The Best Buy in Tech

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The IDC report published this year predicts that the global spend on the cloud industry would be around $40 billion in 2012 alone. Reading on, the report also says that the spending on cloud infrastructure would increase to $100 billion by the end of 2016. The IT infrastructure is remodeling, and moving towards cloud based solutions which are more cost effective, advanced and flexible. This explains why IDC is bullish on the cloud computing industry. Another research report claims that by the end of 2014, the revenues from cloud spending would touch the $150 billion mark. At the days end, companies like Rackspace (NYSE: RAX) will be seen reaping the benefits of the spending bonanza in the years to come.

Rackspace Hosting, with a market cap in excess of $9 billion, provides both dedicated, public and hybrid cloud hosting services to SMEs and large scale enterprises like Fox Network. The company has over 190,000 business customers globally and manages nearly 85,000 servers in 159 countries.

On August 1, the company recently launched its cloud services based on Open Stack. The new service is based on an open source code, which is cheaper and more flexible than proprietary cloud services offered by Amazon, Microsoft and Google. It’s after this launch the stock of Rackspace Hosting surged by nearly 60% in barely 2 months.

Rackspace and NASA together founded OpenStack, around 2 years ago. The beauty of open source software is that it’s freely available and customizable. Companies providing open source solutions don’t charge their customers for their software, but for the setting up and maintenance of their systems. Up till now, Rackspace was providing proprietary cloud services, but this shift to OpenStack, has set the company apart from its peers.

“So what? Open Stack could be hyped”

Well, it’s worth noting that in a period of just 1 year, Open Stack has officially become the fastest growing open source platform, ever.

In the recent quarterly results, revenues stood at $319 million, which were 29% up in the year ago quarter. Net income stood at $25 million, which was up 43% compared to the same period last year. Analysts expect that the company’s earnings would grow at 45% over the next year, and 34% over the coming 5 years. The solid results beat the market expectations, which also contributed to the stock’s near-to 60% upside.

Competitors offering open source software based cloud services are Red Hat (NYSE: RHT), Oracle (NYSE: ORCL) and VMware (NYSE: VMW).

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Long Term Debt/Equity</p> </td> <td> <p>Gross Profit Margin</p> </td> <td> <p>EPS growth expected next 5 yrs.</p> </td> </tr> <tr> <td> <p>Rackspace</p> </td> <td> <p>11%</p> </td> <td> <p>70.7%</p> </td> <td> <p>45.3%</p> </td> </tr> <tr> <td> <p>Red Hat</p> </td> <td> <p>0%</p> </td> <td> <p>85%</p> </td> <td> <p>17.6%</p> </td> </tr> <tr> <td> <p>VMware</p> </td> <td> <p>8%</p> </td> <td> <p>84%</p> </td> <td> <p>23%</p> </td> </tr> <tr> <td> <p>Oracle</p> </td> <td> <p>34%</p> </td> <td> <p>79.3%</p> </td> <td> <p>12.4%</p> </td> </tr> </tbody> </table>

Rackspace Holdings has a low Debt/Equity ratio, and a fat gross profit margin. Analysts expect the EPS to grow at 45% compounded for the next 5 years.

 

<img src="http://media.ycharts.com/charts/dd6da35bbbd12be7800fcd8dbb5ab268.png" />

RAX data by YCharts

Additionally on taking a look at the stock performance over the last 1 year, we can see that Rackspace has outperformed its peers significantly.

Cloud industry is a rapidly growing industry and we believe that OpenStack could be a game changer for the company. Rackspace has a good mix of financials and fundamentals, and has also outperformed its peers over the last year.  It is due to these reasons that we believe the shares of Rackspace Holding are heading up.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Oracle and VMware. Motley Fool newsletter services recommend Rackspace Hosting and VMware. 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. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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