4. Rackspace Hosting has made a terrible pricing move. In late February of 2013, it cut the prices of its cloud bandwidth and content delivery network by a third. This is a strange way of trying to grow revenue. Rackspace should have tried to compete on quality of its solutions, and not on the price. Price wars with giants cannot end happily. The results of the price cut are not fully reflected in the first quarter results. The company has operated with the new prices for only one full month. The second quarter results will show if the move was just bad or if it was catastrophic.
5. Companies all over the world are dedicated to cutting costs. While the stock market hits new highs, the real world is in a more difficult situation. There is no growth in Europe, and China is slowing down. Even those companies that do not feel the impacts of that are cautious about spending. Capital spending is revised downward in many industries.
6. Analyst earnings estimates have been revised downward during the last 90 days. Estimates for the second quarter fell 15%, while estimates for the full year 2013 fell 14%. These estimates could be cut further when the impact from the pricing cuts would be clear. During the earnings call, Rackspace Hosting, Inc. (NYSE:RAX) executives were asked to provide some guidance about the impact of the cuts. Of course, they refused to do this because of the competition issues. No one wants to reveal the details of the business to competitors. However, they did not give any assurance that pricing cuts were the right thing to do.
In my opinion, Rackspace Hosting is an overvalued company. The company fails to deliver earnings that are good enough to justify the price of the stock. Rackspace has made an extremely dubious pricing move. The company has to deal with bigger and stronger competitors. Rackspace lacks growth, which is very bad for a technology stock. During the earnings call, company executives did not give a hint about how they are going to change things in the company’s favor. I think that Rackspace Hosting, Inc. (NYSE:RAX) will continue to go down until there is evidence of positive changes in the company’s strategy.
The article Six Reasons Why Rackspace Hosting Will Fall Further originally appeared on Fool.com and is written by Vladimir Zernov.
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