After Red Hat's Q3 Beat, KeyBanc Remains A Buyer

Red Hat Inc RHT reported third-quarter results Tuesday after the market close: 22 percent year-over-year revenue growth and a 20-percent increase in non-GAAP earnings per share to 73 cents.

The results exceeded estimates, and the company issued upbeat guidance for the fourth quarter and fiscal 2018.

The Analyst

KeyBanc Capital Markets analyst Alex Kurtz maintained an Overweight rating on the shares of Red Hat and upped the price target from $135 to $138.

The Thesis

Kurtz said he would be a buyer of Red Hat shares, given his expectations that the company will benefit from secular growth in hybrid cloud/PaaS adoption. (See the analyst's track record here.) 

The core driver of Red Hat's solid Q3 results was large deal flow, with a record 17 deals greater than $5 million and 62 percent cross-sell of emerging solutions, Kurtz said. Billings growth was solid at 19 percent year-over-year, although some of the outperformance may have to do with an easier comparison, he said. 

Infrastructure revenues, which grew 15 percent in the quarter, are likely to grow 12-14 percent over the next two years, according to KeyBanc. Red Hat's outperformance in free cash flow is viewed by KeyBanc as a function of higher billings and a "slightly better" figure for days of sales outstanding.

KeyBanc raised its fourth-quarter revenue and earnings per share estimates by $6.5 million and 5 cents per share, respectively, to reflect the higher guidance. Billings growth guidance was increased  from 14 to 16 percent in light of Red Hat's large-deal momentum.

The Price Action

Red Hat shares are up over 81 percent year-to-date.

Red Hat was trading down about 5 percent at $122.45 at the time of publication. 

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Photo courtesy of Red Hat.