Pacific Crest Downgrades Rackspace To Sector Weight; Disappointed With Guidance

• Rackspace Hosting, Inc. RAX shares have plunged 63.65 percent over the past one year, to touch a low of $16.76 on February 11.
• Michael Bowen of Pacific Crest has downgraded the rating on the company to Sector Perform.
• Bowen expects the absence of near term growth catalysts within the cloud sector, which is marked by growth, would lead to continued weakness in the stock, despite the company’s aggressive buyback initiative.

Analyst Michael Bowen mentioned that Rackspace Hosting reported its revenue in line with and EBITDA ahead of the estimates, although the guidance was weaker than expected.

Constant currency revenue growth is now expected at 6-10 percent for 2016, which the company attributed to macro pressures, the softness during 1Q16, resources transitioning to Azure and AWS and increasing dependence on cloud partners to generate value-added revenue.

This in turn has led to increased uncertainty regarding if or when revenue growth would accelerate, and Bowen expects growth to remain weak during 2016.

“While Rackspace continues to attempt to win value-added contracts associated with other cloud platforms, the contracts are not material enough to offset softness in Rackspace's public cloud revenue,” according to the Pacific Crest report.

The 2016 estimates have been lowered to the low end of the revenue guidance range, while also accounting for management's expectations of revenue weakness in 1H16.