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Red Hat Earnings: Amazon A Threat In Linux Landscape?

There’s a notion out there, says Deutsche Bank analyst Karl Keirstead, that Amazon ’s ( AMZN ) flavor of the Linux open-source operating system is about as good as other Linux distributions — and since it’s free and Amazon Web Services (AWS) offers good support, converting is cheap. So does that stand to hurt Red Hat ( RHT ), which reports its fiscal fourth-quarter 2016 earnings after the stock market close Tuesday? “Bottom line, we conclude that the number of migrations from RHEL (Red Hat Enterprise Linux) to Amazon Linux remains quite modest and mostly confined to small enterprise customers,” Keirstead wrote in a research note March 13. “Larger RHEL-centric customers have only a small mix of workloads on AWS, they value OS consistency across their hybrid infrastructures, they prefer support from RHT and/or view the cost savings of a switch as being too modest to be worth the hassle. “These advantages appear to more than offset a view that AMZN Linux is at/near functional parity with other Linux distributions.” Keirstead reiterated Deutsche’s buy rating for Red Hat with a 95 price target, which might take Red Hat a couple of months to achieve if it stays on the same upward trajectory that it’s maintained since bottoming out Feb. 8 at a two-year low of 59.59. Red Hat stock was unchanged at 74.90 on Monday after rising 3.2% last week, closing just below its 200-day moving average. Shares are just 12% off a 16-year high set Dec. 30, 24% above its Feb. 8 low. But it looks like Red Hat is rebounding firmly from the Software Sag of ’16 that battered many of Red Hat’s rivals and tech players in January through early February. Red Hat stock gets an IBD Composite Rating of 84 out of a possible 99, factoring in earnings, sales, stock performance, institutional ownership and other metrics. Enterprise software developer Salesforce.com ( CRM ) carries an 81, Microsoft ( MSFT ) ranks 76, software giant Oracle ( ORCL ) earns a 61 and SAP ( SAP ) a 70. For its Q4 ended Feb. 29, analysts polled by Thomson Reuters expect Red Hat earnings per share up 9% from a year earlier to 47 cents minus items, matching the company’s guidance. Analysts expect revenue up 16% to $537 million, which also would match the midpoint of the company’s guidance of between $535 million and $539 million, and rival the year-ago sales growth rate of 16%. At those levels, Q4 would be Red Hat’s first quarter decelerated to single-digit growth since EPS flattened at 42 cents in fiscal 2015’s Q3. It would be the 16th consecutive quarter of mid-to-high-teens sales growth. In a research note issued Thursday, Robert W. Baird analyst Steven Ashley warned that Red Hat’s long-term revenue growth in Q4 could have fallen below expectations as seen in historical, sequential long-term growth weakness every three years, going back to Q4 2007. This is due to what he theorizes as three pools of larger deals that renew every three years in Q4, with the most recent cohort in Q4 being smaller than the others. “We believe this nuance (if correct) is truly just ‘noise’ and short-term billings should remain strong,” Ashley said. He models Q4’s total billings growth (long-term and short-term) at a 10% year-to-year improvement vs. the 12% consensus. “Where could we be wrong?” Ashley asked. “Signing a bunch of ‘new’ large three-year deals could augment the smaller renewal pool.” He tipped his hat to Baird’s outperform rating on Red Hat with an 80 price target.      

Red Hat Earnings Report Ahead: Amazon A Threat In Linux Landscape?

