Can Red Hat Stay Red Hot?

Linux vendor Red Hat (NYS: RHT) is gearing up for a fourth-quarter report after Wednesday's market close. The stock is off to a great start in 2012 with a market-trouncing 28% return so far. Will Wednesday's report fuel another jump or are Red Hat investors headed for heartbreak hotel?

Wall Street doesn't expect any major fireworks. The average analyst sees adjusted earnings of about $0.27 per share on $291 million in sales. Hitting those targets exactly would be a 4% earnings boost compared to the year-ago period on 19% stronger revenue.

But don't take those estimates as absolute gospel. The company hasn't missed an earnings estimate since the summer of 2008 and crushed Street expectations in each of the last four outings. Both results would also be significantly below Red Hat's recent trends: Sales are growing at a 25.6% run-rate these days while trailing earnings gained 46% year-over-year.

Red Hat delivers these strong growth rates by stealing market share from larger rivals. At the last earnings report, CEO Jim Whitehurst told me that his company is busy stealing enterprise-class server installations from Microsoft (NAS: MSFT) Windows but also from the Unix flavors offered by IBM (NYS: IBM) and Hewlett-Packard (NYS: HPQ) .

These Linux systems offer a low-cost but high-quality alternative to traditional high-end operating systems, and it only makes sense to see a major shift in market shares when IT budgets are under pressure. IBM has reacted to the Linux threat by allowing Linux programs to run on its AIX platform; HP is happy to sell its own servers running Red Hat and other Linux versions outright. Not even Redmond can afford to ignore the penguin anymore.

I'll pay close attention to any discussion of these share shifts in this report, and revenue figures are far more important than earnings. The company can largely manage its earnings to whatever level management sees fit by pulling levers in the sales and advertising budgets, but a sale is a sale. At this early stage in Red Hat's rise, it's all about carving out a large footprint as quickly as possible.

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