Red Hat has been a strong performer since we launched coverage, up 15% vs. the S&P +9% and the Nasdaq +2% over the same time period, despite a 5% move lower after its F3Q earnings. We see the most recent move as an attractive entry point, and RHT remains our one of our top ideas going into CY18.
Two key debates continue to surround the stock: a) sustainability of double digit infrastructure growth and b) the amount of leverage in the model. We believe the infrastructure segment is more durable than most given our view that Red Hat will increasingly become more of a strategic vendor to large enterprises in the cloud era. We saw evidence of this in Q3 with 14% constant currency growth and have done detailed field work and analysis to prove that this is sustainable. With RHEL as the core building block of the Company’s infrastructure agnostic hybrid stack, we expect customers to increasingly leverage RHEL in the Cloud as larger production workloads move to cloud environments and expect margins to expand as renewals improve given a clearer hybrid cloud roadmap.
By unpacking the elements of the Infrastructure Segment, we have gained more conviction that consensus forecasts will move upward toward ours over the next several quarters and F3Q results have reinforced our conviction.
We’d like to invite you to a conference call January 5th at 11am Eastern to discuss:
1) A disaggregation of RHT’s Infrastructure Segment and Growth
2) RHEL’s positioning in the Cloud Era
3) What double digit Infrastructure growth implies for RHEL on premise
4) The path for continued margin expansion
We hope you can join us.