Rackspace Is A Value In Cloud-Computing

A Shaky Start But Goods Things Are In Store For Rackspace

It was less than a month ago that Rackspace (NASDAQ:RXT) re-IPO’d with little fanfare. The company, a leader in cloud-computing software and migration, began its first day of trading well below the target price and has only recently recovered that lost ground. What I want to point out now is the company has only had good news since the open, the analysts are gushing, and the outlook for growth is as bright as can be.

This is what the analysts were saying before the 2nd quarter figures were released.

• RBC - Rackspace represents a “significant opportunity” in cloud computing and an accelerating shift to the cloud.
• Credit Suisse - analyst Matthew Cabral says the acceleration of the shift-to-cloud spurred by the pandemic is “here to stay as public cloud wallet-share is poised to double in three years.”
• Barclays - analyst Ramsay El-Assal expects near-term revenue acceleration due to higher bookings. Among the company’s strengths are “highly recurring and long-term” commercial agreements and its “high degree of resiliency”.

Rackspace Reports In-Line With Expectations

The Rackspace results are a little hard to judge because the analysts didn’t have time to drum up a consensus before the release but there is a comparison. VMware (NASDAQ:VMW) is another cloud-computing gem specializing in cloud migration and it reported earnings last week.

So, while Rackspace pleased the market with its 9.0% YOY revenue growth it wasn’t a shock, that’s exactly the same as VMware. A portion of the revenue increase is due to the acquisition of Onica Holdings in November of 2019. Excluding the impact of that revenue is up 4.0% on a YOY basis.

The bottom line results are a little less impressive and possibly the reason why share prices saw so much volatility in early trading. GAAP earnings reversed to a loss due to one-off events in the previous year but there are mitigating factors to consider. Excluding the impact of an unrealized gain on investment, the company’s loss shrank on a YOY basis and, when adjusted for items including share-based compensation, are positive and growing.

Looking forward, company bookings are up more than 107% for the quarter and point to strong results for many quarters to come. "The quarter was highlighted by accelerating revenue growth driven by our ramping sales bookings growth over the past year. This quarter’s impressive 107% growth in sales bookings further validates our conviction in the massive opportunity presented by the tectonic shift to multicloud," CEO Kevin Jones commented.

The Technical Outlook: Rackspace Has Several Catalysts To Push It Higher

Rackspace has more than just an outlook for growth to push the stock higher. Trading at only 19X next year’s earnings (and that estimate is probably too low) the stock offers a significant’ value in the cloud-computing arena. Competitor VMWare trades closer to 22X next year’s earnings and cloud-computing icon Salesforce.com (NYSE:CRM) is pushing 75X its earnings, in either case, an opportunity for multiple expansion is there.

In addition, Amazon is in talks to purchase a minority stake in the company. The talks are expected to take another month or so but could result in a sizeable position and boost to the market. The reason is simple, Amazon (NASDAQ:AMZN) and Amazon Web Services need to strengthen ties with cloud-computing services like Rackspace to facilitate the adoption of their technologies. It’s not about gaining market share although that is part of the calculus too, it’s about cross-platform integration so client businesses can interact with whomever they want.

On a technical basis, today’s news has the stock moving up after confirming support at the IPO price of $21. Price action may move sideways from here but I wouldn’t expect to see it fall below $21 again. At least not for long.