There’s a notion out there, says Deutsche Bank analyst Karl Keirstead, that Amazon ’s ( AMZN ) flavor of the Linux open-source operating system is about as good as other Linux distributions — and since it’s free and Amazon Web Services (AWS) offers good support, converting is cheap. So does that stand to hurt Red Hat ( RHT ), which reports its fiscal fourth-quarter 2016 earnings after the stock market close Tuesday? “Bottom line, we conclude that the number of migrations from RHEL (Red Hat Enterprise Linux) to Amazon Linux remains quite modest and mostly confined to small enterprise customers,” Keirstead wrote in a research note March 13. “Larger RHEL-centric customers have only a small mix of workloads on AWS, they value OS consistency across their hybrid infrastructures, they prefer support from RHT and/or view the cost savings of a switch as being too modest to be worth the hassle. “These advantages appear to more than offset a view that AMZN Linux is at/near functional parity with other Linux distributions.” Keirstead reiterated Deutsche’s buy rating for Red Hat with a 95 price target, which might take Red Hat a couple of months to achieve if it stays on the same upward trajectory that it’s maintained since bottoming out Feb. 8 at a two-year low of 59.59. On Friday, Red Hat stock closed up 1.9% to 74.09, up 3.2% for the week, 24% above that Feb. 8 nadir, and just 12% off a 16-year high set Dec. 30. Trading above its 50-day moving average, Red Hat stock is still below its 200-day line near 75. But it looks like Red Hat is rebounding firmly from the Software Sag of ’16 that battered many of Red Hat’s rivals and tech players in January through early February. Red Hat stock gets an IBD Composite Rating of 84 out of a possible 99, factoring in earnings, sales, stock performance, institutional ownership and other metrics. Enterprise software developer Salesforce.com ( CRM ) carries an 81, Microsoft ( MSFT ) ranks 76, software giant Oracle ( ORCL ) earns a 61 and SAP ( SAP ) a 70. For its Q4 ended Feb. 29, analysts polled by Thomson Reuters expect Red Hat earnings per share up 9% from a year earlier to 47 cents minus items, matching the company’s guidance. Analysts expect revenue up 16% to $537 million, which also would match the midpoint of the company’s guidance of between $535 million and $539 million, and rival the year-ago sales growth rate of 16%. At those levels, Q4 would be Red Hat’s first quarter decelerated to single-digit growth since EPS flattened at 42 cents in fiscal 2015’s Q3. It would be the 16th consecutive quarter of mid-to-high-teens sales growth. In a research note issued Thursday, Robert W. Baird analyst Steven Ashley warned that Red Hat’s long-term revenue growth in Q4 could have fallen below expectations as seen in historical, sequential long-term growth weakness every three years, going back to Q4 2007. This is due to what he theorizes as three pools of larger deals that renew every three years in Q4, with the most recent cohort in Q4 being smaller than the others. “We believe this nuance (if correct) is truly just ‘noise’ and short-term billings should remain strong,” Ashley said. He models Q4’s total billings growth (long-term and short-term) at a 10% year-to-year improvement vs. the 12% consensus. “Where could we be wrong?” Ashley asked. “Signing a bunch of ‘new’ large three-year deals could augment the smaller renewal pool.” He tipped his hat to Baird’s outperform rating on Red Hat with an 80 price target.      

Apple-Alphabet Cloud Accord Could Help Google Catch Up With Amazon

Google-owner Alphabet ( GOOGL ) has snared iPhone maker Apple ( AAPL ) as a customer for its Google Cloud Platform, a deal that could help Google’s service catch up with industry leader Amazon.com ( AMZN ), says an industry note from Pacific Crest Securities on Thursday. Amazon unit Amazon Web Services (AWS) is now the biggest provider of infrastructure as a service (IaaS), where customers rent computer servers and data storage systems via the Internet. Microsoft ( MSFT ) and Alphabet’s Google rank next. Apple signed a contract worth between $400 million and $600 million to use Google’s Cloud Platform, according to CRN . Apple now uses cloud services from Amazon and Microsoft, but intends to end its reliance on all its rivals in the next few years, as it builds its own data centers, according to Re/Code. While Apple has reportedly used AWS historically for iCloud, “the more surprising shift is from Apple to Google, which are odd bedfellows given the two companies’ mudslinging and competition in other areas,” wrote Pacific Crest Securities analyst Evan Wilson. “Did Google throw in free cloud as a way to renegotiate the search contract? Definitely adds to the perception of Google’s momentum,” Wilson added. The deal has not been confirmed by Google or Apple, but Apple did disclose its reliance on AWS and on Microsoft’s Azure in a 2014 white paper. The alleged Apple-Google accord would help “Google Cloud Platform catch up to Amazon and Microsoft — at least in terms of perception — as a real third player in the space instead of a distant third. Google has done similar deals with Snapchat, PricewaterhouseCoopers, General Mills ( GIS ) Coca-Cola ( KO ), HTC and Best Buy ( BBY ),” said Wilson. In total, the cloud opportunity is big enough for all three Internet powerhouses, said Wilson, who estimated “a potential $25 billion windfall opportunity in cloud services for Amazon, Microsoft and Google, collectively.” While AWS has been the biggest IaaS price-cutter of the last decade, Google Cloud Platform (GCP) has been aggressive since moving into the market. Google slashed prices in March 2014, October 2014 and May-June 2015, Goldman analyst Heather Bellini said in an industry report last month. Goldman Sachs says that the top three service providers are gaining share as Verizon Communications ( VZ ),   Hewlett Packard Enterprise ( HPE ) and others exit the public IaaS market and focus on private clouds. Goldman Sachs estimates that AWS’ revenue will hit $12.5 billion in 2016, up from $7.88 billion last year. Apple stock was down a fraction in midday trading in the stock market today , near 106. Alphabet was up a fraction, near 760, while Microsoft stock was also up a fraction, near 55. IBD 50 stock Alphabet gets a best-possible Composite Rating of 99 from IBD. Microsoft has a 75 and Apple a 70. Image provided by Shutterstock .