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Make Room for Rackspace

Stocks in this article: RAX

RAX has emerged as the worldwide leader in not only offering Web hosting but also providing dedicated cloud services comprising customer management portal and other management tools for managing the data center, network, hardware devices, and operating system software.

They've spent a large amount of money building enormous data centers in areas where the land is inexpensive and so is the electricity. They need affordable energy to power the monster computers that host the tens of thousands of Web sites and the massive amounts of data that comprises them.

An article on the Oregon Live Web site states that RAX is planning to build a data center in Morrow County, Ore., where industrial power costs around 3.34 center per kilowatt. That's nearly 75% less than what a data center might pay in areas of California, for example.

The point is that RAX is cost-conscious and they pass on their savings to their customers, many of whom operate on tight IT budgets and want all the advantages of a great web host at affordable pricing.

Speaking of affordable prices, how do we explain RAX shares, which are selling at a current price-to-earnings ratio of nearly 98, and a forward P/E of 59? Looked at from a price-to-earnings-to-growth ratio, RAX shares are selling for two-and-a-half times their five-year expected growth rate.

Those kinds of growth rates are achievable for Rackspace if they can continue to drive earnings much higher which should equate to a lower PEG ratio. The one-year chart demonstrates the meteoric rise of RAX share price along with its 200-day moving average.

RAX Chart RAX data by YCharts

Who can say what is overpriced, when companies like (CRM), currently trading at $152.71, are trading with negative earnings last quarter and a forward P/E ratio of almost 77. It's PEG ratio (five-year expected) is an amazing 3.57!

Now I'm not saying this will happen, but if you'd like to own some shares I'd wait for at least a 10% correction in the share price. If you're a prudent and exceedingly patient investor, you may even see the stock pullback to the Aug. 22 low of $55.30, with a share price of $54.84 being a 15% correction from its Sept. 12 closing price of $64.52.

As Jim Cramer likes to say on his Mad Money TV show, "why not wait to buy it when the entire market has corrected," which may be sooner than many would like to believe. Stay tuned for Dr. Bernanke's quarterly report from the Federal Reserve on Thursday and if he disappoints, watch out below.

As of the time of publication the author held no positions in any of the companies mentioned in this article.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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