How Can Red Hat Be Worth More Than Sun?

Matt Asay notes a milestone today: Red Hat is just about to surpass Sun Microsystems in market capitalization. At the moment, Sun's market capitalization is $2.69 billion and Red Hat's is $2.61. If the trends in share prices for these two companies continue, Red Hat's market cap will soar right past Sun's. Does this make any sense?

The valuations of many public companies in America make very little sense at the moment, and there is some nonsense in the valuations of both Sun and Red Hat. Back in November, I questioned the valuations of both of these companies, based on the fact that they sold for approximately the amount of cash they both have.

Since that post, Red Hat's share price has nearly doubled, while Sun's has fallen. The main difference between the performances of the shares came from Red Hat's continuing success with its model of getting revenues from service and support for free software. Red Hat just turned in yet another sterling quarterly financial performance.

And so it goes in this bizarre economy. Sun's revenues are over $13 billion compared to $627 million for Red Hat. Sun has far more IP, a more vast patent portfolio, more history, products positioned in good categories, and a solid open source strategy. It doesn't have good earnings, though, or positive buzz. It's cheap enough to be an easy acquisition target. And so it goes...