Rackspace Hosting (NYSE:RAX)

CAPS Rating: 4 out of 5

Recs

0
Player Avatar TMFInnovator (42.86) Submitted: 5/13/2013 10:10:58 AM : Outperform Start Price: $41.53 RAX Score: -24.22

This is a great business that is just getting hammered by Wall Street. The drop this past week is truly a GIFT to long-term investors.

- The company's Fanatical Support® (i.e. fanatical focus on customer service) is a bigger deal than most give it credit for. They do this to increase stickiness and induce switching costs - both of which are strong forms of a competitive advantage.
- Rackspace's CEO, Lanham Napier is a visionary, but he is also very good at adapting to changes in the industry. Don't expect him to get outdated or blindsighted as new technologies come online.

THE OPENSTACK OPERATING SYSTEM IS THE KEY (http://www.rackspace.com/cloud/openstack/). It's going to take time and patience to convert businesses and users to use OpenStack. That uncertainty is what is holding the stock back right now. But if they establish a dedicated user base for developing public/private cloud infrastructure, they'll have recurring revenues for years into the future.

Even after the drop, RAX is still trading at a forward P/E of around 30. But don't let the pricetag fool you: this is a buy right now. There is plenty of space to fly in this cloud.

Member Avatar TMFInnovator (42.86) Submitted: 11/11/2014 10:56:44 AM
Recs: 1

Street liked the results, which is causing the stock to pop. But I'm getting skeptical of the long-term opportunity. RAX is now going after the high-end of the market that values their fanatical support enough to pay for it (leaving GOOGL/AMZN to fight it out for more price-conscious customers). This limits their total addressable market, and I also see those high-end customers providing lower margins over time as their before more informed on other options.

Tough industry. Closing this one out.

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