Is Rackspace a Scary Investment?

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With shares of Rackspace Hosting (NYSE:RAX) trading at around $50.09, is RAX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Rackspace provides cloud computing services and managed web-based IT systems for small and medium-sized businesses and large enterprises worldwide. Cloud computing refers to shared networks, servers, storage, and application services. It’s quickly becoming known as a more affordable and efficient option than IT. This has led to many companies jumping on the cloud computing bandwagon. Therefore, Rackspace must offer something unique. Rackspace has been best known for its exceptional customer service, but exceptional customer service can only take a company so far. Looking ahead, with OpenStack, Rackspace aims to offer a cloud that can accommodate any customer’s needs. Acquisitions such as ObjectRocket can help Rackspace accomplish this goal.

Rackspace is rumored to be a takeover target of International Business Machines Corporation (NYSE:IBM). However, if Rackspace isn’t acquired, then it will likely have to face some stiff competition from the likes of Amazon.com Inc. (NASDAQ:AMZN), Google Inc. (NASDAQ:GOOG), VMware (NYSE:VMW), EMC Corporation (NYSE:EMC), and more. Another negative for Rackspace has been price cutting. This is never a good sign. Furthermore, missing expectations and trading at high multiples is a recipe for catastrophe. Rackspace recently suffered the consequences.

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The chart below compares fundamentals for Rackspace, VMware, and EMC.  These three companies differ in size. VMware has a market cap of $6.90 billion, VMware has a market cap of $34.39 billion, and EMC has a market cap of $52.01 billion.

RAX

VMW

EMC

Trailing   P/E

66.56

46.67

20.03

Operating   Margin

13.19%

19.02%

18.66%

ROE

14.61%

14.19%

13.18%

Dividend   Yield

None

None

None

Operating   Cash Flow

$399.50 Million

$1.90 Billion

$6.26 Billion

Short   Position

9.00%

7.90%

2.40%

Beta

1.18

1.15

1.38

 

Let’s take a look at some important numbers prior to forming an opinion on this stock…

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