Welcome to Week 7 of the Big Idea Portfolio. This time, an earnings-fueled rally in the shares of Rackspace Hosting (NYSE: RAX) lifted my portfolio. Details below, but first let's dig into the numbers:
|
Company |
Starting Price* |
Recent Price |
Total Return |
|---|---|---|---|
| Apple | $422.46 | $502.21 | 18.9% |
| $650.09 | $604.64 | (6.9%) | |
| Rackspace Hosting | $41.65 | $52.93 | 27.1% |
| Riverbed Technology | $25.95 | $28.34 | 9.2% |
| salesforce.com | $100.93 | $129.17 | 27.9% |
| AVERAGE RETURN | -- | -- | 15.24% |
| S&P 500 SPDR | $127.71 | $136.05 | 6.53% |
| DIFFERENCE | -- | -- | 8.71 |
Source: Yahoo! Finance. * Tracking began at market close on Jan. 6, 2012. ** Adjusted for dividends and other returns of capital.
After reporting market-beating results Monday night, Rackspace surged more than 10% the next morning -- Valentine's Day -- serenading existing investors with an all-time high of $56.94 a share. The stock has since pulled back some, yet not enough to keep me from extending my lead by almost two percentage points. Modest gains by Apple and Riverbed Technology also added tailwind.
But it was Rackspace that did most of the work. Revenue improved more than 32% YOY and 7% sequentially in the fourth quarter. Net income rose 85% and 25%, respectively, for the same periods. Cloud sales as a percentage of revenue rose 6% and revenue per server soared to more than $17,000 as management added fewer servers in order to better leverage assets acquired earlier in the year.
That's what Rackspace is, after all: an asset play. Deploy customizable servers, use them to host ever-increasing amounts of customer data, charge for the privilege, and then do everything imaginable to keep those servers and related infrastructure working as promised.
Everything depends on managing these assets well. In 2011, Rackspace did as well as it ever has. Returns on capital -- an important measure of management efficiency -- improved by 301 basis points in 2011, while the monthly average revenue per server rose 9.8%. More than 172,000 customers now trust the company to handle their data, and most of those are using Rackspace's cloud offerings.
The week that was
Each of the major indexes rallied more than 1% during a politically charged week that saw the White House release a new budget that, by the numbers, calls for lower-than-average tax revenue as a percentage of U.S. Gross Domestic Product. Interest on the national debt is now near a 40-year low, and lower rates have led China and the U.K., among others, to trim their interest in Treasuries.
Should investors care? I suppose that depends on whether you own stocks tied to the business cycle or heavily dependent on government spending. For tech shares, the week was a mixed bag in spite of the economic news. Rackspace outperformed. So did real estate tracker Zillow (NYSE: Z), which saw revenue double as profits came in $0.02 above Wall Street's average projection.
Other rebels underperformed. Shares of Qlik Technologies (Nasdaq: QLIK) fell more than 8% on Friday after reporting worse than expected results the night before. Overall and new license revenue both improved more than 30% but earnings came in $0.03 lower than the Street consensus. First-quarter sales and earnings guidance also came in below analyst projections.
Zipcar (NYSE: ZIP), meanwhile, fell more than 10% when first-quarter and full-year guidance came in below expectations. Analysts were hoping to see the company earn $0.13 a share in 2012; Zipcar is forecasting $0.04 to $0.13. The delta appears to have spooked investors who were hoping to see momentum translate into profit more consistently than it has.
Such is the wild world of investing in innovators. See you back here next weekend for more tech stock talk. In the meantime, you can check out the Fool's latest special report – "3 Stocks That Will Help You Retire Rich" -- and add the Big Idea portfolio stocks to your Foolish Watchlist for ongoing, up-to-the-minute coverage. Both the report and the Watchlist as 100% free to use.
