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Why Did Red Hat Stock Fall Last Week?

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Disappointing 3Q16 results

Red Hat (RHT) stock fell 13.6% last week. The stock fell 14% on December 14, 2016, due to disappointing 3Q16 results. Revenue from the firm rose 18% YoY (year-over-year) to $615 million compared to the analyst estimate of $618 million. The company’s non-GAAP earnings per share were $0.61 compared to analyst estimates of $0.58.

Red Hat missed revenue estimates as the US presidential election delayed the signing of contracts between the firm and the US government. Red Hat, however, expects the deals to be signed in 4Q16. The strong US dollar (UUP) also affected the company’s revenues.

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Analysts downgraded Red Hat

Stifel analyst Brad Reback reduced the target price on Red Hat from $87 to $70 and expressed concerns about the firm’s product offerings such as OpenStack and OpenShift. The analyst mentioned that these products are likely to remain niche offerings. Stifel is also concerned by the increase in the adoption of hyperscale cloud solutions from tech heavyweights such as Amazon (AMZN) and Microsoft (MSFT).

BMO Capital’s Keith Bachman also lowered the price target of Red Hat from $89 to $75 due to concerns about declining margins and billings growth.

Of the 29 analysts covering Red Hat, 21 have given it “buy” recommendations, one has given it a “sell” recommendation, and seven have given it “hold” recommendations. The median target price for the stock is $88.5, which indicates that Red Hat is trading at a discount of 24.6% to median analyst estimates.

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