Rackspace Hosting in a Transition
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Rackspace Hosting (NYSE: RAX) did not have the 1Q everyone was anticipating after a great fourth quarter. The slowdown caused concerns for investors. Q4 was a very strong quarter and management was very bullish on the quarterly conference call that eyebrows rose wondering how the company could decelerate so quickly in just 3 months. The growth rate was only 4.8% and noticeably less than previous quarters.
Part of the problem was revealed by the company. Rackspace is wedded to OpenStack and its cloud based platform. But the public cloud may not be a profit gusher after all. Rackspace has confessed that the transition to OpenStack for its cloud product is preventing RAX from winning large deals from Amazon's (NASDAQ: AMZN) AWS service. The OpenStack software isn't easy to connect with Amazon's and some analysts and investors are wondering whether it can take market share from Amazon or VMWare.
The company faces a strong uphill fight this year. Cloud computing is huge and Rackspace intends to become a large player in the market. This costs money so it is heavily financed which causes cash-flow problems. On top of that, many companies are interested in building their own private clouds before moving essential work over to public clouds, and that they want to keep their options open. It adds up to this. Competition is coming to the cloud. Can a relatively-small San Antonio company really compete in this environment against the industry's giants?
But let’s not count out OpenStack. Sony’s gaming arm is moving at least some of its workload from Amazon Web Services to the rival Rackspace OpenStack. This shows that Openstack is a serious contender (or will be) against Amazon. This is a much needed shot in the arm for Openstack. Hewlett-Packard, Dell, Citrix and Cisco all back OpenStack to some degree, and some already host OpenStack services, so it is slowly gaining momentum.
IBM may be its biggest jewel in the crown! Since early February, IBM was rumored as a participant in Openstack. Most of the big tech companies that back OpenStack have their own proprietary cloud products, but they are hedging their bets by joining the open-source effort in case it winds up becoming popular. As part of their backing, they contribute technology to the effort and support that technology.
I think what we can expect from Rackspace in the short term (next quarter or two) is limited growth because of the product transition with Openstack cloud. Rackspace's intense focus on superior customer service will be a winning strategy. In the long run, we believe it will continue to grow and increase revenue—just not during this transition period.
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