Red Hat (RHT) earnings preview: what to expect?

Carla Olson | 8:33 am ET, 21 Jun 2018

On Thursday, June 21, after the closing bell Red Hat, Inc. (RHT) is announcing its Q1'19 earnings.  Red Hat shares are now trading at $172, up 0.82%.  What can you expect from RHT earnings?  What will be the biggest RHT stock news?  

For the first quarter, the company is expected to make $807 million in revenue, a 19% increase over last year's first quarter.   The consensus Earnings Per Share (EPS) is $0.68, representing a 23% year-over-year increase.

RedHat has a strong history of growth.    Both revenue and EPS have grown double-digit in the past 8 quarters.  

The company has also massively exceeded Wall Street analyst expectations.  In the most recent quarter, the company beat the Wall Street consensus EPS by 11 cents, 14% above what the analysts had predicted.

Red Hat's growth is predicated on its strong partner base, which includes companies such as Google Cloud Platform, Microsoft Azure and Amazon Web Services, IBM and Dell.  Those partnerships are helping Red Hat sell its cloud-based technologies and products; management expects the partner base to drive 80% of new bookings in the near term.

Over the last couple of years, Red Hat acquired a number of startups: CoreOS, Permabit, Codenvy, 3scale, Ansible, FeedHenry, eNovance, Inktank, and Codenvy. The company’s acquisitions that are now integrated with its mainstream business have expanded its product portfolio into new segments, such as hybrid cloud computing, cloud management, OpenShift, OpenStack, and storage.

What drives Red Hat's growth, in particular, is OpenShift.  The market for OpenShift is expanding rapidly.  Another driving force for the quarter is Red Hat’s containerized application offering.

Over the last month, Red Hat, Inc. (RHT) returned +4.51%.

Red Hat, Inc. (RHT) forward P/E ratio is 43.65, and it’s high compared to its industry peers’ P/E ratios.

Red Hat, Inc. (RHT) average analyst price target ($168.45) is -1.28% below yesterday's close-of-business price ($170.64).  The RHT stock forecast does seem particularly bullish at this point. 

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Red Hat, Inc. (RHT) Buy or Sell Stock Guide

Updated at: 5:26 am ET, 25 Dec 2018

The analysis below may be helpful to you if you have any of the following questions about RHT stock:

  • Is RHT a buy or a sell?
  • Should I sell or hold RHT stock today?
  • Is RHT a good buy / a good investment?
  • What are RHT analyst opinions, recommendations, ratings?

Here are RHT stock buy reasons/signals:

1. As a leading voice in the open-source community, Red Hat controls roughly 75% of the paid Linux server OS market.

2. Linux OS has been the fastest-growing server OS over the past decade, replacing Unix and other proprietary systems.

3. Red Hat has made some progress duplicating its Red Hat Enterprise Linux success with open-source middleware, virtualization, storage, and IT management tools, and the firm has substantially expanded its market opportunity as a result.

4. Red Hat has pioneered the open source model and is a well-known name in the Linux operating system (OS) market. The company has successfully expanded product offerings over the years. From being a single-product company, it has transformed itself into a multi-product one with solutions across the software stack.

5. Red Hat remains focused on expanding its RHEL customer base, exposure to hybrid cloud infrastructure and containers. Red Hat noted that its total addressable market (TAM) is more than $66 billion in size, with significant exposure to Middleware, OS and Cloud management. The company believes that both OpenShift (uses RHEL to scale apps) and OpenStack (uses RHEL to scale infrastructure across hybrid cloud) are important for long-term growth particularly in hybrid cloud computing environment.

6. Red Hat has been building its portfolio through strategic acquisitions, which are generating incremental revenues, strengthening technology leadership and resulting in a more favorable mix of business. The company’s strategy of making acquisitions (3scale, Ansible, FeedHenry, eNovance, Inktank, Codenvy) that can be easily integrated into current business has expanded its product portfolio into higher-growth segments, such as Hybrid cloud and other emerging technologies (Cloud Management, OpenShift, OpenStack, and Storage). From time to time, the company also acquires organizations with competing technologies with the intention of killing rival products.

