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Red Hat is a One of a Kind Technology Growth Story



Fundamentals


##Symbol##RHT

Red Hat is the world's largest provider of open-source solutions, providing software to 90% of Fortune 500 companies. It is the inventor (loosely speaking) of the Linux operating system. The company has a stated goal of becoming the single leader of enterprise cloud computing and of course, Linux is its weapon. I'm going to weave a story that's going to sound incredibly bullish, and there's good reason for it. In fact, if you've never heard of Red Hat (RHT), now may be the time to listen.



If we take all technology firms in North America above $5 billion in market cap, and select only those that have five star ratings and bullish technicals, we will find only five companies. At the very top of that list is RHT. It is truly one of a kind.


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The bullish thesis for RHT surrounds cloud computing, which is a huge growth segment of technology for reasons surrounding everything from web hosting to the Internet of Things (IoT), data accumulated from IoT and then the sale and marketing of that data. Further, Red Hat has a strong product pipeline and partnerships with IBM and and Intel (INTC).

The company stock is up 44% in the last year, revenue is at an all-time high, earnings are at an all-time high, free cash flow is at an all-time high all the while research and development (R&D) is also at an all-time high. The company is very well positioned to compete with the likes of Microsoft's (MSFT) windows servers in the enterprise market and in reality, that may be its biggest competitor. Remember, RHT is an OS inventor and it's that OS that the company has built a huge business around.



The bearish thesis surrounds rather stark hints of IT spending slowdowns and of course, competition from the OS giant, Microsoft (MSFT).

Technicals   |   Support: 75.99   |   Resistance: 80.69   

Golden Cross Alert:
The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

RHT has a five bull (top rated) technical rating because it's trading above its 10-, 50-and 200- day moving averages and the stock is up on the day.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
EARNINGS ESTIMATES
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-09-17 $0.29 $495 million M $495 million M $481 million M Provided by ZACKS


Let's look at the core elements that drive the company's fundamental rating.


Fundamentals Rating Summary



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 1,847 1,595 1,377

Operating Margin (QTR) 1.173 1.14 1.18 RISING

Net Income (TTM US$ Millions) 191 176 153 RISING

Levered Free Cash Flow (TTM US$ Millions) 435 355 250 RISING

Research and Development (US$ Millions) 97 90 74 RISING

Research and Development Expense/Revenue 0.203 0.212 0.203 FALLING





Stock Returns and Chart

RHT is up +6.8% over the last three months and up +21.1% over the last six months. The stock price is up +43.9% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 1,8471,5951,377


Revenue (TTM) has increased for at least five consecutive quarters which triggers a "trend" (in this case we are looking at over 30 consecutive quarters of revenue all-time highs on a TTM basis). Revenue is up 16% year-over-year and 34% over two-years and now stands at an all-time high of over $1.8 billion. That revenue growth (and the rest of the fundamentals to follow) is an explicit demonstration of RHT's acceptance into the enterprise cloud computing realm in essentially all of the Fortune 500 and its competitive power as it faces the technology giant Microsoft (MSFT).

What do all these numbers mean?
RHT's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.
Finally, the five+ consecutive quarters of an upward trend in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Net Income (TTM US$ Millions) 191176153RISING


Net Income (after tax profit) over the trailing twelve months (TTM) for RHT is rising and is now at an all-time high of $191 million in the trailing twelve months. The company has seen after tax earnings grow 8% year-over-year, which is actually pretty solid given the continued state of growth. It's quite common, if not too common in the technology sector. to see firms give up earnings to accumulate revenue growth and RHT has not done that. A rare find indeed.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars. Note the rising bars from a year ago (four quarters ago) and the green bar which identifies the all-time high.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Levered Free Cash Flow (TTM US$ Millions) 435355250RISING


Levered Free Cash Flow (FCF) (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For RHT the metric is rising, up a very impressive 23% year-over-over to a new all-time high of $435 million. This is fascinating because yet again we see that while RHT is able to grow revenue in a competitive landscape, it maintains net income (above) and free cash flow levels that continue to break all-time highs. When we look at the chart below, we can see that mountain of FCF building rapidly.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time. Note, again, the green bar which indicates the all-time high.



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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Research and Development (US$ Millions) 979074RISING


Research and Development (US$ Millions) in the most recent quarter for RHT was $97 million which is up over 8% year-over-year and 32% over the last two-years. Note that RHT is not only growing revenue and earnings and FCF to all-time highs, it's still spending on R&D, which is also at an all-time high. The company is investing in the future and it's not sacrificing investment in the firm's future for short-term earnings. This final piece is the sign of a truly healthy growth company with legs to stand on for the future.

Further, R&D per dollar of revenue for the latest quarter is $0.203. Last year this measure was $0.212, and while that number is falling a bit, it's consistent and under control. This is also a very bullish sign for a firm with all-time highs in the other critical fundamental measures.

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per $1 of revenue in the gold line.


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Summary
Red Hat has broken new all-time highs in revenue, earnings, free cash flow and R&D. It's growing rapidly, has visions of greatness in the fast expanding market of cloud computing and has acceptance levels that are through the roof. It's competing with Microsoft (MSFT) and doing just fine, thank you very much.

The bullish thesis follows a train of thought which sees cloud computing growing, firm acceptance continuing on its trajectory, and a capitalization of its large R&D expenditures into revenue streams down the line with a rich product pipeline. Further, the company has strong alliances with Intel (INTC), IBM and DELL.

The bearish thesis surrounds valuation and competitive pressures. No matter your view of the firm in the future, as of right now, it is literally one of a kind, with the highest fundamental rating of any large cap technology firm with bullish technicals. It's time to look at Red Hat as a legitimate player in a fast growing technology segment.