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

RALEIGH, N.C. – Wall Street analyst Katherine Egbert of Jefferies & Co. came to Red Hat’s headquarters for some on-site research at the Linux software and services firm. To the relief of the Hatters, she was impressed.

In an extensive research note written after the visit, Egbert upped the target price for Red Hat shares $3 to $48 while maintaining her “Buy” rating.

Red Hat shares traded up slightly Wednesday morning at $41.61.

The analysis and ratings of Street insiders can send stocks soaring or tumbling. Egbert usually is respectful of the Hatters, so her latest note probably didn’t come as a surprise among Red Hat faithful. But the note must have been gratifying.

“We come away from yesterday’s onsite meeting in Raleigh with increased confidence in our [cash flow estimates] for FY11 and a positive attitude about the company’s execution and strategic direction,” Egbert wrote. “Reiterate Buy.”

In discussing risks, Egbert noted there are several, including “Oracle’s entry into the enterprise operating system market” as well as “flattish margins.”

Oracle often criticizes Red Hat, but Red Hat management isn’t worried, Egbert noted.

“Management does not seem concerned with Oracle’s renewed efforts in Linux and the cloud, citing customer dissatisfaction with Oracle’s growing wallet share [amount of business done with current clients],” she said.

Just last month, a buy of Novell’s SuSe Linux was seen as a potential threat to Red Hat. And rumors come and go about Red Hat being an acquisition target for IBM or another large firm. But Egbert spent little time on the M&A front, choosing instead to delve into Red Hat’s product offerings.

Silver and gold linings in the “cloud”

On the positive, side, she pointed out:

• Red Hat Enterprise Linux (“RHEL”) 6 is “right around the corner. RHEL 6 is slated to go into general availability before December” with “likely” boosts to virtualization technology and pricing that is “better” in “accounting upside from multi-core systems.”

• “Private cloud technology on the way.”

The IT sector loves “cloud” computing that enables PC and server sharing on demand across networks. (Note IBM’s launch of a new “cloud” lab on Tuesday. IBM is a Red Hat cloud partner.)

At Red Hat, Egbert said, the Hatters have a “new private cloud enablement technology” that “should go into beta shortly. The goal is to provide existing customers with technology that takes virtualized data centers to the next level in terms of portability and scalability. They are advantaged by the familiarity of the RHEL/RHEV [Red Hat Enterprise Virtualization] platform, its low cost, and the widespread use of RHEL with public clouds.”

In much detail, Egbert dug into Red Hat’s cloud strategy and successes to date, suchas its work with Amazon and the recent customer win with Dreamworks.

“All about the cloud,” Egbert noted of the growing market and Red Hat’s attempts to capitalize on it. Red Hat “powers some of the largest scale cloud deployments” already such as Amazon.

Plus, Dreamworks has had “success in dramatically lowering their time to render new animation frames.”

While Red Hat faces competition in the cloud space, Egbert said Hatter engineers are “close to debuting” technology that “takes virtualization to the next level” with virtualized data centers becoming “private clouds” rather than shared “public clouds.”

“From what we know, this effort seems similar to what VMware introduced in August with vCloud Director and vFabric,” Egbert said. “The new products include customer self-service features, monitoring, provisioning, billing, high availability, tie in with storage systems and existing operational/management assets. Red Hat believes they have a scale advantage over VMware, citing Dreamworks’ success in dramatically lowering their time to render new animation frames, from hours to minutes.”

Egbert sees three advantages for Red Hat in the cloud world: Familiarity of Red Hat’s offerings already; low cost, and the “widespread use” of RHEL in public clouds such as Amazon. (Read about Red Hat cloud offerings here.)

JBoss is delivering

Egbert also likes what is happening in middleware – the “glue” that connects various applications – and Red Hat’s JBoss product line.

“The middleware market is coming to them,” she wrote. “The slowing economy has coincided with an increased sales focus and a ramp-up in professional services capabilities to create a tailwind behind the use of JBoss. Management reiterated their expectation that JBoss can grow at twice the rate of the core business, as it did last quarter.”

Affirming the “Tailwinds”

Finally, Egbert also said she is “more confident” about Red Hat’s cash flow estimates.

In its most recent earnings report last month, Red Hat lifted its revenue projections for the year to between $877 million and $885 million, up from $835 million and $850 million.

At that time, CEO Jim Whitehurst said Red Hat said the company has a “lot of tailwinds behind us.”

Red Hat topped Street expectations for revenues and profit last quarter. And according to Egbert’s analysis, the skies are looking greener, too, with tailwinds blowing cloud customers Red Hat’s way.

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