Why Red Hat, Inc. Shares Crashed Today

What happened

Shares of Red Hat (NYSE: RHT) crashed on Friday, following Thursday night's release of the open-source software vendor's first-quarter results. The stock opened Friday's trading session 14.6% lower, recovered to a 10.1% decline near 11:20 a.m. EDT, and was trading at a 12.5% negative return near 2:30 p.m. EDT.

So what

Red Hat's first-quarter sales rose 20% year over year to land at $814 million. Earnings increased by 24%, stopping at $0.72 per diluted share. Your average Wall Street analyst would have settled for earnings near $0.69 per share on revenues of roughly $807 million. For those keeping score at home, the high end of management's first-quarter guidance called for earnings of $0.68 per share and sales of $810 million. Red Hat exceeded all of these targets.

Closeup on the first of three red fedoras hanging on hooks in a white hallway.
Closeup on the first of three red fedoras hanging on hooks in a white hallway.

Image source: Red Hat.

Investors found other reasons to worry, though. Second-quarter earnings and revenue guidance targets came in below Wall Street's consensus projections, along with soft billings in the first quarter. That was enough to trigger a 10% to 14% haircut today.

Now what

This stock had been on a roll, making it more vulnerable to quick market corrections. Coming in to this report, Red Hat shares had gained 68% over the previous 52 weeks. After the sharp sell-off, we Red Hat investors have still enjoyed market-beating one-year gains of 47%.

It's not surprising to see the market focusing on whatever weaknesses it could find in a fundamentally strong report, but this looks more like a buying opportunity than a call to retreat from Red Hat's stock. After all, the soft second-quarter guidance was posted along with higher full-year targets.

Management sees a strong second half coming. You heard it here first.

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Anders Bylund owns shares of Red Hat. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.