FIN 560: Course Project
February 22, 2015
Professor Muleka Kikwebati
Rackspace Hosting, Inc. (RAX) operates in the hosting and cloud computing industry. It offers its products under the Fanatical Support brand. Rackspace is now a global company with more than 200,000 customers in 120 countries and $1.5 billion in annual revenue headquartered in San Antonio, Texas with 9 data center facilities spanning three continents. Prior to their shift into cloud hosting, Rackspace focused on managed hosting, competing with companies such as Peer1. Now, Rackspace has proclaimed itself to be the “world’s leading specialist in the hosting and cloud computing industry“, fighting for that title with industry titans Amazon and Google.
This essay will discuss Rackspace’s competitive forces in the industry, including the company's relative advantages and disadvantages to its competitors. In comparison to the competitors, this paper will provide an analysis of return on equity; projected earnings growth; required rate of return using the CAPM measurement; and the intrinsic value using the discount valuation techniques. After providing these analyses, I will conclude a recommendation to buy or sell RAX and the estimated price target.
Rackspace main competitors are Amazon (AMZN) and Google (GOOG). Amazon’s Web Services, or AWS, is a cloud-based web service platform that provides customers with the tools they need to create and maintain online applications, manage server space, track web data and more. Google’s Cloud Platform provides the building blocks so you can quickly develop everything from simple websites to complex applications. Rackspace has a list of many other competitors but Amazon and Google are direct competitors that continue to challenge the company.
Rackspace’s competitive advantage that will separate them from the others and ensure profitability are open source architecture, customer support, expansion to niche clientele, and employee loyalty. Rackspace utilizes OpenStack, which is open sourced because the company believes in not locking in their client to proprietary software like their competitors. The company is known for their high-quality and timely customer support which is part of their strategy for premium pricing. Rackspace has the technical expertise and manpower to cater to niche markets as well. Rackspace's ability to innovate and diversify for new clients while maintaining its offerings for core clients will enable the company to remain highly competitive. Rackspace is dedicated to providing an outstanding work environment for its employees. Rackspace's four areas of competitive advantage can be summed up in a single word: quality. The company has clearly established a firm foundation with its customers as a luxury brand.
While Rackspace has made quality its competitive advantage for premium pricing, its disadvantage is revenue from cloud. Rackspace is competing against technology juggernauts and is trying to distinguish itself as a premium cloud provider by offering 24×7 access to cloud engineers, architecture guidance, a security audit, and system monitoring and alerts. The problem is that many of Rackspace's services are twice as expensive as equivalent services from Amazon, Microsoft, Google, and IBM, and that cloud infrastructure is the sought service, not architecture guidance.
Return on Equity
Return on Equity (ROE) measures the rate of return on the ownership interest (shareholder's equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. The formula for Return on Equity is: Return on Equity (ROE) = Profit Margin X Asset Turnover X Leverage Ratio
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Colo & Cloud. (2015) Rackspace Overview – Who is Rackspace? Retrieved from
Google, Inc. (2015) All Cloud Platform products. Retrieved from
Amazon Web Services, Inc. (2015) Amazon Web Services. Retrieved from
Wang, Arthur. (2014) Rackspace: Beyond The Price War. Retrieved from
Nichols, Brian. (2014) Here’s What’s Next For Rackspace Hosting, Inc. Following Its Strategic Review. Retrieved from
GuruFocus.com, LLC. (2015) Summary. Retrieved from
Schwartz, Jeffrey. (2014) Rackspace Up for Sale. Will Microsoft Make a Bid? Retrieved from
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