Rackspace Hosting, Inc. (RAX), Oracle Corporation (ORCL): Should We Take Advantage of This Stock’s Significant Drop?

Page 1 of 2

Buy low, sell high! It is a simple investment strategy that investors should follow. That is why I am quite excited to examine stocks which have recently experienced a free fall. Since the beginning of the year, Rackspace Hosting, Inc. (NYSE:RAX) has dropped significantly, from around $78 per share to only $48 per share. Should investors consider this recent drop as a chance to invest in the company? Let’s find out.

Rackspace Hosting, Inc. (NYSE:RAX)

Co-founder of OpenStack

Rackspace Hosting, Inc. (NYSE:RAX), incorporated in March 2000, is an open cloud company providing open technologies to more than 200,000 business customers in around 120 countries and territories. The company is also the co-founder (with NASA) of the fastest growing open cloud platform and developer community, OpenStack.

The majority of its revenue, $1 billion, or 77% of total 2012 revenue, was generated from Dedicated Cloud product sales, while the Public Cloud produced around $304 million in sales in 2012. In terms of geography, Rackspace Hosting, Inc. (NYSE:RAX) derived most of its revenue, $974 million, or 75% of total revenue, from the U.S.

A fast growing business with a strong balance sheet

What impresses me is its rapidly growing operating performance. For the past five years, Rackspace Hosting, Inc. (NYSE:RAX) has delivered consistent growth in both top line and bottom line. Revenue increased from $532 million to more than $1.3 billion in 2012, while net income rose from $22 million, or $0.19 per share, to $105 million, or $0.75 per share. Its cash flow position has also been on the rise. Its operating cash flow has increased from $137 million to $399 million since 2008, while the free cash flow jumped from $(29) million to $129 million.

Furthermore, Rackspace has achieved consistent growth in its operating performance without the help of too much leverage. Its balance sheet is quite strong. As of December 2012, it had $844 million in total stockholders’ equity, $292 million in cash, and only $4 million in long and short-term debt. The capital leases stayed at $60 million. Interestingly, Rackspace does not have much goodwill and intangibles. Thus, Rackspace’s historical growth has been quite organic.

Still quite expensively valued

At around $48 per share, Rackspace is worth around $6.6 billion on the market. The market still seems to value the company quite expensively, at more than 15 times EV/EBITDA. However, Rackspace Hosting, Inc. (NYSE:RAX)’s valuation seems to be much cheaper than that of Red Hat, Inc. (NYSE:RHT), a provider of open source software solutions.

Red Hat, Inc. (NYSE:RHT) is considered to be the second biggest contributor to the OpenStack community. Red Hat, Inc. (NYSE:RHT) is trading at nearly $50 per share, with a total market cap of $9.6 billion. Red Hat is valued as much as 31.2 times EV/EBITDA.

Oracle seems to be a better buy

Oracle Corporation (NASDAQ:ORCL) is another big player in the software industry and an aggressive player in the cloud business. However, Oracle Corporation (NASDAQ:ORCL) and OpenStack seem to be quite opposite endeavors. While OpenStack is a free, open source software allowing different companies to create and offer cloud computing services running on standard hardware, Oracle is trying to build a complete cloud solution themselves.

Indeed, Oracle Corporation (NASDAQ:ORCL)’s current clients are all big companies, which consider Oracle as a place for all IT solutions. Recently, Oracle announced that it would buy out Nimbula, a startup engaged in providing private cloud infrastructure management software. The acquisition would let Nimbula’s products to be integrated with Oracle’s cloud offerings.

Oracle Corporation (NASDAQ:ORCL) is a much bigger company compared to Red Hat and Rackspace, with nearly $160 billion in total market cap. It has the cheapest valuation of the trio. At around $34 per share, Oracle is valued only at 8 times EV/EBITDA. Interestingly, it is the most profitable company with the highest operating margin at 38.5%. While Rackspace Hosting, Inc. (NYSE:RAX) has the lowest operating margin at 13.2%, the operating margin of Red Hat is nearly 15.4%.

My Foolish take

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!