Red Hat (RHT) ended the week 15% higher after the open source software provider reported strong fourth quarter results.
Fourth Quarter Results
Red Hat reported final quarter earnings of $0.19 per share, which beat estimates by a penny. Net income on a non-GAAP basis came in at $37.6 million, essentially unchanged on the year. Revenues were up 21% to $297 million, which surpassed the analyst consensus of $291 million. Billings for the fourth quarter, a good indicator for future revenue, rose 31% to $418 million.
Analysts point out that this is the fifth quarter in a row in which Red Hat beat analyst expectations. Furthermore, the the company's new products and realistic long-term projections are bullish for the stock as the company benefits from the migration from corporate data centers to public or private clouds.
Outlook
The open-source provider of Linux Software is confident about the future and continues to expect strong demand, which would boost future margins and revenues.
For the first quarter of its fiscal year of 2013, the company expects revenue in the range of $307-$311 million. Non-GAAP earnings are expected in the range of $0.25-$0.27 per share. For the entire fiscal year of 2013, the company expects revenue of $1.34-$1.36 billion and non-GAAP earnings per share of $1.16-$1.20.
Management's confidence about the future is confirmed by the Board of Director's decision to authorize a $300 million repurchase program. Management and the Board have "confidence about the long-term growth prospects and ability to generate shareholder value by repurchasing shares", according to CFO Charlie Peters.
Valuation
The fourth-quarter results imply that full year 2012 revenues came in at around $1.13 billion, up 24% on the year. This marks the third year in a row in which the company reports accelerating revenue growth. Non-GAAP net income rose to $193 million, up 80% on the year, representing a non-GAAP 17% net margin.
After this week's jump in the share price, shares are valued at $11.6 billion. Excluding its $1.3 billion cash balance, shares are valued at 9.1 times revenue and 53 times non-GAAP earnings based on the preliminary 2012 results.
Investment Thesis
After the jump in the share price, the company trades at a 12-year high (it was only during the heights of the internet bubble that the shares traded higher). Trading just below the $10-mark by the end of 2008, the stock has since been trending upwards to settle towards $60 at Friday's close. The company operates in the red hot cloud-industry which is being driven by acquisitions, which propel valuations across the entire industry to new highs.
The company has excellent products, and is expanding revenues and margins at record rates, but shares have simply moved too far in too short a time frame. At these levels, I can no longer consider Red Hat a prudent long-term investment opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
