What has happened to my old company RAX? I hope they don’t kill it…

Nov 16 2011

I hope they don’t crush the company… looks like management is cashing out – and fast. 🙁

“Fanatical” Insider Sales

Maybe the company’s management team is seeing the same thing I am seeing because if you look at the SEC filings on RAX you’ll see some insiders with itchy trigger fingers. It appears that the only thing more “Fanatical” than their service is the insiders yearning to rid themselves of this company’s shares. In the last 6 months according to Yahoo finance there have been 60 transactions involving 3.5m shares sold. Zero shares have been bought. If you assume an average price of $35 that’s over $120m in six months extracted by management.

In Conclusion

The business model around outsourced Infrastructure Technology is severely flawed. RAX’s current stock valuation (91x tailing EPS and 53x forward, nearly 11x book value and 6x sales) makes this situation perilous. RAX is rapidly expanding and the returns do not justify the spending. The industry is growing more competitive which will relentlessly drive margins lower over long periods of time. This will prove especially deleterious in a down turn. In the short run the ramping up of cap-ex by RAX and competitors represents a dangerous new phase with much higher risks, and an even more inevitable outcome.

via Rackspace: A Poor Business Model That’s Severely Overvalued – Seeking Alpha.

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