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Didn’t take long for investors to follow analyst Gregg Moskowitz’s upgrade clue. Red Hat ( RHT ) stock turned red hot again briefly, up 3% in morning trade in the stock market today , before cooling to close up 1.4% at 68.62 Thursday, 19% off a 16-year high of 84.44 touched Dec. 30. An analyst for Cowen, Moskowitz had just issued a research report Thursday morning, making the case that Red Hat’s “valuation looks compelling once again” and upgrading the stock to outperform from market perform with an 86 price target. Red Hat, based in Raleigh, N.C., is the fast-growing developer of software, built on the open-source Linux operating system, that manages vast enterprise data, be they in the cloud or in traditional on-premise operations. Microsoft ( MSFT ) announced in November that it would run Red Hat hybrid software on Azure, Microsoft’s cloud service. How fast is Red Hat moving? Earnings grew 14% and revenue 15% in the third quarter ended Nov. 30, although analysts polled by Thomson Reuters think that for the current quarter, Q4, profit will moderate to 9% growth from a year earlier of 47 cents per share minus items, on sales up 15.7% to $537 million. “While we have been positive on the stock for a long time, our recent market perform rating was largely valuation-based,” Moskowitz said. “However, the stock has significantly underperformed this year (down 18%, vs. the Nasdaq down 10%), which has presented investors with a favorable risk/reward once again.” Moskowitz said that his crew’s recent checks with midsize and big IT customers suggest that Red Hat Enterprise Linux (RHEL) — its core software, first issued 13 years ago — is likely to grow faster than the 2% annual pace that research firm Gartner gives the overall Linux market. “Meanwhile, though not yet inflecting, demand for OpenStack continues to rise, and we expect another year of high growth (off a still relatively low base),” Moskowitz wrote. OpenStack is a free, open-source software platform for cloud computing. “We also believe RHT’s recent partnership with Microsoft Azure (not in our numbers) should create significant revenue synergies for RHEL (and Azure) over time,” Moskowitz added. “Further, one of our public cloud contacts we recently spoke with sees material upside from the partnership and believes the power of Microsoft’s distribution could also drive an inflection in sales for RHT’s CloudForms hybrid cloud management software. “Longer term, we believe containers will become increasingly prevalent and that RHT is very well placed to benefit from this unfolding trend, with native support built into RHEL and OpenShift, and with RHEL Atomic Host specifically targeting the opportunity.” Containers allow software to run reliably in a variety of computing environments. OpenShift is a Red Hat platform-as-a-service product; RHEL Atomic Host is an operating system. With a market cap of $12.5 billion, Red Hat is the third largest member of IBD’s Computer Software-Desktop industry group — led, of course, by Microsoft with about a $409 billion market value. Adobe Systems ( ADBE ) is second-largest at just over $43 billion. Red Hat’s stock, however, earns a 79 Composite Rating, which means that it performs better than 79% of all publicly traded firms on a variety of metrics. Microsoft carries a slightly better Composite Rating of 83 and Adobe a strong 96. Microsoft closed down 0.4% Thursday and Adobe fell 1.3%. Scalper1 News
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