Talk about a perfect storm. First, the CFO quits, and then the firm turns in a great quarter -- but not great enough -- and now this. Linux software provider Red Hat (NASDAQ:RHAT) was drenched by a massive wave of investor fear yesterday upon announcing that it would be restating three years' worth of earnings. The stock dropped 22%.
If you click that link above, you'll see that I had warned that Red Hat looked overvalued, but don't expect any "I told you so" out of me today. It's not that I'm a gentleman -- heavens no. It's just that today's price reduction looks like an overreaction to a scary-looking piece of news.
In order to comply with its accountant's recommendations, the company in its restatement will shift revenue recognition for the firm's Linux services to more closely follow the exact date that service agreements begin. In effect, it moves some of the revenue previously recognized in the first month of the contract to the last month, and that appears to be it. Subscriptions, annual revenues, and other key metrics stay about the same. As a result of the date shifts, some quarterly figures, however, will differ, and a penny per share looks like a lot when it changes last year's fourth-quarter earnings number from $0.03 per share to $0.02.
Given the departure of the CFO, maybe today's sellers can be forgiven their jitters, but investors with guts to stick through tough times are often rewarded. Heck, I'd be willing to jump in here and buy a pile of shares if it weren't for one thing: I still think Red Hat is overvalued.
I've got great respect for its product and its prospects, but I don't think any company deserves a P/E of 135 when it sells an open source enterprise system and competes with cutthroats such as HP (NYSE:HPQ), Sun Microsystems (NASDAQ:SUNW), Novell (NASDAQ:NOVL), IBM (NYSE:IBM), and Microsoft (NASDAQ:MSFT).
If you have faith in Red Hat's long-term prospects, you will probably not see such a buying opportunity again. Go get 'em, tiger. I can think of plenty of reasons not to buy Red Hat, but this restatement isn't one of them.
For more Fool coverage of the Linux biz:
- I'm not the only one who thinks Red Hat is risky.
- Think Red Hat's a mess? Take a look at SCO Group (NASDAQ:SCOX).
- Will the old school behemoths step on Red Hat?
Fool contributor Seth Jayson has no stake in any company mentioned. View his Fool profile here .
