Why Is Rackspace Jumping Into Deep Space?

Shares of Rackspace Hosting (NYSE: RAX  ) jumped 12% overnight and have gained a spectacular 25% since last Thursday. Not only did Mr. Market bid the stock up in anticipation of a terrific second-quarter report -- but the budding cloud-computing giant also delivered in style.

Analysts were looking for earnings of $0.18 per share on about $318 million in sales. Rackspace delivered $0.19 per share and $319 million, respectively, sliding past the Street's consensus by the slimmest of margins.

That's nice and all, but it's hardly cause for a rocket launch. The real explanation lies in a separate press release.

You see, Rackspace took this opportunity to launch a new brand identity. The company will still be known as Rackspace, but the OpenStack cloud computing service is leaving fingerprints all over the corporate logo, tagline, and marketing messages.

Oh, Rackspace still sells traditional hosting services like its name would suggest. But the "open cloud company," as it now makes itself known, is really all about cloud computing. Never you mind that Amazon.com (Nasdaq: AMZN  ) and Microsoft (Nasdaq: MSFT  ) each got a head start with their Amazon Web Services and Windows Azure platforms, not to mention that those giants' enormous financial and operational resources dwarf Rackspace's. Built on open standards and backed by customer support so fanatical that it's a trademarked term, Rackspace expects to keep winning share of this exploding market anyhow.

At least three analyst firms increased target prices, sales projections, and/or earnings estimates after this one-two punch. Scott Goldman of Goldman Sachs (no relation, I presume) said the bear thesis was mitigated by this quarter's financial results. OpenStack will be more of a long-term growth driver than an instant catalyst, according to Jefferies.

My bullish CAPScall on Rackspace has served me well over the past two years and will continue to pull its weight for years to come. This company is a key cog in the Big Data machine, where cloud-based tools combine to extract value from huge data sets. Learn all about Big Data, including the name of the one company poised to profit the most from this technological revolution, in this special report -- totally free for a limited time.

Fool contributor Anders Bylund holds no 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, Goldman Sachs, and Microsoft. Motley Fool newsletter services have recommended buying shares of Amazon.com, Rackspace Hosting, and Microsoft and creating a bull call spread position in Microsoft. We Fools don't 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. The Motley Fool has a disclosure policy.


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