Rackspace Hosting Inc. (
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
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
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
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.
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
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
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 (
): Free Stock Analysis Report
To read this article on Zacks.com click here.