Top 5 Tech Stocks for Fall 2012 - #3
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So far at both the Motley Fool and at Fastball Financial, we have covered two stocks in previous posts for our list of Top 5 Tech Stocks for Fall 2012: Accenture (NYSE: ACN) at #5 and SalesForce.com (NYSE: CRM) at #4. Accenture is one of the largest consulting companies in the world, provides a stable earnings stream and gives investors a 2.1% dividend. SalesForce.com is a provider of Customer Relationship Management software and distributes its product through the cloud. It has a tremendous growth history and plenty of future growth potential.
Let's continue the list with the #3 stock.
#3 - Rackspace
Rackspace (NYSE: RAX) provides cloud computing services for all sizes of corporations. It is at the heart of the “cloud” expansion. As a result, it stands to benefit tremendously from the drastic and rapid shift to cloud computing.
Rackspace chose to utilize an open source solution instead of developing a proprietary model. There are upsides and downsides to both. A proprietary model, if successful, can provide a huge dominance in a market. However, open source provides an easier method to penetrate a market, while leaving the door open a bit for other companies to steal market share or dominate the market entirely.
What many successful companies have done though is create proprietary control over an open architecture. If Rackspace can have its OpenStack become the de facto standard, while leaving it open for others to develop and improve the code, then other vendors and customers will have a vested interest in making sure that OpenStack, and therefore Rackspace, is successful. For example, RedHat (RHT), who we featured last year and has done quite well, has recently focused a lot of efforts into supporting and providing services for OpenStack. Support from external vendors like this is critical for Rackspace’s long-term growth and market dominance.
Yikes! Yet another fast-growing technology stock with sky-high ratios. Right? Sure. It has a P/E of almost 100 and a Price-to-Sales of 7.7, both high by any standards. So this does not fit into any true “value” investing methodology. However, most companies growing this rapidly don’t fit into a value investing model.
Rackspace reported 29% revenue growth and 37% EBITDA growth year-over-year, when it reported its most recent quarterly results. The chart below shows how much Rackspace has been able to grow and provide gains for its shareholders. We expect this trend to continue going forward, since cloud computing itself is still relatively in its infancy.
The big, long-term key for Rackspace is whether or not its OpenStack becomes the de facto standard for open source technologies and cloud computing as its management believes it will. In the short-term, Rackspace should still benefit from both its own execution and the rising tide in cloud computing.
Zaegs has no positions in the stocks mentioned above. The Motley Fool has the following options: short JAN 2013 $150.00 calls on Salesforce.com and long JAN 2013 $150.00 puts on Salesforce.com. Motley Fool newsletter services recommend Accenture Ltd., Rackspace Hosting, and Salesforce.com. 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.