Rackspace Needs to Find Its Rhythm

Finally, there is the question of valuation. Rackspace has 115.4 million shares outstanding, which gave it a valuation of $1.16 billion at Friday's close, or 3.2 times last year's revenue. That's not bad, but it's also 64.8 times 2007 net profit.

Remember, Rackspace's net profit is up only 7% so far this year. Unless profit grows much faster in the last half of the year, it's hard imagining Rackspace with a forward P/E below 60, a rich valuation given we're seeing the harshest climate for tech IPOs in several years.

Rackspace shows a lot of promise, setting a strong foothold in a growing niche. But there are a number of questions hanging over it: Were the accounting mishaps a one-time incident? Can it leverage all the new hires into stronger profit growth? Can it overcome recent outages and strengthen client loyalty?

Until these issues become clearer, Rackspace will have a hard time justifying its high valuation. Which means another recent IPO of a well-run company could be poised for further declines.