NEW YORK (TheStreet) -- Since reaching a 52-week high of $81.49 on June 18, shares of Red Hat (RHT) - Get Report , the world's largest provider of open-source Linux software solutions, have lost as much as 18% of their value. And while the stock has rebounded from their summer lows and is now up almost 4% on the year, Red Hat is still 13% below where it was trading three months ago.
From my vantage point, the Raleigh, N.C.-based company, which reports second-quarter fiscal 2016 earnings results Monday after the closing bell, has done nothing to warrant the punishment the stock has taken. Last quarter, the enterprise cloud and software virtualization specialist, which competes with the likes of VMware (VMW) - Get Report and Citrix (CTXS) - Get Report , extended its streak of consecutive quarterly earnings beats to 11.
Better still, not only did both revenue and earnings exceeded the analysts' average estimates, the company posted adjusted earnings per share of 44 cents, a 29% jump from the year before, while revenue of $481 million was up 14%. Red Hat also logged its thirteenth straight quarter of growth in total revenue and subscription revenue in the mid-teens to 20%+ range.
How has it done this? Red Hat has invested heavily in marketing and R&D, where first-quarter expenses climbed 12% and 8% year over year, respectively. And with Red Hat hinting at slightly higher expenses in the quarters ahead, it would appear the company plans to spend even more in its efforts to out-compete its rivals.
The idea of higher operating costs may have spooked some investors away. But given the rate at which Red Hat is growing revenue and the execution streak it has amassed, it's clear the company is getting returns on its investments. Besides, with the stock trading at price-to-earnings ratio of over 70, against a P/E of 21 for the S&P 500 (SPX) tons of growth is priced into the stock. And growth is what investors can expect Monday when Red Hat's results are released.
For the quarter that ended August, analysts' average earnings estimate is for 44 cents a share on revenue of $494.65 million, increases of 7% and 11%, respectively. For the full year ending February 2016, earnings per share are projected to climb 14% to $1.83, while revenue of $2.05 billion would mark an increase of more than 14%.
That both full-year revenue and earnings are projected to grow in that mid-teen range underscores what Red Hat has been able to do in terms of execution. Accordingly, investors should want to own its stock, which has a consensus buy rating and is poised to deliver 20% gains in the next year, based on its average 12-month price target of $85.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.