Which Cloud-Computing Stock Is a Better Buy Today?


Looking for a great investment? One way to make sure you've picked the right stock is to compare it with a strong peer on a series of cold, objective financial results and other key statistics. In that spirit, we'll be taking a closer look today at two cloud-computing leaders, salesforce.com (NYS: CRM) and Rackspace Hosting (NYS: RAX) .

Both companies will go head to head in several battles. The winner will be the one with the most cumulative victories through several contests of objective and subjective analysis. We'll start with some cold, hard numbers that will hopefully uncover the better growth stock with the brighter future. We'll also examine analyst optimism toward each stock and take a closer look at each company's key initiatives, to see what sort of growth the market's top minds may see in the years ahead.

In this corner ...
Rackspace and Salesforce don't usually go head to head, but both have bet their future on the cloud. Cloud computing can be confusing to many, which is why I put together a "Cloud Computing for Dummies" series earlier this year.

If you already have your head in the clouds, you know that Salesforce is known primarily for heavily promoting the term "cloud computing," through which it offers various layers of distributed management and social software. Rackspace is a standout in infrastructure computing as well as hosting services. That is, it offers smaller companies the ability to run programs and services through its servers, which can often save money and resources over maintaining dedicated hardware on site.

Cloud computing is an intensely competitive arena. Rackspace's biggest threat may be Amazon.com (NAS: AMZN) , an industry leader in infrastructure computing with Amazon Web Services, or AWS. The main barrier to entry in this business is scale, and Amazon has it in droves. Rackspace counters this threat with open-source services, which can appeal to developers looking for greater portability.

Salesforce's CEO, Marc Benioff, has a certain Silicon Valley star quality that reminds Fool analyst Tim Beyers of a certain black-turtlenecked fellow from Cupertino. His relentless push to create greater value from cloud-sourced software has led Salesforce to dizzying highs, and the company has lately diversified from its original enterprise services into "enterprise social media."

Its original mission led it right into the crosshairs of giants such as IBM (NYS: IBM) , which is making a strong push into business-focused cloud software, but it must now contend with Microsoft (NAS: MSFT) in the social sphere. The software giant recently acquired "enterprise social network" Yammer, a direct counterstrike to Salesforce's acquisitions of Buddy Media, Radian6, and Heroku.

Will Rackspace's openness help it fend off Amazon? Can Marc Benioff best IBM, Microsoft, and other megacap tech companies looking for a new space to grow? Let's take a look at the numbers and see what we can discover.

Baseline battle
We use many different numbers and ratios when talking about the value of a stock. How highly valued is it, relative to the company's sales? Is the company profitable? Does it have positive cash flow? How much debt, if any, has it taken on to maintain or expand its operations?

As a possible tiebreaker, we'll also examine management's faith in the company's future through its level of insider ownership.

Our two competitors lock up:



Rackspace Hosting

Price to sales



Profit margin



Free cash flow margin



Debt to equity



Insider ownership



Source: Yahoo! Finance. Winners in bold.

Rackspace pulls out a victory, thanks in no small part to management's higher personal stake in their company's success. Has that faith been rewarded with superior growth? Let's find out.

Growth battle
If we were comparing steady, dividend-paying stalwarts, we might look at things like dividend yields or payout ratios. But these two will face off on more high-growth metrics.

We'll first compare the two on price appreciation, because one of Fool co-founder David Gardner's keys to finding great Rule Breakers is to find growth stocks with a history of strong stock-price growth. We'll also look at the growth (or lack of growth) in each company's top and bottom lines, and their change in free cash flow over time.

As a tiebreaker, we'll examine the change in outstanding shares, to see how willing each company's management has been to dilute your stake. With the exception of share counts, the more growth we see, the better. These numbers will be calculated based on each stock's past three years of history -- or whatever history we can get, if it doesn't have that much to analyze.

Total Growth Over Three Years in:


Rackspace Hosting

Stock price






Net income*



Free cash flow*



Shares outstanding



Sources: Morningstar and YCharts. Winners in bold.
*Calculated from 2009 annual results to trailing-12-month results.

Rackspace takes another battle! That's some strong growth. Investors may have lots more growth in store, considering how well Rackspace has increased its bottom line.

Sentiment battle
How do the world's most engaged market participants view these companies? Let's see what Wall Street's analysts expect from these companies, and what our Motley Fool CAPS community thinks.



Rackspace Hosting

"Buy" recs (% of total ratings)



Forward growth rate (2013)



CAPS sentiment (% outperform)



Sources: Yahoo! Finance and Motley Fool CAPS.

Analysts may not be so bullish about the cloud-hosting service, but our CAPS players more than make up the difference. These are both high-growth, high-risk, high-reward stocks, and they could both hit home runs in the years ahead. However, Rackspace's commitment to an open-source cloud infrastructure looks like a smart decision in a world full of competing proprietary options. That may be what propels it to greater long-term success than Salesforce. Whatever the results in years ahead, Rackspace has pulled off a rare clean sweep against Salesforce today.

While Rackspace and Salesfoce might be two of the most direct ways to leverage the cloud-computing boom, they're far from the only options. In fact, two of the largest companies in tech today have some pretty impressive exposure to the cloud as well -- Amazon.com and Microsoft. And while they're dominant players in this space, they have plenty of other aspects investors should also understand before trying to gain cloud exposure by investing in them. The Fool recently highlighted how the cloud boom factors into each of these tech giant's investment thesis and more in the Fool's new premium research reports on Amazon and Microsoft. Grab yours today!

The article Which Cloud-Computing Stock Is a Better Buy Today? originally appeared on Fool.com.

Fool contributorAlex Planesholds no financial position in any company mentioned here. Add him onGoogle+or follow him on Twitter,@TMFBiggles, for more news and insights. The Motley Fool owns shares of salesforce.com, IBM, Microsoft, and Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Microsoft, Rackspace Hosting, Amazon.com, and salesforce.com, creating a synthetic long position in IBM, creating a synthetic covered call position in Microsoft, and shorting salesforce.com. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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Originally published