Red Hat Beats on the Top and Bottom Lines

Red Hat Inc. (Ticker Symbol: RHT) reported earnings yesterday that beat consensus estimates on the top and bottom line.  The multinational software company reported an earnings per share beat of $1.00 per share vs. Wall Street analysts’ expectations at .87 cents per share.  The open-source software distributor released revenue that also came in better than expected at $934.11 million vs. Wall Street analysts’ expectations of $933.6 million.  One of the leading metrics was the growing subscription revenue which grew to $815 million, up 15%.

In the fourth quarter of 2018, International Business Machines (Ticker Symbol: IBM) announced its intent to acquire Red Hat for $34 billion.  The United States Justice Department has already approved the acquisition and it is getting close to winning regulatory approval in the European Union.  IBM is set to pay $190 per share in cash, if the deal goes through.  That price is just over 1% higher than where Red Hat is currently trading. Red Hat executives did not have a conference call with analysts after its earnings release nor did the company offer any financial guidance on the merger with IBM.

Above is a chart of the past three and a half years of Red Hat’s stock price.  The stock spent the entirety of 2016 trading in a trading range between the prices of $60.00 and $85.00.  It finally broke out of that range in the first quarter of 2017, led by positive earnings and guidance report, and proceeded to rally throughout the rest of the year.  Red Hat’s stock found some support at its 100-day Moving Average in the first quarter of 2018, before completing its 18 month rally, having moved 110% higher.

In the second quarter of 2018, the stock topped, forming a bearish divergence pattern, as indicated on the chart by the yellow lines, where the stock makes a higher high in price but the Relative Strength Index makes a lower high. Traders and investors sometimes look at divergences for a possible pause within the current trend which can, at times, lead to a reversal as occurred in Red Hat’s case. The stock sold off, giving back roughly 50% of its previous move.  In the fourth quarter of 2018, IBM announced its intent to acquire Red Hat for $34 billion. This sent the stock gapping higher over 40% overnight.  The stock has continued to trade higher, trading to an all-time high of $189.14 on July 19, 2019.

(Chart above courtesy of ​​)

Based on a survey of 2 analysts offering 12-month price targets, the average price target for Red Hat’s stock is $190.00. According to that number, the stock is priced at a discount relative to Wall Street’s analysts and could be considered undervalued around current levels near $187.92.

Red Hat has beaten earnings consensus estimates consecutively for four quarters in a row.

As you can see, it has paid to be a long term shareholder of Red Hat’s stock, as it continues to grow and now is potentially acquired. Investors in the company should look to IBM’s earnings report and conference call on July 19th for fresh news on the acquisition.