Red Hat (RHT) is set to report second quarter fiscal 2019 earnings results after the closing bell Wednesday. Investors are anticipating strong top- and bottom-line numbers on the back of the company’s emerging technologies such as OpenShift, OpenStack, Storage and cloud management.
On the strength of OpenShift and OpenStack, in particular, the Linux specialist has delivered an earnings beat of almost 10% in each of theist four quarters. OpenShift — the company’s Linux Container platform — continues to gain strong traction, generating more than 100 new customers in the first quarter. And thanks to the company’s expanded relationship with IBM (IBM) and Microsoft (MSFT), among others, Q1 revenue grew 20% year over year.
All told, Red Hat, which has seen its shares rise 24% year to date and 100% in three years, is (and has been) operating on all cylinders — that’s the good news. The bad news is, Wall Street already knows this. The Street’s EPS estimate for the current quarter has been revised almost 1% higher in the last 30 days. Looking farther ahead, the company’s earnings are predicted to grow at more than 16% annually in the next two years, while revenue is projected to grow at an average rate of 18% over the next five years.
On Wednesday, the open-source software company must give investors a reason to believe that the stock — at 45 times 2019 estimates, compared to a P/E of 19 for the S&P 500 Index — can still deliver value. Additionally, as the company’s earnings catch up to the valuation, can the company continue to fight off stiff competition from the likes of Citrix (CTXS) and VMware (VMW)?
For the quarter that ended August, Wall Street expects the Raleigh, NC-based company to earn 82 cents per share on revenue of $829.31 million. This compares to the year-ago quarter when earnings came came to 77 cents per share on revenue of $723.37 million. For the full year, ending February, earnings are projected to rise 16.44% year over year to $3.47 per share, while full-year revenue of $3.4 billion would rise 16.3% year over year.
Red Hat has pivoted from its core Linux business into building an app development platform for moving business workloads to public cloud service providers such as Amazon (AMZN) and Google (GOOG , GOOGL). Beyond the core headline numbers, the company must also guide confidently. Last quarter the stock fell 10% after the company, which has pivoted from its core Linux business into building an app development platform, lowered its guidance, citing currency exchange rates.
On Wednesday the company must convince that the downbeat guide would not become a trend. It must also highlight strong demand for RHEL (Red Hat Enterprise Linux) — its software-as-a-service suite for managing application servers and data storage, which is sold by its aforementioned cloud partners. And to the extent it can report these strong results, while revealing strong demand for hybrid cloud technology, these shares could still be a bargain.