09.17.08 

rax: THE HOSTESS WITH THE MOSTEST; INITIATING COVERAGE ON HOSTING LEADER RACKSPACE WITH A HOLD RATING AND $10 PT
We are initiating coverage of IT outsourcing, or 'hosting' company, Rackspace Hosting, Inc. (RAX), with a Hold rating but have a favorable outlook on its business and growth prospects. Rackspace is a leader in hosting and has capitalized well on the needs of the SME market and the trends towards IT outsourcing. The Company also appears to be benefiting from the shift towards 'managed' hosting away from traditional dedicated (unmanaged) hosting, which was a low monthly cost way to run a server basically without any service or support, only hardware maintenance and connectivity. The trends in software-as-a-service (SaaS) also play into the growth we see for managed hosting, with the trend of internet-based SaaS applications accelerating growth in managed hosting, since previously most were large applications in self-hosted or colocation facilities. Although its business is incredibility capital intensive, we believe there is still rapid growth and medium/longer-term opportunities ahead in cloud computing and application hosting/delivery for Rackspace. We also expect cash flow (free cash flow specifically) and EPS (leverage and % of revenues) to improve as the company matures in the years ahead (medium-term). We believe fair value on the shares currently is around $10, which represents 8x our estimated 2009 EV/EBITDA. Contact Us for Full Report - PDF