This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Red Hat: Good Growth, Tricky Valuation

NEW YORK ( TheStreet) -- I didn't give virtualization giant Red Hat (RHT - Get Report) a glowing endorsement ahead of the company's fiscal fourth-quarter earnings report.

While concerns still remain and the company did, in fact, miss on revenue as I predicted, I'm nonetheless impressed the report arrived "less bad" than expected. However, I do wonder how long investors will wait for Red Hat to produce the sort of premium presumed by its stock price.

Investors are still betting the company will outperform the likes of Oracle (ORCL) and VMware (VMW) in cloud and virtualization services. Given Red Hat's soft operating margin, which is more than half that of Oracle and lower than both VMware and Microsoft (MSFT), investors are still playing the wrong odds.

This is a recurring theme for Red Hat. The margin situation has not been appealing for some time. But I did notice some improvement this quarter. Unfortunately, Oracle is improving as well. Red Hat's investors have never appeared bothered by this sort of detail as long as the top line looks good. To that end, the company delivered.

Revenue arrived up 17% year over year, but only advanced 1% sequentially. However, even though Red Hat was coming off of a strong third quarter, which produced 18% revenue growth that then advanced 7% sequentially, the fact that this quarter's sequential improvement was almost flat was not a surprise.

Essentially, after Oracle's revenue miss, which arrived down 2%, it wasn't hard to expect unfavorable results from Red Hat, especially since VMware had issued weak guidance for this quarter. Also, according to Richard Williams, an analyst at Cross Research, who has a hold rating on the stock, "The channel checks showed that activity just stopped after the first week of December."

He was proven right. Consequently, Red Hat reported sales of $347.9 million for the quarter, which was shy of Street estimates of $349.3 million. That being said, 17% is still solid in this environment. But investors were disappointed by fourth-quarter billings. This is the metric that indicates the strength of future sales. Billing arrived at $454 million, which was more than 3% shy of estimates.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
RHT $76.48 0.00%
AAPL $112.12 0.00%
FB $93.24 0.00%
GOOG $643.61 0.00%
TSLA $220.69 0.00%


Chart of I:DJI
DOW 17,084.49 +33.74 0.20%
S&P 500 2,014.89 +15.91 0.80%
NASDAQ 4,830.47 +19.6820 0.41%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs