Why Red Hat, Inc. Gained 11% in September

By Markets Fool.com

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What happened

Shares of Red Hat (NYSE: RHT) rose 10.8% in September 2016, according to data from S&P Global Market Intelligence. The jump rested on a strong second-quarter earnings report, and was then reinforced by a steady stream of bullish analyst notes praising those results.

RHT data by YCharts

So what

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The open-source software specialist saw second-quarter earnings rise 17% year over year, based on 17% stronger sales. Both of these figures were above Wall Street's consensus estimates. Application development tools led the way with 33% higher sales, and Red Hat customers' adoption of long-term support subscriptions is pacing ahead of the basic revenue growth.

Now what

Looking ahead, Red Hat's management boosted full-year revenue and earnings targets above the then-current analyst view. The greatest challenge on the table today might be to set an appropriate spending level to support Red Hat's business growth. In a phone interview, CEO Jim Whitehurst told The Motley Fool that the company will slow down its rampant hiring growth in the second half of 2016. A recent rush of new salespeople and engineers has put some short-term strain on Red Hat's operating expenses.

Red Hat shareholders like yours truly have now enjoyed a market-beating 77% return over the last three years, and the stock is trading close to multiyears highs after a deep February dip. The long-term story here is as exciting as ever, and I intend to stay invested in this remarkable open-source business for the long haul.

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Anders Bylund owns shares of Red Hat. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days.

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