Red Hat Missed Guidance Isn't That Bad

Red Hat doesn't have debt and while the price-to-earnings multiple is still high compared to the S&P 500(SPY) , the company simply didn't miss by much. In fact, it would not surprise me in the least if the company "pushed" some future sales into this quarter to break the billion-dollar mark. It's good for employee morale and really doesn't take much to make it happen.

If you are looking for Wednesday's drop to signal a buying opportunity, you are likely going to find Thursday or opening on Friday to be near the sweet spot.

At the same time, there is no hurry jumping on board with Red Hat. Stocks dumping as a result of lowered guidance usually take a full two good earnings quarters to recover. I believe the odds favor a faster than normal recovery.

Operating margins, while already low compared to Microsoft and Oracle appear closer to IBM(IBM) and CA Technologies(CA) . (See the table below.)

Without a strong dollar, operating margins may improve, but don't count on Europe for any favors. (Read my article, ORCL: Buy on Dips as it Heads for the Cloud.)

For an idea what a disappointing earnings report gap down usually looks like, take a look at Dell's(DELL) chart. Dell disappointed and traded from $15 down to an intraday low of $12.31.

Also, take close note of the next few days after earnings. Use your software to look at charts from the past few quarters and review the ones that gapped down the next day. The high placed a couple of days after the gap down in Dell is now resistance. This is a classic pattern. (Read my article, Surviving Dell in an Apple World.)

The main difference between Dell and Red Hat is this: Red is still clearly executing, but just slightly missed on guidance in a quarter that they reported a billion in yearly revenue. All in all the earnings release is a good one and with Red Hat Storage coming online shortly, I expect the storm clouds to pass quickly.