I remember the heady days when Rackspace first went public. Think back to early August 2008 - before the market crash and all the bank failures. Rackspace had successfully launched its stock on the New York Stock Exchange. For those that may not know, here is how Rackspace described its business in its S-1 filing with the SEC:
”Rackspace Hosting is the world’s leader in hosting. We deliver websites, web-based IT systems, and computing as a service. Our rapid growth is the result of our commitment to serving our customers, known as Fanatical Support, and our exclusive focus on hosting. Our financial success is the result of responsible financial management and our disciplined, just-in-time approach to capital investment. During 2007, we had net revenue of $362.0 million. As of December 31, 2007, we served over 29,000 business customers of all sizes with more than 36,000 servers, over 700,000 business email accounts, and more than 32,000 cloud hosting domains. To deliver on our Fanatical Support Promise to our customers, we have created a culture that encourages passionate, engaged employees who we call “Rackers.” In 2008, Fortune magazine ranked Rackspace Hosting #32 on its list of ‘100 Best Companies to Work For’.”
Shortly after the IPO, on August 20 to be exact, I wrote an op ed piece asking the question, ”Is Rackspace Really Worth $1.2 Billion?”. The point of the piece was that even though Rackspace had lost 20 percent of its value, the price to earnings ratio was higher than Google, Microsoft or Yahoo. Remember that it is a bit hard to compare non hosting businesses to hosting businesses. Also Rackspace competes in the managed hosting space (IT hosting, they call it) - not the VPS or budget hosting space.
I went on to speculate that:
”It 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.”
Oh how times have changed. I took a look at the valuation of Rackspace since August 12, 2008 and compared it to the performance of the Dow Jones Industrial Average during the same period. Neither investment looks particularly good, as you might imagine. The Dow Jones Industrial Average lost 24.9 percent of its value. Ouch. Rackspace, however, lost twice as much declining an eye popping 50.8 percent. So if you had put your life savings into Rackspace on August 12, 2008 (just about 10 weeks ago) you would have lost half of your money.
So does that mean that now is a great time to buy Rackspace? The price to earnings ratio is way better now, having declined from around 60 times earnings to a more reasonable 30.8 times earnings as of the close of business on October 17, 2008. The key to this answer lies in your confidence that Rackspace will do exactly what they said that they would do when the stock was launched. Here is what the company stated it would accomplish:
”Our vision is to be recognized as one of the world’s great service companies. Our goal is to expand our leadership position in hosting around the world, and our strategy for accomplishing this goal includes the following key elements:
Add New Customers. We intend to continue our focus on aggressively acquiring profitable new customers.
Keep Existing Customers for Life and Sell Existing Customers More Services. When we serve customers well, they generally stay with us and buy more services. This means each customer has the potential to generate significant lifetime economic value.
Add New Services. Our goal is to add new services to meet our customers’ growing needs.
Expand Globally. We intend to expand further into continental Europe and to Asia.
Continue to Invest in Our Culture and Hire the Best People. We intend to continue our highly selective hiring process and maintain a work environment that encourages passionate, engaged Rackers.”
At this stage in the stock market cycle, I tend to become bullish on Rackspace. I believe that the company can execute well on the above-listed objectives. I think the company has done a great job of positioning itself as the leader in high end hosting and will add new customers at a steady rate. The global expansion seems to be going well. While I am not advocating putting your life savings into any one stock (have a well balanced portfolio to reduce risk) I think that Rackspace is a much more attractive investment at 50 percent off.
This content was written by Derek Vaughan exclusively for hostdiscussion.com.