UPDATE: FBN Securities Downgrades Rackspace to Underperform Following FQ1 Miss, Lower FQ2 Guidance

In a report published Thursday, FBN Securities analyst Shebly Seyrafi downgraded the rating on Rackspace Hosting

from Sector Perform to Underperform, and lowered the price target from $55.00 to $35.00. In the report, Seyrafi noted, “RAX reported a FQ1 miss and guided below consensus for FQ2 as the company is facing significantly slower installed base growth (now only .1% vs. .5% to 1.2% over the prior two years) and increasing competition (from Amazon and others in the IaaS space). Moreover, we see margins coming under increasing attack, as RAX responds to aggressive price moves from Amazon, Microsoft, Google, and others. Figure 1 on page 2 shows a comparison of AWS with RAX's Public Cloud business and shows that AWS may be outgrowing RAX by roughly 3:2 even though it is roughly 7x larger in size. RAX's Adjusted EBITDA margin, which has typically been around 33-35% in the past (and was 34.5% in FQ1) is guided to decline to ~30% in FQ2, and we believe that this metric will stay in the low 30s % for a few quarters.” Rackspace Hosting closed on Wednesday at $52.24.