Red Hat (RHT) reported strong third-quarter results that were ahead of our expectations on the top line, as the company continues to see a strong demand environment for its application development and emerging technology solutions, most notably OpenStack and OpenShift. These results should further pacify potential investor concerns around Red Hat’s place in an increasingly cloud-oriented world, particularly as emerging tech becomes a more significant part of the firm’s subscription revenue base. We are maintaining our narrow moat rating, and modestly lifting our fair value estimate to $113 per share from $110 previously. Although shares are retreating roughly 4% following these results and management’s solid outlook, we believe this is more a reflection of the firm’s full valuation than a reaction to any perceived structural changes to Red Hat’s business outlook.
Third-quarter revenue rose 22% versus the prior-year period to $748 million, roughly 2% ahead of our internal estimate and management’s prior guidance. Application development and emerging tech solutions remain Red Hat’s most intriguing growth engine, as sales rose 44% year over year to $162 million, representing nearly 24% of subscription revenue in the quarter. This continues a strong uptrend in growth rates we’ve seen from this part of the business throughout fiscal 2018, as some of the talent supply constraints facing Red Hat in recent years appear to be dissipating against a healthy demand backdrop, particularly as firms increasingly embrace hybrid cloud environments. Perhaps the best indicator of this is the heightened services revenue the firm is generating from consulting projects around OpenShift and Ansible, driving 27% growth from the firm’s services business in the quarter.
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