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Red Hat's Growth Strategies Deserve a Tip of the Cap

Tickers in this article: HPQ IBM MSFT ORCL RHT VMW
NEW YORK (TheStreet) -- Software giant Red Hat will report results for its fiscal second-quarter on Monday after the market close.

From a valuation point of view, I haven't been the Red Hat's biggest fan -- not when the stock carries of price-to-earnings ratio of 67, which is five times more than both Oracle and Microsoft .

I don't mind disclosing that, as a value investor, I've always resented Red Hat for its costly premium. You can save your "keep emotions out of investing" emails -- I'm over it now. I've come to accept there's not much a company can do when the Street has already made up its mind that it's going to love the stock no matter what, especially companies having anything to do with the Cloud and software virtualization.

To that end, while I won't make an all-out plea for investors to jump in the stock today, after a solid June quarter by Red Hat that included new strategic growth initiatives such as Open Shift and Open Stack, Red Hat may have uncovered new ways to justify investors' trust. As with "Big Data" and other recent IT buzzwords, Open Stack, which has attracted interest from Microsoft, Hewlett-Packard and VMware , has begun to generate considerable momentum.

What's more, unlike Oracle, which had an absolutely brutal June quarter and a less-than-joyful first quarter Wednesday, Red Hat's management continues to do an excellent job of balancing expectations with actual performance. So, as with IBM and Oracle, which have shown eroding growth trends, growth has never been an issue for Red Hat.

With revenue climbing more than 15% in the June quarter, I've had no choice but to tip my cap to the company's management, especially since Oracle produced growth of less than 1%. Unlike Oracle and, to some extent, IBM, Red Hat continues to outperform in its subscription business, which grew 16% year over year and 4% sequentially. Not to mention, the company beat earnings-per-share estimates by 1 cent.

Now, Red Hat bears and perhaps Oracle bulls might suggest that I'm "exaggerating" the June performance. But in the context of a weak enterprise spending environment, which (pretty much) killed hope for any growth in software sector, I can counter that argument and suggest that it's "sour grapes."