Rackspace Hosting (RAX) Stock Drops After Analyst Action

NEW YORK (TheStreet) -- Shares of Rackspace Hosting (RAX) closed down 0.60% to $43.36 after Jefferies lowered its price target to $46 from $48 and reiterated its "hold" rating for the San Antonio, TX-based managed cloud company

Continued weakness in adoption of the company's OpenStack-based services by larger enterprises and the notion that companies may choose to hire cloud engineers to manage cloud workloads rather than outsource support resulted in Jefferies changing its price target, the analyst firm noted.

"Although RAX prides itself on customer service differentiation, long-term, we are concerned about a crowded market with competitors that have significant scale and market recognition," said Jefferies analyst Mike McCormack. "Despite pursuing a more hands-on approach to cloud support, RAX is likely to be impacted by price deflation from large scale public cloud operators."

Currently, the company is pursuing supporting workloads on third party cloud platforms and if successful, the addressable market would be significantly higher, according to Jefferies.

Separately, TheStreet Ratings team rates RACKSPACE HOSTING INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate RACKSPACE HOSTING INC (RAX) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, growth in earnings per share, increase in net income and solid stock price performance. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • RAX's revenue growth has slightly outpaced the industry average of 5.8%. Since the same quarter one year prior, revenues rose by 14.0%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • Although RAX's debt-to-equity ratio of 0.14 is very low, it is currently higher than that of the industry average. To add to this, RAX has a quick ratio of 1.72, which demonstrates the ability of the company to cover short-term liquidity needs.
  • RACKSPACE HOSTING INC has improved earnings per share by 11.1% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, RACKSPACE HOSTING INC increased its bottom line by earning $0.78 versus $0.60 in the prior year. This year, the market expects an improvement in earnings ($0.87 versus $0.78).
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Internet Software & Services industry average. The net income increased by 11.6% when compared to the same quarter one year prior, going from $25.45 million to $28.40 million.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 54.67% over the past year, a rise that has exceeded that of the S&P 500 Index. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.
  • You can view the full analysis from the report here: RAX Ratings Report

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