Patience Must be Exercised when Assessing Rackspace and its Performance

Long-term investing is becoming a rare commodity and more and more investors expect unrealistic returns based on companies that have had a good run. However, if you look at Berkshire Hathaway, a methodical system has been used with a long-term view in mind by acquiring assets capable of withstanding the ups and downs of not only the stock market, but the global economy. The disgruntled chatter surrounding Rackspace Hosting (RAX) is not justified because this is a company with all the attributes of a worthwhile long-term investment.

Rackspace is in an industry slated to grow to $55.5 billion by 2014 which is a compound annual growth rate of 27.4 percent since 2009. Cloud computing is the future of the digital world and everyone from high school students to enterprise organizations are using this platform for their IT needs. The growth potential for Rackspace in the long run is positive to say the least.

The company has been posting profit margins that have been increasing in the past three years from 5.94 percent two years ago, 7.45 percent last year and 8.05 this year. This growth has to be weighed in with the large amount of investments the company is making in research, real estate and servers which will decline once they have the right assets in place, increasing the profit margin even more.

The company’s total revenue grew 27percent year-to-year from managed hosting, which was up by 20 percent, and for cloud services, which was up by 57 percent. With estimated growth for the industry at more than 20 percent for the foreseeable future, the growth potential once again looks good for RAX.

RAX is competing against Amazon, which is a low-cost cloud service provider. RAX, on the other hand, differentiates itself by providing a superior customer service for businesses that require cloud computing with enterprise-level hosting for businesses large and small around the world.

RAX is second only to Amazon in cloud computing by addressing businesses instead of consumers. While the consumer market is much bigger, corporations need to start investing in cloud infrastructure and they have the capital to make these investments. Consumers, on the other hand, don’t have the same obligation to make these types of investments in order to keep up with competition.

With more than 205,000 global customers and data centers around the world, RAX has more than 60 percent of the Fortune 100 companies. This company is healthy and with the stock price several hundred percent higher since its initial IPO in 2008, it is not time to even consider the possibility of getting rid of this company from any portfolio.