In a note published Tuesday, Morgan Stanley upgraded the open cloud company to "overweight" from "equal weight" with a price target of $45. The firm pointed to Rackspace's previous under performance but believes the company has metrics in place to overcome its hurdles.
"Rackspace's stock underperformance since 2013 has been driven primarily by a deceleration in revenue growth, concerns of increasing competition, and the retirement of its CEO in February 2014. We believe Rackspace is beginning to provide satisfactory mitigants to these factors, which may help ease the pressures on the stock performance going forward," the note said.
Separately, TheStreet Ratings team rates RACKSPACE HOSTING INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate RACKSPACE HOSTING INC (RAX) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, feeble growth in the company's earnings per share and deteriorating net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Despite its growing revenue, the company underperformed as compared with the industry average of 16.4%. Since the same quarter one year prior, revenues rose by 15.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Although RAX's debt-to-equity ratio of 0.06 is very low, it is currently higher than that of the industry average. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.48, which illustrates the ability to avoid short-term cash problems.
- The gross profit margin for RACKSPACE HOSTING INC is rather high; currently it is at 67.21%. Regardless of RAX's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, RAX's net profit margin of 5.09% is significantly lower than the industry average.
- RACKSPACE HOSTING INC's earnings per share declined by 33.3% in the most recent quarter compared to the same quarter a year ago. Earnings per share have declined over the last year. We anticipate that this should continue in the coming year. During the past fiscal year, RACKSPACE HOSTING INC reported lower earnings of $0.60 versus $0.75 in the prior year. For the next year, the market is expecting a contraction of 0.3% in earnings ($0.60 versus $0.60).
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Internet Software & Services industry. The net income has significantly decreased by 30.4% when compared to the same quarter one year ago, falling from $29.91 million to $20.80 million.
- You can view the full analysis from the report here: RAX Ratings Report