What Ails The Rackspace Stock?

What Ails The Rackspace Stock?

What Ails The Rackspace Stock?

Rackspace US, Inc. (NYSE: RAX), a IT hosting company based in San Antonio, Texas, has long been a darling of the cloud computing industry. Established in 1998 and gone public in 2008, Rackspace is one of the early success stories of the cloud computing revolution. However, its recent stock performance, in spite of revenue increases, has given investors cause for worry.

Here’s an analysis of the situation.

The following table from stock analysis website The Street brings into focus the relative non-performance of Rackspace in stock ROI as compared to other parameters. Like many tech companies, Rackspace does not pay dividends and hence, its low score on that factor is not of importance. Even Google and Microsoft would score poorly on that measure.


 Source: The Street (http://www.thestreet.com/r/ratings/reports/detail/RAX.html)

The Rackspace stock has lost 25% of its value in the last two months. While this may offer a great buying opportunity, as indeed many financial advisors believe, a comparison with peer Red Hat does raise some interesting issues. For one, on comparable revenues, Red Hat delivered 50% more profits than Rackspace. The inevitable question on Rackspace’s low operating margins follows.

Secondly, even with the price decline, Rackspace still trades at a considerable premium in terms of price-to-earnings ratio as compared to its peer group. This brings to mind the question whether the price correction was actually justified.

Source: The Street (http://www.thestreet.com/r/ratings/reports/peergroup/RAX.html)

There’s another cause for concern as pointed out by financial analyst Will Ashworth. He says that Rackspace is heavily depending on OpenStack – the open-source cloud computing project launched by Rackspace and NASA – to drive future growth (See: Archives: Open Stack). However, too many companies may be involved in OpenStack’s development, leading to the proverbial “too many cooks spoil the broth syndrome”. On the other hand, competing cloud computing platform Eucalyptus is already up and running. With the important first-mover advantage, Eucalyptus may very well steal a march on OpenStack.

In conclusion, while Rackspace still seems to be a good bet (it’s still “racking” up impressive revenue growth numbers), its management has its work cut out to ensure its top rating in the cloud computing stakes.

By Sourya Biswas

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