Now that 2011 has passed and 2012 is upon us, it's worth evaluating the stocks you own and are interested in. Should you buy? Sell? Hold? Ignore? Today, we'll put these questions to Rackspace Hosting (NYSE: RAX), a Motley Fool Rule Breakers recommendation that's also a key member of my Big Idea portfolio.
Rackspace Hosting is a provider of technology and services for hosting software and websites on the Internet. Sound like a bad business? You aren't alone in thinking that. Critics cite major e-businesses such as Zynga (Nasdaq: ZNGA) and Foursquare using Amazon.com's (Nasdaq: AMZN) cheap alternative as proof that Rackspace will eventually suffer lower margins and profits at the hands of cut-rate peers. Management counters that its trademarked commitment to "Fanatical Support" keeps customers loyal. They've been proven right so far.
Forecasts for Rackspace Hosting
| Median Target Stock Price | $48.00 |
| Fiscal 2011 EPS Estimate | $0.53 |
| Fiscal 2012 EPS Estimate | $0.80 |
| Expected Annual Earnings Growth, Next 5 Years | 37.37% |
| Forward P/E | 82.19 |
| CAPS Rating (out of 5) | *** |
Source: Yahoo! Finance.
How will 2012 go for Rackspace Hosting?
Analysts are expecting outrageous growth this year. Earnings are expected to improve 51% on a 27.5% increase in revenue. That's about in line with what we've seen in recent quarters, yet still well ahead of Wall Street's long-term estimates.
And why not? Most evidence points to increased use of cloud computing for everything from connecting to friends to managing business operations. But don't take my word for it. SAP recently spent $3.4 billion to acquire SuccessFactors, a cloud-based supplier of human resources software. In June 2010, Hewlett-Packard (NYSE: HPQ) committed $1 billion to streamline its enterprise business while expanding its cloud offerings.
Against this backdrop, Rackspace is doing more to make cloud computing accessible to everyday businesses. More than 161,000 customers now use the company's hosted services. Most of those choose some form of cloud hosting, wherein Rackspace chooses which servers and services are needed to meet each client's requirements.
When management chooses well, outsized profits follow. They've gotten better with each passing quarter. Rackspace was 69% more efficient at generating revenue per customer in Q3 than it was in last year's third quarter. The resulting gains have, in turn, led to ever-higher returns on capital.
Finally, for all the talk of brutal competition, it's worth noting that Rackspace was born in 1999 and waited to build a sustainable franchise before filing for its 2008 initial public offering. Contrast that with Angie's List (Nasdaq: ANGI), which took 16 years to reach the public markets yet still lacks the resources to fund its ongoing operations.
Rackspace is growing, well-managed, and battle-tested. I'm confident the stock will be a market beater for years to come. Do you agree? Disagree? Please weigh in using the comments box below.
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