Successful investing demands a careful balance between confidence in
your own subjective analysis and a willingness to acknowledge that you
may be wrong. When I last wrote on Rackspace (NYSE:RAX)
back in February of 2012, I thought the stock looked overpriced and was
trading far more on the mania over all things “cloud” than on credible
projected cash flow streams.
What I didn't mention at the time was that my fair value was less than
half of the current stock price. Such a dramatic difference of opinion
with the market led me to revisit the numbers repeatedly, and things
didn't look so good for that call as the stock climbed into the high
$50s, came back down into the $40s, and then rocketed up to the high
$70s earlier this year. Then the worries about growth, competition and
margins started to take hold – leading to a nearly 50% drop to today's
price just below $40 (as of this writing).
As it sits today, my concerns about Raxspace really haven't changed.
While I believe gross demand for managed hosting and cloud platform
services will be strong, I believe Rackspace will be hard-pressed to
create any sort of economic moat in this market or produce the sort of free cash flow
necessary to validate even today's lower share price. I continue to
appreciate why investors like Rackspace as a play on cloud and
outsourced services, but I fear Rackspace will be laid low by
commodity-like profitless prosperity.
Read more here:
http://www.investopedia.com/stock-analysis/050913/overheated-expectations-send-rackspace-investors-torture-chamber-rax-amzn-goog-ibm.aspx
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