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Sell-Off in Rackspace Hosting Seems Highly Overdone, says Cowen Analysts

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Sell-Off in Rackspace Hosting Seems Highly Overdone, says Cowen Analysts

Shares of Rackspace Hosting (NYSE: RAX) fell more than seven percent following the opening bell on Tuesday. The reason for the sell off was attributed to investors concerns that Google's (NASDAQ: GOOG) announcement of lowering pricing for most of its cloud and server-related services can be viewed as a negative for Rackspace.

Analysts at Cowen believe that a seven percent sell-off is “highly overdone” and that “current levels offer excellent entry” based on three observations.

The first observation relates to price. Google was “the least competitive from a pricing perspective and insinuated that the company wasn't yet ready to start aggressively competing but that when they did it was likely they would become more aggressive on pricing.” The analysts noted they are not surprised with Google's announcement, which had been widely expected.

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Secondly, Google's market does not align with Rackspace. Google is operating in an area dominated by the Amazon.com's (NASDAQ: AMZN) and Microsoft's (NASDAQ: MSFT) thus Google's announcement is “less of a concern for Rackspace.”

Finally, Rackspace has demonstrated an ability to grow within an extremely competitive environment. The company's 9.5 percent sequential growth in its most recent quarter is in-line with industry growth rates.

The analysts concluded by acknowledging that Google's announcement “isn't a positive event” for Rackspace, but is more of a “headline risk.”

Despite the recent sell off, shares at current levels are heavily skewed to the reward side and shares maintain an Outperform rating, according to the analysts.

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