Although Amazon.com (AMZN) is the overwhelming leader in the burgeoning cloud-computing infrastructure-as-a-service market, Rackspace Hosting, Inc. (RAX) has been making some interesting moves in the field, as well. This is supporting the OpenStack project it helped to launch in 2010. Infrastructure-as-a-service, such as Openstack, provides customers with computing power and other IT resources over a network based on demand, so customers don’t have to maintain these resources in house. This market could be worth about $4 billion in the next few years by some estimates.
Amazon’s infrastructure-as-a-service provider, Amazon Web Services (AWS), currently dwarfs the competition. AWS makes up only a small percentage of total Amazon revenues, and the company uses this technology to power its own huge retail business. Meanwhile, Rackspace’s comparable Public Cloud segment reported 2012 revenues of about $300 million, with growth at 60%. Estimates put AWS sales at roughly $2 billion, with similarly strong growth.
Launched in 2006, Amazon Web Services has seen much success in gaining its lead position. This is despite some service outages in recent years. Nevertheless, adoption continues, powering further business momentum and economies of scale. Clients include heavy-data users Netflix, Inc. (NFLX) and the New York Times (NYT). Given AWS’s scale, competing with it can pose quite the challenge for any upstart.
So what differentiates OpenStack from Amazon Web Services? The biggest differentiating factor is that OpenStack touts itself as an open-source project. This suggests that users won’t be locked into any one vendor, something that may be appealing to many clients. Another difference is that Rackspace provides its so-called “fanatical support” for its OpenStack clients, the unique name for its customer service. OpenStack, first launched by Rackspace and NASA, has also already been adopted by a slew of vendors, including some big names like Hewlett-Packard (HPQ – Free HP Stock Report), Dell (DELL), International Business Machines (IBM – Free IBM Stock Report), and Oracle (ORCL), adding momentum to the project’s success.
OpenStack seems to be making further progress of late. The latest iteration of the project, codenamed “Grizzly”, was announced recently. The OpenStack Foundation, which now controls the project and is made up of representatives of Rackspace and other companies and entities supporting OpenStack, has weekly meetings for the project’s development. Rackspace is also opening an institute called the Open Cloud Academy in the company’s home city of San Antonio, Texas to train people in key cloud-computing I.T. skills. Too, the company is breaching Asia Pacific markets, entering Australia last year much like Amazon did. Also, as with Amazon, Rackspace has lowered pricing for its cloud-computing offerings recently. This may, at once, comprise the company’s premium image and help to spread wider adoption of OpenStack. Investors saw the development positively, bumping the stock’s price up a bit on the news.
There are many other players in the infrastructure-as-a-service market, such as Microsoft’s (MSFT – Free Microsoft Stock Report) Windows Azure and Google (GOOG) Compute Engine. While these bigger players are a potential threat and certainly would have an interest in developing their own proprietary cloud capabilities, OpenStack is the second biggest force in the infrastructure-as-a-service market after Amazon Web Services now, putting Rackspace Hosting in a competitive position in a fast-growing market.
The road to success may well be rocky. In fact, Rackspace stock is down about 40% in price from its year-earlier peak on top-line growth that fell short of lofty expectations. And the company will have to perform well to outdo its biggest competitors, even with strong growth in the OpenStack community.
All in all, the burgeoning market will offer plenty of opportunities for these different players. Even if Rackspace doesn’t overtake Amazon in the cloud-computing business, it still has plenty of room to grow independently. And its differentiation, especially in regards to the open-source framework of OpenStack that it has pushed, could even help it to potentially eat away at Amazon’s market share. We think growth investors might want to follow the development of the OpenStack project, including potential investment opportunities it may present. For further details, visit Rackspace’s individual company report in the The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.