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Why Is Rackspace Stock on a Decline in 2016?

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Growing competition and weakening position of Rackspace in cloud weighed heavily on its stock

Earlier in the series, we discussed growth in the cloud space. We also discussed that though Rackspace (RAX) has posted growth for its Amazon (AMZN) AWS and Microsoft (MSFT) customers, the intensifying competition between the two leading players in the cloud space has put pressure on Rackspace.

Industry analysts are wary of Rackspace’s position in the increasingly competitive cloud space. Earlier in the series, we mentioned that Amazon, Microsoft, IBM (IBM), and Google (GOOG) (GOOGL) collectively command more than half of the cloud space. After Rackspace’s fiscal 1Q16 results, Michael Bowen, an analyst at Pacific Crest Securities, stated, “The lack of near-term catalysts for growth, in a cloud sector marked by growth, will likely result in continued weakness in the shares despite an aggressive buyback program.”

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Rackspace’s fiscal 1Q16 revenues, which failed to meet analysts’ expectations, the growing competition in the cloud space, and the company’s tepid guidance for fiscal 2Q16 weighed heavily on Rackspace’s stock. In 2016, the stock has lost approximately 12% of its market value. In the last one year, Rackspace’s stock value fell ~60%.

Rackspace’s fiscal 1Q16 results

Rackspace, which announced its fiscal 1Q16 earnings in early May 2016, repurchased $68 million of its shares. The company shared that it plans to buy back ~$65 million in fiscal 2Q16.

It reported revenues and non-GAAP (generally accepted accounting principles) EPS (earnings per share) of $518.9 million and $0.34, respectively, in fiscal 1Q16. Though the company’s EPS exceeded analysts’ expectation by 12 cents, its revenue, despite growth of ~8% on a YoY basis, fell short of analysts’ expectations by $0.85 million. Its EPS grew 21% on a YoY basis in fiscal 1Q16. Rackspace had earlier provided revenue guidance of $517 million–$521 million for fiscal 1Q16.

Fiscal 2Q16 expectations

In 2Q16, Rackspace expects revenue to be in the $519 million–$524 million range. Rackspace revenue guidance for fiscal 2Q16 fell short of analysts’ expectations of $523.9 million.

You might consider investing in the SPDR S&P 500 ETF (SPY) to gain exposure to Rackspace, which makes up 0.02% of SPY. Application software makes up ~7% of SPY.

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