Rackable Systems Feels Slowdown

Rackable Systems, Inc. (RACK) continues to lead in green technologies for lower power consumption, and high density servers. The company trimmed its outlook for fiscal 2008 due to a slowdown in the corporate purchasing, which has greatly impacted its sales and bookings.

We have therefore adjusted our forecast to reflect the company’s weak outlook. We believe, over the long-term it may be a challenge for the company to compete with larger hardware vendors. We do not expect the company to return to GAAP profitability in the near future, and neither do we believe that the company will return to previous margins given the increasingly intense competitive environment and the need for RACK to invest in engineering.

With the market for power efficient computing coming to the forefront, RACK could be an acquisition target for a larger company looking to advance its capabilities should the valuation remain depressed.

Shares of Rackable Systems are currently trading at its 52-week low price. This represents a P/S [price-to-sales] multiple of 0.7x our 2009 revenue per share estimate of $10.56, a discount to the industry. We maintain a Hold rating on RACK shares and lower our price target to $7.50, which is based on a P/S multiple of 0.7x 2009 revenue.

Read the full analyst report on RACK

Read the full analyst report on RACK