Rackable Systems: Good Business and the Market Agrees (RACK)

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 |  About: Rackable Systems Inc. (RACK)
by: David M. Gordon

Here is a new opportunity. Let's pretend I am not previously familiar with it...

Rackable Systems (Nasdaq: RACK) is engaged in the development, sales and marketing of high-performance, low-power-consumption servers. In many ways servers are simply fancy computers. In fact, in many small companies a dedicated PC is used as a server. Servers are used primarily for data storage and access and as front-end interfaces to high-speed internet connections. In this latter function they are usually referred to as web servers, but they also host more specialized services such as load-balancing, policing security protocols, application servers and a score of other functions.

Servers are all computers, but, at least in a commercial setting, all computers are not servers. Servers have to carry heavy loads. They are often multi-processor boxes, containing massive amounts of memory and attached storage. They also will typically have a variety of specialized interfaces which allow them to connect to high-speed internet and storage networks.

In large businesses, these servers are typically set in an air-conditioned room where large banks of servers are located, and into which typically high speed network and internet lines enter and connect. Nobody outside the company truly knows how many servers a company like Google might have, but it is most assuredly in the thousands, probably tens of thousands.

In such large configurations, putting generic PC’s into such rooms would not be at all practical. The two most notable problems are space and heat. A bank of 10,000 typical PC boxes would be a rat’s nest of wires and connections, would be rather large, and would generate a massive amount of heat which would need to be dissipated. To address the space problem racks were developed. Racks are nothing more than specialized shelving which hold slimmed-down powerful PC’s and other components. They also contain hardware for efficiently and neatly connecting the various wires that need to go between these servers and between the servers and the network.

Rackable servers are nothing more than very powerful thin PC’s that are made to fit directly onto a standard rack. While racks address the space problem efficiently, they only exacerbate the heat problem, as the dense packing of these servers provides less air to dissipate the tremendous heat that such high-powered machines generate.

Rackable Systems manufactures rackable servers which efficiently address this heat problem. Its proprietary system uses DC power rather than the typical AC power. They also externalize the rectifiers which convert the incoming AC power to DC power. As a result their servers are very heat-efficient. Without internal power supplies their servers generate less heat than conventional servers with the added benefit that the rectifiers can be located apart from the server racks and near cooling sources – so that the temperature around the servers is kept lower.

This not only results in lower costs for operating the data center (a very significant cost for a large center) but the cooler servers operate more efficiently and with less wear and tear. This increases reliability and reduces downtime from blown components. It also further addresses the space problem, since cooler servers can be located closer together allowing for more servers in a given space.

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The first items I note: Its average daily volume is ~835,000 shares and the shares have enjoyed a sustained and powerful uptrend for the past 6 months. So the stage is well set for my interest: The market likes it, I like the company and its opportunity, and I need only wait on an opportune moment to purchase.

If I were to purchase this current setup, I would acknowledge the necessity for a meaningful correction, and thus enter the position on the appropriate signal only as a trade. Once I own the investment, I can manage it in accord with how its chart builds day by day. At this particular moment, however, the odds are 50/50 whether accelerated up trend line A will continue to prove relevant. If it does not hold (and I doubt it will), then look for tests of the 50-day simple moving average (sma), and, failing to hold there, trend line B. In each instance, the intermediate and long term up trends would remain in force. But should the price slice through crucial support at trend line B, then a deeper test toward, but not necessarily as deep as, the 200-day sma would follow soon thereafter.

Does price volatility mean the stock should not be purchased during weakness? If you are solely a price momentum trader, then no do not buy this opportunity, or any other, except on strength. But if you are a long term investor, then you prefer to purchase price weakness in the periodicities lesser than the one important to you. (Of course, the moment that particular picture changes, then you change your tactics.)

Never allow yourself or your portfolio to get caught behind the 8 ball. Rack 'em up!