Tuesday, September 21, 2010

Cloud Computing Gems Part I: Rackspace Hosting (RAX)

Cloud computing has been around for awhile but I don't believe it has caught enough mainstream attention. One stock in particular that I have been watching is still flying under most Wall Street Analysts' radar. This gem is Rackspace Hosting (RAX). There are also several other stocks I believe that have an incredible amount of value behind them that I'll discuss later.

As for RAX, a little bit of background: (source: Yahoo! Finance)

Rackspace Hosting, Inc. operates in the hosting and cloud computing industry. It provides information technology (IT) as a service, managing Web-based IT systems for small and medium-sized businesses, as well as large enterprises worldwide. The company’s service suite includes dedicated hosting comprising managed hosting service that manages data center, network, hardware devices, and operating system software; private cloud service, which enables large enterprises to virtualize their IT environments; and managed collocation service that serves the demands of technical customers who require ordering and provisioning support.

RAX is in the business of making lives easier for other businesses. Imagine not having to pay for your own server maintenance - the cooling, electric, and IT repair guy bills. All you would need is your own portal to access this information. All your data housed securely at a fraction of the price. The obvious downsides: Server damage or downtime, data theft, or loss of information.There are downsides to any business, but I firmly believe this is the future of technology. We already see it in software we use everyday - Google's Gmail, Apple's Mobile Me, Video streaming sites. Eventually one day all we will need is a computer terminal and an access code to all your data. This is the future in business and personal computing. 

Cloud computing is still in its infant stages - All the major service providers such as AT&T and Verizon are building better and faster connections to support the new infrastructure. Barrier to entry will be incredibly difficult in this space - as hosting data requires massive amounts of resources and hardware. RAX already has a foothold in a lot of major businesses. As far as international growth, EMC is taking on on a project in India to expand their cloud network. The estimated market for cloud computing India is still less than $1 Billion. The international marketplace has sky as the limit for growth potential in this sector.

I have been watching RAX for several weeks. Quite frankly, I wish I had purchased the stock in late September when it breached the $20 resistance level. I would consider holding RAX for the long-term, 5+ years. Although price is everything, you should always look for a good entry instead of chasing fast money. Today RAX rocketed over 8% and over 1.5% more in the after-hours on heavy volume. Volume today alone exceeded the average daily volume by double. Someone is buying with conviction. Want proof? Here's the option chains for today.

Note that call buying nearly doubled the existing Open Interest. Some option premiums surged by over 250% today alone! This activity is all today. Given the momentum we're seeing, RAX's all time high of 23.51 is in sights and we could see it breached very soon. The options money says so - but don't bet the farm.

(source: Marketwatch.com)

SymbolLastChangeVolBidAskOpen Int.Strike














The chart below shows today's price (and the huge candle) and a slight overthrow but close slightly below the previous high. A perfect place to buy would have been the 23.6% retrace off the most recent prior high which is around $21. At this level, the stock broke above resistance and created a support level worthy of buying. I've also included everyone's favorite 50/200 Simple Moving Average bullish cross which is possibly occuring. Although a lagging indicator, this does provide some confirmation in a possible new bullish trend. Money Flow Index takes into consideration volume and is not currently oversold, suggesting room for a northbound move. 

Fundamentally, earnings seem to be growing at a healthy clip relative to a growth stock. Cash and Receivables exceed Current Liabilities. Assets (presumably hardware) exceed long-term debt by 4 to 1. It's also always nice to see steady increases in Retained Earnings and Capital Surplus.

Click on the image and see notes and highlights on earnings and price moves.

My conclusion: I plan to buy RAX on a pullback or a break to new highs, and hold for the longer-term, with stop-losses around the $20 level, or a trailing stop under the 50 DMA.

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