This Tech Stock Crashed, Is it Time to Buy? – Rackspace Hosting, Inc. (RAX)

Granted this year has seen some improvement as indicated in this chart. Note how CapEx as a share of revenue fell in 2012 vs. 2011.

However, in these results RAX announced that CapEx for 2013 would be $375-445 million with customer gear expenditures of $235-275 million. Considering that the consensus revenue forecast for 2013 revenues is $1,640 the mid-point of these figures is 25% and 15.6% respectively. It’s an improvement but not by much, and it’s possible that RAX will struggle to beat this year’s free cash flow figure of $119 million.

Where Next for Rackspace?

And herein lies the problem. As I write, the stock price is around $60, which gives a market cap of $8.3 billion and enterprise value of 10.2 billion. In other words, it is only generating 1.1% of its enterprise value in free cash flow, and the forward PE ratio is around 41x.

The challenge for RAX is to successfully migrate customers onto its open cloud architecture and grow its installed base by convincing customers of its benefits. However, the real test of whether the company can grow into its evaluation will be when it convincingly demonstrates that it has the requisite scalability. The jury is still out.

The article This Tech Stock Crashed, Is it Time to Buy? originally appeared on Fool.com and is written by Lee Samaha.

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