Welcome to Week 19 of the Big Idea Portfolio. Sharp declines in shares of Rackspace Hosting
|S&P 500 SPDR||$127.15**||$135.61||6.65%|
Source: Yahoo! Finance.
* Tracking began at market close on Jan. 6, 2012.
** Adjusted for dividends and other returns of capital.
Both Rackspace and salesforce.com each gave back about 15 percentage points of return over the past week. What happened? A less-than-thrilling earnings report and a troubling comment from the CEO of one of tech's stalwarts.
Let's address the report first. Rackspace filed its earnings release after the bell on May 7 and was soon greeted with a chorus of sellers. The stock fell as much as 14% during the next day's trading because of an unexpected earnings miss and margin concerns.
Revenue climbed 31% to $301 million while adjusted profits rose 71% to $0.17 a share. Wall Street was hoping for $0.18. Worse, Rackspace converted just 33.4% of revenue as earnings before interest, taxes, depreciation, and amortization -- or EBITDA -- versus 36.1% in the fourth quarter. The drop appears to have worried some investors and analysts.
Are the fears justified? Probably not. Investments in technical staff and a shift to a new cloud computing platform for hosting websites and applications -- built on open-source technology called OpenStack -- offer the hope of luring larger clients with more expansive needs. Or at least that's how management put it during a conference call with analysts. In a follow-up interview, Chief Financial Officer Karl Pichler described OpenStack as the key to returning margins to 2011 levels before year's end.
But that's only if demand for advanced tech services holds up as the year progresses; Cisco Systems
More than a few investors took that to mean salesforce.com could come in light when it reports fiscal first-quarter earnings next week. Analysts at William Blair exacerbated fears by reporting that its channel checks showed the company was coming in short of Q1 targets in terms of U.S. sales. The stock has suffered a substantial haircut in the days since. Yet that may be good news. Expectations are now lower, which makes further selling in the wake of the report less likely.
Either way, my advice is to remain focused on CEO Marc Benioff's long-term goal to build a $10 billion business. Last quarter, his team took a big step with a large sale to Hewlett-Packard
The week that was
Make that two weeks of market losses. The Dow Jones Industrial Average
A $2 billion trading loss at JPMorgan Chase may have prompted the selling, while last week's tough jobs report adds fear that our immediate future includes yet more economic malaise. Whether or not that's true, Warren Buffett was right when said during last weekend's Berkshire Hathaway annual meeting that Mr. Market doesn't wait for good economic news to offer crazy bargains to investors. Each trading day brings yet another new sale. Stay alert for the markdowns.
See you back here next weekend for more tech stock talk. And remember to check out the Fool's latest special report -- "These Stocks Could Skyrocket After the 2012 Presidential Election" -- 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: