Red Hat Inc (NYSE:RHT), the pioneer of open-source software in the tech industry, is capable of rewarding investors with outstanding returns. Although Red Hat allows developers to use most of its software for free, the company is still making significant profits.
In fact, Red Hat stock has been consistent in generating earnings and revenue that either beat or meet the expectations of Wall Street analysts. RHT stock’s solid financial performance only shows that its open-source business model is effective. Many are bullish that Red Hat stock is poised to gain substantially over the next quarters.
Red Hat Stock Is a Consistent Outperformer
RHT stock surprised Wall Street after reporting outstanding financial results last month. Red Hat stock posted a 17% increase in adjusted earnings to $0.55 per share and a 19% growth in revenue to $600.0 million for its second-quarter fiscal year 2017, ended August 31, 2016. (Source: “Red Hat Reports Second Quarter Results for Fiscal Year 2017,” Red Hat Inc, September 21, 2016.)
Analysts expected its earnings to be around $0.54 per share on approximately $593.0 million in revenue in the second quarter. RHT stock gained more than six percent last month, driven by the company’s robust results.
For the third quarter, Red Hat stock expected to deliver non-generally accepted accounting principles (GAAP) earnings of around $0.58 per share and revenue between $613.0 million to $623.0 million. For the full year, the company raised its outlook and it estimated to achieve adjusted earnings of around $2.23 to $2.25 per share and revenue between $2.42 billion and $2.44 billion. The guidance shows that management is extremely positive about its future.
Red Hat obtained an annual earnings growth rate of almost 15% and revenue growth rate of 16% from its fiscal years 2013 to 2016.
Red Hat: A Trusted Technology Provider for Enterprises
During Red Hat ’s earnings call, CEO Jim Whitehurst told analysts and investors that the company’s growth was driven partly by its expanding footprint with customers. The company’s subscription revenue grew 20%, driven by its infrastructure offerings and application development and emerging technologies, up 18% and 33% respectively in 2Q.
Whitehurst emphasized that Red Hat is the only company included in the “Visionaries Quadrant” of Gartner Inc’s (NYSE:IT) “Magic Quadrant” list for “x86 Server Virtualization Infrastructure.” It is also recognized as one of the Forbes “Most Innovative Companies.” According to Whitehurst, the recognitions demonstrate that Red Hat is a trusted strategic technology provider for enterprises worldwide.
Red Hat IT Wallet Share Is Getting Bigger
The number of deals closed by Red Hat during the second quarter increased 60% year-over-year. The company won 55 large deals, which shows its strategic importance in customers’ data centers and expanding the company’s wallet share in the IT industry.
The company’s top-30 largest deals were $1.0-million-plus, and five of those deals were more than $5.0 million. Its cross-selling is high, with more than 70% of its top-30 deals including one or more components from a group of its application and emerging technologies offerings.
Additionally, Red Hat renewed 23 of its top-25 deals expected in its financial services and government business unit. The company said the government agency that did not renew continues to depend on Red Hat’s technologies, and that agency closed a six-figure deal with the company in 2Q. Red Hat is engaged with the customer and is optimistic that it will win back a deal on other areas of its business.
The value of Red Hat’s top-25 deals that renewed was 115% higher than its previous value. CFO Frank Calderoni said the company is driving wallet share, given the growth in its $1.0-million deals. He noted that there is a high demand for the company’s hybrid cloud technologies. Organizations continue to modernize their infrastructure platforms and application development platforms.
The Bottom Line for RHT stock
Red Hat proves that its open-source business model is working, and it is capable of generating lucrative earnings and revenue growth. Enterprises trust the company as a strategic technology provider because of its leadership in innovation.
Wall Street analysts are confident that Red Hat will continue to outperform the market, and that RHT stock could surge even higher. Over the past 52 weeks, Red Hat stock stock traded from $59.59 per share to $84.44 per share. The stock is currently trading at $77.07 per share.
Red Hat stock is forecasted to trade as much as $110.00 per share, an upside of more than 42% over the next 12 months. The median price target for RHT stock is $90.00 per share, an increase of 16%. Given the company’s positive outlook, there is a great possibility that it could gain double-digits over the next quarters.
However, take note that RHT stock is not cheap; it has a premium valuation with a price-to-earnings (PE) ratio of 64 times, which is higher than its peers in the industry.