The market doesn't know what to make of Rackspace Hosting
I'll tell you what I think. Rackspace missed earnings estimates by a penny per share this time, which was only the second earnings miss in the last nine quarters. More to the point, Rackspace hit Street targets exactly in those other seven quarters, including an unbroken five-quarter streak.
That terrific consistency has been rewarded with a 143% return over the last year. And I don't see this trend stopping any time soon for the burgeoning cloud-computing powerhouse.
Why? Because Rackspace manages its earnings with a very firm hand. Just as Red Hat
This vehicle is moving exactly as fast as its driver wants it to, thank you very much.
Rackspace is notable, among other things, for actually reporting return on capital every quarter. As CEO Lanham Napier told me on the phone this week, ROC is a factor in every investment Rackspace makes. "It's a navigational guide for us," he said, and went on:
Given that we operate in a relatively capital-intensive industry, the return on capital that we generate really matters. We are an EVA [economic value added) shop. I feel like we're one of the few companies in our industry that understands this.
And while we're talking about streaks, Rackspace's rolling ROC has shown steady improvement and stands 130 basis points above last year at 11.9%. By contrast, Amazon.com
If you're disappointed in Rackspace's slow earnings growth and the high P/E ratios it creates, rest assured that it's all according to plan. Like Red Hat and Netflix before it, Rackspace just isn't ready to focus on earnings yet because there's too much growing left to do.
And if you want to follow the company's growth at a risk-free distance, we have a new service just for you: add Rackspace to your Foolish watchlist by clicking here.
Fool contributor Anders Bylund owns shares of Netflix but holds no other position in any of the companies discussed here. Motley Fool newsletter services have recommended Amazon.com, Netflix, and Rackspace, and have recommended buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.