International Data Corporation estimates cloud computing services from public companies will soar from $16 billion in 2009 to $55.5 billion by 2014. That represents a compound annual growth rate of 27.4%. Investors should consider adding the exponential growth prospects of cloud computing to their portfolio. (For more on growth, check out Is Growth Always A Good Thing?)
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Who's Emerging From Cloud's Crowded Field?
Cloud computing, or internet-based computing, is software as a service delivered on demand, over the internet. Cloud is a new technology disruptor, meaning new customers are created every day, out of those shifting away from old technologies. Sensing a tectonic shift in computing, big technology names like Verizon Communications Inc. (NYSE:VZ), Microsoft Corporation (Nasdaq:MSFT) and Google (Nasdaq:GOOG) are rushing to get into cloud; some are doing it organically, others by acquisition. Verizon recently bought Terremark Worldwide for $1.4 billion, CenturyLink, Inc. (NYSE:CTL) scooped up Savvis for $2.5 billion and Time Warner Cable Inc. (NYSE:TWC) purchased Navisite Inc. for $230 million.
Rackspace Hosting, Inc. (NYSE:RAX), the biggest prize of them all, is still standing tall among the clouds. As the number two player in cloud computing, behind Amazon.com, Inc. (Nasdaq:AMZN), Rackspace is a pure play on businesses moving onto dedicated servers with the flexibility and scalability of public cloud platforms. Amazon is leveraging its entire business with cloud to enhance consumer services, whereas Rackspace markets directly to businesses. The consumer market is bigger, but right now, corporations are sitting on billions in cash, while there's a lot of uncertainty surrounding consumer spending. This positioning makes Rackspace one of the best options in cloud computing.
Rackspace's Sunny Cloud Business
Cloud computing could very well be a multi-billion dollar revenue stream for Rackspace in the near future. Cloud computing sales growth has been nothing short of phenomenal, growing 92.6 and 85% year-over-year in the first and second quarters of 2011, respectively. As a percent of total sales, cloud computing revenues have surged over the past six quarters, up from 10.8% in the first quarter of 2010 to 17.4% in the second quarter of 2011. With the recent spin off of OpenStack into an independent foundation, scaling toward enterprise cloud clients will become even more important.
Rackspace has a bright future in cloud, led by fantastic management. Rackspace President and Chief Executive Officer, Lanham Napier, recognizes the growth prospects in cloud, calling it "the biggest market opportunity in all of technology." Napier has made it Rackspace's goal to be the dominant service leader in the cloud computing market.
The Bottom Line
Rackspace has demonstrated the ability to consistently increase revenues, over the past five years, and the stock price is reflecting that growth. Valuation is the main reason to tread careful in the cloud. Since the 2008 IPO, Rackspace is up roughly 270%. This year alone, Rackspace has outperformed the S&P 500 by about 22%. The summer sell off provides the perfect opportunity to reconsider Rackspace, which fell 31% from July 7 to October 3. Rackspace's multiples, while still on the high end compared with Equinix, Inc. (NYSE:EQIX), for example, improved dramatically. There's no dividend yield in cloud, but Rackspace has only begun to tap into it's growth potential . Use this summer's correction to make room for Rackspace. (To gain a better understanding, read Great Company Or Growing Industry?)