“Annual earnings dropped for the first time since Rackspace went public. The stock price has plunged more than 55% over the past 12 months. Rackspace is far from dead, but its business of offering Web hosting and other cloud-based tech services has undergone a big shift since Amazon’s AWS operation got into the game with that company’s usual playbook of driving down prices.”, Heard on the Street, WSJ, February 11, 2014

“It seems that Amazon’s strategy is to use money-losing price concessions to crush competitor Rackspace and muscle its way to the top of the web hosting business. This price war is costing Rackspace investors billions in stock market losses. But we don’t know for certain what is going on because Amazon doesn’t publicly disclose to investors it AWS division’s revenues, costs, and profits. I don’t think that’s right, as I discussed on November 13, 2013, Statement #85: “Does Amazon Have a Special Exemption from the SEC in Complying With the Securities Disclosure Laws?””, Mike Perry, former Chairman and CEO, IndyMac Bank

 

HEARD ON THE STREET

Rackspace is Under an Amazonian Cloud

By 
DAN GALLAGHER
Feb. 11, 2014 3:07 p.m. ET

Ironically, with its latest attempt at reinvention, Rackspace Hosting is borrowing from the slogan of the big rival helping to make that reinvention necessary.

The corporate graveyard is littered with those who tried to compete against Amazon.com. Rackspace is far from dead, but its business of offering Web hosting and other cloud-based tech services has undergone a big shift since Amazon’s AWS operation got into the game with that company’s usual playbook of driving down prices.

AWS has made a brand of the term “re:invent,” but it is Rackspace that is in flux. Chief Executive Lanham Napier is stepping down. The company on its fourth-quarter earnings call Monday vowed to focus on corporate customers who need more of a high-touch cloud partner than those who prefer Amazon’s cheaper, do-it-yourself offerings.

It is the right move, but Rackspace now has to regain lost momentum. Revenue growth for 2013 was 17.2% compared with 27.7% average annual growth over the prior three years. Annual earnings dropped for the first time since Rackspace went public in August 2008. The stock price has plunged more than 55% over the past 12 months, including a sharp dive Tuesday following the results.

Rackspace also has to fight a perception challenge, as Amazon’s AWS has become the go-to name for many businesses. In a recent survey by Jefferies, 57% of respondents were considering using Amazon in their deployment of cloud-based services compared with just a third for Rackspace.

And despite Tuesday’s selloff, Rackspace is no bargain. The stock still trades at around 55 times forward earnings, a slight premium to its five-year average. Trying to avoid getting into a price war with Amazon is wise. To pay a stock-price multiple assuming Rackspace can pull that off without mishap is less so.

—Dan Gallagher

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Posted on February 12, 2014, in Postings. Bookmark the permalink. Leave a comment.

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