Note: The Skinny blog is written by Rick Smith, editor and co-founder of Local Tech Wire and business editor of

RESEARCH TRIANGLE PARK, N.C. – Wall Street analyst Katherine Egbert at is giving a “thumbs up” to (NYSE: RHT).

In a research note issued overnight, Egbert upgraded the world’s top Linux software developer to a “buy” and boosted her projected stock price to $35.

“A rebound in low and mid-range server shipments, increased pricing due to more CPU power per server, and discipline on discounting should benefit Red Hat this year and into next,” Egbert wrote in an extensive research report.

“The recent pullback is an opportunity,” she added, referring to recent turbulence in the market.

“Upgrade to Buy,” Egbert added.

Egbert had rated Raleigh-based Red Hat as a “hold” with a target share price of $30. It’s 52-week high is $32.19, nearly double its 52-week low. She had cut Red Hat to “Hold” last July.

Her upgrade follows three other analysts who recently listed Red Hat as a “Buy” or “Outperform” – Oppenheimer to “Outperform” in April, UBS initiated as a “Buy” in April and William Blair launched coverage as “Outperform” in February, according to Yahoo! Finance.

Red Hat closed at $28.90 on Monday, up $1.41 or 5.13 percent as buyers swept in on RHT during Monday’s bull stampede.

Why the upgrade?

“The yottabytes are coming,” Egbert wrote in the headline on her report.

In other words, the amount of data is continuing to explode. And that means more powerful servers with Red Hat Enterprise Linux there to provide management solutions, Egbert says.

First, what’s a yottabyte?

“The combined space of all hard drives on Earth does not yet equal one yottabyte,” Egbert noted “The entire Internet was estimated to contain close to 500 exabytes in 2009.”

Here’s how techTerms defines yottabyte:

“A yottabyte is 2 to the 80th power, or 1,208,925,819,614,629,174,706,176 bytes.

“It can be estimated as 10 to the 24th power, or 1,000,000,000,000,000,000,000,000 bytes. The yottabyte is the largest unit of measurement for computer data, consisting of 1,024 zettabytes.

“Fortunately for those of us finite beings, yottabytes are not used very often. The prefix ‘Yotta’ comes from ‘Iota,’ which is the ninth letter of the Greek alphabet. However, it seems more fitting that ‘yotta’ refers to a ‘lotta’ bytes.”

The Red Hat money model

According th Egbert, more data means more multi-core powerful processors, and in the server space Linux continues to grow at a faster rate than either Windows or nUnix.

In her key points, Egbert noted:

“• An expected rebound in server sales should benefit Red Hat this year. Shipments of Linux-based servers are expected to be up 10% in 2010 vs +7% for Windows and +4% for Unix, per IDC. The increasing server shipments can only help Red Hat, which grew cash flow 8% and billings 10.7% during the recession despite a >20% dip in shipments of volume-based servers.

“• The move to multicore servers has probably been the most important trend underlying Red Hat’s excess growth.”

In a later point, Egbert expanded on the multicore point and how Red Hat makes money.

“It’s a multicore world. The move to multicore servers has probably been the most important trend underlying Red Hat’s excess growth. Catalyzed by the rise of virtualization technology and largely responsible for the flattening growth in the volume server unit shipments expected post 2010, the mid-tier and low-end server market is mainly staffed by x86 machines, and almost none of which ship with single cores.

“The trend towards higher core servers is set to continue this year, with new 8 core offerings from Intel … and AMD … soon to be made available. Red Hat charges per CPU i.e. by the processing power of the machine, and so they are able to capture the upside from these bigger machines.

“There is also an emerging trend towards very large purpose-built boxes for OLTP, data warehousing, [business intelligence’], analytics etc. that is typified by Oracle’s Exadata machine. While Exadata runs Oracle Linux, we expect other firms to team up with Red Hat as they beef up their array of servers built for very high-end data processing.”

Egbert does see a risk from Oracle, following up on its acquisition of Sun, but still felt comfortable enough to raise the stock valuation.

“The only perfect hedge,” she added later, “is in an English garden.”

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