Barclays Initiates Coverage On Rackspace

Barclays initiated coverage on Rackspace Hosting, Inc RAX with an Overweight rating and a $52 price target.

Analysts Amir Rozwadowski and Sandeep Gupta found “the cloud, hosting and data center segments fundamentally attractive, driven by a combination of underlying data traffic trends, declining computing costs, and rising complexity of the software ecosystem.”

“A combination of defensible growth, leadership in the managed cloud segment, expectations for improving margins and moderating capital intensity, and an attractive valuation,” were cited as supporting the rating.

“Rackspace offers a full-service business model ('managed cloud') that includes technical IT support; this differentiates it from Amazon and Microsoft, which provide unmanaged cloud access ('unmanaged cloud'). Even as Amazon and Microsoft continue to lower pricing, we think Rackspace remains differentiated as a result of its technical expertise,” according to the analyst report.

“In addition to sales growth, we believe management is keenly focused on optimizing profitability and capital intensity, which should improve the company's cash generation. Rackspace also plans to spend $500M through YE2016 for share repurchases,” according to Rozwadowski.

The report concluded that “Rackspace trades at a meaningful discount to its data center peers in our coverage universe, such as Equinix, CyrusOne, etc. Our price target implies a ~10x multiple on our 2015 EBITDA estimate, which is a discount to forecast mid-teens growth in 2015, and in line with the current trading multiple on our 2014E EBITDA.”

Rackspace recently traded at $43.14, up 1.03 percent.