Should You Buy or Burn Rackspace Today?
Shares of Rackspace Hosting (NYS: RAX) plunged as much as 16% on Tuesday as investors panicked over a somewhat underwhelming earnings report. First-quarter earnings jumped 70% year over year on 31% higher sales, but analysts wanted another penny of bottom-line profits.
Is this a sell signal or a buy-in opportunity?
First off, I'd like you to feast your Foolish eyes on this chart:
Rackspace is riding the cloud computing trend like a champion rodeo artist. That chart doesn't include the latest figures, where sales growth dipped due to seasonal order patterns but earnings surged anyhow. On a trailing basis, both the top and bottom lines are accelerating.
And if you listen to Rackspace's management talking about the business, you'll come away thinking that the exciting part of this S-curve growth is just starting. "The shift toward cloud computing represents a massive multi-billion-dollar revenue opportunity that Rackspace has only just begun to tap," said CEO Lanham Napier in this week's earnings call.
More specifically, Rackspace's OpenStack cloud architecture is gaining support across the computing industry. Data giant IBM (NYS: IBM) and Linux vendor Red Hat (NYS: RHT) both joined the OpenStack consortium in April, lending heavy-hitting support on both the traditional and revolutionary sides of the fence. Rackspace drives that car and is sure to serve as the preferred provider of OpenStack cloud services.
The platform is in many ways a comparable alternative to Amazon.com's (NAS: AMZN) Web Services products. Amazon is far and away the market leader today and is not letting up the pressure on the gas pedal, but Rackspace and OpenStack could give the e-tailer a serious run for the money.
Napier admits that Rackspace might see some short-term turbulence along the way, but the path to long-term profits is wide open. "The technology industry is in the midst of a tectonic architectural shift. Massive technology disruptions like this create once-in-a-lifetime opportunities for companies to seize the moment, take the initiative and lead the revolution," he said. "Our goal is to lead the revolution."
Skeptics would pin a "spin" sticker on that kind of big talk, but Rackspace walks the walk. So yeah, shares dropping back to January prices created a buy-in opportunity this week. You can quote me on that because I have a very profitable thumbs-up CAPScall riding on Rackspace. If I didn't, I'd start one today.
This isn't your grandfather's computer industry. Technology is evolving quickly and cloud computing is far from the only game-changing megatrend today. In a special report penned by the Fool's finest analysts, you'll learn about the only stock you need to profit from the new technology revolution in big data and business intelligence. The report is totally free but it won't be available much longer, so get your copy right away.
At the time this article was published Fool contributorAnders Bylundholds no position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool owns shares of Amazon.com and International Business Machines.Motley Fool newsletter serviceshave recommended buying shares of Rackspace Hosting and Amazon.com. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.