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What Red Hat (RHT) Earnings Says About The Cloud Market

Red Hat ()

Red Hat ()

There’s a battle brewing in the cloud market, where tech leaders like Amazon (AMZN), Microsoft (MSFT), and Google (GOOGL) are jostling to plant their flags.

Linux software provider Red Hat (RHT), which just posted strong cloud subscription revenues, which are growing at high double digit rates, just highlighted how robust the cloud market is and is poised to remain. Although RHT stock is not the bargain it was when I last discussed its prospects at the start of the year, it nonetheless belongs on the radar of investors who are looking for long-term revenue and earnings growth in the next 12 to 18 months.

Corporate customers, particularly those with Fortune 500 status, continue to migrate computing workloads to cloud service providers such as Amazon’s AWS platform and Microsoft's Azure, in addition to other public clouds. This shift bodes well for Red Hat, which is a huge Amazon partner. And the fact that these companies are paying premiums for Red Hat Enterprise Linux (RHEL) — the company's software-as-a-service suite for managing application servers and data storage — mean higher profits in the quarters ahead. And it’s already begun.

In the most recent quarter that ended May, Red Hat posted earnings of 56 cents per share on revenue of $677 million, easily beating Wall Street’s consensus forecast for earnings of 53 cents per share on revenue of $647.8 million. The Raleigh, NC-based company also raised its full year earnings per share and revenue guidance.

Notably, the company’s RHEL platform won massive deals, valued at $5 to $20 million or more. And with technologies such as its OpenShift, its container platform component, gaining greater adoption with large franchises, including IBM (IBM) and Microsoft, Red Hat is showing it can fight off the stiff competition it faces from the likes of Citrix (CTXS) and VMware (VMW). Wall Street has taken notice of the trend.

Stifel analysts Brad Reback upgraded Red Hat stock to Buy from Hold with a $115 price target. "It has become increasingly clear Red Hat is effectively capitalizing on the opportunity presented by enterprise customers increasingly making the push to convert their existing IT infrastructure footprint to a hybrid cloud-based environment," Reback noted.

Meanwhile, Deutsche Bank’s Karl Keirstead, who has a Buy rating on the shares and it raised its price target from $100 to $110, sees Red Hat’s business as boosting Amazon.

According to Keirstead, Red Hat is able to make corporate internal infrastructure and apps look more AWS-like, which he says makes migrating to AWS less of a burden to corporations.

All told, Red Hat is poised to stay red hot in the next 12 to 18 months.

And thanks to the company’s close ties with Amazon and Microsoft, combined with the accelerated rate of cloud adoption among Fortune 500 companies, the cloud market — which has become the focus of both AMZN and MSFT — is as robust as ever.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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