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Why Rackspace's Recent Weakness Is a Buying Opportunity

August 08, 2014 | About:
Rustic Nomad

rusticnomad

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The stock of cloud services company Rackspace Hosting (RAX) has fallen tremendously in the past year. However, the recent market buzz unveils that either Amazon (AMZN) or Microsoft (MSFT) could possibly go for acquiring or building a strategic partnership with Rackspace.

Will Rackspace improve?

Management has hired Morgan Stanley to evaluate the inbound strategic proposals coming from various parties and to explore other alternatives which could gear up Rackspace’s long-term strategy.

These strategic moves highlight a tremendous growth opportunity for Rackspace going forward, and investors should use this opportunity to buy more of the shares as the stock is considerably cheap at present.

Rackspace is working aggressively on various strategic elements like a hybrid cloud system that could perhaps resurrect its stock going forward. Its continuous focus on the managed cloud category is pretty impressive. Rackspace runs web servers for its clients, at its own facilities, allowing clients to reduce the number of in-house servers and in-house IT professionals, desirable to run them, thus equipping them with world-class cloud infrastructure.

On the other hand, the other cloud service companies like Amazon, Google and Microsoft are engaged in providing unmanaged cloud service to their customers. Though these services are gaining traction in the market, but they lack economies of expertise.

Meanwhile, Rackspace is more than just renting out the access to cloud infrastructure as the company manages that infrastructure. On top of it, Rackspace specializes in the complex tools and applications, hence allowing its customers to leverage the specialized expertise of its cloud engineers and architects.

Better technology

Moreover, Rackspace uses VMware and OpenStack in its data center, and they are driving its growth as strategic amalgamation with VMware and OpenStack offering best fit infrastructure for specific applications of its customers, regardless of their requirement of multi-tenant, single tenant or hybrid architecture. Also, none of its larger competitors offer hybrid solutions, thus it enjoys a competitive edge over its peers.

In addition, Rackspace has witnessed solid demand for its products and services. The company provides its customers “computing on demand” and other services such as an email system, load balancing strategies, system stress testing, better monitoring and higher security. Besides, the company has recently announced OnMetal cloud servers, an application programming interface (API)-driven, single-tenant Infrastructure-as-a-service offering designed for customers with rapidly growing infrastructure footprints who seek the agility and elasticity of cloud along with the simplicity and performance of collocation that should ramp up its sales in the future.

Growing customers to propel its performance

Rackspace was thrilled to notice that thousands of new and exciting customers selected Rackspace to run their important applications on its multiple cloud systems, including companies like Appboy, Under Armour, SunPower, Clarks and Alex and Ani. These customers are opting for our specialized solutions such as of multi-tenant, single tenant or hybrid architecture based on their requirements.

For example, Appboy selected Rackspace’s DevOps service model; Appboy is the leading platform for applications in marketing automation. It now avails Rackspace hybrid cloud solutions to support its agile application development practices and high scaling requirements. Appboy leverages other Rackspace products in its hybrid cloud solution, including our multi-tenant Performance Cloud Servers and our ObjectRocket service for running MongoDB.

Under Armour has also availed its hybrid cloud solutions. Under Armour is an innovative athletic performance brand whose products are worn by athletes in the NFL, the Olympics, top universities and all levels of sport around the world. Rackspace is not only hosting its websites, but also provides large ecommerce platform and a disaster recovery site.

Similarly, Clarks has also adopted its multiple cloud infrastructure solutions. Clarks is a shoe manufacturer based in the U.K. with more than 1,000 company-owned stores and franchises around the world and more than GBP 1.4 billion in annual sales. Clarks selected Rackspace to run its new global ecommerce platform. This complex deployment consists of dedicated servers running the Hybris ecommerce application, VMware and an Oracle database.

Conclusion

Overall, Rackspace looks solid, and building strategic partnerships with Amazon or Microsoft will certainly drive its growth. The company currently trades at a forward P/E multiple of 38.22 as against the trailing P/E multiple of 56.05, indicating robust growth. Also, its profit and operating margins stand at 5.33% and 8.12%, respectively, while return on Equity is 8.58%. Hence, investors shouldn’t miss the chance to invest in Rackspace as it looks like a good long-term holding.


Rating: 1.0/5 (1 vote)

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Comments

robertcray
Robertcray - 1 month ago

Paying 38 times earnings for a company with an 8 1/2 % ROE doesn't look like a good long term or even short term holding, They put themselves up for sale about 3 months ago, and nothing has been announced so it looks like they are probably too expensive for an acquirer. And their competitors are midgets like Amazon, Microsoft and Google.

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