Which is the best cloud computing stock? The wide-open field includes Amazon.com (NASDAQ:AMZN), IBM (NYSE:IBM), and many others, but Rackspace Hosting (NYSE:RAX) is doing its best to win votes.

Last night, the data-hosting specialist for corporate clients reported a 17% year-over-year improvement in revenue and a $0.02-per-share earnings gain in the third quarter. Both results satisfied the Street's prognosticators, but only the top-line number beat expectations.

Not that the Street's hand-wringing, or lack thereof, should concern Foolish investors. We're more interested in tangible stuff like free cash flow, which Rackspace is producing plenty of -- $16 million in Q3, to be specific.

What's more, since December, Rackspace has shed more than $152 million in debt, not including capital leases attached to the data centers it operates. True, last year's IPO proceeds provided most of the capital for those debt payments. That doesn't change the simple truth that Rackspace is a stronger business today than it was a year ago.

Don't believe me? See for yourself:


Q3 2009

Q2 2009

Q1 2009

Q4 2008






Cloud Computing Customers










New customers per deployed server





Gross margin





Data current as of Nov. 10.

There are two things to keep in mind when reading this table:

  1. Rackspace added some 15,000 customers to its cloud-computing business when it acquired Slicehost and Jungle Disk last October.
  2. This is merely a 12-month snapshot, and a lot could change in a year.

Still, I like the trend. The Q4 numbers are skewed because of the Slicehost and Jungle Disk deals, but Rackspace has since figured out how to get more from its principal fixed assets -- servers -- using a combination of hardware, tools, and software from a variety of suppliers, including Dell (NASDAQ:DELL) and VMware (NYSE:VMW).

Think of Rackspace as the Akamai (NASDAQ:AKAM) or American Tower (NYSE:AMT) of its industry. It acquires and then deploys fixed assets as cheaply as it can, using them to generate incrementally higher revenue over each system's useful life. In this particular case, that means more customers per deployed server.

Over time, these gains should lead to ever-higher returns on assets, capital, and equity. That's why you'll see me argue that Rackspace isn't overpriced, even though it trades for almost 90 times trailing earnings.

Do you agree? Disagree? Let loose in the comments box below; I'd love to hear from you.

Akamai, Rackspace Hosting, and VMware are Rule Breakers recommendations. Amazon is a Stock Advisor selection. Dell is an Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers owned shares of Akamai and IBM at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. After seeing San Antonio-based Rackspace's results, the Fool's disclosure policy has decided, officially, not to mess with Texas.