Can This Cloud-Computing Winner Keep Winning?

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I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series. We'll be taking a closer look at many of the market's great growth stocks to see which of them show real, numerically relevant signs of sustainability.

Next up is Rackspace Hosting (NYSE: RAX  ) , a data-center operator that's adding thousands of clients to its cloud-computing servers each quarter. If that sounds like a pedestrian business with an indefensible moat, it is. And isn't.

Rackspace makes its living providing the best support in the business. "Fanatical support," the company calls it, with the idea being that no customer can ever be too satisfied with their experience. And that level of commitment has created as many Rackspace fans as customers.

Foolish facts


Rackspace Hosting

CAPS stars (5 max)


Total ratings


Percent bulls


Percent bears


Bullish pitches

58 out of 62

Highest rated peers

Akamai Technologies, VeriSign, Google (Nasdaq: GOOG  )

Data current as of Sept. 18.

Fools are also fans, and for good reason. Company insiders still own more than 22% of the business, according to Capital IQ. Company chairman Graham Weston, one of Rackspace's earliest investors, owns a little less than 16%.

Rackspace is also attracting some of the best talent in the business. David Kelly, the company's new head of international operations, has experience with both Amazon (Nasdaq: AMZN  ) and eBay.

"Quality management is of paramount importance to Foolish investing, and Rackspace is certainly doing its part to stay on top of the game," wrote my Foolish colleague, Anders Bylund, in rating the stock in Motley Fool CAPS.

The elements of growth


Last 12 Months



Normalized net income growth




Revenue growth




Gross margin




Receivables growth




Shares outstanding

124.9 million

123.8 million

117.2 million

Source: Capital IQ, a division of Standard & Poor's.

There's a lot of good news in this table. Let's review:

  • Rackspace has accelerated net income growth since 2008. Sustained, long-term improvement like that is exactly what we growth investors love to see.
  • Even better, growth hasn't come as a result of price cuts. Volume sales in low-cost cloud computing services have kept margins high.
  • Finally, take a look at the receivables growth. Not only is revenue growing faster than receivables today, reversing a trend from 2008, but the gap between revenue and receivables growth is also widening. This business gets more efficient with each passing year.

Competitor and peer checkup


Normalized Net Income Growth (3 yrs.)



AT&T (NYSE: T  )


Equinix (Nasdaq: EQIX  )

Not material




Not available

Source: Capital IQ, a division of Standard & Poor's. Data current as of Sept. 18.

Rackspace hasn't been public for long, thus its lack of a long-term track record for normalized net income growth. But it would be a mistake to write off this Rule Breaker because of its short time dancing with Mr. Market.

Why? Loyalty and focus. Rackspace has loyal fans as customers and management is focused on producing the highest possible returns on its available capital. They've been successful so far; ROC has improved steadily since 2008.

Grade: Sustainable
I've twice recommended Rackspace to our Rule Breakers subscribers, and I've seen nothing to shake my conviction that this is a long-term winner in the making.

Now it's your turn to weigh in. Do you like Rackspace Hosting at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness featuring Rackspace Hosting:

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Amazon and eBay are Motley Fool Stock Advisor selections. Akamai, Google, and Rackspace is a Motley Fool Rule Breakers recommendation. Google is also a Motley Fool Inside Value pick. Motley Fool Options has recommended subscribers open a bull call spread position in eBay. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Akamai, Google, and IBM at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Google and IBM and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.

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