Rackspace Hosting, Inc. Gives Investors Reason to Hope Again

After months of disappointment and a plummeting stock price, Rackspace Hosting, Inc. (NYSE: RAX  ) finally managed a quarterly performance worthy of an after-hours pop.

Shares of the cloud computing specialist moved as much as 12.5% in late trading on first-quarter results that beat expectations. Rackspace's second-quarter outlook also impressed. (My Foolish colleague Anders Bylund has all the details here.)

The better news, of course, is that Rackspace's strategy seems to be working. Big investments in Openstack infrastructure have paid off in higher revenues per server and improving returns on capital:

Q1 2013
Q4 2013
Q1 2014

Revenue growth rate (YoY)




Gross margin




Return on capital (annualized)




Servers in operation




Monthly revenue per server




Sources: S&P Capital IQ, Rackspace Hosting press releases.

Looking at this table, two things stand out:

  1. Rackspace is earning more despite pricing pressure. Notice the slight decline in gross margin? That's where pricing pressure appears to be taking a toll, and yet revenue -- and revenue per server -- is still on the rise.

  2. Rackspace hasn't stopped investing. Seeing more than 12,000 new servers pressed into operation over the past year lends credence to interim CEO Graham Weston's claim that Rackspace today is chasing a bigger opportunity today than it was 15 years ago.

Next step: Go on the road
In a brief interview, Rackspace director of finance Bryan McGrath said that Rackspace is winning the business it most wants: customers who have complex deployments that demand a higher level of service than what (NASDAQ: AMZN  ) and Google (NASDAQ: GOOGL  ) (NASDAQ: GOOG  ) offer with their own cloud offerings.

Company president Taylor Rhodies echoed those same sentiments in my conversation with him last month for Motley Fool Rule Breakers.

"Ideally, we want to get the chance to engage in the conversation about [price and value] because when we do, we have a very high hit rate. The danger is if we don't get the chance to explain it, and that's where our mission in the market is -- to go out and really articulate our story," Rhodes said. (Full interview available with subscription.)

And how will Rackspace achieve that? By going on the road. McGrath said that Rackspace plans to host a series of events in in which current customers will explain to prospects why they bet on its open cloud approach. Investors might do well to track how well attended these events are.

Now it's your turn to weigh in. What do you think of Rackspace's strategy? Do you believe better marketing will restore the growth investors had become accustomed to? Leave your take below, including whether you would buy, sell, or short Rackspace Hosting stock at current prices.

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Tim Beyers

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at or send email to For more insights, follow Tim on Google+ and Twitter.

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