RXT - Rackspace plunges 15% as Raymond James downgrades following mixed Q2 weak outlook

Rackspace Technology ( NASDAQ: RXT ) plunged 15% in early Wednesday trading after the cloud computing company reported mixed second-quarter results and issued a weak outlook, prompting investment firm Raymond James to downgrade the stock.

Analyst Frank Louthan lowered his rating on Rackspace ( RXT ) to market perform from outperform, noting that the company has abandoned its strategic options exploration in favor of going at it alone, which was a "large part" of the firm's thesis.

"Given the disruption to the sales team and other parts of the organization that are inherently part of that process, we believe growth recovery and improved [free cash flow] is 9-12 months away," Louthan wrote in a note to clients. "As such, we find it difficult to maintain a constructive rating on shares of the company."

Rackspace ( RXT ) said it earned an adjusted 17 cents per share on $772M in revenue, up 3.8% year-over-year. Analysts were expecting adjusted earnings of 16 cents per share on $759.28M in revenue.

Looking to the third-quarter, Rackspace ( RXT ) said it expects revenue to be between $769M and $779M, compared to estimates of $809.21M. Adjusted earnings are forecast to be between 8 and 10 cents per share, well below the 20 cents analysts were expecting.

Louthan added that Rackspace's ( RXT ) management is investing in sales and other parts of the organization, which will eventually prove fruitful, but that is likely to take at least 12 months to show results.

The company is also splitting into public and private cloud divisions, with the analyst expecting that "top line growth and margins will suffer in the interim as this process shakes out."

Louthan lowered his 2022 estimates to $3.099B in revenue and $1.30 in free cash flow per share, down from $3.18B and $1.34. For 2023, he now expects $3.162B in revenue and 73 cents in free cash flow per share, down from a prior outlook of $3.48B and $1.37.

Last month, Barclays downgraded Rackspace Technology ( RXT ) to underweight, noting that the current macro volatility "may cause customers to re-evaluate their IT budgets by pulling back on spend or shifting to cost takeouts rather than embarking on new projects."

Analysts are extraordinarily mixed on Rackspace ( RXT ). It had an average rating of HOLD from Seeking Alpha authors , while Wall Street analysts rate it a BUY . Conversely, Seeking Alpha's quant system, which consistently beats the market, rates RXT a SELL .

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