Rackspace Hosting up on revenue beat

The cloud-computing company's third quarter proves the industry is growing strong.

By Benzinga Nov 8, 2011 2:28PM

By Jonathan Chen, Benzinga Staff Writer


Rackspace Hosting (RAX) reported third-quarter revenue Monday that was better than analysts expected, sending shares nearly 7% higher Tuesday.


The cloud-computing company's profit of 14 cents per share was in line with expectations, but its $265 million in revenue beat the $261.6 million Wall Street wanted to see.


The Texas company said that total server count was up 6%, and total customers rose 6% as well.


Rackspace is focused on finishing the year on a strong note, said chief financial officer Karl Pichler in a statement. He promised investors a more in-depth look into 2012 plans when the company reports full-year results in February.


Chief executive Lanham Napier praised the company's strong pace of revenue growth and its increased margins and returns.


Morgan Stanley was not as positive on Rackspace as others, but said that was mostly due to valuation. Analysts noted increasing cloud demand, and accelerated adoption rates for Rackspace's expanding portfolio of products.


"By leveraging its existing expertise, RAX is able to sell more variations of the cloud product to existing customers and make itself more relevant to the growing interests of large enterprise customers," the analysts said in a note to clients. "Improved margins are a result of these new products as many of them have higher margins than the basic cloud product."


Bank of America analysts were more positive, saying that Rackspace remains their top infrastructure cloud stock.


Rackspace is in the ultra-hot cloud-computing sector -- and growing like a weed. Revenue jumped 32.7% year over year, and earnings rose 60% year over year. It has been afforded a very high premium, trading at nearly 50 times expected 2012 estimates.


As cloud computing continues to take off, some are expecting consolidation in this space. With a market cap of around $5 billion, Rackspace is one of the smaller cloud-computing names, and is agile enough to get acquired by one of the larger information-technology companies in coming months.


Cloud computing is everywhere. Apple (AAPL), Google (GOOG), Amazon (AMZN) and a host of other major players are continuing to devote more resources toward cloud computing.


As cloud computing continues to take shape and ultimately transforms the IT industry, this should benefit Rackspace, as the company's servers will continue to go up in number.

With revenue growth of over 30% year over year and earnings growth of 60%, those are definitely some lofty metrics to keep your head in the clouds.


ACTION ITEMS:

Bullish:
Traders who believe that Rackspace will continue to grow sharply over the coming years might want to consider the following trades: 

  • Go long Rackspace, despite the high valuation. If traders are concerned about this, perhaps wait until the $41 level, where there is technical support.
  • Also consider names like Citrix Systems (CTXS), VMware (VMW) and other major cloud computing names.

Bearish:
Traders who believe that Rackspace might see a slowdown in server growth may consider alternate positions:

  • Rackspace is a momentum name, and any slight hit to the momentum could have traders leaving the name faster than you could imagine. Consider shorting aggressively.

Neither Benzinga nor its staff offer investment advice, nor do recommend that you buy, sell, or hold any security.


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