Rackspace (RAX) got slammed after it reported last quarter earnings. Although the company met estimates, Wall Street wasn’t impressed with sales of cloud computing products. Rackspace offers data storage to companies, RAX owns the servers and data storage devices and companies can rent space as needed. Cloud computing is where the growth is for Rackspace, and cloud growth has decelerated for five consecutive quarters. Last quarter cloud sales rose 49%, down from 57% 2QtrsAgo and 69% 3QtrsAgo.
What does this mean for RAX? The lower stock price is what I’m looking for. RAX has proven to be a top-tier growth stock and the stock’s been too high to buy. Is it low enough to get into now? Let’s take a look.
One Year Chart
Last quater’s profits rose only 17%, that’s not good for a stock with a now 56 P/E. Estimates show 24% and 28% growth coming, but those estimates have been coming down. Looking three and four quarters out it looks like growth could accelerate back to 32% and then 38%. But that’s a long way away, and these numbers could fall. RAX only met estimates last quarter.
Fair Value
I’ve taken my Fair Value P/E down from 50 to 40, but still the stock’s too high for me to get into. Also, RAX competes with Amazon for storage customers, and AMZN has been known to slash prices to kill competition. I’m concerned profit margins could erode.
Sharek’s Take
RAX is getting closer to its buy zone, but its still too high. I’m not concerned with the stock’s drop — it needed to come down off the clouds anyway. Look to get into RAX if it gets down to $40.
View the Earnings Table here.View the Ten Year Chart here.
