This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
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
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Red Hat May Be a Buy After Turning the Corner

NEW YORK ( TheStreet) -- Another quarter is in the books for software giant Red Hat (RHT - Get Report) and the valuation debate lingers.

The fact that Red Hat's price-to-earnings ratio of 60 is twice the P/E of Oracle (ORCL) and Microsoft (MSFT) put together is tough to reconcile.

But it's been this way for a while. Although several analysts didn't give the company much of a chance ahead of Red Hat's fiscal first-quarter earnings report, management continues to do an excellent job stating their valuation case pretty strongly.

Interestingly, given the lackluster results posted by Oracle and IBM (IBM), it's starting to look as there's a divergence within a sector that has often traded in tandem.

While I'm inclined to believe that tough IT spending environment has had an impact on both Oracle and IBM, I can no longer ignore the possibility that Red Hat is beginning to steal share in areas like middleware. Valuation concerns aside, this is beginning to look interesting.

Revenue growth has never been an issue at Red Hat; nor was it an issue this quarter, with sales climbing 15.4% year over year. The company also did well growing subscription revenue 16% year over year and 4% sequentially. Adjusted net income rose to 32 cents from 30 cents per share -- enough to beat estimates by 1 penny.

Billings, also known as deferred revenue, is the metric that indicates the strength of future sales. These were up 12%. This is a pretty significant improvement from the fourth quarter where Red Hat posted billings that were 3% shy of Street estimates, which (then) prompted management to lower guidance. Not this time. Management issued outlook for both sales and profits were in-line with analysts' expectations.

As is often the case, though, margin showed some struggles, falling off a bit for the fourth consecutive quarter. More than any other reason, this constant lack of leverage has been my biggest sticking point with Red Hat, particularly in the face of stff competition from the likes of Citrix (CTXS) and Salesforce.com (CRM).

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
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

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
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
RHT $67.68 -0.44%
AAPL $127.92 1.20%
FB $80.53 -0.84%
GOOG $572.57 -0.48%
TSLA $196.97 -1.80%

Markets

DOW 17,953.95 -181.77 -1.00%
S&P 500 2,084.79 -16.25 -0.77%
NASDAQ 4,957.6540 -25.1550 -0.50%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs