Buying A Call Option on Rackspace Hosting (RAX)

| February 20, 2015 | 0 Comments

cloud computingBuying A Call Option On Rackspace Hosting (RAX)

While cloud computing is still a word which generates a fair amount of buzz, in reality it’s already a mature market.  Cloud technology is already being utilized by most companies who have an online presence.

In fact, any company with an Internet site not using cloud computing is probably doing something wrong.  Paying someone else to host your Internet site is easily the smartest and cheapest way to go (barring some unusual situation).

The leading cloud computing technology and services company is Rackspace Hosting (RAX).

RAX is the most prominent company in the US and Europe in terms of managed hosting.  The company has over 300,000 customers, 100,000 physical servers, and 9 data centers worldwide.  It also generates nearly $2 billion in revenues per year.

However, in the most recent earnings, investors are allegedly disappointed with RAX missing on revenues and revenue guidance lower than expected.  Still, as of this writing, the stock is setting new highs.  Apparently investor “disappointment” isn’t leading to a lower stock price.

In fact, RAX is trading at $50.99, up 2% on the day.  That’s 95% from the 52-week low of $26.18, and already 1% above the previous 52-week high of $50.65.

So is now the time to buy a call option on RAX?

As a reminder, a call option makes money when the underlying stock goes up.  But RAX supposedly disappointed investors.  So is it worth it?

For a more in-depth look at RAX, you can check here.

Here’s the deal…

Despite the up move, there still seems to be a fair amount of negative sentiment towards Rackspace.  The stock is setting new 52-week highs, yet there are more negative articles to be found than positive.  (It reminds me a little of Amazon (AMZN) in the early years.)

After all, RAX has consistently grown revenue quarter after quarter for the last several years.  Even after the revenue “miss”, the company’s quarterly revenue rose 16% year over year.  It would have been higher if not for the negative impact from foreign exchange.

Not to mention, the company’s revenues of $472 million missed analysts’ expectations by only $1.5 million.  In the meantime, earnings per share handily beat expectations, coming in at $0.26 instead of the projected $0.19.

What’s more, the company’s full year guidance for 2015 is expected to be between $2 and $2.1 billion.  That’s just a tad below the consensus estimate of $2.08 billion.  And, it’s hardly a cause for concern.

Let’s take a look at a chart of RAX:

call option buying opportunity, a chart of RAX

As you can see from the chart, the stock is setting new highs, despite missing revenue projections.  It’s hard to see why there’s so much negative sentiment towards this name.

Now could be a great time to invest in a long-term RAX call option.

RAX has an excellent track record.  The company has continuously grown sales and is the most respected company in its field.  I believe this makes the stock a strong long-term investment candidate.

As such, buying LEAP (long-term) calls in RAX makes sense.  The January 2016 55 calls are priced at around $5 right now.  That’s not a bad price to pay for nearly a year’s worth of time.  Plus, the option is less than 10% from being in the money.

Yours in Profit,

Gordon Lewis

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

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