Red Hat Shares Have Even Upside-Downside Profile, JPMorgan Says In Downgrade

Despite being long-term positive on Red Hat Inc RHT, a JPMorgan analyst said Tuesday it's time to move to the sidelines.

The Analyst

Analyst Mark Murphy downgraded Red Hat from Overweight to Neutral and lowered the price target from $160 to $150.

The Thesis

Dual headwinds — namely middleware deceleration and a softer renewal pattern that impacted Red Hat's first-quarter results — are likely to linger for a few quarters, Murphy said in the downgrade note. (See his track record here.)

The deduction is based on the findings of JP Morgan's Q2 Red Hat partner survey, which painted a mixed picture, with a couple of metrics improving and others deteriorating.

Murphy said he expects the company's top-line growth will be in the teens for a few quarters, decelerating from the 20-percent-plus growth in the last four quarters.

If the decelerating trend results in a CY19 EV/FCF range of 20-30 times for Red Hat, the analyst expects the shares to trade in the $120-$180 range for now, equating to an even upside/downside profile.

JPMorgan views the company's longer-term positioning favorably, with a better renewals setup and OpenShift reinvigorating growth a few quarters down the line.

"Red Hat was growing at a premium to its peers, but due to a few dynamics such as a lower renewals portfolio in FY19 and headwind against middleware growth, it should no longer enjoy a growth premium," Murphy said. 

The Price Action

Red Hat shares have gained about 20 percent year-to-date. The stock was down 0.6 percent at $143.51 at the time of publication Tuesday. 

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