This Data Shows Upside At Rackspace

• Shares of Rackspace Hosting, Inc. RAX have declined steadily since May 2015, down 52 percent since then.
• Bank of America Merrill Lynch’s Scott S. Shiao upgraded the rating on the company from Neutral to Buy, while reducing the price objective from $47 to $38.
• The positive 3Q data for the company is positive and raises the possibility of the company meeting its reduced full year guidance, Shiao mentioned.

Analyst Scott Shiao mentioned that the latest data for Rackspace Hosting suggests that the incremental weakness witnessed in 2Q appears to have moderated in 3Q.

Although the data mainly tracks the managed hosting business and there is a possibility that the managed cloud services segment performance could have diverged, “we see this as a slight incremental positive given the Q2 fundamental performance,” Shiao stated.

Rackspace Hosting needs to post continued acceleration in its quarterly revenues in order to meet its reduced full year guidance. “Barring any strong divergence in the managed cloud segment, the data suggests that revenue should continue to, at least mildly, accelerate and that 2H15 estimates are at less risk than earlier in the year,” the Bank of America report noted.

The company’s current stock valuation reflects very bearish fundamentals. Shiao believes there is limited downside risk, with room for fundamental improvement.

In addition, Shiao does not believe that there is any threat from AWS and Azure, while mentioning that the shift towards a managed service business model could pose additional risk.

Shiao, however, pointed out that the threat from the business model shift is potentially limited to the cash generation of the business.