Today's Rackspace Disaster Could Just Be The Start

| About: Rackspace Hosting, (RAX)

Rackspace (NYSE:RAX) is down over 11% today, after results disappointed the street. The company still sports a PE north of 80, but beneath the numbers is a more frightening reality. The public cloud may not be a profit gusher after all.

Part of the problem is that market leader (NASDAQ:AMZN) is determined to push new competitors to the side with highly-aggressive pricing that leaves little profit for anyone. This allows Amazon to maintain high market share and top-line growth, with the bottom line subsidized a bit by hype and a bit more by hope for its Kindle e-readers and commerce services.

Part of the problem is that Rackspace's OpenStack software isn't easy to connect with Amazon's. Amazon's APIs are practically an industry standard, and while OpenStack is promising its own AWS compatibility - Canonical's Ubuntu has already delivered - some analysts are beginning to wonder whether it can, indeed, take on competition from both Amazon and VMWare (NYSE:VMW).

What is clear is that Rackspace is wedded to OpenStack, even if management of the open source project is now in the hands of a separate foundation. It's also clear that enterprises are determined to build their own private clouds before moving essential work over to public clouds, and that they want to keep their options open. These include OpenStack, whose recent new support from IBM and Red Hat (NYSE:RHT) should be cause for celebration.

It adds up to this. Competition is coming to the cloud. Can a relatively-small San Antonio company really compete in this environment against the industry's giants? Stay tuned.

I think once the nervous-nellies and the boom followers are washed out, Rackspace may present a buying opportunity.

Disclosure: I am long AMZN.