Rackspace Hosting (RAX) faces increasing competition and uncertainty about the future growth of its cloud business, with the most recent fourth-quarter results showing a revenue growth outlook which implied lower capex guidance than the Street hoped for, says Todd Weller, Managing Director at Stifel, Nicolaus & Co., Inc.
“We decided to downgrade the stock after we had a great multiyear run with it. I think at this point we remain more cautious than optimistic, and again some of that is just we feel that to become more constructive, we need to have a better understanding of what sustainable growth looks like, because again, things seem to have changed — and trying to figure out if they’re a low 20% grower or high-teens grower, or how to think about that,” Weller said.
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Weller has a “hold” rating on RAX, saying the current growth and competition environment makes it difficult to make a valuation call on the stock. He says he needs more confidence that sustainable growth is on its way, and also confidence that estimates have baselined.
“The increase in competition on the cloud side is an issue that is likely to persist. For example, Rackspace recently lowered their pricing, which I think makes sense, because whenever you’re competing against very big competitors like Amazon (AMZN), who has cut prices over 20 times, it seems like there is a fair amount of headline risk related to competition,” Weller said.
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