Why I'm Buying Red Hat On Today's Tumble (RHAT)

| About: Red Hat, (RHT)

I bought two sets of Red Hat (RHAT) $22.50 July calls today -- first group for $1, 2nd round at $0.80.


Not so much because of earnings per se but because the earnings included a $5M negative effect of exchange rates (which can be fixed by hedging), higher taxes (again, need to manage income reporting better) and a $7.5M stock options expense. There was also dillution from the June 2 acquisition of JBoss which shaved $.04 off the top.

So what looks like a 25% miss is more like a 40% beat.

That's what I'm playing. Of course I wouldn't do that if the fundamentals weren't there...

New client additions are through the roof and turnover is less than 1% and the company is accellerating growth, which is so far not fully reflected as each quarter has a 50% lagging effect on recognizing subscription revenues (SIRI has the same problem).

There is nothing in these numbers that justifies a 10% sell-off, especially on a big Nasdaq day.

Related: Red Hat, Inc. F1Q07 (Qtr Ending May 31, 2006) Earnings Conference Call Transcript

UPDATE 11:55 AM: RHAT gone at $1.20, I'm very pleased with that. Still looks good but I said it was a day trade and I didn't want to change strategy with looming Fed meeting. If it breaks $23 post Fed I might want back in.