Rackspace Won't Find A Buyer, CLSA Warns

Shares of Rackspace Hosting, Inc. RAX have surged more than 5.2 percent this week on rumors that the company may be drawing buyout interest. CLSA analyst Louis Miscioscia is not convinced, however, and believes that a buyout wouldn’t make a lot of sense.

According to Miscioscia, the public cloud space is now a three-horse race between Amazon.com, Inc. AMZN, Microsoft Corporation MSFT and Alphabet Inc GOOGL, and the data center architecture of each of these three vendors is not compatible with Rackspace’s architecture.

In addition, second-tier players like Hewlett Packard Enterprise Co HPE, International Business Machines Corp. IBM and VMware, Inc. VMW are likely so far behind the big three names that they are unwilling to invest billions of dollars at this point playing catch-up.

“IBM is making a go of it with its 2013 acquisition of SoftLayer, but from our checks and even with billions of investments, doesn’t seem to be gaining enough traction,” Miscioscia explains.

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He concludes that there are simply no potential buyers for Rackspace that make sense.

“Big firms do make illogical decisions which Wall Street derides, and is often right, so anything is possible, but in our humble opinion, we don’t think is makes tactical or strategic sense for the firms we comment on,” Miscioscia concludes.

CLSA has downgraded Rackspace from Underperform to Sell and maintains a $17 price target for the stock.

Disclosure: the author holds no position in the stocks mentioned.