Red Hat: Good Growth, Tricky Valuation

NEW YORK ( TheStreet) -- I didn't give virtualization giant Red Hat ( RHT) 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.

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