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Why Is Rackspace Finding It Difficult to Grow in the Cloud Space?

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May. 19 2016, Updated 8:08 a.m. ET

Increasing competition from Amazon and Microsoft has impacted Rackspace’s position in the public cloud space

Earlier in the series, we talked about growth in the cloud space. According to a recent report from Synergy Research, Rackspace (RAX) is one of the 20 players positioned below Amazon (AMZN), Microsoft (MSFT), IBM (IBM), and Google (GOOG) (GOOGL) in the cloud space according to market share.

Though Amazon is a clear leader in the cloud space, Microsoft is leaving no stone unturned to enhance its position in the cloud space. This growing competition from Amazon and Microsoft has impacted Rackspace.

According to RightScale and as the below chart shows, Rackspace is behind Amazon and Microsoft in the public cloud space. Undoubtedly, any move by these leading players significantly impacts Rackspace and other players in this space.

In January 2016, when Amazon announced price cuts, Microsoft also slashed the price of Azure. These price cuts impacted Rackspace, whose stock plunged by as much as ~11% in January 2016.

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Rackspace’s strategy to achieve growth in the cloud

In its own terms, Rackspace is a “managed cloud” company. In managed cloud hosting, companies share and access resources that include databases, hardware, and software.

Rackspace lacks the scale and footprint that Amazon and Microsoft enjoy. Lack of size, scale, and presence limit the growth potential of small players in the cloud space. These factors were highlighted by John Dinsdale, chief analyst and research director at Synergy Research. He stated, “The big question for them is whether or not they are building a sustainable and profitable business. This can be done by focusing on specific regions or specific services, but the bulk of the market demands huge scale, a broad footprint, very deep pockets and a long-term corporate focus.”

Thus, Rackspace instead of competing on pricing, altered its business strategy to achieve growth in the increasingly competitive cloud space. Now, apart from providing its own services, it provides services for public clouds. Later in the series, we’ll see how this provides a growth opportunity for Rackspace in the managed cloud space.

Investors who want to gain exposure to Rackspace could consider investing in the Technology Select Sector SPDR ETF (SKYY). While SKYY invests ~3.4% of its holdings in Rackspace, it also has ~56% exposure to application software.

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