Why Rackspace Hosting Shares Rocketed Higher

Why Rackspace Hosting Shares Rocketed Higher

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Rackspace Hosting climbed as much as 12% during Friday's intraday trading after the Web hosting specialist reported earnings that beat expectations.

So what: For the second quarter, net revenue grew 18% year over year to $376 million, beating estimates that called for sales of just $372.3 million. Meanwhile, even though quarterly net income per diluted share fell 11% to $0.16, analysts were only expecting earnings of $0.13 per share on the same basis.

During the quarter, Rackspace also increased its server count by more than 4,762 units to 98,884, and while margins took a hit from the effect of foreign exchange rates and a $1.5 million non-cash data center lease charge, Rackspace's revenue per server did rise 2% from the second quarter of 2012 to $1,298.

Now what: Going forward, management says they are planning to reaccelerate growth by making a series of operating and capital investments during the year to focus on "branding, expanding our global data center reach, and building out the capabilities of our hybrid cloud portfolio."

As a result, they warned, "margins and returns were, and will remain, lower than they were in 2011 and 2012."

Today's pop seems to show that investors are just fine with that plan, especially considering shares of Rackspace currently trade more than 40% below their 52-week-highs set in late January.

Even so, the stock still trades for nearly 62 times last years' earnings and 56 times next years' estimates, so investors who buy now should know they're still paying a premium, and need to count on Rackspace delivering on its long-term growth promises.

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The article Why Rackspace Hosting Shares Rocketed Higher originally appeared on Fool.com.

Fool contributor Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Rackspace Hosting. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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