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 = 18.75
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.
About Derek Vaughan
Derek Vaughan has been actively marketing on the Internet since 1995. His extensive online marketing experience includes the online direct marketing of books for $300 million per year NYSE traded book publisher Thomas Nelson. Mr. Vaughan also marketed products online at the Walt Disney Company as the online marketing manager of ecommerce for ESPN.com. He was also the marketing manager for the launch of the NASCAR Online Store in October of 1999.
More recently Mr. Vaughan turned his attention to online marketing for the Affinity Internet, Inc. family of companies - which owns a broad portfolio of web hosting brands. Additionally, Mr. Vaughan served as Vice President of Marketing for Aplus.Net and helped them establish a strong position in the web hosting field. Derek has also serverd as the VP of Marketing at HostMySite.com.
Derek Vaughan holds undergraduate degrees from both Indiana University and Purdue University, and has earned a Master of Business Administration degree from the Owen School at Vanderbilt University.
Through his theWHIR blog, Derek will touch upon online marketing in the Web hosting space, web hosting events and industry trends.
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