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Why Shares of Red Hat Inc. Are Soaring Today

By Timothy Green - Mar 26, 2015 at 3:05PM

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What investors need to know about Red Hat's earnings.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Red Hat (RHT), a provider of open-source software solutions, rose on Thursday after the company beat analyst earnings estimates when it reported its fourth-quarter earnings. By 2:30 Thursday afternoon, the stock was up over 11%.

So what: Red Hat reported fourth-quarter revenue of $464 million, up 16% year-over-year and $7.5 million higher than the average analyst estimate. Subscription revenue rose 15.2% to $405 million, while training and service revenue rose 20.4% to $58.9 million.

Non-GAAP EPS came in at $0.43 per share, two cents higher than what analysts were expecting and a penny higher year-over-year. The fourth quarter was the 52nd consecutive quarter of revenue growth for the company, and with the total backlog growing by 19% year-over-year and deferred revenue growing by 15% year-over-year, this streak will likely continue going forward.

Red Hat did come up short on guidance. The company expects first-quarter revenue of between $469 million and $474 million, below the analyst consensus of $475.6 million. EPS is expected to be $0.41, in-line with analyst expectations. In addition to reporting earnings, Red Hat also announced a new $500 million buyback program.

Now what: Red Hat has a history of consistent growth, and the market rewarded yet another solid quarter from the company. Guidance came in below expectations, but investors brushed that off, sending the shares higher. Red Hat is an expensive stock, however, currently trading for nearly 80 times GAAP earnings and 47 times non-GAAP earnings, and the company's growth doesn't seem fast enough to justify such a valuation. The market may be ahead of itself of this one.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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