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Stocks benefiting from the cloud-computing revolution have taken their share of lumps lately. Would-be WiMAX king Clearwire (Nasdaq: CLWR) looks like a pauper, Akamai Technologies (Nasdaq: AKAM) is failing to live up to its growth promises, and comScore -- tracker of all things Web -- is tracking for lower 2011 revenue growth.
Signs of hope aren't easy to find, unless you're looking in the relatively low-tech metropolis of San Antonio, Texas. There you'll find Rackspace Hosting (NYSE: RAX), whose servers host the Web infrastructures of more than 150,000 companies at last count, including such diverse companies as Domino's Pizza (NYSE: DPZ) and Newell Rubbermaid (NYSE: NWL).
Year-over-year revenue growth accelerated for the third consecutive quarter, up 32% to $247.2 million. Rackspace is now running at $1 billion in revenue annually, CEO Lanham Napier said during Thursday's earnings call with analysts. The company's 70,000-plus servers now play host to more than 152,000 customers.
More impressive, I think, is that returns on capital continue to rise as incremental investments pay off. For Q2, Rackspace earned 14.4% on its invested capital, up sharply from last year's 10.9%. All signs point to efficient growth, even in the face of stiff competition from Amazon.com (Nasdaq: AMZN) as well as specialists that tack hosting onto other services, such as 8x8 (Nasdaq: EGHT).
In an interview earlier this week, Rackspace Director of Finance Bryan McGrath cited the secular trend toward outsourcing infrastructure as the biggest growth driver, but I suspect that the company's commitment to "Fanatical Support" is also at work. Churn, a measure of customer turnover, has averaged under 0.9% in each of the past two quarters.
Strong growth. Loyal customers. Efficient use of capital. Forget that the phrase "cloud computing" is even a part of this stock story. Doesn't that sound like the sort of business you want to own?
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