NEW YORK (TheStreet) -- Cloud computing may be considered a high-growth industry, but Rackspace Hostings (RAX) is struggling amid stiff competition. Its shares have plummeted some 31% in 2015 (and 25% in three years), and with second-quarter earnings results due out Monday after the closing bell, now's not a good time to place a long-term bet on RAX stock.
Rackspace, headquartered in San Antonio, is approaching a period where growth will be harder to come by. And even though it has shown modest signs of improvements and profit growth, competition from larger players like Google (GOOGL - Get Report) and Amazon (AMZN - Get Report) continues to pressure its margins while eating into its revenue stream. Complicating matters, Microsoft (MSFT - Get Report), which has grown its commercial cloud business by an average of 100% in six straight quarters, is showing no signs of slowing down.
And here's the thing: Rackspace stock isn't cheap, either. Despite its struggles and competitive threats, its shares are still trading at 43 times earnings, which is more than twice the average for stocks in the S&P 500 (SPX) index. As for next year, based on consensus earning-per-share estimates of $1.10, Rackspace is still valued at 30 times forward earnings, against a forward P/E of 17 for the broader market.
Not to mention, the average analyst EPS estimate for the just-ended quarter has declined 9% since the quarter started. During that span, full-year EPS estimates for the quarter ending in December are also down more than 6%. Second-quarter earnings are now expected to be 20 cents a share, up from 16 cents last year, while revenue is projected to climb 11% year over year to $490 million.
So, where's the value?
Here we have estimates being cut on an expensive stock that's suffering from stiff competition from bigger rivals with deeper pockets. Not to mention, these rivals have other businesses beyond the cloud that generate the lion's share of their revenue and profits. That's not a great combination for Rackspace. And its tough to see a scenario -- beyond an acquisition -- where Rackspace emerges as a victor in this crowded market.
For these shares to make sense as a buy today, Rackspace must grow revenue by at least twice the rate of the 12% that it's projected to grow for fiscal 2015. The 17-year old company is being priced like a start-up, even though it's not growing like one. That's an important distinction new investors must make, and as evidenced by the decline in the stock, some have already figured that out.