Rackspace Hosting, Inc. (NYSE:RAX) is a cloud computing company that manages web-based IT systems for all kinds of businesses worldwide. With the help of cloud computing, companies can use IT resources via the internet. This is a win-win situation for both the provider and the customer. The specialized service provider gets customers and revenue, while customers do not need to implement difficult solutions that take time, effort, and are costly to maintain.
Rackspace Hosting, Inc. (NYSE:RAX) has recently released its first quarter results. The company has reported earnings of $0.19 per share, while it was estimated to report $0.20 per share. Net revenue for the first quarter of 2013 was $362 million, up 2.6% from the previous quarter. In the meantime, net income decreased 8.8% from the previous quarter.
The stock was already under pressure before the report, down 30% in 2013. The report made things worse for Rackspace, and the fall of its stock price continued. I think that Rackspace has more room to fall, and I’ll explain why.
1. The stock is not cheap at all. Rackspace Hosting, Inc. (NYSE:RAX) is unattractive by both P/E and forward P/E, scoring higher than 30 on both metrics. Current P/E is usually not important for technology companies, because investors are focused on future earnings growth. In the case of Rackspace, analysts do not estimate future earnings are enough to justify the current price of the stock.
2. Rackspace Hosting lacks growth. In its earnings call, the company stated that it was not satisfied with its growth rates in the first quarter. Investors were not satisfied, either. Average monthly revenue per server was $1308 in the first quarter of 2013, compared to $1310 in the prior quarter. Rackspace Hosting, Inc. (NYSE:RAX) states that net upgrade activity and new bookings from enterprise customers slowed.
3. There is a lot of competition from big players. Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), Google Inc (NASDAQ:GOOG), Oracle Corporation (NASDAQ:ORCL) have their own cloud solutions. They also have better brand recognition and bigger budgets. Amazon’s Web Services is currently the main threat to Rackspace Hosting, Inc. (NYSE:RAX). Amazon offers computing, networking, storage, database and application services. Amazon’s headliner products include Amazon EC2, a web service that provides re-sizable computing capacity, and Amazon S3, which provides storage for the internet. Amazon.com, Inc. (NASDAQ:AMZN)’s products are used by the federal government, life sciences researchers, media & entertainment companies and for game hosting.
Google Inc (NASDAQ:GOOG)’s Cloud Platform has currently over 3 million applications running. While Google’s main source of income is advertising, the company is known for its investments into perspective technologies. The power of Google would certainly make this platform more and more popular. Microsoft Corporation (NASDAQ:MSFT) is more active on the software part of the business with its Windows Azure platform. The software giant also offers SkyDrive, a cloud storage with pre-installed apps that are ready for use. SkyDrive has yet to become popular with the general audience. Oracle Corporation (NASDAQ:ORCL) provides sophisticated solutions for enterprise clients with its Oracle Cloud. It includes offerings for enterprise resource planning, budgeting, financial reporting and marketing. Oracle generally targets bigger clients than Rackspace Hosting, Inc. (NYSE:RAX).