Rackspace Sinks: Q2 Report Mum On Possible Sale

Rackspace Hosting Inc. RAX fell more than 7 percent Tuesday after the company failed to offer insight into its possible sale and said second-quarter expense grew faster than revenue. Investors had feared the cloud services competition from Amazon AMZN, Google GOOGL and Microsoft MSFT might hurt results. But on Monday Rackspace posted 16 percent revenue growth for the second quarter that beat expectations. "They dodged a bullet" from competitors' lower prices, UBS's Steven Milunovich said in a note maintaining a Neutral rating and $34 target. Richer executive bonuses and a hiring spree hurt margins while the company considers whether to discontinue performance outlooks. "It seems extreme," Milunovich said of the potential lack of guidance, given that the company has "a good handle" on revenue trends by the time it reports. "Most importantly, management didn't provide an update on the review process that seemed to have some hoping for an imminent sale," Canaccord's Greg Miller said in a note maintaining a Hold and $35 target. Rackspace hired Morgan Stanley in May to advise on what it called "interest from multiple parties," regarding its sale. "The longer the process takes, the greater the risk they will lose key employees and revenue growth could suffer," Miller said. While the average revenue per server customer grew in the recent period, the company added the fewest number of servers since the fourth quarter of 2011. "We're concerned that the growth rate in 2014 could be less sustainable that in the past and we lack confidence in its ability to increase revenue by upgrading existing customers," Pacific Crest's Michael Bowen said in a note maintaining a Sector Perform rating. But Credit Suisse's Sitikantha Panigrahi said second-quarter results and the company's third-quarter guidance "reinforce our belief that the company is well positioned" to benefit from a trend toward could-based computer services. Panigrahi maintained a Buy rating and $40 target. Rackspace traded recently down 7.3 percent to $29.02 a share.