Rackable Systems (RACK-NASDAQ) has backed itself into a corner.  The company took the server space by storm in its niche, but what happens when a hi-flyer and hi-beta stock starts to miss and then becomes mediocre? Massive haircuts. And if you name is Rackable, racks happen too.  It posted EPS $0.19 on non-GAAP and revenues were $106.9 million.  Today’s numbers didn’t matter because they had already warned two weeks ago.

FOR 2007 PROJECTIONS:
Revenue is projected to be in the range of $450-$525 million ($490 million is consensus); up from 2006 of $360.4 million. Non-GAAP diluted net income per share is projected to be $0.75-$ 1.05 per share ($1.05 EPS is the consensus estimate; compared to $0.94 in 2006. GAAP diluted net income (loss) per share is projected to be $ (0.10) – $ 0.20 per share.  GAAP gross margin is projected to be in the range of 16.8%-21.0%; Non-GAAP gross margin is projected to be in the range of 18%-22%, compared to 22.4% in 2006.

So the revenue growth is expected to be up roughly 30% at the mid-point, with a mid-point EPS projection that would actually be under 2006 and on lower margins.  High growth and high beta is only fun on the way up.  Shares closed up over 6% at $20.34 on the day in hopes that today wouldn’t matter, but shares are giving up half of those gains to about $19.70 in after-hours trading.  The 52-week range is $18.34 to $56.00, so you can see the air has come out of the balloon.  Its market cap was $571 million, so at 1.2 times forward revenues and 22 times forward earnings can you call a recently former high-flyer a value stock?  Doubtfully so, but you can expect some will try soon.

Jon C. Ogg
Febrauary 1, 2007