From Motely Fool - READ THE WHOLE ARTICLE - Good point counterpoint arguments to consider.

(No investor ever beats the market without knowing how to value companies. The numbers are that important -- and they suggest that Rackspace Hosting (NYSE: RAX) is overpriced.

In particular, I mean numbers like these:

Negative free cash flow after accounting for the impact of debt and capital needs.
A trailing P/E ratio of 82.
"Unlike many other internet companies, Rackspace Hosting is somewhat capital-intensive," CAPS All-Star mrindependent recently wrote. "It needs to reuse its capital to build more and more computer capacity. I like the company's market niche and growth opportunities, but I think it is significantly overvalued at 5.5 times book value and 56 times estimated 2009 earnings. Insiders are heavy sellers around $15."

Dozens of mrindependent's peers agree:

Metric
Rackspace Hosting

Recent price
$16.77

CAPS stars (out of 5)
***

Total ratings
227

Percent bulls
91.2%

Percent bears
8.8%

Price-to-book
6.56

ROE
12.0%

% Above 52-week low
319.3%

Sources: CAPS, Capital IQ. Data current as of Oct. 28.

Numbers do lie, sometimes
So a lot of smart people think Rackspace is overpriced. And by the numbers, they're right. To paraphrase:

The more you know about the business, the less valuation matters. Conversely, the less you know about the business, the more valuation matters.

It makes sense, doesn't it? Valuation is an imperfect science that we use to reduce risk as investors.

Growth is the problem. Growth is the key driver for all valuation equations, and for techies, it's frequently unpredictable and underappreciated. Think of Apple (Nasdaq: AAPL), whose $1.82 in fourth-quarter per-share earnings beat the consensus estimate by a whopping 28%.

This is a frequent problem among disruptive techies. Ask anyone who follows salesforce.com (NYSE: CRM), Netflix (Nasdaq: NFLX), and Amazon.com (Nasdaq: AMZN). Wall Street has a history of swinging and missing in its attempts to predict earnings and pin a value on these businesses and their rebellious peers.

If not numbers, then what?
Analysts would have done better to look at the underlying qualities of these companies and ask why they were growing so quickly. They would have found:

Leading positions in massive growth markets.
Excellent management.
An underappreciated ability to invest for above-average returns.
Rackspace has all three. Its market opportunity is the same one driving growth for salesforce.com, NetSuite (NYSE: N), VMware (NYSE: VMW), and many others: cloud computing. It's a multibillion-dollar business today, and researcher Gartner predicts it will become a $150 billion global market by 2013.

What's more, two of Rackspace's three co-founders retain an active role in the business, and their passion for customer service has become a corporate obsession. Customers have become fans, and more of them are coming through the door: 8,700 more in the last quarter alone, a 14% increase.

Skeptics will note how much debt Rackspace carries. What they miss is that debt is down $90 million from January, and that management has produced a 7.5% return on capital over the past 12 months, higher than 6% maximum interest rate the company was paying as of the end of fiscal 2008.

The Foolish bottom line
Finally, I'll admit to a bias here. Rackspace Hosting is one of my outperforming picks for Motley Fool Rule Breakers. I still like it at these levels for all the reasons you just read, and because history tells me that even 100 P/E stocks outperform when the conditions are right. Rackspace couldn't be better-positioned than it is now.

But that's my take. Now it's your turn. Do you think Rackspace is a buy at these prices? Please vote in our poll and then add your comments in the box below. We'd love to hear from you.