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What Factors Affected Rackspace’s Performance?

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Nov. 20 2020, Updated 4:59 p.m. ET

Intense competition in cloud space

Earlier in the series, we discussed market expectations from Rackspace’s (RAX) fiscal 2Q16 earnings. In 1Q16, cloud infrastructure service revenues surpassed the $7 billion landmark. High growth in the cloud space has attracted technology players, consequently leading to increased competition as well as greater concentration.

Amazon continues to rule the cloud space with 31% market share. It’s followed by Microsoft (MSFT), IBM (IBM), and Google (GOOG) (GOOGL), which collectively accounted for 22% of the cloud space.
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According to Synergy Research’s recent report, Rackspace (RAX) is one of the 20 players positioned below Amazon (AMZN), Microsoft, IBM, and Google in the cloud space based on market share. These 20 players that include Rackspace collectively held 27% of the cloud space and grew 41% on average on a yearly basis.

Ideally, growth in the cloud space should provide an opportunity for Rackspace to grow. However, it seems Rackspace is finding difficult to harness growth potential in the cloud space.

On the surface, the growth posted by these 20 players looked promising. However, when we compare their growth figures with the growth of the overall cloud space, the growth is not very satisfactory. Synergy Research estimates show that the cloud space is growing at more than 50% while these 20 players reported average yearly growth of 41% in 1Q16, indicating that they are losing market share.

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Rackspace’s stock fell 16% in June 2016

Moreover, growing competition between Amazon and Microsoft is also impacting Rackspace. Rackspace is behind Amazon and Microsoft in the public cloud 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. 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.

In the last one year, Rackspace stock has lost ~34% of its value. In June 2016, Rackspace stock lost more than 16% of its value. Considering no major analyst downgrades regarding Rackspace stock were announced in June 2016, a likely reason could be the uncertainty hovering around the company’s business model and increasing competition in the cloud space.

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