Tuesday, October 14, 2008

Rackable Systems (RACK) Hit by Economy

Rackable Systems issued a press release yesterday (October 13, 2008) stating customer purchases slowed down in September. This should not be a surprise; we will be hearing a lot of such statements in the coming weeks. In theory, since this is a known issue, stock prices have already tanked enough to more than compensate for it. Instead, just as Rackable (RACK) has had a major price hit today, we will probably see more individual hits corresponding with September quarter earnings announcements going forward.

Rackable released quite a bit of good news along with the bad, and it bears looking at. They signed up 25 new customers in the quarter. Their customers are all large corporations that need energy efficient, powerful, and managable datacenters, so 25 is a very good number. New generations of products are available for Q4. This is on top of the deals with IBM and NetApp from earlier in the year.

Opportunities and dangers abound for Rackable. As the leader in designing energy-efficient large scale server systems, it must compete with much larger players like IBM, Dell, HP and Sun, who have all been improving the energy efficiency of their systems. Rackable has plenty of cash on its balance sheets, almost $200 million at the end of Q2, and it is highly focussed on its niche. Its annual sales guidance is now $275 to $300 million, scaled back from above $350 million. It has been losing money on a GAAP basis but stayed in the break-even range on a cash basis. All in all, with a market capitalization today of $224 million, it seems undervalued even by current market standards.

I am a long term investor in Rackable Systems.

For more details, see

My Rackable Systems (RACK) analyst conference summary for Q2 2008
Rackable Systems press release of October 12, 2008

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