Rackable Systems (RACK): Between a Rack and a Hard Place

From the Rackable Systems most recent 10Q:

Revenue from customers representing 10% or more of total revenue was as follows:
		Three Months Ended								Nine Months Ended
		September 29, 2007				September 30, 2006				September 29, 2007				September 30, 2006
Customer A			29	%			28	%			31	%			31	%
Customer B			*				22	%			14	%			28	%
Customer C			21	%			*				15	%			*
Customer D			11	%			*				*				*

* = under 10%

Two of their top 3 customers are Microsoft and Yahoo and those capex budgets have to be in stasis, though Yahoo did throw out a capex number of up 10% y/y after they reported but before Microsoft swooped in for the kill. Since the deal's been announced I'd imagine there's quite a bit of confusion internally at Yahoo and approved purchase orders will be hard to come by near-term.

Stock is cheap, trading at a discount to book. They do low profile, shielded servers. Rack space is expensive and the less heat servers throw off and the smaller they get the better. Dell has recently turned up the pricing heat on them and margins have collapsed in recent quarters. I doubt anything has changed with respect to pricing being tough.

I've always suspected Rackable will be acquired by Dell at some point – it'd be like a revenue buy. Dell could very easily remove a competitor and leverage their vast supply chain power to improve Rackable's profitability significantly.

It's probably a buy after the quarter on the theory that it can't get a lot worse looking for them and the stock reflects a lot of risk already.