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Is Rackspace Worth $1.2 Billion?

Posted by whirbot 139 days ago (http://feeds.feedburner.com)

As mentioned in a recent post by David Snead, managed hosting company Rackspace has gone public. The company began trading on the New York Stock Exchange last week under the ticker symbol ‘RAX’. A complete financial overview can found at Google finance.The IPO shares were distributed via a Dutch Auction mechanism – made famous by Google when it went public in 2004. The stock was issued at $12.50. From the Rackspace press release regarding the IPO: ‘’ Rackspace announced the initial public offering of 15,000,000 shares of its common stock at a price of $12.50 per share. Rackspace will offer 12,700,000 shares of its common stock in the offering and the selling stockholders will offer an additional 2,300,000 shares of common stock in the offering. Rackspace and the selling stockholders have also granted the underwriters a 30-day option to purchase up to an additional 2,250,000 shares to cover over-allotments. Rackspace's common stock will begin trading on the New York Stock Exchange under the symbol "RAX" on Friday, August 8, 2008.’’Almost immediately after trading began, the stock price dropped around 20% and has hovered in that range ever since. As of the publication of this article, the current stock price is $10.37 yielding a market capitalization of $1.2 billion.However, an important question remains unanswered: “Is Rackspace worth $1.2 billion?”. The current market price seems to indicated yes. Despite that, there remains the issue of future performance and earnings expectations to solidify the current market cap. A nagging thorn in the side of the company’s valuation is the Price to Earnings ratio. At the current market price, RAX is trading at over 58 times earnings – that is, the P/E is 58.26. This is pretty high by any analysis, indicating an expectation of torrid growth in the coming quarters. However, when compared to other market leaders in the online space, Rackspace begins to look seriously overvalued – even at the 20% discount to the issuing price. For comparison:Google – P/E = 32.75Microsoft – P/E = 14.81Yahoo – P/E = 27.44Cisco – P/E = 18.75It is possible that Rackspace justifies the current valuation and that the company will shock and surprise investors with incredible upside when they next report earnings. That’s just what Google did when it went public. However, if the first earnings reports are anything less than spectacular – it’s likely that Rackspace won’t be worth $1.2 billion anymore.This content is provided courtesy of the managed dedicated server experts at HostMySite.com.