Red Hat Stock Breaks Out After Earnings…Again

Red Hat Stock
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RHT Stock Is a Rare Commodity

Shares of Red Hat Inc (NYSE: RHT) climbed 4.1% after second-quarter earnings were released on Monday. Investors were extremely happy about the company’s second-quarter results, but I think most of them are still missing the bigger picture.

Red Hat is way more than a hot software stock—it is a souvenir of the past. A time when small firms could compete with giants. A world of specialists. A world that sadly was crushed by the Amazons and Googles of the world.

Today’s economy is a winner-take-all game. Little firms that dare to challenge the tech titans are crushed or absorbed. But not Red Hat stock. It managed to buck the trend by drilling down on one business.

It doesn’t do a million things at once but instead keeps to its core business like a moth to a flame. By combining this intense focus with an open-source strategy, the company managed to breed low cost and high quality at the same time.

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Perhaps that is why RHT stock is up 53.7% this year.

It made deep inroads into the cloud computing business. But the strangest part is that RHT stock seems immune to downturns in its industry.

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Its revenue trudged on upwards, even when big cloud computing players took a hit on their top line sales (I’m looking at you, ORCL stock!).

Chart courtesy of StockCharts.com

But Are There More Gains Left for RHT Stock?

Don’t worry; there’s tremendous upside left in Red Hat stock.

This week’s gains came after the company beat earnings expectations, but it wasn’t the first time that happened. The last two quarters were the exact same story.

So when we saw $0.77 in adjusted RHT earnings per share crush the market forecasts of $0.67 per share, it shouldn’t have come as a surprise. Yet that’s exactly what happened.

Investors took a look at the 21% top-line growth, to $723.0 million of revenue, and they sent RHT stock soaring to $110.00 (at the time of writing). Here are some of the other highlights:

  • Subscription Revenue accounted for 88% of total revenue
  • Application Development Revenue increased 44%
  • GAAP Net Income was $97.0 million, UP FROM $59.0 million YoY
  • Operating Cash Flow increased 48% to $143.0 million
  • Cash Balances were $2.31 billion as of August 31, 2017

If it’s not clear from these numbers, Red Hat is blazing hot right now after the earnings. It has been around forever (in tech years, that is), somehow manages +20% growth, and sits on a giant pile of cash.

Don’t be surprised if RHT stock accelerates to $250.00 or beyond. Why not? It’s quickly becoming a star player in the cloud computing business, and everyone knows that the market is virtually limitless.

All the time we spend on smartphones, computers, and tablets creates demand for more data centers. So if you believe that people are spending less time on devices, then, by all means, go short on Red Hat stock.

However, if you constantly bump into people that are glued to their smartphones, then consider that RHT stock price is a steal.

Analyst Take: 

We are extremely bullish on the cloud computing business, not least because +90% of businesses are still keeping their books offline. That is crazy! The benefits of cloud computing are self-evident, especially now that customers can request a mix of onsite and offsite services.

There’s still so much untapped potential in that market, which means companies like Red Hat are going to be busy for years to come.