Why Rackspace Hosting, Inc. Shares Rumbled Higher Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Rackspace Hosting  (NYSE: RAX  ) jumped nearly 15% Tuesday morning after the managed cloud hosting specialist released better-than-expected first-quarter results.

So what: Quarterly revenue rose 16% year over year to $421 million, near the top end of its previous guidance and helped partially by a $6.6 million positive impact from currency exchange rates. This translated to a roughly 6.7% decline in net income over the same period to $25.5 million, or $0.18 per share. However, analysts expected net income of just $0.12 per share on sales of $419.5 million.

Better yet, Rackspace expects second-quarter revenue of $434 million to $440 million, the mid-point of which is also well above analysts' expectations for Q2 sales of $435.5 million.

Now what: Rackspace chairman and CEO Graham Weston added, "We are encouraged by qualitative factors, including the thousands of new customers we added in the quarter, including one of the largest we've ever landed. [...] Each of these customers values our managed cloud approach and chose us over providers of less expensive unmanaged infrastructure." 

To be sure, Rackspace's total server count increased sequentially this quarter by more than 2,300 servers to 106,229. This solid beat on both the top and bottom lines also allows weary investors to breathe a long-overdue sigh of relief, especially after the last two quarters served up little more than disappointment.

Shares don't exactly look cheap trading around 34 times next year's expected earnings. But with the stock still trading down 23% so far this year -- and keeping in mind those estimates will likely climb as analysts have time to fully digest today's news -- I think Rackspace Hosting is now worthy of consideration for patient, long-term investors.

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Steve Symington

Technology and consumer goods specialist for the Fool. Steve looks for responsible businesses which positively shape our lives. Then, he invests accordingly. Enjoy his work? Connect with him on Twitter & Facebook so you don't miss a thing.

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8/28/2015 4:00 PM
RAX $31.26 Up +0.31 +1.00%
Rackspace Hosting CAPS Rating: ***