Can Rackspace Crush Wall Street This Quarter?

Three months ago, Rackspace Hosting (NYSE: RAX  ) missed earnings estimates by a nose. Shares plunged over the next month and a half, but started rising again last week. The company reports second-quarter results after the closing bell on Tuesday, and this is Rackspace's time to prove the doubters wrong -- or right.

So, what should we look for in this report?

Analysts expect earnings to jump 38% year over year, landing at $0.18 per share. Sales should rise 29% to $318 million. While these numbers look impressive taken out of context, Rackspace is actually used to growing earnings much faster than that:

RAX Revenue Growth Chart

RAX Revenue Growth data by YCharts

Analyst firm Jefferies voiced some typical concerns about Rackspace, while re-upping its "hold" rating on the stock. The hosting company is making an audacious play on a cloud computing segment traditionally owned by Amazon.com (Nasdaq: AMZN  ) , but the space is getting crowded now that Google (Nasdaq: GOOG  ) is moving in with its Compute Engine platform.

But the challenge is balanced by opportunity. "We continue to believe that the market may be large enough to support multiple providers, and that 'fanatical support' remains a key differentiator for [Rackspace]," Jefferies said.

That is indeed the crux of the matter. Rackspace cheerfully supports open standards through its OpenStack initiative. The company leads a consortium of tech heavyweights to develop and publish an architecture for any cloud computing job you might dream up, which seems to invite an invasion of low-cost newcomers mooching off Rackspace's research.

But the newcomers won't be able to offer the top-shelf support that Rackspace sells, which should keep customers coming back for more -- and telling their friends to follow along. So far, the chart above shows that this strategy is working very well. It's a page ripped right out of the Red Hat (NYSE: RHT  ) playbook. You may have noticed Red Hat crushing the market by quadrupling its share prices since early 2009, while Rackspace served up a tasty nine-bagger. There's clearly some business value to be found in sharing your secrets with the world.

Prick up your ears at any mention of OpenStack in this earnings release, because this is the core of the company nowadays. I see the platform gaining market traction, and fully expect Rackspace to beat revenue targets this time around. Whether the bottom line follows suit is less of a slam-dunk, as Rackspace balances earnings performance with marketing and sales growth, but the top line is what really matters, anyhow. You heard it here first.

Rackspace plays an increasingly important role in the burgeoning cloud computing and Big Data trends. Click here to read up on The Only Stock You Need To Profit From the NEW Technology Revolution. This in-depth report is totally free right now, but only for a limited time. Get your copy right now.

Fool contributor Anders Bylund owns shares in Google, but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Amazon.com and Google. Motley Fool newsletter services have recommended buying shares of Google, Amazon.com, and Rackspace Hosting. The Motley Fool has a disclosure 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 services free for 30 days.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1974581, ~/Articles/ArticleHandler.aspx, 7/29/2014 8:12:21 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement