Rackspace Stock Trades In The Clouds But Analysts Warn The Party Could Slow

May 13 2014, 4:40pm CDT | by

IT-hosting and cloud-computing company Rackspace is trading in the clouds — up nearly 10% after Tuesday’s market action — on the heels of better-than-expected first quarter earnings results. But as the company celebrates its earnings beat and stock rally, more than a few analysts have issued words of caution about the company’s growth potential and future market performance in light of increased competition from technology giants Amazon, Google and Microsoft.

Rackspace reported $421 million in first quarter revenue after the closing bell Monday afternoon, beating the Street consensus of $419 million and marking a 16% increase over sales recorded during the same time in 2013. Net income for the quarter came in at $25 million, resulting in earnings of 18 cents per share, a penny below earnings from the year-ago quarter but six cents above the 12-cent per-share analyst estimate. Investors cheered the earnings beat, sending shares of Rackspace surging in after-hours trading Monday; the stock sustained those gains in early Tuesday trading, going on to open to a 14% pop and trade at or near a 10% gain throughout the day.

However, several different analysts issued lower price targets for Rackspace on Tuesday, issuing words of caution that highlighted everything from the competitive cloud computing landscape to lower selling, general and administrative expenses that slow growth in the future.

“The company will be challenged to differentiate itself from competitors and achieve sufficient pricing to deliver excess returns on capital,” wrote Morningstar analyst Rick Summer in a note on Tuesday, adding that Rackspace competes with Amazon, Google and Microsoft and could be hard-pressed to keep up, especially in light of the giants cutting the price to access their cloud infrastructure services.

“In the ‘unmanaged’ cloud segment, we aren’t convinced Rackspace can avoid the competition and believe it is likely to experience slowing growth or limited profitability for its public cloud offerings,” Summer said. “Either way, we remain concerned that Rackspace will not be able to earn returns above its cost of capital over any meaningful period.”

Morningstar has a $19 per share fair value estimate for Rackspace; the research agency has one of the lower price targets for the cloud-focused company. Other investment firms have higher price targets, even after Tuesday’s revisions: Canaccord Genuity, for instance, lowered its price target from $39 to $35.

“Without a permanent CEO and with increasing levels of competition from competent competitors, we remain concerned for this subsector in the second half of the year and remain cautious on the stock,” wrote Canaccord’s Greg Miller, referencing the departure of Lanham Napier, who retired as Rackspace CEO in February. Graham Weston, Rackspace co-founder, is serving as interim chairman.

Miller added that it is due to the aforementioned competition as well as the company’s lower SG&A spending that resulted in the lower price target.

Stephens’ analyst Barry McCarver, too, cited competition from Amazon, Google and Microsoft in his note about Rackspace but said it had little to do with lowering the Stephens Rackspace price target from $59 to $41. “Rackspace has suffered from headline risk and confusion about the exact service that it offers,” McCarver wrote on Tuesday, but going on to note that Rackpace management made sure to explain the difference between its services and Amazon Web Services/Google Cloud/Microsoft Azure, and in so doing got off to a “strong start” in re-branding. “While we lowered our price target, that was mainly due to trading patterns and the volatility that Rackspace’s stock has experienced and not our belief in the company.”

Analysts from Nomura, Wells Fargo and UBS issued similar sentiments, lowering Rackspace’s price target but attributing the revision less to a significant problem with a company than to a new EBITDA calculation. Nomura analyst Adam Ilkowitz lowered his price target from $42 to $39; Wells Fargo analyst Gray Powell lowered the stock’s target range from $48 to $51 per share to a target range of $38 to $41 per share, based on 7.5 to 8 times Rackspace’s 2015 EBITDA; and UBS analyst Steven Milunovich lowered his price target from $38 to $34, noting, “the stock got deeply oversold and this solid report should calm some fears, but we think the competitive dynamics will make the long term model difficult to achieve.”

Shares of Rackspace traded for gains around 10% throughout the day on Tuesday and eventually closed for an 8.5% gain despite all the price target revisions. Year-to-date, however, the picture still isn’t pretty: the IT provider is down a whopping 26.9% since the first day of 2014 trading. Shares of Amazon, Google and Microsoft, meanwhile, finished Tuesday with modest gains ranging from 0.6% to 1.1%.


