Raymond James Downgrades Red Hat Ahead Of Q1 Print

Heading into Thursday's earnings report, investors should no longer be bullish on Red Hat Inc RHT, according to Raymond James.

The Analyst

Raymond James' Michael Turits downgraded Red Hat from Outperform to Market Perform with no assigned price target (prior price target of $166).

The Thesis

Raymond James' first-hand checks with U.S. and European Value Added Resellers (VARs) were "mostly strong" in the first quarter, Turits said in a note. The checks also echoed the company's own warnings that legacy middleware is slowing as applications move to containers and the cloud. As such, there's now lower visibility into growth this year which also adds pressure on the company's other emerging technologies to maintain high levels of growth.

Meanwhile, Red Hat faces risks related to its margins and top-line with a shift in focus to mid-market in 2018, the analyst said. While not unique to Red Hat, investors shouldn't ignore foreign exchange concerns after the euro lost 6 percent in value since the company's fourth-quarter report.

Given multiple company-specific and macro trends ahead, the stock's current peak valuation of 31 times on fiscal 2019 estimated EV/FCF implies a neutral risk-reward profile with a bull-case scenario offering investors a 15 percent return and a bear-case scenario would send shares lower by 15 percent.

Price Action

Shares of Red Hat were trading lower by more than 3 percent Tuesday at $170.78.

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