Red Hat's Cloud Story Is Finally Here; Time To Buy?

• Red Hat Inc RHT shares have been highly volatile since January and have appreciated 16 percent year-to-date.
• Deutsche Bank’s Karl Keirstead upgraded the rating on the company from Hold to Buy, while raising the price target from $75 to $90.
• The company is poised for revenue growth with IT workloads shifting towards AWS/Azure, Keirstead said.

Analyst Karl Keirstead noted that almost all of Red Hat’s peers are facing a challenging IT budget environment. This acts as “a looming headwind,” since IT workloads are moving to AWS/Azure and the companies face risks from cheap open source alternatives.

Against this backdrop, Red Hat stands out as a company that is “on the right side of the big public cloud and open source trends,” Keirstead mentioned. The company has a cloud subscription revenue stream of more than $100 million, with AWS contributing almost 50 percent of this.

Additionally, Red Hat has been generating 15-20 percent growth in constant currency billings, with margins beating the guidance.

In the report Deutsche Bank noted, “In our view the Street attention on the ramp of Red Hat’s cloud revenue stream will only increase as AWS itself ramps, offering not only valuation support but upside as this revenue stream continues to grow and as the Street embraces Red Hat as one of the few “AWS winners”.”

Keirstead said that he believes:

1. The Street is already anticipating tougher billings growth comps
2. Traction of Red Hat’s JBoss middleware product remains strong and the pace of acquisitions to further diversify the mix could increase in 2016
3. Red Hat is likely to set longer-term financial targets at its 2016 financial analyst day, which should be a positive