Is This the Best Cloud-Computing Stock Right Now?

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Stocks benefiting from the cloud-computing revolution have taken their share of lumps lately. Would-be WiMAX king Clearwire (Nasdaq: CLWR  ) looks like a pauper, Akamai Technologies (Nasdaq: AKAM  ) is failing to live up to its growth promises, and comScore -- tracker of all things Web -- is tracking for lower 2011 revenue growth.

Signs of hope aren't easy to find, unless you're looking in the relatively low-tech metropolis of San Antonio, Texas. There you'll find Rackspace Hosting (NYSE: RAX  ) , whose servers host the Web infrastructures of more than 150,000 companies at last count, including such diverse companies as Domino's Pizza (NYSE: DPZ  ) and Newell Rubbermaid (NYSE: NWL  ) .

Year-over-year revenue growth accelerated for the third consecutive quarter, up 32% to $247.2 million. Rackspace is now running at $1 billion in revenue annually, CEO Lanham Napier said during Thursday's earnings call with analysts. The company's 70,000-plus servers now play host to more than 152,000 customers.

More impressive, I think, is that returns on capital continue to rise as incremental investments pay off. For Q2, Rackspace earned 14.4% on its invested capital, up sharply from last year's 10.9%. All signs point to efficient growth, even in the face of stiff competition from Amazon.com (Nasdaq: AMZN  ) as well as specialists that tack hosting onto other services, such as 8x8 (Nasdaq: EGHT  ) .

In an interview earlier this week, Rackspace Director of Finance Bryan McGrath cited the secular trend toward outsourcing infrastructure as the biggest growth driver, but I suspect that the company's commitment to "Fanatical Support" is also at work. Churn, a measure of customer turnover, has averaged under 0.9% in each of the past two quarters.

Strong growth. Loyal customers. Efficient use of capital. Forget that the phrase "cloud computing" is even a part of this stock story. Doesn't that sound like the sort of business you want to own?

Please vote in the poll below, and then leave a comment to tell us your thoughts about Rackspace's business, valuation, and competitive positioning. You can also add the stock to your watchlist for up-to-date analysis as soon as it's published.

Fool contributorTim Beyers is a member of theMotley Fool Rule Breakers stock-picking team. He owned shares of 8x8 and Akamai at the time of publication. Check out Tim'sportfolio holdings andFoolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insightsdelivered directly to your RSS reader.

The Motley Fool owns shares of Domino's Pizza.Motley Fool newsletter services have recommended buying shares of Amazon.com and Rackspace Hosting and formerly recommended Akamai Technologies. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.


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