Rackspace Hosting Inc - Momentum

By Jared Levy,

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Rackspace Hosting Inc. ( RAX )

There is a good chance that some part of your head might just be in the clouds… 

Even if you're not a daydreamer "the cloud" is all around you.  Data and processing power is moving away from your home and office computer and occurring offsite.  The cloud is an essential catalyst for the revolution already underway in communication, (smartphones, tablets, etc) business tasks and pure efficiency both personally and professionally.  Rackspace is positioning itself as a key component of the new cloud revolution.  Their products and services allow businesses and individuals to expand their virtual data needs broadly, quickly and affordably. 

Company Description & Developments
Rackspace provides enterprise hosting and storage solutions to over 161,000 customers around the world.  To put it simply, they offer businesses the ability to store and compute off site.  Instead of  having to spend large sums of money on purchasing, installing and maintaining their own servers, RAX does it for them and charges an ongoing fee for usage and amount of data/services used. 

Not only does this solution makes sense from convenience and upfront cost perceptive, but it takes away the need for companies to have to maintain, replace and upgrade systems that are becoming obsolete at an ever increasing pace. Most importantly, the cloud allows almost instantaneous and infinite scaling capabilities that can match the needs of any growing company. 

If you use Gmail or any of Google's other services online, you are using the cloud.  Smartphones use the cloud to take the strain from their internal processors and memory which allows for magnitudes more power in your palms.  Everyone from Amazon to Google, Apple to Microsoft and more are moving services into the cloud.  Our world is going from CDs, DVDs and hard drives to a universal wireless network where all your documents, music, data and even medical history can be accessed anytime, anywhere (and by anyone if you're not careful).

Speaking of which, security will be a major concern when it comes to doing business in the cloud.  Some clouds are only accessible by users at a certain location (or corporate network); where others, like Google are completely open.  Both require complex security measures which Rackspace believes that they address adequately according to their website.

The reality is that the cloud is here to stay and the premise of cloud computing not only makes sense, but is necessary in the world we live in and the way our society is doing business. If Rackspace continues on its current growth path, the stock should follow. 

Financial Profile
Rackspace is a mid-cap (5.73 billion), growth company that is trading at about 92 times trailing earnings (P/E).  Looking forward, Zacks Consensus Estimates are calling for that number to drop to 54 with no change in price from these levels.  It is important to note the high multiple and  that investors have high expectations for RAX to deliver growth.  Earnings reports for growth companies with high multiples can prove to be especially volatile, so use caution.

Rackspace hit the Zacks Rank 1 Strong Buy list January 19th.  It moved from rank 3, which is where it has stood since August.

Rackspace reported a quarterly sales increase of 7% at their last earnings report.  The company saw a jump of 32% in sales year over year with total sales of roughly 780 million in FY2010.  RAX saw earnings growth of about 56% in the same period.  Rackspace is expected to earn $0.53 in FY2011 according to the Zacks Consensus Estimate. 

Earnings Estimates
One Rackspace analyst increased their current quarterly estimates slightly higher on the 23rd of January.  We did notice a couple analysts shuffle their estimates in November of 2011, with 2 revisions higher and two lower.  It seems that most analysts are within a fairly narrow range for this quarter's earnings. Rackspace will report Q4 (2011) results on February 13th.

Expectations are for the cloud company to generate $0.15 in income this quarter.  Of the 18 analysts who cover RAX, the consensus is for the company to grow earnings by 51% in FY2011 with another jump of 53% in FY2012. 

In terms of the magnitude of analyst estimate trends, we are seeing all of the consensus estimates higher than they were 90 days ago from current quarter, out to FY2012.  This again reflects the bullish sentiments and elevated expectations as Rackspace continues to grow.  Rackspace beat estimates last quarter by 8%, but this year's past earnings results have been mixed, with them just about meeting expectations on average over the past 12 months.  The stock has also had mixed responses after earnings reports.

Market Performance & Technicals
Rackspace has been consolidating for the past couple weeks right around its 50 day moving average, forming a bit of a wedge which is typical ahead of a breakout.  Volatility has been decreasing as well and the stock is currently about $4.00 away from its 52 week high of $46.50.

As stated earlier, RAX is flirting with its 50 day moving average of $42.75, but remains solidly above the 200 day moving average of $40.50.

Momentum was strong for most of the past year, although Rackspace did pause during the broad market pullback in the summer of 2011.  The stock outpaced the S&P 500 by almost 26% over the past year, but has lagged about 3% behind the broad market for the past twelve weeks.

If you have an appetite for risk and believe in the growth of the cloud, RAX may be an interesting play ahead of earnings.  Be prepared for volatility after the report.


Jared A Levy is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Whisper Trader Service.


RACKSPACE HOSTG ( RAX ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks
Referenced Stocks: RAX

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