Monday, March 30, 2009

RACK Up The Losses

Rackable Systems (RACK) provides computer servers and storage devices for use in data centres. The company has $170 million worth of cash on hand versus no debt, yet it trades on the Nasdaq for just $120 million. The company has announced a plan to buy back $40 million worth of stock.

Unfortunately, despite the strong balance sheet position, there are risks associated with this company. It operates in a constantly evolving high technology field. Success for this company is dependent on generating interest for new products/services which could be hits, and could be misses. As we've discussed, value investors prefer companies in stable industries with stable operating histories, as this gives us more predictability going forward.

The company intends to use up a portion of its cash position making investments to shore up its product line. Unfortunately, it's not possible to tell how those investments will turn out, increasing the speculative element of this stock. The company's history with its investments is not good: operating income in each of the last two years has come in south of negative $30 million.

Certain investors for whom the products sold by RACK fall within their circle of competence might feel very comfortable valuing this company with some level of certainty. For the vast majority of value investors, however, this will not be the case. While it is certainly appealing to invest in stocks trading below their net current asset values, investors must still use sound business judgment to eliminate the stocks which are burning through cash and for which the future holds too much uncertainty.

1 comment:

B said...

And yesterday it was announced that RACK will purchase SGI - Silicon Graphics, another server manufacturer. This will be interesting.