Red Hat (RHT), the world's largest open-source Linux software company, is set to report third quarter fiscal 2017 earnings results after the closing bell Wednesday. The extent to which Red Hat stock deserves a spot in your closet, or portfolio in 2017, will likely be determined by what the management says about its growth prospects heading into the new year.
For the quarter that ended November, Wall Street expects adjusted earnings per share of 58 cents. Not only would this mark a 21% rise year over year, it would also match Red Hat's strongest gain (percentage wise) since its fiscal first quarter in June 2015. Meanwhile, revenue is expected to rise 19% year over year to $621.7 million, which would match its strongest revenue increase in nine quarters.
All told, there's a lot riding on Wednesday's numbers.
RHT stock entered 2016 gaining some 20% last year, compared to flattish gains for the S&P 500 Index. But the Raleigh, N.C.-based company, which competes with the likes of Citrix (CTXS) and VMware (VMW), has found it difficult to maintain its growth path. Accordingly, RHT stock has declined 4% this year, trailing not only the 11% rise in the S&P 500 index, but also the 14% rise in the PowerShares Dynamic Software ETF (PSJ).
Notably, the stock's underperformance has come even as the company has beaten Wall Street's earnings estimates in ten straight quarters. Essentially, Red Hat, whose Linux software runs computer servers in corporate data centers, has become a victim of its own success. But for these shares to rebound Wednesday and in 2017, the management not only must crush analysts estimates, but also guide with enough confidence to suggest Red Hat can capture market share from its competitors, particularly in its public cloud business.
Corporate customers continue to migrate computing workloads to cloud service providers such as Amazon.com's (AMZN) dominant AWS platform. This bodes well for Red Hat, which is a huge Amazon partner. In that vein, the pressure is on the company to demonstrate that it can secure large Fortune 500 companies as customers, convincing them to keep buying more of its cloud services, particularly its Red Hat Enterprise Linux (RHEL) -- the company's software-as-a-service suite for managing application servers and data storage.
The company still dominates the Linux server market with more than 70% market share. And to the extent Red Hat can grow its software solutions like OpenShift and OpenStack, RHT stock can, indeed, become red hot in 2017. At around $79 per share, its fair value can reach $92 in 2017, delivering almost 20% gains.