Rackspace Hosting: Worth a look at current price

Rackspace Hosting, Inc. (NYSE:RAX), which has been in business since 1998, operates six data centers in the United States and two in the United Kingdom. Each is a warehouse filled with servers that host websites, hold application software, and store data. Rackspace also provides redundant systems, high security, and 24-hour support in order to ensure that customer’s websites and IT networks stay up and running. Some customers own their servers and handle the maintenance themselves; others lease servers from Rackspace and use their technicians for support. Either way, the company brought in $362.0 million in revenue in 2007, an increase of 61.64% from 2006. Some of that was due to acquisition, though.

The company is profitable, although profit growth is less steady than revenue growth. In 2007, the company posted net income of $17.8 million, down from the $19.8 million recorded in 2006. Rackspace broke even in 2003 and has been profitable ever since. One factor in projecting profitability is that the business is capital intensive. It requires ongoing investments in technology and infrastructure. Even though the company leases its data centers, it still has to do extensive remodeling and upkeep to make them suitable for storing servers. The company benefits from scale economies until it reaches the point where it has to build out more space or invest in more equipment. Then, the economies reset. In 2007, the company spent $105.4 million on property and equipment.

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