Jeffries: Linux Slowdown Puts Red Hat Inc Consensus At Risk

Red Hat Inc.'s

expected revenue growth faces a significant risk from a sales slowdown for its core Linux operating system, an analyst said Thursday. Jeffries' John DiFucci launched coverage on Red Hat with Hold rating and $58 target. The company closed Thursday at $62.79 a share and is up 12 percent in the year to date. DiFucci predicted the compounded annual revenue growth for the Linux system will equal 7 percent for the period 2013 to 2018, from 16 percent in the preceding five-year period. Linux provides about 70 percent of Red Hat's annual revenue, and the slow-down represents "a significant risk" to Wall Street's expectation of subscription growth of 14 percent in 2015 and 15 percent in 2016, DiFucci said. Other headwinds blowing on the company include the declining use of Unix systems which spurred adoption of Linux over the past decade, as well as a premature market for its OpenStack products. DiFucci said annualized subscription billings have strengthened in the year to date, which he attributed to new business from the company's so-called public cloud partners. "This could provide a material source of new business," DiFucci said, although he sees it providing "limited gains from current levels."