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URL:  https://boards.fool.com/q2-analysis-30296032.aspx

Subject:  Q2 analysis Date:  10/2/2012  6:29 PM
Author:  newsreporter Number:  9060 of 9070

Deep Dive Into Red Hat's Q2 2013
http://seekingalpha.com/article/898881-deep-dive-into-red-ha...


While the market was generally disappointed by Red Hat, Inc.'s (RHT) fiscal Q2 2013, we think it was a solid quarter that was masked by challenging currency headwinds. The stock's hefty valuation of 31x our 2013 EPS (excluding cash) warranted a minor sell-off, but we are hanging on tight to our long position, given the company's exposure to several favorable secular trends - cloud, virtualization, storage, and open source.

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The first key metric we follow is the renewal rate for the largest 25 deals in the quarter, which is normally in the 120%-130% range. Results in this quarter were within this band and suggest that customers are finding value in Red Hat's products.

The second key metric we follow is the size and quantity of large deals. Specifically, management announces how many deals in the quarter were larger than $1M and $5M. For the quarter, Red Hat booked 27 deals over $1M, inline with recent trends, and booked 4 deals over $5M, at the high end of recent trends.

Importantly, management indicated that it won two deals worth more than $10M each, the first time ever it has won deals of that size. This implies that Red Hat is taking a larger "wallet share" from its customers as its product offerings expand. We expect this trend to continue if the company builds out its storage business and enhances its middleware offering.

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All in, we think the story is much intact at Red Hat. The stock likely needs to take a breather due to it's premium valuation and decelerating revenue growth, but the market will eventually respond favorably to continued strength in the core business over the next several quarters.

We think Red Hat deserves to trade at $61, or 35x or 2013 EPS (excluding $7 in cash per share). Our bet is that revenue growth will accelerate in fiscal 2014 as the impact of currency diminishes (or reverses) and its storage business gains traction.

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If the company stumbles, or the market sells off, we think there is 18% downside to $46, or 25x our 2013 EPS (excluding $7 of cash per share).

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