Don't miss ...


<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.


blog comments powered by Disqus

Latest stories

The Black Friday 2014 Sales You can Shop Today 11/26
The Black Friday 2014 Sales You can Shop Today 11/26
Over 20 Black Friday 2014 sales are already launched. Get the deals early to get your head free for the hard to get Black Friday deals to be released on Thanksgiving Day.
Pakistan blocks three Saarc connectivity pacts; Modi, Sharif avoid meeting (Roundup)
Kathmandu, Nov 26 (IANS) Pakistan Wednesday played spoilsport by blocking three major Saarc connectivity projects initiated by India, even as Indian Prime Minister Narendra Modi conspicuously avoided meeting his Pakistani counterpart Nawaz Sharif while he met five other South Asian leaders here.
One-third of Libyans suffer mental health problems: Report
Tripoli, Nov 26 (IANS) Human rights violations in Libya have left nearly a third of the population suffering from mental health problems, according to a new report.
1.7 kg of drugs found in Iranian's stomach
Tehran, Nov 26 (IANS) Narcotics weighing 1.7 kg have been found in the stomach of a 20-year-old man in Iran's northeastern Khorasan Razavi province, police said.

Latest from the Network

The Black Friday 2014 Sales You can Shop Today 11/26
While most Black Friday 2014 ads state that Black Friday 2014 sales start on Thanksgiving Day, we are already seeing more than 20 Black Friday sales that are live online and even several that launched in stores. The...
Read more on Celebrity Balla
Tori Spelling wants to display breast implants
Tori Spelling wants to get her breast implants removed and display them in a glass dome on her wall. The 41-year-old reality TV star is keen to have her fake boobs taken out because they have ''expired and recalled''...
Read more on Celebrity Balla
Prince leaves social media
Prince has removed himself from social media. The 'Little Red Corvette' hitmaker has deleted his Instagram, Twitter and Facebook accounts and removed his work from YouTube and Soundcloud, just a year after joining the...
Read more on Celebrity Balla
Party-pooper Pharrell Williams
Pharrell Williams says asking him if he wants to go out partying is like asking a McDonalds worker ''if they want chicken nuggets for dinner''. Despite being a successful singer, the 41-year-old star insists he's not a...
Read more on Celebrity Balla
43 IS militants killed in clashes with Iraqi Kurds
Mosul (Iraq), Nov 26 (IANS/EFE) At least 43 members of the Islamic State (IS) Sunni radical group were killed in clashes with Peshmerga Kurdish troops near the strategic Mosul Dam near the northern Iraqi city by that...
Read more on Politics Balla
Five soldiers killed in Yemen Al Qaeda attack
Sanaa, Nov 26 (IANS) Five soldiers were killed in a massive attack by suspected Al Qaeda miltants against a Yemeni military base in the southeastern province of Shabwa Wednesday, a police source said. The source told...
Read more on Politics Balla
Pakistan blocks three Saarc connectivity pacts; Modi, Sharif avoid meeting (Roundup)
Kathmandu, Nov 26 (IANS) Pakistan Wednesday played spoilsport by blocking three major Saarc connectivity projects initiated by India, even as Indian Prime Minister Narendra Modi conspicuously avoided meeting his...
Read more on Politics Balla
IS pamphlets distributed in Pakistan
Islamabad, Nov 26 (IANS) Unidentified people have distributed pamphlets of the Islamic State (IS) Sunni radical group in Pakistan's South Waziristan tribal region, residents who have seen the pamphlets said Wednesday...
Read more on Politics Balla
Three policemen shot dead in Egypt's Sinai
Cairo, Nov 26 (IANS) A police officer and two recruits were shot dead Wednesday by unidentified gunmen in Arish city in North Sinai province, a security source told Xinhua. "The militants set an ambush for a police...
Read more on Politics Balla
Ferguson burns as racial protests spread across US
Washington, Nov 26 (IANS) As night fell, Missouri state in midwestern United States deployed more security forces to quell violence in Ferguson after a grand jury failed to indict a white police officer in the August...
Read more on Politics Balla