The firm said it lowered its rating on the managed cloud company based on a valuation call.
D.A. Davidson said it expects the company to show "steady top line and EBITDA growth over the next several years."
The firm also said that once the company stopped looking for "strategic alternatives," its stock "rebounded significantly."
Now that Rackspace has moved away from the competitive cloud market, D.A. Davidson said it's ready to focus on "its core competency of 'fanatical service'."
Shares of Rackspace are lower by 2.81% to $45.95 at the start of trading on Friday morning.
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 increase in net income, robust revenue growth and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we find that the company's return on equity has been disappointing."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Internet Software & Services industry. The net income increased by 57.8% when compared to the same quarter one year prior, rising from $16.31 million to $25.74 million.
- Despite its growing revenue, the company underperformed as compared with the industry average of 28.1%. Since the same quarter one year prior, revenues rose by 18.3%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- Net operating cash flow has slightly increased to $125.43 million or 9.49% when compared to the same quarter last year. Despite an increase in cash flow, RACKSPACE HOSTING INC's cash flow growth rate is still lower than the industry average growth rate of 25.78%.
- RACKSPACE HOSTING INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth 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. This year, the market expects an improvement in earnings ($0.71 versus $0.60).
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. When compared to other companies in the Internet Software & Services industry and the overall market, RACKSPACE HOSTING INC's return on equity is below that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: RAX Ratings Report