Rackspace Moves Higher After Analyst Upgrade

Rackspace Moves Higher After Analyst Upgrade

Rackspace, a solid player in the cloud industry, has received a key upgrade today from one firm a day after another firm upgraded Microsoft for its strength in cloud offerings. RBC Capital Markets analyst Jonathan Atkin believes Rackspace will ride high on its partnerships with Microsoft and Amazon Web Services in addition to its own managed cloud platform.

Shares of Rackspace climbed by as much as 2.52% to $29.32 per share in heavy trading today. As of 1:45 p.m. Eastern, more than 2.6 million shares had changed hands. The average full-day trading volume is 2.84 million shares.

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Rackspace to Outperform

In a report dated Dec. 1, Atkin said he has upgraded Rackspace from Market Perform to Outperform and pegged his price target at $62 per share. He noted that Microsoft is picking up momentum thanks to its Azure cloud platform, as is Amazon Web Services. Rackspace offers managed cloud support services on both platforms and also runs its own platform called OpenStack.

The RBC Capital analyst believes Rackspace could accelerate its revenue growth next year to a rate higher than the recent average quarter over quarter rate, which is at 2.5%. When pairing that expected growth acceleration with the company’s “stable to potentially declining capital intensity,” he thinks any signs of acceleration on the top line could be a catalyst for Rackspace shares to hit $36.

Estimates for Rackspace

Based on his expectations for the cloud company’s momentum to pick up, he has set his revenue estimate for the fourth quarter (results expected in February) at $524 million and his adjusted EBITDA estimate at $176 million. His estimate for sequential revenue growth is 3%, while his EBITDA margin is at 33.6%, with both numbers being at the midpoint of Rackspace management’s previously provided guidance of between 2.5% and 3.5% quarter over quarter revenue growth and margin of 33% to 34%.

He’s expecting Rackspace to have spent $130 million on capital expenditures during the quarter, which implies a capital intensity rate of 25%. For the full year, he expects revenue to have climbed 11.6% year over year to $2 billion and adjusted EBITDA to have increased to $677 million. He believes Rackspace will have spent $499 million on capital expenditures this year.

For next year, his revenue projection is at $2.257 billion, while his EBITDA estimate is at $765 million and his capital expenditure projection is at $540 million.

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