UPDATE: J.P. Morgan Color On RHT Free Cash Flow Growth

J.P. Morgan, which downgraded shares of Red Hat Inc. (NYSE: RHT), is providing some color on the stock.

“Management has executed admirably through the economic downturn and the ensuing recovery, and it does an exemplary job of communicating with investors,” J.P. Morgan writes. “In addition, RHT is unlikely to miss expectations, given its highly recurring subscription model, and it has less exposure to potential negative macro forces in Europe than many Software companies. But we do not believe these positives justify the current price.

“Valuation stretched, regardless of what valuation metric we consider, and we believe investors should reduce their exposure to this name. We believe the current stock price implies a positive inflection point to free cash flow growth of about 25%, which we view as improbable.

“We're maintaining our price target of $32, which implies a more reasonable inflection to 15% free cash flow growth – not necessarily a low bar.”

Red Hat Inc. closed Wednesday at $40.58.