Rackspace Hosting, Inc. (RAX): The Silver Lining in Its Cloud Earnings

Rackspace Hosting, Inc. (RAX) saw some heavy dumping of its stock on news of its latest quarterly results, but the selling has since subsided.

Rackspace Hosting, Inc. (RAX): The Silver Lining in Its Cloud EarningsRAX stock is now up about 2% as of Wednesday afternoon trading. This, however, is little consolation for existing shareholders who have held RAX stock through its 63% gutting over the past year.

Yet, maybe there is some kind of bottom here? Perhaps. But let’s first take a look at the earnings.

In Q4, Rackspace reported profits of 24 cents a share and revenues of $523 million, compared to the Wall Street consensus of 23 cents and revenues of $521.4 million.

Guidance, however, was the main issue for investors. In the current quarter, Rackspace expects revenues between $517 million and $521 million, and estimates full-year numbers between $2.08 billion and $2.16 billion.

The consensus, on the other hand, was for $530.68 million for the quarter and $2.21 billion for the year. Despite all this, the fact remains that the business is still fairly healthy and the company remains a top player in the fast-growing cloud business.

Interestingly enough, Rackspace smartly broadened its footprint by providing high-end services for mega operators like Amazon.com (AMZN), Microsoft (MSFT) and Red Hat (RHT). This is important since it is common for companies to actually have multiple clouds.

While the effort is in the early stages, there are already indications of traction. In Q4, the company signed up 100 Amazon Web Services customers and one was for a six-figure deal.

But this partnership strategy could lead to some interesting revenue synergies. That is, there should be juicy cross-selling of additional services like managed security, private clouds and data services.

While it’s true that the competitive environment is intense and, yes, Rackspace’s partners are some of its biggest rivals, there are few signs of attrition. On the earnings call, CEO Taylor Rhodes noted:

“Our customers are loyal and sticky. Their spending with us recurs and grows and we expect that growth to continue … We’re number one in the world in managed hosting, and we’re proud to report that customer churn for that product hit a three-year low during Q4.”

Bottom Line on Rackspace Stock

For the most part, Rackspace is in solid financial shape: free cash flows for Q4 came to $85 million, and RAX has $485 million in the bank. The company also bought back $117 million in RAX stock during the period.

What’s more, the valuation is definitely attractive. After all, the enterprise value-to-EBITDA ratio is sitting at about five (enterprise value is market cap plus long-term debt). This compares to an EV-EBITDA ratio of about 19 for Equinix (EQIX)

But the real play could be a buyout. Let’s face it, many old-line tech companies like IBM (IBM), Hewlett Packard Enterprise (HPE) and Intel (INTC) want a piece of the cloud.

A buyout of RAX would yield a platform generating $2 billion in annual revenues from over 300,000 customers across 120 countries. With the languishing stock price, that may be too good to pass up.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/rackspace-rax-stock/.

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