Bloomberg News

Rackspace Jumps Most Since 2008 After Hiring Morgan Stanley (2)

May 16, 2014

Rackspace Hosting Inc. (RAX:US) surged the most since 2008 after the provider of cloud-computing services hired Morgan Stanley to seek strategic options that could include teaming up with bigger technology companies.

Rackspace enlisted the investment bank to explore ways to expand the business, after Amazon.com Inc. (AMZN:US) and Google Inc. cut prices on competing products at a faster pace than expected. The result could be a partnership or acquisition, though there is no timetable, Rackspace said in a statement yesterday.

“Our board decided to hire Morgan Stanley to evaluate the inbound strategic proposals, and to explore any other alternatives which could advance Rackspace’s long-term strategy,” the company said in the statement.

Revenue growth at San Antonio-based Rackspace is on track to slow for a third straight year, even after the company reported first-quarter sales earlier this week that exceeded analysts’ estimates. Graham Weston, who co-founded the company in 1998, took over as chief executive officer in February, when Lanham Napier retired. Weston has been trying to differentiate Rackspace’s services from the cheaper raw-computing alternatives offered by Amazon and Google.

“Our business has always been about more than just renting out access to infrastructure,” Weston said on the May 12 earnings call with analysts. “We add value by managing that infrastructure, as well as specializing in the complex tools and applications that run on top.”

Stock Troubles

Investors have been skeptical. Since climbing to a record in January 2013, Rackspace’s stock (RAX:US) had plunged more than 60 percent as of yesterday, leaving the company with a $4.36 billion market capitalization. The shares rose 18 percent to $36.12 at the close today in New York, the biggest gain since August 2008.

Analysts on average project revenue to rise 16 percent this year to $1.79 billion, according to data compiled by Bloomberg. That’s slower growth than 31 percent in 2011, 28 percent in 2012 and 17 percent last year.

Still, as businesses demand more computing power and storage capabilities in the cloud, Rackspace’s technology is at the heart of the transition. In addition to its vast network of server farms that host and manage client data, the company started OpenStack, an open-source platform that lets any business develop its own private cloud.

‘Highly Disruptive’

“The OpenStack software that Rackspace co-founded is considered the next-generation technology for private clouds and is highly disruptive to the existing hardware and software ecosystem,” Jim Breen, an analyst at William Blair & Co., wrote in a report yesterday. “OpenStack is still in the early innings of paid deployment, and Rackspace lacks the enterprise reach of many of its competitors.”

Based on other data center transactions, which have averaged 12.8 times projected earnings before interest, taxes, depreciation and amortization, Rackspace would be worth $54 a share, Breen wrote. That’s a 47 percent premium to its current price.

Gartner Inc. projected the worldwide public cloud-services market would jump 19 percent last year to $131 billion. Traditional business-technology vendors that have struggled to move customers to the cloud could benefit from working with Rackspace.

Mary Claire Delaney, a spokeswoman for New York-based Morgan Stanley, declined to comment.

Changing Landscape

The competitive landscape is expanding, with Microsoft Corp. investing heavily in its Azure cloud service under new CEO Satya Nadella, and International Business Machines Corp. incorporating technology from its $2 billion purchase of SoftLayer Technologies Inc. last year.

In March, Google cut the price of its key computing-capacity product by 32 percent and lowered its storage offering by 68 percent for most users. Amazon followed immediately by matching many of Google’s prices.

“Cloud computing competition is exploding, with services almost too numerous to count,” according to an April 30 report from Blueshift Research LLC. “Price is a critical point, and Rackspace’s higher price points are keeping it from winning new accounts.”

Weston, 50, is Rackspace’s second-biggest shareholder (RAX:US), with a 13 percent stake, according to data compiled by Bloomberg. FMR LLC, parent of Fidelity, owns about 15 percent.

To contact the reporters on this story: Alex Sherman in New York at asherman6@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net; Mohammed Hadi at mhadi1@bloomberg.net Cecile Daur, James Callan


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Companies Mentioned

  • RAX
    (Rackspace Hosting Inc)
    • $48.2 USD
    • -0.04
    • -0.08%
  • AMZN
    (Amazon.com Inc)
    • $309.1 USD
    • 6.07
    • 1.96%
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