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I'm initiating coverage on RHT: Strong Buy

*DISCLAIMERS*
- I am not a registered, certified, credible, gifted or even competent securities analyst. I wouldn't take stock advice from myself.
- My recent track record commenting on stocks is suspect.
- I used to work at Red Hat, but there is no insider information here. Just opinions.
- I really want RHT to go up to about $25 by next week. I have a small truck-load (a hand-truck) of options at $23.50 that expire next week, and the kids need new shoes.

OKAY, now that we have that out of the way (and if you're still reading, bravo!): I am initiating coverage on Red Hat (RHT) as a Strong Buy, with a 3 day price target of $25. Yesterday's sluggish MSFT earnings put me over the edge on this - as Red Hat said a couple of years ago when it acquired JBoss, open source is "changing the economics of IT in favor of the customer", and I believe it is starting to show-up in the earnings of proprietary-only software companies.

More importantly, though, the macro-economic conditions are worsening (trust me... I'm trying to sell a house right now), which is a perfect time for low-cost replacements that can help corporate IT organizations cut costs without losing performance. In fact, when Red Hat first launched Enterprise Linux back in 2002, the economy was slow - the message of replacing Unix with Linux resonated because CIOs needed a new approach, and RHEL launched like a rocket (a million servers sold in the first 3-ish years!).

I suspect that cutting costs will rise to the top of the list again for CIOs toward the end of this year, and into next - which is the perfect environment for a strong Red Hat (and other open source players) to accelerate adoption of low-cost, open source replacements for virtualization, proprietary middleware (like JBoss), databases and developer solutions (like Ruby on Rails). At FiveRuns, we are seeing acceleration in adoption of Rails for some of the same reasons, I think.

So, buy RHT. And fast (like today, or early next week would be good).

Google App Engine tanks Google's (GOOG) stock price

When Google launched the much anticipated App Engine last week, I immediately sold all of my GOOG shares... uh, I mean, share (I'm diversified). Why you ask? Recently, I had a very interesting conversation with an old Red Hat colleague of mine, rPath founder Erik Troan. We were talking about EC2, Joyent, Mosso, and the like, and I asked him why Google hadn't yet come to the hosting party. Erik pulled out his UVA economics degree, and wisely pointed out that hosting would "kill their margins." A week later, enter Google App Engine.

If you think about Erik's comment, he's right. Google's operating margin is 30+%! I challenge you to find any hosting company who has operating margins outside of single digits, no matter how efficient they are. Hosting is a competitive, cut-throat business, and it's only going to get more competitive as anyone who has an under-utilized "cloud" will try to enter this space. Conversely, Amazon's operating margins are in the 5% range, so it's a fair bet that better utilization of their IT assets just might improve their margins. Unless Google figures out how to drop ads into every app in App Engine, you can bet that they will be giving away a lot of free hosting so that they don't materially affect their margins, so drink up.

And if that's not enough to make you short the googster, here's the kicker: App Engine doesn't support Rails apps. Python is sooooo 2005.

(Seriously, though - Larry or Sergey, call me if you want FiveRuns to help you with the whole Rails support thing. We don't want to see your stock price tank or anything.)