Keybanc: Rackspace's Turnaround Is Slow, But Shares Are Still A Good Bet

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In a report published Tuesday, KeyBanc Capital Markets analyst Michael Bowen maintained an Overweight rating on Rackspace Hosting, Inc. RAX, while reducing the price target from $58 to $45.

Rackspace reported its 2Q results in-line with expectations, with revenue growth of 1.8 percent q/q in constant currency terms, near the low end of its guidance range. The company reduced its growth outlook to reflect slower sales in public cloud and Q1 customer churn.

Although the company’s potential new offering for AWS and services for hybrid cloud deployments are unlikely to contribute meaningfully this year, they “provide the company with large potential TAMs and potential growth in 2016,” analyst Michael Bowen said.

The EPS estimates for FY15 and FY16 have been reduced from $0.91 to $0.88 and from $1.487 to $1.09, respectively. Bowen believes, however, that Rackspace’s shares have “substantial value at current levels.”

Struggling To Remain Relevant, Despite Attractive Valuation, Says Canaccord

In a separate report Canaccord Genuity analyst Gregory Miller maintained a Hold rating on Rackspace, while reducing the price target from $42 to $38, after the company reported its 2Q15 results and reduced its full-year guidance.

“At this point we are not confident that the reduction clears the decks for the company to return to beating guidance given that the hiring has slowed companywide for the past several quarters – that has likely helped the company better manage its margins. However, with easier FX comps in 2H15, and with additional sales and engineering staff, it is not likely we are to see continued material weakness in the coming two reports,” analyst Gregory Miller wrote.

Miller expects Rackspace’s $1 billion share repurchase program, of which 50 percent is likely to be executed in the next six-to-nine months, to provide additional support to the stock.

The company’s plans to offer the same “fanatical support” to Azure users as well as AWS platform indicate a shift towards an IT Services model from a managed service provider, the report noted, while adding, “[W]e believe it is likely to help accelerate top-line growth even if it further pressures margins along with the additional staffing in the near term.”

The company’s longer term risk profile is mitigated to some extent by easier comps, Miller added.

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Posted In: Analyst ColorPrice TargetReiterationAnalyst RatingsCanaccord GenuityKeyBanc Capital Markets
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