NEW YORK (TheStreet) -- Shares in Rackspace (RAX) soared Tuesday, up 13.21% at the close following the company's third-quarter earnings beat Monday. After several quarters of mixed results, San Antonio, Tex.-based Rackspace delivered third-quarter earnings and revenue that grew 64% and 18% year over year, respectively. Plus, Rackspace announced a $500 million stock repurchase program.
Rackspace has given Wall Street just the kind of growth investors have bet on. That's all well and good, but it doesn't mean Rackspace -- which competes with Amazon (AMZN) and IBM (IBM) in cloud computing and web hosting services -- is any less risky than before.
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The chart below, courtesy of Google Finance, shows how Wall Street has been unable to make up its mind about Rackspace's direction and to what extent it can live up to high expectations.
To say that these shares have been volatile would be an understatement. At one point they were down 24% in the trailing twelve months through Monday's close of $37.32. Each peak is immediately followed by valley.
So with the stock now generating yet another peak Tuesday with a better-than-13% jump, it's tough to ignore that a corresponding double-digit decline is likely lurking around the corner.
To top it off, at a trailing price-to-earnings ratio of 71, these shares are now even more expensive then they were before. That trailing P/E is almost four times the average P/E of companies (21) in the S&P 500 (SPY) , according to CNN Money.
And even where there is optimism, there are also reason for worry.
For instance, an analyst at Credit Suisse raised the price target for Rackspace Tuesday to $45 from $40 while reiterating its outperform rating. The thing to consider here is that the stock is now trading above the12-month median target of $40, according to CNN Money, which suggests a potential decline of 4.3%.
What's more, CNN Money polled 24 investment analysts and the consensus is a hold rating. And while Credit Suisse is a little more bullish with its 12.5% price target boost, the firm also lowered its earnings per share estimates for 2014 and 2016 to 74 cents and $1.17 per share. That is down from 75 cents and $1.13 a share, respectively, from prior estimates.
Buying an expensive stock at a time when analysts are cutting profit estimates is not profitable formula -- not when there are better-performing and less riskier cloud names out there like Cisco (CSCO) and Hewlett-Packard (HPQ) that trade a P/Es of 16 and 13, respectively. And they pay yields of 3% and 1.8%, respectively, compared to no dividend for Rackspace.
The good news is that, as is evident in the company's third-quarter results, business conditions are improving and Rackspace's struggles are on the mend. Nonetheless, when adding larger players like Google (GOOGL) and Microsoft (MSFT) into the mix, it's tough to see an environment where Rackspace emerges the victor within the cloud.
Rackspace has received some much-needed breathing room. But the war for the cloud is far from over.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.