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How Did Rackspace’s Growth in the Public Cloud Space Contribute to Its Sale?

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Lagging behind peers in the public cloud space

Citing Goldman Sachs (GS), the Wall Street Journal estimates that Rackspace’s fiscal 2Q16 public cloud revenues grew by only 11% on a YoY (year-over-year) basis, while Amazon.com (AMZN) and Microsoft (MSFT) reported growth of 66% and 113%, respectively, during the same period in the same space. Let’s explore what caused this slowdown in Rackspace’s growth.
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Amazon’s and Microsoft’s competition and dominance

According to RightScale, Rackspace is behind Amazon and Microsoft in the public cloud space. Although Amazon is the 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. Moreover, 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. Since May 2015, Rackspace’s stock has lost more than 40% of its value, and this fall includes the more than 35% rise that the stock has seen since rumors of a possible sale started spreading.

Thus, Amazon’s and Microsoft’s growing dominance as well as their rising competition in the public cloud space impacted Rackspace’s growth and consequently its stock price.

For more specifics on how Amazon and Microsoft stunted Rackspace’s growth, you might be interested in reading Market Realist’s “Why Is Rackspace Finding It Difficult to Grow in the Cloud Space?

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