Analyst Tips His Cap To Red Hat After Yet Another Beat And Raise Quarter

Red Hat Inc RHT reported Monday an encouraging earnings beat that sent shares higher by more than 4 percent Tuesday. But not all of Wall Street were sufficiently impressed to be recommending the stock, including Bank of America's Kash Rangan who maintains a Neutral rating on Red Hat's stock with a price target boosted from $105 to $115.

Red Hat's second quarter billings and subscription revenue came in better than expected while the emerging technologies segment re-accelerated from 32-percent growth a year ago to 43-percent growth, Rangan commented in a research report.

While Red Hat's hybrid cloud strategy "makes sense" and there certainly are a few positive factors working in the company's favor, including:

1. Oracle is deemphasizing Solaris.
2. OpenShift is seeing traction.
3. OpenStack traction is being driven by a telco tech refreshes.
4. Microsoft SQL server/core .NET is now running on Linux.

On the other hand, Red Hat's strategic positioning and growth opportunity will benefit from an overall shift to hybrid cloud, but if new apps are written and scaled natively on public clouds, the "picture could change," the analyst explained. Specifically, it will become harder for Red Hat to push emerging technologies to offset a potential slowing of RHEL with "adverse margin-trade offs."

In addition, Red Hat will likely face margin headwinds as any margin leverage will be "muted" in the near to mid-term as management continues to invest in its business, the analyst added. The company is now expected to show a 31-percent margin rate in fiscal 2018, which marks a decrease from 36 percent in fiscal 2016.

Bottom line, the stock's 52-percent return since the start of 2017, coupled with a less than perfect outlook should keep investors on the sidelines.

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A Stellar Q1 For Red Hat ___________ Image Credit: By Christine Puccio from San Francisco - RHT TIcker, CC BY-SA 2.0, via Wikimedia Commons