I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series. We'll be taking a closer look at many of the market's great growth stocks to see which of them show real, numerically relevant signs of sustainability.
Next up is Rackspace Hosting
Rackspace makes its living providing the best support in the business. "Fanatical support," the company calls it, with the idea being that no customer can ever be too satisfied with their experience. And that level of commitment has created as many Rackspace fans as customers.
Foolish facts
Metric |
Rackspace Hosting |
---|---|
CAPS stars (5 max) |
**** |
Total ratings |
395 |
Percent bulls |
92.9% |
Percent bears |
7.1% |
Bullish pitches |
58 out of 62 |
Highest rated peers |
Akamai Technologies, VeriSign, Google |
Data current as of Sept. 18.
Fools are also fans, and for good reason. Company insiders still own more than 22% of the business, according to Capital IQ. Company chairman Graham Weston, one of Rackspace's earliest investors, owns a little less than 16%.
Rackspace is also attracting some of the best talent in the business. David Kelly, the company's new head of international operations, has experience with both Amazon
"Quality management is of paramount importance to Foolish investing, and Rackspace is certainly doing its part to stay on top of the game," wrote my Foolish colleague, Anders Bylund, in rating the stock in Motley Fool CAPS.
The elements of growth
Metric |
Last 12 Months |
2009 |
2008 |
---|---|---|---|
Normalized net income growth |
48.3% |
42.4% |
17.6% |
Revenue growth |
20.6% |
18.2% |
46.9% |
Gross margin |
67.8% |
68.1% |
67.6% |
Receivables growth |
12.8% |
25.2% |
21.5% |
Shares outstanding |
124.9 million |
123.8 million |
117.2 million |
Source: Capital IQ, a division of Standard & Poor's.
There's a lot of good news in this table. Let's review:
- Rackspace has accelerated net income growth since 2008. Sustained, long-term improvement like that is exactly what we growth investors love to see.
- Even better, growth hasn't come as a result of price cuts. Volume sales in low-cost cloud computing services have kept margins high.
- Finally, take a look at the receivables growth. Not only is revenue growing faster than receivables today, reversing a trend from 2008, but the gap between revenue and receivables growth is also widening. This business gets more efficient with each passing year.
Competitor and peer checkup
Competitor |
Normalized Net Income Growth (3 yrs.) |
---|---|
Amazon |
45.2% |
AT&T |
3.3% |
Equinix |
Not material |
IBM |
10.9% |
Rackspace |
Not available |
Source: Capital IQ, a division of Standard & Poor's. Data current as of Sept. 18.
Rackspace hasn't been public for long, thus its lack of a long-term track record for normalized net income growth. But it would be a mistake to write off this Rule Breaker because of its short time dancing with Mr. Market.
Why? Loyalty and focus. Rackspace has loyal fans as customers and management is focused on producing the highest possible returns on its available capital. They've been successful so far; ROC has improved steadily since 2008.
Grade: Sustainable
I've twice recommended Rackspace to our Rule Breakers subscribers, and I've seen nothing to shake my conviction that this is a long-term winner in the making.
Now it's your turn to weigh in. Do you like Rackspace Hosting at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.
You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.
For further Foolishness featuring Rackspace Hosting: