A Big Upgrade for Rackspace Hosting

After spending much of the past year at a mediocre three-star rank, Rackspace Hosting (NYSE: RAX  ) has impressed enough top-performing members of our 170,000-strong Motley Fool CAPS community to climb up to four stars. A total of 419 members have given their opinion on the virtual IT firm, with many of them offering analysis and commentary explaining the recent optimism.

Similar to other companies exposed to the fast-growing cloud-computing space, Rackspace sports a lofty earnings multiple that has many value-minded investors balking. Its price-to-earnings ratio sits in the high double digits, still below the triple-digit wonder Salesforce.com (NYSE: CRM  ) and VMware's (NYSE: VMW  ) 146, but still many times the level of noncloud peers.

But the potential growth of cloud computing has some CAPS members looking past the extreme valuation of the hosting and cloud computing company and seeing long-term potential as the firm continues to show strong results. Rackspace pulled in a solid second quarter with revenue up 23% and earnings growth of 60%. With strong trends in adding servers and customers, and big growth in revenue in cloud computing, the company remains bullish on the second half of the year.

The company isn't alone in seeing big things ahead in cloud computing, which research firm IDC expects will attract more than $44 billion in global IT spending by 2013. Verizon Communications (NYSE: VZ  ) recently launched a service targeted toward small-to-medium-sized businesses, which will go up against competing services from Amazon.com (Nasdaq: AMZN  ) and Rackspace. And the frenzied bidding war that recently took place between Hewlett-Packard (NYSE: HPQ  ) and Dell (Nasdaq: DELL  ) over 3PAR demonstrates the desire by large companies to pick up assets in the space. Despite the increasing competition, some investors believe Rackspace's tenure in the market and attention to customer service will help it continue winning business. Together with the improving efficiency in its business, more CAPS members are banking on a good future for the company despite the oversized valuation today.

Do you think Rackspace Hosting deserves its raised status? Add your thoughts in the comments box below on this page, or head over to CAPS to rate the company and check out all the information and opinions the community offers, absolutely free.

Always looking ahead, the Motley Fool Rule Breakers service is picking the next generation's big winners today. To see what other rule-breaking stocks David Gardner is recommending now, take a free 30-day trial.

Fool contributor Dave Mock recently upgraded his loafers with a new coat of polish. He owns no shares of companies mentioned here. Salesforce.com, Rackspace Hosting, and VMware are Rule Breakers picks. Amazon.com is a Stock Advisor recommendation.

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. The Fool's disclosure policy can rub its tummy and pat its head at the same time.


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