After the close, Red Hat (RHT) continued a march to new highs. The solid FQ2 results combined with solid guidance leaves investors with the most desirable outcome: accelerated growth.
The stock reached $109 in after-hours trading based on the $0.10 EPS beat. The question of course is how to handle a stock that has surged from only $70 to start the year and is now more than 50% higher when growth is only in the 20% range.
The market is bedazzled with the application development business that is producing revenue growth of 44% YoY. The performance helped deliver 21% total revenue growth for the highest in years. Red Hat last grew at this rate back in 2011.
RHT Revenue (Quarterly YoY Growth) data by YCharts
The market loves accelerating revenue growth so momentum in the stock should remain. Even using the highest EPS estimate for FY19 of $3.32, Red Hat trades at a premium P/E multiple of 33x.
The software infrastructure company has taken a major step forward as customers move to the hybrid cloud. The consistent small quarterly revenue beats are now in the $20+ million range after a history of only small beats followed by missing expectations on occasions.
The FY18 revenue guidance of $2.880 to $2.895 billion far exceeds analyst estimates at around $2.810 billion. FQ2 estimates were around $677.4 million before Red Hat raised the forecast to $695 to $702 million during the FQ1 report and eventually ended at $723 million. The analyst estimates from only three months ago were topped by nearly 7%.
The $2.3 billion cash balance and operating cash flows of up to $900 million this year reduces the risk in the expensive stock. Red Hat bought $75 million worth of shares during the quarter suggesting the company sees some value even up at these prices. The enterprise
