Cloud

Why Rackspace stock tumbled even after beating expectations

Image Credit: Garrett Heath/Flickr

It’s been almost three months since managed-cloud and hosting provider Rackspace said it’s considering acquisition offers and other proposals, and we got no hint that a deal was in the works during the company’s quarterly call with analysts yesterday.

Today, Rackspace stock took a 6 percent plunge, falling from $31.31 at market close on Monday and ending up at $29.50. That suggests that news about the company, including that it hit analysts’ estimates of 16 cents per share in net income, was not good enough.

The fall might well reflect the continuing uncertainty about Rackspace’s future, ever since the big regulatory filing in May about retaining Morgan Stanley to consider strategic proposals. Companies like IBM, which might seems like a possible buyer, are not interested. And several people believe it’s unlikely that Rackspace would go private. So the outcome is unclear. There’s a sense that everything is in limbo as the company shifts away from the commodity public-cloud business and puts more emphasis on its support and managed services.

And that market shift points to the challenges that might well have led Rackspace think hard about its future in the first place. Amazon Web Services has come to dominate the public-cloud market, with Google and Microsoft coming up quickly in the past few years. Meanwhile, hosting companies like DigitalOcean have been growing fast while offering low prices. Growth at Rackspace has not kept up, even if Rackspace remains a big company, with a $4.19 billion market cap.

Now investors could be getting antsy as they wonder what will come of Rackspace, even if a deal might not happen right away, if ever.

“Looking across the main scenarios, we think the market has correctly assumed a high (70 percent-plus) probability that nothing will happen on the strategic side,” Wells Fargo analysts noted in a July 1 report.

More information:

Rackspace (NYSE: RAX) is the #1 managed cloud company. Its technical expertise and Fanatical Support® allow companies to tap the power of the cloud without the pain of hiring experts in dozens of complex technologies. Rackspace is al... read more »

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1 comments
anonymous
anonymous

There's been a lot of new info released since the article came out. You can find it at the Under Twin Skies site: undertwinskies.com