Shares of Red Hat Inc (NYSE: RHT) are receiving a lot of investor interest as of late due to the stock’s 24.2% increase over the prior three months. Shareholders are now asking themselves whether the company’s current stock price is reflective of its true value or if shares have even further upside from here.
Let’s take a look at Red Hat’s value and outlook based on its most recent financial data to see if there are any catalysts for a price change.
What’s The Opportunity In Red Hat?
Red Hat appears to be overvalued by -14.2% at the moment, based on 9 separate valuation models. The stock is currently trading at $158.90 on the market compared to our average intrinsic value of $136.35. This means that the buying opportunity has probably disappeared for now.
|Analysis||Model Fair Value||Upside (Downside)|
|10-yr DCF Revenue Exit||$122.32||-23.0%|
|5-yr DCF Revenue Exit||$134.65||-15.3%|
|Peer Revenue Multiples||$109.96||-30.8%|
|10-yr DCF EBITDA Exit||$198.20||24.7%|
|5-yr DCF EBITDA Exit||$243.71||53.4%|
|Peer EBITDA Multiples||$120.94||-23.9%|
|10-yr DCF Growth Exit||$104.58||-34.2%|
|5-yr DCF Growth Exit||$109.16||-31.3%|
|Peer P/E Multiples||$83.60||-47.4%|
Click on any of the analyses above to view the latest model with real-time data.
However, will there be another opportunity to buy low in the future? Given that Red Hat’s stock is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) could mean the price can sink lower, giving investors another chance to buy in the future. This is based on its beta of 1.24, which is a good indicator for share price volatility.
Can We Expect Growth From Red Hat?
Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matters the most, a more compelling investment thesis would be high growth potential at a cheap price.
source: finbox.io data explorer
Red Hat’s revenue growth is expected to average 13.8% over the next five fiscal years, indicating a solid future ahead. Unless expenses grow at the same level, or higher, this top-line growth should lead to robust cash flows, feeding into a higher share value.
What This Means For Investors
Growth investors typically look to invest in companies that are expanding sales, gaining market share and building customer bases. On the other hand, value investors often argue that the most successful investments are in companies that deliver the highest cash flows while trading at the lowest valuation.
But why not put those hands together? A company that has both growth and value characteristics would certainly make the most attractive investment. So what did we find out about Red Hat?
Red Hat has positioned itself so that double-digit growth appears to be a reasonable assumption for the foreseeable future. However, this growth does not look highly attractive at current trading levels. As such, investors may want to hold off on buying or adding to their RHT position for the time being.
It is important to note that there are a variety of other fundamental factors that I have not taken into consideration in this article. If you have not done so already, I highly recommend that you complete your research on Red Hat by taking a look at the following:
Valuation Metrics: what is Red Hat’s short ratio and how does it compare to its publicly traded peers? It represents the percentage of total shares outstanding that is being shorted. View the short ratio here.
Risk Metrics: how much interest coverage does Red Hat have? This is a ratio used to assess a firm’s ability to pay interest expenses based on operating profits (EBIT). View the company’s interest coverage here.
Efficiency Metrics: fixed asset turnover is calculated by dividing revenue by average fixed assets. View Red Hat’s fixed asset turnover here.
As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.