Late last month, the CEO of Rackspace Hosting, Inc. (RAX) apologized to investors for the chaotic ride the company’s stock has been on. And while big drops might be fun at amusement parks, they aren’t quite as appealing when you’re on Wall Street. Unfortunately, over the last year, the Rackspace stock rollercoaster hasn’t been much more than a drop.
Shares of RAX gained around 3% on Wednesday, but that pop did little to stop the bleeding. The stock has still lost 9% since the start of the year and 55% over last year. The broader market has been struggling lately as well, but its losses only tally 3% and 6% for the respective time periods.
For those not familiar, Rackspace is a managed cloud company with a hybrid model. A hosting company at the core, RAX also lets businesses run their software on a private or public cloud. And while the cloud mega-trend is undeniable, so is Rackspace’s long list of competitors.
Public cloud giants like Amazon.com, Inc. (AMZN), Microsoft Corporation (MSFT) and Alphabet Inc (GOOG, GOOGL) are all in the same space, while companies like IBM (IBM) also offer similar IT services.
RAX Stock At Risk
Rackspace stock dropped signifcantly last year when “rival” AWS cut its prices. Since then, RAX has been positioning more products that run on top of competing cloud computing services, as mentioned.
While that shift is necessary, it hasn’t been as fruitful as investors would like. In the fourth quarter, Rackspace earnings came in slightly above expectations, but its first-quarter and full-year guidance disappointed, leading to several analyst downgrades. For all of 2016, the new consensus is for sales growth of just 7%.
Looking long-term, earnings growth is expected to be pretty strong. After the last year or so’s selloff, RAX is trading for 19 times forward earnings, with estimated long-term earnings growth sitting in the same neighborhood. But earnings estimates have already been sliding, and that could continue in coming quarters and years if the reported tech slowdown continues.
Folks have watched closely as Silicon Valley darlings like Twitter (TWTR), Yelp (YELP), GoPro (GPRO) and others struggled on Wall Street — for failing to post consistent profits, impressive enough growth or simply for being a risky bet in a rocky market. But the tech struggles are happening in the VC world too — a place where many folks have been calling “bubble” for some time.
VC funding slowed in Q4 — a trend that, should it continue, could affect Rackspace’s customers and in turn its sales and earnings. Put another way, RAX stock is priced for perfection … and that’s after a 55% one-year slide and barring any kind of slow down, whether from a shifting tech landscape or the slew of cloud competitors out there.
No wonder analysts have been souring on the stock. Barclays, Credit Suisse, Pacific Crest and more have all downgraded RAX recently, while the consensus is for little-to-no upside from current levels despite the aforementioned earnings growth.
When analysts are this bearish on a pick, it’s for the best to follow their lead.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
