Year-to-date return: -29%
Rackspace Hosting (RAX) isn’t doing everything right, but it’s hardly doing everything wrong either. The comapny’s second-quarter results, for example, included 18% year-over-year revenue growth, 4% sequential growth and adjusted earnings growth of 10%.
Yet the stock is down 29% so far this year. What gives?
Well, Rackspace is continuing its push to become the world’s greatest hybrid cloud company, combining both public and private clouds. Its public cloud business is the second largest behind Amazon’s (AMZN) Web Services. The reason it’s going hybrid is because its customers are asking for it. The bad news, though, is that this requires a substantial investment, which cuts into its adjusted free cash flow.
The good news: That’s only temporary. Since going public in 2008, Rackspace posted four consecutive years with positive total returns. That streak is on pace to be broken this year, but I don’t see why the investments it’s making now won’t pay off in 2014 and beyond.