Rock My Rack
Company: Rackspace Hosting, Inc.
Symbol: RAX
Current Price: ~$10.40
Summary (per yahoo): Rackspace Hosting, Inc. provides information technology systems and computing as a service for businesses worldwide. It delivers enterprise-level managed services, such as Websites and Web-based information technology systems. The company’s portfolio of hosted services includes managed hosting, email hosting, cloud hosting, and platform hosting. It offers hosting solutions comprising virtualization, security services, email services, database services, storage and backup, reporting and administration, and professional services for small businesses, medium to large businesses, software as a service providers, and Web designers and developers. The company was founded in 1998 and is headquartered in San Antonio, Texas.
2007 Net Income: $17.8M
A profitable tech? More specific, a profitable *IPO* tech? Shocking. I’ve never paid big money for a rack, but everything I hear says it’s a booming business (bada bing?). Seriously though, it IS a growing industry and there is no real reason for RAX to suddenly become a money losing business.
RAX has to be MORE than a money making business though. It has to be an exploding business, one that continues to grow at 60%/yr over the next four years or so. An influx of over $100M from the IPO is certainly going to help reach that goal by aiding in capital investments for new capacity (either directly or through debt reduction). Asking any business to do this is always a risky proposition, although some do manage to succeed.
You may remember that I steered away from a different company (Intuitive Surgical) for similar reasons, but there are some differences:
- Known competition: No surprises in this industry as far as competition. RAX has several established competitors and knows that it must constantly increase the value of its product for its customer to survival. RAX is certainly at no risk of resting on its laurels at this time.
- Customer Savings: Unlike an expensive medical tool, RAX’s product is easily marketable in both down times and up times. Every potential client is looking for ways to cut costs while maintaining/enhancing their technical abilities, which are both things that RAX offers. It’s one thing to pitch a million dollar machine based on superior surgical results for the patient and long term revenue enhancements, it’s another to pitch immediate cost savings to a profit seeking corporation.
Sounds good, but there is also the regulation tech industry draw back: over-build. My brief in-depth research suggests that there has been significant expansion in the hosting industry and therefore greater than normal opportunity for some rough times should demand for services not continue to increase at the expected rate (think hi-speed internet infrastructure build out in the late 90’s that collapsed in the dot com bust). The strong rise stronger for the shake out, but it’s not something you want to be a shareholder for.
So what’s RAX worth? After the IPO there are about 115.4 million shares outstanding. Yahoo tells you that there are 101 million shares outstandings, but Yahoo is essentially retarded and never gets an IPO’s shares count right. I’m right. Check it with the man.
Heck, that document in the link has all the numbers.
Anyway, so 115.4M at about $10.40 a share amounts to about $1.2 billion dollars. That’s fairly steep for a company that pulled in $17 million in profit last year, but if it can achieve 60% growth, then it’s worth it.
But wait! There’s more.
22.8 million extra shares in existing options and warrants and an extra 6.8 million shares “available for grant” under employee incentive plans. Wicked! So YOU think there’s 115.4 million shares, but really there’s 145 million shares. The “strike price” on the options are all either significantly below the current stock price (making at least a handful of employees instant millionaires) or about what it’s trading for right now. As a shareholder you would HAVE to hope these options get exercised, because if they don’t that means that stock price has never gone up any.
So 145 million shares at $10.40 = $1.5 billion! WOW! After all that, I can admit that if RAX holds the 60% line, it’s still fairly valued. Still maybe even undervalued even. If you could promise me 60% growth, it could be worth $30 in five years or so. If you only get 50% though, it drops to more like $22. And if it’s just a puny 40%/year, well, I’d probably only give you about $12 for that.
So there’s definitely some range here. What would I recommend?
Hell, I don’t know. How much more can the Western market for this product grow? Let’s not talk about China… if you think an American company is going to bust into the dragon’s lair and storm the nacent hosting sector their, I’ve got a Georgian military offensive to sell you. If you want, let’s consider stateside demand for the service by Chinese firms. Let’s not worry about India, as I’m fairly confident that they’ll take care of their needs in house. I hear they have some tech labor over there.
You figure out how much room is left in the US, Canada, Europe… maybe even South America and Africa. Then you’ll have a better idea how long RAX can keep up the growth. I couldn’t even begin to claim to have the beginnings of an idea, though.
I would, however, recommend waiting 6 months before buying into RAX. Use it to research the stock if you want. Why 6 months?
That’s when pre-ipo shareholders can begin to sell their stock. It might not hurt the price, but it won’t help it either.
