UPDATE: D.A. Davidson Downgrades Rackspace Hosting On Valuation

D.A. Davidson downgraded Rackspace Hosting, Inc. RAX Friday from Neutral to Underperform and set a price target of $40.

Analyst Mark Kelleher expected “steady top line and EBITDA growth for Rackspace Hosting over the next several years,” and he believed “an Enterprise value of 7x our 2016 EBITDA estimate of $793 million is justified. This provides our 12-18 month price target of $40 per share.”

“Since the company ceased its efforts to find ‘strategic alternatives’, the stock has rebounded significantly, supported by a solid September quarter report. Having moved away from the highly competitive public cloud market dominated by IBM, Google, Microsoft, and Amazon, RAX’s strategy now is to focus on its core competency of ‘fanatical service’,” according to Kelleher.

The analyst note concluded, “While we believe this is a good strategic move for the company, we also believe the steady inherent growth presented by the service market has been more than adequately priced into the stock.”

Rackspace Hosting traded in the premarket at $45.65, down 1.30 percent.