I'll get past the financial metrics quickly. The stock is trading around 10X 2012 EV/Adjusted EBITDA and 9X forecasted 2013 EV/Adjusted EBITDA. The 2013 multiple is based on an approximately 33% Adjusted EBITDA margin. If you assume approx. 16% y/y revenue growth in 2014 and 2015 along with Adjusted EBITDA growth back to the mid to high 34% margin range. The stock is trading at around 7X 2014 EV/Adjusted EBITDA multiple and around 6X 2015 EV/EBITDA multiple.
If you place a 12X multiple-which has been discussed as a reasonable multiple within the industry- to the 2015 Adjusted EBITDA (add back in the cash and subtract debt to get the equity value...and divide by shares outstanding)-- the stock is worth $60+.
Here's why I believe the stock works mid to long-term.
First things first. Rackspace will not control OpenStack- whatsoever. Red Hat...HP.... whoever...can go control OpenStack. And, by control I mean controlling the rollout of new OpenStack upgrades and iterations (much like Red Hat already does with Linux).
Control here by Red Hat would actually end up being quite fruitful for Red Hat- given the developer momentum and support around OpenStack (unlike any other open source cloud initiative to date), I believe it will become a predominant standard within cloud computing that Red Hat could potentially monetize.
Here is why RAX succeeds:
Assuming OpenStack makes exceptional progress in the next 24 months and increases mind share among enterprise customers through marquee customer acquisitions etc... I believe Rackspace wins by being the key SUPPORTER of OpenStack. No- not the key cheerleader. Not the key marketing body behind the code and not the key supporter of code development.... I mean the key supporter as in the company best at supporting/hosting the code.
The Red Hat's of the world will support the development and iterations around the code (potentially) but Red Hat doesn't have the experience supporting or hosting cloud computing standards in public cloud environments. This goes for anyone else with a hand in OpenStack. Develop and iterate and try to control all you want. Duke it out. Go ahead... but when that Fortune 500 company needs support on the actual hosting of the iteration you fought to develop and control... you no longer have the leverage. And, you're probably fine with that. Because Rackspace does it best, they're a hosting company.
Rackspace- as they do now with customers- will gladly deploy, host and support your OpenStack environment within your four walls, or within their four walls (either on dedicated hardware or their public cloud). And, as cloud adoption transitions from the early adopters to a more pragmatic enterprise purchaser- this Rackspace support will become even more crucial. Add even more emphasis around said hosting support when you take into account that OpenStack is driven by an open source community and the development/upgrade/iteration cadence of the code will likely maintain a fairly brisk tempo of change.
I don't believe Amazon Web Services is going to get into the business of supporting the intricate hosting of a constantly changing code base in order to make different iterations run optimally for different enterprise customers.
Enterprise customers will want to use OpenStack but equally prioritize the ability to seamlessly deploy and host the changes and optimizations made around OpenStack by the open source community.
Rackspace will become the Red Hat of OpenStack on the hosting side of the business- not the software development side of the business.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.