(WEB HOST INDUSTRY REVIEW) — When Rackspace (www.rackspace.com) announced its third quarter earnings earlier this week, it demonstrated growth in both its cloud business and its managed hosting business – meeting and exceeding projections for revenue – and it excited some of the Wall Street analysts following the web hosting company.
The company reported third-quarter managed hosting revenue of $147.1 million, an increase of 6 percent over the previous quarter, while cloud hosting revenue grew 17 percent to $15.3 million.
Among analysts whose areas of expertise include hosting – mainly those in the telecom space – the news was good enough. Rackspace, which had already been well received, saw opinions upgraded in many cases.
On Tuesday, Kaufman Bros. telecom and data services analyst Colby Synesael increased his rating on Rackspace to “buy,” moving his price target from $16 to $22.50 and saying “expect growth to accelerate in 2010.”
On the same day, Oppenheimer analyst Srinivas Anantha upped his rating from “perform” to “outperform,” increasing his price target to $24. His justification for the increased rating included Rackpace being in an excellent position to capitalize on the rise of managed hosting services, the company’s strong portfolio of cloud services and its strong financial position.
Rackspace’s stock closed the day Tuesday at $18.32.
Dan Golding, research director at Tier 1 Research, which specializes more directly in the hosting business, says winning over Wall Street has been an ongoing development for Rackspace.
“In the beginning they talked a lot about ‘fanatical support,’ and Wall Street guys tend to dismiss that, because it’s very illusory,” he says. “It’s hard to put a value on. They value companies like Southwest or Nordstrom or Costco differently, not because they have this mantra – a lot of companies claim to have secret sauce – but because it’s the only explanation for a consistently superior performance, and they’ve run out of other explanations. So now they believe the secret sauce exists. With Rackspace, they needed to experience it. And it was compounded by the fact that Rackspace didn’t want to give guidance. Now they’ve seen that there is something to this. And now they’re beginning to believe.”
Golding says Wall Street’s understanding of the hosting business is limited, partly because of the traditional areas of specialization into which hosting is piled – the telecom or software businesses – and partly because of the fact that only a few other hosting companies, Savvis and NaviSite, are publicly traded. A few colocation firms, Equinix chief among them, have given some analysts an understanding of that market, but managed hosting remains a bit of a mystery.
Part of Rackspace’s role in the hosting business, now, is changing the investment community’s understanding of the hosting market, and hosting businesses are hoping it succeeds.
“Before the Rackspace IPO,” says Golding, “nobody was pulling for them more than their competitors. I talked to a lot of people who worked for their competitors, and there were a lot of fingers crossed. Because that is what sets your valuation. If Rackspace can do X, then we can do Y. So there was a lot of disappointment when they first came out, and now there’s a lot of relief and a lot of happiness. As an industry we compete against each other, but we rise and fall together.”
Part of Rackspace’s attractiveness to Wall Street might be its close association with the much-hyped cloud computing movement.
In a Tuesday article on The Motley Fool, Tim Beyers wrote “Which is the best cloud computing stock? The wide-open field includes Amazon.com, IBM, and many others, but Rackspace Hosting is doing its best to win votes.”
