Rackspace Hosting, Inc. (RAX): What You Need to Know About This Cloud Play

Nonetheless the question mark over its long term ability to leverage its capital expenditures will get even more relevant after this report. Here is a graphical depiction of what I am talking about.

It is one thing to laud offering ‘fanatical support’ and argue (positively) that capex only increases with future growth, but the fact is that the gap between operating cash flow and capex isn’t expanding much at present. Where is the scalability?

Moreover I note that –despite revenue disappointing- there was no downward adjustment to the full-year capex forecast of $375-445 million. The bulk of which being focused on customer growth. Rackspace Hosting, Inc. (NYSE:RAX) is going to continue investing because it believes in its strategy. That is fair enough but to follow it you need to share this belief.

Where next for Rackspace?

Clearly the question marks over its business model are not going to be answered definitively anytime soon so investors will have to live with this uncertainty. In addition investors will have to deal with the general macro uncertainty around tech spending. Naturally this also provides some upside potential as well. If enterprise spending picks up then it could appreciate strongly but I would argue that there are better ways to get exposure to it than by buying Rackspace.

Competition is also an issue here with Amazon.com, Inc. (NASDAQ:AMZN) and VMware determined not to cede market share meanwhile investors need to appreciate that VMware is generating huge amounts of cash while Amazon Web Servces can be supported. In other words they can deal with some margin erosion from price cutting. Can Rackspace Hosting, Inc. (NYSE:RAX) do the same while it has significant outlays planned for capital gear this year?

Throw in the overlying uncertainty over the transition to its OpenStack public cloud model and proposition gets even harder. It’s not a stock for widows, orphans or for me.

The article What You Need to Know About This Cloud Play originally appeared on Fool.com and is written by Lee Samaha.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Rackspace Hosting, and VMware. The Motley Fool owns shares of Amazon.com and VMware. Lee is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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