Rackspace shares slipped today after Goldman Sachs analyst Heather Bellini said she initiated coverage of the cloud storage firm with a Neutral rating and a price target of $27 per share. The stock fell by as much as 2.01% to $24.41 per share before bouncing and regaining some of its value during regular trading hours today. Rackspace shares climbed earlier this month when RBC Capital upgraded them.
Rackspace currently a leader
Bellini did note that as of right now, Rackspace is a leader in the area of cloud management as it combines its Fanatical Support service with cloud infrastructure. At one time the company was one of only a few established firms that allowed customers to rent cloud infrastructure, but now competition in the space has increased dramatically. Big players like Amazon and Microsoft have now entered the space, and all these entries triggered a pricing war which has pressured prices and margins in the cloud services industry.
Amazon Web Services, Microsoft Azure and, to some extent, Google Compute, are starting to take huge chunks of the industry and pose a challenge to the dynamics of the market. As a result, Bellini sees any upside to Rackspace’s earnings results and shares as limited.
Trying to change courses
The analyst sees the cloud storage firm as “still in the midst of its pivot.” She believes Rackspace’s public cloud revenue, which made up almost a third of total sales in calendar year 2014, may be compressed due to increased competition in the space. The segment’s revenue growth has decelerated from 61% in 2012 to her estimate of 17% this year.
She does see the new Fanatical Support service, which involves partnerships with Microsoft and Amazon Web Services, as a positive because it might offset the deceleration in the company’s overall business. However, she thinks it will take “several years” for these partnership to bring about “material” benefits to Rackspace. Further, she expects public cloud competition to impact the company’s dedicated cloud segment, which made up 70% of its revenue last year.
Wall Street has become increasingly bearish on Rackspace stock since May as shares are down by more than 47% year to date. However, some big-name investors took a liking to it earlier this year with Dan Loeb and George Soros taking stakes.