rbanffy]

If you refuse to make a profit, you can't blame those who don't when they make one by offering useful services to a large community.

Re:Thank you Sun

[Anonymous Coward]

When I walked into a data center 10 years ago, I saw mostly HP servers. Now I'm seeing a lot more Sun boxes. I guess it depends on your sample population.

Re:A relatively unimportant event

[fm6]

I fail to see why this is a "deeply symbolic moment in the history of operating systems" and not merely a moderately interesting moment in the corporate history of the respective companies (or, more specifically, in Red Hat's corporate history).

It's symbolic because Sun was one of the leaders of the big change that occurred at the beginning of the microcomputer era, when Unix started to replace the old mainframe OSs. And it's symbolic because Sun is the last major player to consider Unix part of its core strategy. Other Unix vendors have become insignificant (SGI, SCO), disappeared, or changed their emphasis to Linux and Windows (IBM, HP).

Also, if you want to run a supported, commercial Unix on commodity hardware, Solaris is really your only option. Which is why both HP and Dell offer Solaris preinstalled. Though I don't suppose they sell a lot of those systems.

As a benchmark of the rise of Linux and the fall of Unix, yeah, it's not that big a deal. But symbols and benchmarks are different things.

This may all be a big yawn to somebody whose career started after Linux began to take over. But to those of us who spent most of our professional lives working with Unix (I started in the early 70s, before Unix was even available commercially; I've worked for 5 different Unix vendors, including Sun) it's as big a symbol as the takeoff of a certain helicopter on Tuesday.

Sun's missteps over the year

[br00tus]

First - Sun had a UNIX for x86 in 1992-1993 which was superior to Linux at the time. This is not hindsight being 20-20, my manager complained to me in 1997 (we had Solaris x86 dekstops) how Sun was screwing up Solaris x86. Red Hat only got things like a decent kernel crash dump put in recently - Sun really messed this up.

Secondly - too slow to embrace "open source". Red Hat did and now their market cap is about to surpass the company that did not (soon enough anyhow).

Thirdly - how necessary was dumping the Berkeley-like SunOS for the System V-like Solaris? I personally think they put too much of an effort into this, although opinions may vary.

I watched SGI get killed in the mid-1990s. People began doing low-end graphics stuff on Macs or even Windows, and suddenly SGI only became a company for the high-end. It was easy to see that this was the future for Sun. Now Wall Street has collapsed, and the big market Sun had has dried up. And Wall Street has gone from an environment where in 2001 Linux was just a test project, to where some companies are now almost all Linux on the UNIX front, and are looking to dump their "legacy" Sun stuff. It didn't have to be this way.

I first encountered Sun in the late 1980s and until recently I still had a lot of love for them. Red Hat's lack of things like a decent kernel crash dump bugged me. But now Red Hat really does have almost all of the stuff that a critical production server needs. Windows-heavy shops like Suse a lot. I know a lot of UNIX admins and shops that develop for UNIX, including in the traditional financial companies - everywhere the new machines coming in are Linux, and a lot of places are trying to phase their Suns out. I think metaphors of a Sun set are becoming appropriate. Sun screwed up x86 and they screwed up "open source" and now Solaris is going to be relegated to the dustbin that Ultrix and HP-UX are in. If you search for admin jobs on Craigslist, Solaris doesn't even have much of a lead on AIX. With Red Hat now having journaling filing systems, virtualization, decent kernel crash dumps, production Oracle instances that run as well (or better) than on Solaris, high availability and so on and so forth, I can think of very little that Sparc's running Solaris have that a cheaper x86-64 running Red Hat doesn't have.

Re:Thank you Sun

[Anonymous Coward]

But not necessarily in the stock market. Just because it's wrong today, doesn't mean it'll be right tomorrow (or even some time down the road) to let you capitalize on being right today.