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Analysts Like Rackspace's Stand-Alone Outlook

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Rackspace Hosting, Inc. (NYSE: RAX) gained more than 13 percent Tuesday as strong third-quarter results came in just weeks after abandoning efforts to attract a buyer.

With the strategic review now in the rear view mirror, investors are focused on newly named Chief Executive Taylor Rhodes' growth plans for the stand-alone company.

Growth stalled in 2013 as the San Antonio, Texas-based cloud services company shifted to new technology, while investments in capacity expansion and marketing have squeezed margins more recently.

"We have opportunities starting in the near future to begin to march our margins back up to historical norms," Rhodes told investors recently.

Investors are worried about competition in cloud services from the likes of Inc.Microsoft Corporation and Google Inc.

But recent results show that Rackspace "can carve out a niche" as an independent company by stressing a high level of service, Credit Suisse's Sitikantha Panigrahi said Monday.

Amazon has been characterized as treating its cloud services like a commodity.

Panigrahi raised his target 12 percent to $45 and said "reacceleration" in revenue growth "reinforces our believe that the execution continues to improve."

Morgan Stanley's Simon Flannery said Rackspace's heavy hands-on support to customers offers a key advantage and positions it as a "pure play" in the fast-growing segment.

Third-quarter revenue grew 18 percent to $459.8 million while Net income increased 57 percent to $25.7 million, or $0.18 per share.

The company also launched a $500 million buyback program, including $200 million in "accelerated" buybacks.

Oppenheimer's Timothy Horan said Rackspace appears to be finding "a customer care niche in hybrid cloud that is defensible."

If Rackspace share-price drops on expected news of price-cuts by Amazon, investors might see a "buying opportunity," according to Horan, who has an Outperform rating on Rackspace and a $62 target.

Latest Ratings for RAX

Aug 2016Raymond JamesDowngradesMarket PerformUnderperform
Aug 2016Tigress FinancialDowngradesStrong BuyNeutral
Aug 2016JefferiesMaintainsHold

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