Rackspace's Competition Is Getting Even Stronger; CLSA Cuts Targets

• Shares of Rackspace Hosting, Inc RAX have lost 40 percent since May 26 and are trading close to their 52-week low of $23.65.
• CLSA’s Louis Miscioscia maintained an Underperform rating on the company, while reducing the price target from $27 to $23.
• The massive scale advantage of Google, Microsoft and Amazon allows them to pose significant competition to Rackspace, Miscioscia noted.

Aggressive and increasing competition is likely to exert pressure on Rackspace’s growth, margins and cash flows in the near future. Checks indicate that AWS of Amazon.com, Inc. AMZN and Microsoft Corporation MSFT are working hard to win more Enterprise business, analyst Louis Miscioscia mentioned.

AWS, which was so far focused on test development and Greenfield cloud applications, is working harder to not only ramp this type of business but also get core Enterprise applications to the cloud. Rackspace has the same strategy, Miscioscia noted.

Other players like Alphabet Inc GOOGL and International Business Machines Corp. IBM are getting more aggressive in infrastructure-as-a-service [IaaS], the analyst mentioned, while adding that Rackspace’s core businesses - cloud and managed hosting - are under threat.

Although Rackspace’s public and managed cloud platforms face increased competition, many investors believe that the company can support customers on AWS, Azure and other clouds. Miscioscia added, however, that this is not adequate to boost growth until 2017. Moreover, several other players are already providing this type of service.

The EPS estimates for FY2015 and FY2016 have been reduced from $0.92 to $0.90 and from $1.05 to $1.00, respectively.