Make Room for Rackspace

NEW YORK (TheStreet) -- If you're in business for yourself or you work for a company with an online presence, you know how important it is to have a reliable "host" for your site.

This "host" has to have the powerful servers and applications needed to make your Web site operate smoothly and reliably. It should provide cloud computing services, be able to manage Web-based IT systems and have the capacity to do this for businesses of all sizes including large global enterprises.

The current heavy-weight in this vital technology is RackspaceHosting ( RAX) based in San Antonio, Texas.

They're so good at providing a Web hosting service for their clients that their business has been growing at a dizzying pace, with year-over-year quarterly earnings growth reaching 43% in the three-month period ending June 30.

Shares of RAX have been as hot as their business acumen, hitting a 52-week high of $65.26 on Tuesday, Sept. 11. More about the share price later. Suffice it to say this is one of the hottest tech stocks of 2012, mainly because they're a company that's good at what they do.

Earlier this summer Rackspace was named the 2012 Microsoft Hosting Partner of the Year, an award that recognizes managed, cloud and hybrid hosting. This marks the fourth time RAX has received this coveted honor. They were chosen from among 3,000 global Microsoft partners who applied.

This speaks to their commitment to partner very closely with Microsoft ( MSFT) and to grow their services in lockstep with the direction that Web hosting needs to go.

As the "newsroom" on the RAX Web site explains being selected as Microsoft's 2012 Hosting Partner of the Year was a very important way for RAX to separate themselves from their competition.

The news story went on to explain that this achievement was earned "...for demonstrating solution innovations and exemplary commitment to engaging with Microsoft."

"We have focused on hosted solutions for customers' business challenges, identified new market opportunities and along with Microsoft, used technology innovation to address customer needs. In addition, we've allowed our partners to leverage our innovation as the partner community becomes a more integral part of Rackspace and its business," exclaimed their news release. That's part of the brilliant business model that RAX has followed faithfully.

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 Salesforce.com ( 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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