At one time or another, I’m sure that we’ve all been outraged by stories of rampant government waste – especially in areas of aerospace- and defense-related research.
But today I’m going to tell you about a NASA-related tech program that led to a big payoff. In fact, investors who knew what to look for could’ve turned $10,000 into $41,900 – a 319% return – in just 29 months.
I’m relating this story for a couple of reasons. It shows you why I spend so much time looking at the research that’s underway in labs at both the university and national level. And it also explains why I write to you so frequently about cutting-edge science where I believe there’s a big potential payoff.
My ultimate goal, you see, is to tell you about profit opportunities like this one before they occur.
And one of the best ways to do that is by keeping a sharp eye on federal tech programs.
Fortunately, that’s an obsession of mine – and one that I developed long ago.
You see, I grew up in a military family. My dad is a highly decorated U.S. Marine Corps captain who retired from the service to join Aviation Week & Space Technology, where he became its award-winning senior military editor.
Starting when I was a senior in high school (which was more years ago than I’d like to admit), my dad and I have talked often about government research and the huge payoffs for the civilian economy. I later went to work for him covering government technology during the Reagan Star Wars program.
I’ve talked with scores of scientists, business leaders and government officials about this field for more than 25 years. It’s a great way for me to stay abreast of key trends and investment opportunities.
The bottom line is that I know what to look for. And I know what’s on the cutting edge.
Take “cloud computing,” which transforms hardware and software into a service that can be delivered over the Internet.
Seeing NASA get involved with this hot new trend was a signal that a particular program warranted a closer look. It was also a stamp of approval on an emerging technology.
By lending its help to this fast-growing slice of the high-tech sector, NASA helped savvy investors reap big gains from one specific company. The spinoff effects would lead to billions in new wealth across the high-tech sector.
The company in question is cloud-computing pioneer Rackspace Hosting Inc. (NYSE:RAX). Founded in 1998, Rackspace now boasts nearly 200,000 clients in more than 120 countries.
Clearly, NASA can’t claim it made the company the success it is today. But it did give a huge stamp of approval for both Rackspace and its mission of providing open-source cloud computing.
That was the main thrust behind the OpenStack Foundation that the company and the agency launched with $10 million in funding. Today, that program is a global collaboration of developers and cloud-computing experts. They have created an open-source platform for public and private clouds used around the world.
Cloud computing is a loose term that simply means more of the huge amounts of data the world needs are now hosted on “virtual” servers. This software component allows the data servers to handle far more traffic and storage. This helps users avoid spending time and money starting and running their own computer networks.
For NASA, the OpenStack program really began in 2008 when it launched Nebula. That was a project to unify the ocean of data the agency has to manage across what is very much a far-flung organization. NASA soon found that Rackspace was working along similar lines and had already written quite a bit of code.
Here is how Ray O’Brien, former head of Nebula, described the joint effort between NASA and Rackspace in a blog post last May:
“Our hope was that a community would form around these two pieces of software toward the construction of an open source cloud operating system. To say that our greatest hopes in this regard were met would be an understatement. OpenStack today has the support of hundreds of individuals and organizations around the world, all set on realizing the original vision for the project.”
When OpenStack launched in July 2010, Rackspace shares traded at $17.14 (based on the closing price set on July 6). Yesterday, the stock closed at $73.53 – a 319% run.
Some analysts have questioned whether Rackspace can continue its rapid growth, since open-source software means anyone can tweak it and then sell a competing cloud package. A piece in Thursday’s Investor’s Business Daily made that very point.
Despite the threat, or perhaps because of it, Rackspace shows zero intent of changing to a closed format. But that doesn’t mean the stock is headed for a rout. It does mean that Rackspace has to focus like a laser beam on its core business if it wants to continue its heady growth.
Also, I think doubters are missing the big picture. As I see it, Rackspace has helped make cloud computing a key high-tech ecosystem. That means more overall opportunities for tech investors.
Consider that Dell Inc. (NasdaqGS:DELL) Hewlett-Packard Co. (NYSE:HPQ) and Intenational Business Machines Corp. (NYSE:IBM) are all OpenStack members. The first two are stock laggards. But IBM has returned roughly 60% to investors since early July 2010, a figure that doesn’t include the benefit of a roughly 2% dividend.
Web-retailer Amazon.com (NasdaqGS:AMZN) is a major cloud-computing firm that bumps up against Rackspace. It even does business with NASA. In the same period, it has returned 136% to shareholders – an example of the “spinoff benefit” that I mentioned above.
Let me close by noting that I see a lot of major trends ahead that will mean big gains for investors in the Era of Radical Change. As our case-study look at Rackspace and OpenStack makes clear, it pays – and I mean that literally – to keep track of federal support for high tech.
Rest assured that I intend to let you know about more cutting-edge programs that I think will offer investors the chance to score big gains. Stay tuned…
P.S.: We won’t be publishing next Tuesday because of the Christmas holiday. So, I hope you have a great one. We resume next Friday with December’s “Fascinations of the Month.”