Red Hat Rundown

If Red Hat (Nasdaq: RHAT  ) shareholders thought things could only get better after the stock's early week punishment, this morning's 10% drop has got to have them reaching for the Rolaids. So far this week, the Linux provider has lost one-fifth of its market capitalization. It's down nearly 30% from the end of May.

On Monday, the problem was that CFO Kevin Thompson abruptly left for the non-reason "other interests." The market slapped the stock, probably because rats fleeing sinking ships have often been known to cloak their motives as "other interests." There's no evidence of shenanigans at Red Hat, but fear is enough.

Today's problem is a little thing called reality. Red Hat turned in a great-looking quarter, even if the press release does a bit of irksome obfuscation. Revenues were up 53% over the prior-year period, to $41.6 million. Gross margin surged to 80% over last year's 68%. Selling, general, and administrative expenses plus equity-based compensation dropped 4% as a portion of sales. That kind of improvement led to earnings of $0.05 per share, against last year's penny. Heck, it even generated $25 million in free cash flow.

So, what's the big problem? Why did reality bite? Because hyperperformance like that can't keep a stock afloat when it's already priced beyond perfection. When a stock carries a P/E above 160, investors will jump ship for just about any reason. The small, $1.4 million difference between actual revenues and analyst expectations is getting the blame today.

Maybe investors are just readjusting their sights as it becomes clear that Linux doesn't exempt a firm from the laws of nature. With big, savvy competitors like HP (NYSE: HPQ  ) , Sun Microsystems (Nasdaq: SUNW  ) , Novell (Nasdaq: NOVL  ) , IBM (NYSE: IBM  ) , and Microsoft (Nasdaq: MSFT  ) trying to steal their portion of the enterprise software pie, it's just not likely that Red Hat can continue to grow at a high double- or triple-digit pace. Toss in management uncertainty and recent fits of 6%-8% share dilution, and you have a recipe for reevaluation.

Interested in more Fool coverage of the Linux industry?

Fool contributor Seth Jayson thinks the best thing about Linux is that it's pretty much free. He wonders if the folks at Red Hat worry about that. He owns no stock in any companies mentioned. View his Fool profile here.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 508570, ~/Articles/ArticleHandler.aspx, 10/27/2016 9:07:57 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,169.68 -29.65 -0.16%
S&P 500 2,133.04 -6.39 -0.30%
NASD 5,215.97 -34.29 -0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/27/2016 4:02 PM
HPQ $13.99 Up +0.08 +0.58%
HP CAPS Rating: ***
IBM $153.35 Up +1.54 +1.01%
IBM CAPS Rating: ****
MSFT $60.10 Down -0.53 -0.87%
Microsoft CAPS Rating: ****
NOVL.DL $6.10 Down +0.00 +0.00%
Novell, Inc. CAPS Rating: **
SCOX.DL22 $ Down %
The SCO Group, Inc… CAPS Rating: No stars