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TheStreet Open House

Red Hat's Valuation Finally Matters

Stocks in this article: RHT AMZN CRM ORCL VMW MSFT

So, assuming Red Hat doesn't immediately fix its "large deal arrangements" deficiency, how much longer are investors willing to wait for management to harvest the sort of premium presumed by its stock price? While I'm not ready to say Red Hat is suddenly losing its way, management, by virtue of its own guidance, suggests that growth is expected to slow.

For the December quarter, revenue is expected in the range of $381 million and $384 million, which implies year-over-year growth of (only) 13% and 2% sequentially, falling short of Street estimates. Investors must reflect on what these numbers and the soft guidance might actually mean.

Again, this is where Red Hat's valuation, which, even after the 12% decline, doesn't leave much margin for error. That the stock is still trading at 30 times next year's fiscal estimates is discounting the fact that the virtualization/cloud industry is always in transition. Today's leader can easily be tomorrow's has-been. And Red Hat, which is now being attacked from all angles, not only must prove which path it's on, but that it deserves -- what still remains -- an expensive valuation.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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