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RBC: Rackspace Will Win From Microsoft, Amazon Cloud Connection

Courtesy of Benzinga.

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  • Rackspace Hosting, Inc. (NYSE: RAX) shares have plunged 39 percent year-to-date, having declined from a high of above $55 on April 28 to below $26 on November 24.
  • RBC Capital Markets’ Jonathan Atkin upgraded the rating on the company from Sector Perform to Outperform, while maintaining a price target of $36.
  • While there is continued momentum for enterprise cloud, the company is well positioned to benefit from its managed cloud support services as well as its own platform, Atkin said.

Analyst Jonathan Atkin said that the enterprise cloud momentum seems to be accelerating for Microsoft Corporation’s (NASDAQ: MSFT) Azure and Amazon.com, Inc.’s (NASDAQ: AMZN) AWS [Amazon Web Services].

“In our view, part of the accelerated demand will be in the managed cloud segment, where RAX stands to gain by virtue of its growing ability to provide support on each of these cloud platforms, as well as its own OpenStack-based platform,” Atkin wrote.

He added that Rackspace’s revenue growth could accelerate during 2016, ahead of the recently generated rate of 2.5 percent average sequential growth. “Coupled with stable to potentially declining capital intensity, we believe top-line acceleration provides a potential catalyst for reaching our reach our $36 price target,” the analyst commented.

The RBC Capital Markets report enumerated reasons for which Rackspace could outperform peers:

  1. Unlike other cloud providers, Rackspace is building a multi-platform capability for delivering managed cloud services
  2. Enterprise cloud adoption is still in the early stages, which bodes well for various service providers and cloud platform operators
  3. Although Rackspace's support-intensive cost structure and lack of infrastructure ownership in its third-party managed cloud segment could exert pressure on the potential for margin expansion, capital intensity could decline, boosting the company's FCF.
  4. “The company could have strategic appeal as an acquisition target for companies wishing to expand their cloud, hosting, and IT product and market reach.”

Latest Ratings for RAX

Date Firm Action From To
Dec 2015 RBC Capital Upgrades Sector Perform Outperform
Nov 2015 Barclays Maintains Overweight
Nov 2015 Bank of America Upgrades Neutral Buy

View More Analyst Ratings for RAX
View the Latest Analyst Ratings

Posted-In: Jonathan Atkin RBC Capital MarketsAnalyst Color Long Ideas Upgrades Analyst Ratings Trading Ideas


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