Rackable Systems (RACK)

Rackable Systems (RACK) reported record revenues for Q4 2007. It appears to have gotten through difficulties that began in 2006. In the meantime momentum investors have forgotten about it, so the stock appears to be a bargain even compared to other technology stocks that are undervalued in the current liquidity squeeze.

If you want all the salient details, including numbers, management comment, and analysts' questions, you should see my summary of the February 6, 2008 Rackable Analyst Conference. Here I'll analyze the data.

Rackable's sales seem to be consistently seasonal, with quarters ending in December generating considerably higher sales that the other 3 quarters. Revenues were $111.7 million, up 28% sequentially from $87.2 million and up 4.5% from $106.9 million year-earlier. I would not call that strong growth. But it is the third quarter of improving results.

As to earnings, I usually prefer to look at GAAP numbers, but this is a case where I think non-GAAP numbers are actually more accurate. With GAAP rules there was a $23.9 million expense for writing off goodwill acquired in the TerraScale acquisition. That acquisition did not end up generating the expected revenue and earnings, at least not yet. But the charge is non-cash.

Eliminating the goodwill impairment charge and the other usual non-cash charges and one-time matters and you get non-GAAP earnings per share of $0.18.

But that is not why I think the stock is cheap. The market capitalization (number of shares times price per share) of Rackable was $237.4 million when the market closed today.

Rackable reported that it had cash and equivalents at the end of the quarter at $198.1 million. In 2007 that increased $37.6 million.

Which means tht if you forget the money that earlier investors sank into getting the company started and buying TerraScale, in 2007 Rackable generated $1.27 per share in cash.

Today Rackable shares sold for $8.05. For that money you get $6.70 in cash plus (if 2008 is flat on this measure) $1.27 per year.

As attractive as that should be to value investors, the real story hear is Rackable's technology and customer base. Rackable specializes in computer server systems for Internet companies and data centers. Some of its biggest customers are Amazon, Microsoft, Facebook and Yahoo.

Rackable specializes in making vast arrays of servers easy to manage, low in power consumption, and low in space consumption.

In addition to its past client base, it is making good progress, partnering with Raytheon, in getting military and government contracts. It has also partnered to sell more of its systems outside the United States market.

Bookings ended the quarter strongly, so Q1 2008 could be less seasonally down than Q1 2007 was. Rackable's management guided to flat non-GAAP EPS in 2008 compared to 2007. But the reason for that is good: they are investing in a larger sales team and new, highly-competitive products.

Technology companies are usually subject to extreme competition. Rackable's competitors are mostly far larger companies: IBM, Sun, and HP. So any investment in Rackable stock should be considered risky.

I own Rackable stock, so you should look at the data carefully. I try to be objective, but even when I am objective my stock choices don't always work out.

See also:

www.rackable.com
My Rackable main page

And stay diversified!