“When it comes to tech,” Cramer said Tuesday, “value destruction is far more important than value creation.”
Just think about what Apple has done to the music and mobile phone industries. And how VMware’s products eliminate the need for excessive amounts of information-technology hardware. Or Salesforce.com’s use of cloud computing to threaten enterprise-software makers everywhere.
Cramer likes Red Hat for the same reason he praises these companies. The open-source software firm is the leading provider of Linux, an operating system that competes with Microsoft’s Windows. Linux holds such immense potential that Microsoft CEO Steve Ballmer has said it’s the biggest threat to his company out there.
Of course, you may wonder how Red Hat makes its money given that open-source software is free for anyone to use. Well, it earns revenues through services. Any system, open source or not, needs maintenance and that’s where Red Hat comes in. The company presently controls 75% of the pay-for-support Linux market, but has also used acquisitions to move into virtualization, consulting, middleware and storage-infrastructure software, expanding its addressable market to $50 billion.
Now, in terms of owning the stock, investors should note that RHT is up 48% in the past 12 months, and it trades at a soaring multiple of 46 times next year’s earnings. So that begs the question: Is it worth the price?
That’s what Cramer wanted to find out, so he invited CEO Jim Whitehearst onto “Mad Money.” Watch the video of the full interview.
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