Red Hat: Why This Stock Is The Comeback Kid

It took nearly two decades, but Red Hat Inc. (RHT) shares are trading at levels not seen since 1999. Shares of the Linux- and cloud-based software company jumped by nearly 10 percent after it reported revenue and EPS that easily beat analyst expectations for the fiscal first quarter ended May 31. The company also gave full year revenue guidance that was better than expected. 

For the first quarter, Red Hat's total revenue climbed 19 percent year over year to $677 million. Subscription-based revenue rose 18.9 percent to $596.5 million, and accounted for about 88 percent of total revenue. Analysts had expected Red Hat to report quarterly revenue of $647.42 million. 

(Quarterly Revenue Estimates Vs. Actual)

RHT Quarterly Actual Revenue data by YCharts

Red Hat reported Q1 non-GAAP net income of $102 million, resulting in a non-GAAP EPS of $0.56. 

(Quarterly EPS Estimates Vs. Actual)

RHT Quarterly Actual EPS data by YCharts

For the full year 2018, the company is looking for revenue at the mid-point of $2.805 billion, while analysts project $2.75 billion. Red Hat expects non-GAAP EPS of $2.68 at the mid-point, above analyst expectations of $2.63.

(Revenue and EPS Estimates)

RHT Revenue Estimates for Current Fiscal Year data by YCharts

In the late 1990s, the Linux-based open architecture operating system was seen as the slayer of the mighty Microsoft (MSFT) Windows operating system. That vision never materialized, but Red Hat has been able to survive, and for the most part, battle back.

in the late 1990s, the stock hit levels around $135 a share. Today, the shares are trading at nearly $99 and are the highest since that time, with a market cap approaching $18 billion. However, Red Hat stock has been unable to keep pace with Microsoft's stock price despite its best efforts. 

RHT data by YCharts

From a valuation perspective, Red Hat stock has come down to very reasonable levels, with a PE of 32. And when accounting for growth, it has a one-year forward PEG ratio of 0.65.

When compared to Microsoft, though, Red Hat certainly appears more expensive. But, then again, Red Hat is expected to have faster growth than Microsoft. 

RHT PE Ratio (Forward 1y) data by YCharts

Despite not living up to the hype of nearly two decades ago, Red Hat has managed to claw its way back and carve out an impressive niche for itself through the years, making it a business that should continue to thrive uniquely. 

Michael Kramer is the Founder and Portfolio Manager of Mott Capital Management LLC, a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.