Mizuho: Red Hat Valuation Leaves Little Room For Upside

While there is much to like about open source software provider, Red Hat Inc RHT, the company appears fully valued at current levels, according to Mizuho Securities. 

The Analyst

Analyst Abhey Lamba downgraded the company from Buy to Neutral and lowered the price target from $160 to $140.

The Thesis

Although Red Hat's fundamentals are strong and “enterprise spending trends remain buoyant," those qualities are reflected in the valuation, Lamba said in a note. 

Mizuho expects modest upside to revenue, cash flow and billings when Red Hat reports fourth-quarter earnings March 26. 

“We think mid-to-high teens top-line growth can continue on share gains for [Red Hat] and attach on the emerging technologies portfolio. That said, we believe organic and inorganic investments will likely continue given the pace of innovation in the infrastructure space, which would limit margin gains,” Lamba said.

Simply put, the analyst likes the fundamentals of the business but the current valuation leaves little room for upside, leading to Sunday's downgrade. 

“Given all the innovation occurring in the infrastructure space, we think Red Hat’s need for investments is likely to remain high. As such, operating margins could remain under pressure, which limits the company’s ability to deliver meaningful leverage from current levels," the analyst said. 

“While we expect profitability to improve on an organic basis, M&A could exert additional pressure. As such, although we continue to like the fundamentals and market positioning, we believe the stock is likely pricing in strong execution in the near-term in addition to upside to estimates. “

Price Action

Red Hat shares were trading up slightly at $155.56 near the end of Monday's trading session. 

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