Rackspace Holdings (RAX, Financial) posted impressive results in the recently reported quarter. Its robust performance reveals that the company’s strategies are paying off. Rackspace is confident of improving its position in the market. Let's see how.
The growth drivers
Despite a challenging market environment, Rackspace is seeing good growth opportunities. It is counting on three key trends that are expected to power its growth. It is expecting the Cloud market to be a potential growth driver for the company in a long run. There is also an emerging market category for Cloud providers, offering some value added services in conjunction with computing infrastructure. The company is expected to win in this by giving their customers economies of expertise which will enable them to stay fast and lean majorly focusing on their operations. This segmentation is expected to position the company on top of the managed cloud segment.
The company is seeing good pace in its strategy. It is holding a distinguished image in the market. The two key metrics differentiating Rackspace from other unmanaged cloud providers is its fanatical support and specialised expertise. With this solid growth, the analysts are expecting Rackspace to be among 17 leading providers for cloud enabled managed hosting in North America and Europe.
Concerns to watch
Rackspace, however, has been struggling due to stiff competition from the large telco companies such as HP and IBM. This also eroded Rackspace's margins in the past. But with its strengthening foot print in the cloud space, Rackspace is now soaring independently in its regime. This is also giving Rackspace an advantage as these companies are struggling to adapt its model in.
Rackspace is now pleased to divert all the IT spending, phone calls and RFPs to it from the other providers. With the improvement in the spending Rackspace is seeing large number of deals coming for it in future. With a large number of deals of about $100,000 in the pipeline, Rackspace is confident of better long-term prospects. This will help the company to further gain market share, attracting many investors to the stock.
In addition, Rackspace is also seeing more business opportunities from Cloud-native companies who are not satisfied with the services provided by the unmanaged Cloud players. Seeing this growing trend, Rackspace is also focused on expanding its leadership in the profitable managed cloud market. the company on the other hand is also seeing good improvement in its operating performance. With this Rackspace is pleased to be executing well and looks well positioned to deliver better revenue in the coming quarters.
The company also has plans to expand its portfolio to better capture opportunities. In this course it is including Fanatical support for the Microsoft Cloud OS also including Systems centre and Hyper V-server.
Conclusion
Moving to the fundamentals, the stock is very expensive with a trailing P/E of 69.17; however its forward P/E of 49.62 indicates good growth in the earnings in near term. Also, in the next five years the company’s earnings are growing at CAGR of 21.80%, which is marginally better than the industry average of 20.42%. Thus considering all these facts, it can be said that the stock is definitely showing good growth in the earnings so the investors should not mind paying heavy premium for the stock and definitely add in their portfolio.
