Analysts React To Red Hat's Q1 Earnings, Downbeat Forecast

Red Hat Inc RHT stock tanked more than 12 percent Friday after the company’s first-quarter earnings report failed to wow the market. Red Hat also announced a $1 billion buyback.

A number of analysts have weighed in on Red Hat stock following the report. Here’s a sampling of what they had to say.

Billings Slowdown

Morgan Stanley analyst Keith Weiss said Red Hat failed to follow its winning recipe of sustaining billings while improving margins.

“Red Hat began FY19 on an underwhelming note, with Q1 billings slowing to 9% cc after growing 20% in FY18 and missing consensus by ~2%,” Weiss wrote in a note.

Raymond James said slowing middleware growth unfavorable forex environment and lower contract duration weighed on Red Hat’s Q1.

“Billings growth slowed meaningfully to 9%CC last quarter, hurt by shorter duration and potentially just less positive ordering trends,” the firm wrote.

Valuation Perspective

William Blair analyst Jason Ader said investors shouldn’t allow one bad quarter to make them miss the forest for the trees.

“We believe that the messy first-quarter print needs to be kept in context: we estimate first-quarter total bookings grew about 15% in constant currency (adjusted for a change in off-balance-sheet backlog, well above the 9% billings growth) and management reaffirmed both fiscal year 2019 revenue guidance of 16%-17% growth in constant currency and operating cash flow of $1.04 billion (13% year-over-year growth),” Ader wrote.

Credit Suisse analyst Brad Zelnick said even in-line guidance is disappointing for a stock trading at such a high valuation.

“Unlike recent disappointments in ORCL, ADBE and WDAY, we believe this event may be too difficult to dismiss as a harbinger of deceleration in enterprise IT spend,” Zelnick wrote.

Oppenheimer analyst Ittai Kidron said Red Hat stock will likely remained range-bound in the near-term after the market saw some cracks in the Red Hat armor.

“Overall, we believe Red Hat is still well-positioned over the long term to gain share in hybrid cloud due to its comprehensive solution stack (OpenShift, Ansible, JBoss, OpenStack),” Kidron wrote.

Ratings And Targets

• Morgan Stanley has an Equal-Weight rating and $150 target.
• Raymond James has a Market Perform rating.
• William Blair has an Outperform rating.
• Credit Suisse has a Neutral rating and $150 target.
• Oppenheimer has an Outperform rating and $175 target.

The stock traded around $144.95 at time of publication.

Related Links:

KeyBanc Remains Bullish On Red Hat Despite Slowing Middleware Growth, Forex Headwind

Raymond James Downgrades Red Hat Ahead Of Q1 Print