Rackspace Holdings (RAX, Financial), a leading provider of Cloud computing services and managed web-based IT systems to small and medium-sized businesses as well as large enterprise business looks strong to take advantage of ongoing market trends. The company expects these trends to outline the future of the industry and the company going forward. Let us look at these trends and its growth potential that could possibly assist the company to gain the most from these emerging trends.
Managed-Cloud business to drive its growth in the long run
The growing Cloud market demonstrates tremendous growth opportunities for the company going forward. Its managed Cloud positioning has started paying off as it started gaining traction with customers, developers, industry experts and businesses around the world. Its managed services and expertise have strong demand in the managed Cloud markets that should drive its growth in the long run.
Moreover, it has better aligned its strategy that eliminates distractions and simplifies operations efficiency. These services and strategy have earned incremental revenue of $19 million in the most recent quarter. Further, the company remains on track to expand its leadership of the profitable managed Cloud markets. It should gain from the underlying potential for cloud enabled managed hosting with its managed infrastructure and managed operations.
The managed business will drive growth
Its managed infrastructure and managed operations focuses on providing architecture, security and code developments. Also, it facilitates day-to-day Cloud operations that include infrastructure monitoring, OS maintenance and patching, application maintenance and cloud storage. Rackspace is gradually winning markets that once dominated by telecom companies and sellers of IT equipment and services like HP and IBM.
However, the competition in the cloud-enabled managed hosting market is increasing. Likes of Amazon (AMZN, Financial), Google (GOOG, Financial), and Microsoft (MSFT, Financial) have started rolling their own public Cloud services. Since these giants have greater spending power they are able to facilitate their Cloud services for much cheaper than Rackspace.
Nevertheless, Rackspace is differentiating its products from that of its peers in the industry. It has focused on providing more managed Cloud market, whereas its rivals are engaged providing more of commodity Cloud offerings. Additionally, this focus of offering exceptional support and expertise to the companies across the world is enabling the businesses to concentrate on core business. This certainly creates good market prospects for Rackspace in the future.
Furthermore, the company has entered into a relationship with Google of late. This relationship is concentrated providing managed services and fanatical support for all Google Apps technology suite including Gmail, Drives and Hangouts. This again demonstrates is focus on core business as it adds value through its specialized expertise and Fanatical Support. This should help the company to win extra market share going forward.
In fact, the company remains upbeat to enlarge its managed Cloud product portfolio. It is expanding its fanatical support to Microsoft Cloud OS, which includes Systems Center and Hyper-V server. The company expects that this expanded product portfolio will provide its customers with additional choices. The customers can now host applications across VMware, Microsoft and open stack-based private Clouds and another Rackspace managed platform options such as dedicated servers and public Cloud.
These offerings are now available across its datacenters and helping the customers with SLA-backed management across the underlying infrastructure, guest operating systems and select applications including Microsoft Exchange, SharePoint and Link.
In addition, its recent "Rackspace Solve" event in New York City could bring in many other potential customers to its folds. During the event many customers such as Under Armour (UA, Financial) and Digitas spoke about its offerings and how they are leveraging the Rackspace managed cloud and its specialized expertise. It has a total of 300,000 customers across the world.
It continues to offer its solutions and services to many big names in the world such as Aldo fashion shoes and handbags, Kendra Scott jewelry, Luxottica, the world's largest premium eyewear company, PetMed Express, America's largest pet pharmacy, and Feeding America, a national food bank that just jumped to number five among privately funded U.S. charities.
Conclusion
Rackspace looks good with its managed Cloud business. Its strategic plans have started paying off with growing specialized offerings and exceptional support and expertise. The analysts expect its earnings to grow at CAGR of 21.80%, greater-than-average industry CAGR of 20.40% for the next five years. This indicates tremendous growth prospects for the stock in the future. Also, its short-term returns are very attractive as its earnings are expected to grow 14.80% this year and 31.40% for next year respectively.
Moreover, the stock is cheap. It’s trailing P/E of 72.33 and forward P/E of 51.89 reflects a lot of rooms for the stock to grow in the future. Its balance sheet carries total cash of $349.48 million, which is enough to cover its entire debt of $98.52 million. It has operating cash flow of $501.14 million and leverage free cash flow of $67.68 million.
