Editor's note: This Breakout Stocks alert was originally sent to subscribers July 21 at 11:30 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Rackable Systems ( RACK) reports second-quarter earnings on Thursday, July 27, after the close, and we wanted to give readers a preview of the quarter. The stock was recently trading at $36.14. For those new to the story, Rackable makes servers and storage equipment with a focus on energy efficiency. Its products are sold primarily to Internet companies. For the quarter, analysts are expecting Rackable to report a profit of 22 cents a share on $84 million in revenue. Needless to say, expectations are exceedingly high given Rackable's last two quarterly results, which were stunning to say the least. Recall that in the first quarter, Rackable earned 33 cents a share on $84 million in revenue, obliterating the consensus forecast calling for 19 cents a share on $71 million in revenue. And in the fourth quarter of 2005, Rackable generated a profit of 33 cents a share on $83 million in revenue, easily beating Street expectations for 24 cents a share on $71 million in revenue. In addition, several earnings reports this week could further boost expectations for Rackable's quarterly results. Last night, chipmaker Advanced Micro Devices ( AMD) reported very strong demand for its Opteron server chip in the second quarter. Given that in the past two quarters, more than 90% of Rackable's servers were powered by AMD chips, this is an incremental positive because it indicated that the overall server market is healthy. Thursday night, major Rackable customer Microsoft ( MSFT) commented on its earnings conference call that it would continue investing aggressively in Internet services, which could translate into accelerated capital expenditures as it ramps up to battle with Google ( GOOG). But perhaps more importantly, Google, which in the past was a major Rackable customer, also commented that its own capex spending would accelerate in the second half of this year, which we view as encouraging since Google has been spending on new equipment at an incredible pace. This benefits Rackable because both Microsoft and Yahoo! ( YHOO) -- Rackable's biggest customer in 2005 -- will have to spend aggressively to keep up with Google's pace of innovation. In addition, both Yahoo! and Microsoft are aggressively purchasing real estate throughout the country to make room for new data centers, which require a large amount of servers.