7. Apart from accretive acquisitions, Red Hat has a number of collaborations with established IT players like Hewlett Packard Enterprise, IBM, Microsoft, Oracle, SAP SE, Cisco, Dell, Fujitsu Limited and many others. The company’s collaborations with cloud providers like Amazon, Google and now Alibaba positions it for significant top-line growth. Higher deferred revenue for Red Hat (which has a subscription-based revenue model) improves visibility into future top-line growth trajectory.

8. Moreover, the company’s focus on expanding geographies (41.9% at the end of 2017 compared with 40.9% at the end of fiscal 2016) mitigates operating risks and lessens the exposure to volatility in any single market. At the end of fiscal 2017, there were no individual foreign countries in which it earned 10% or more of its revenue from unaffiliated customers.

9. Red Hat has a healthy balance sheet with about $2.32 billion in cash and cash equivalents (and short-term investments) and no long-term debt. The company also generates significant cash flow ($783.7 billion in fiscal 2017). Solid liquidity and cash flow enables it to aggressively buyback shares.

10. RHT quarterly revenue growth was 13.70%, higher than the industry and sector average revenue growth (8.56% and 5.17%, respectively).

11. RHT average analyst rating is Buy.

Here are RHT stock sell reasons/signals:

1. The rise of cloud computing and public cloud vendors such as Amazon, Microsoft, and Google may marginalize Red Hat's offerings.

2. Despite rapid growth for Red Hat's JBoss middleware solutions, the firm has not made a material dent in market share in this space.

3. OpenStack and OpenShift have proved challenging to implement and scale, owing to a lack of trained integrators, and this could stunt growth.

4. Red Hat Enterprise Linux (RHEL) is the core of the company’s business. However, the OS faces significant competition from the UNIX OS, SUSE brand of Linux, Amazon’s & Oracle’s Linux offerings as well as freely available Linux distributions, such as CentOS, Debian, Fedora, openSUSE and Ubuntu. Notably, Red Hat Linux’s adoption rate is comparatively lesser against these freely available distributions as well as UNIX and Microsoft’s Windows.

5. Red Hat continues to invest heavily on new and emerging cloud management technologies. This along with higher acquisition related expenses is hurting profitability. Operating margin declined from 15.1% in fiscal 2014 to 14% in fiscal 2015 and 2016, which further declined to 13.8% in fiscal 2017.

6. The company generates a significant portion of revenues from the International market. Hence, we expect adverse foreign currency exchange rates to impede revenue growth in the near term owing to the fluctuations in U.S. dollar as against the Euro and other foreign currencies (despite the company’s hedging program). Moreover, customer concentration is a headwind.

7. Red Hat’s frequent acquisitions have escalated integration risks. Moreover, we also note that the acquisitions negatively impact the balance sheet in the form of high level of goodwill and intangible assets, which totaled $1.27 billion or almost 26.7% of total assets as of November 30, 2017.

8. RHT stock price ($172.95) is close to the 52-week high ($178.56). Perhaps now is a good time to sell?

9. RHT profitability is declining. The YoY profit margin change was -1.66pp.

10. RHT Price/Book ratio is 24.07, and it’s high compared to its industry peers’ P/B ratios.

11. RHT Price/Sales ratio is 9.88, and it’s high compared to its industry peers’ P/S ratios.

12. RHT short share of float is 6.35%. The stock is much more frequently shorted than the average industry, sector or S&P 500 stock.

What are your thoughts on RHT?

If you liked this analysis, check out Buy or Sell Stock Guides for other stocks.

Disclaimer: The news article above expresses the author’s opinion about the topic of the article. We strongly advise you not to base your investment decisions just on this article alone. If you’d like to become a writer for Finstead Bites, please send us an email at hi@finstead.com.


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