alarm:clock

Storage - Monday, August 11, 2008

The RackSpace IPO In Perspective

Hosting giant Rackspace's IPO was followed by some dismal headlines: "Rackspace's IPO meltdown" "Rackspace's Painful IPO Signals Industry Worries," "Rackspace sparks tech IPO misery." Indeed Rackspace's price feel 20% on IPO day Friday. However, it has since recovered and is trading at $10.70 at today's close down from the IPO price of $12.50.

So we see a bit of a chicken little mentality to tech IPOs. The street expects them to fail. But over the next year or two we would expect holders of Rackspace stock to do fine. TheStreet.com hammers Rackspace in a post-mortem that harps on Rackspace's overuse of the buzzword Cloud Computing, as well as its CEO churn and deteriorating margins as well as outages.

Outages are a fact of life in Rackspace's field of hosting. We will never not have outages and in fact Rackspace has a good track record here. Margin deterioration also makes sense as Rackspace hires up. All of the criticism is rebuffed by strong numbers. In Q1, net income was $5.4M with Q1 revenues at $119.6M, up from $75.2M in the same period a year ago. Plus it has 33K customers.

We are not saying that Rackspace is a dream company but it is a fast growing, well run company in a field where the large rivals are few and far between .

We also can't blame Rackspace for the timing. It had filed for an IPO in 2001 and pulled that. At some point its investors need to get their cash out. Investors by the way include Norwest Venture Partners and Sequoia Capital.