RXT - Rackspace stock slumps after Citi downgrades on further downside potential
2023-07-25 09:21:47 ET
Rackspace Technology ( NASDAQ: RXT ) stock fell ~8% premarket on Tuesday after Citi Research downgraded the shares of the cloud tech services provider to Sell/High Risk from Neutral/High Risk.
The firm raised its target price on RXT to $1.50 from $1.25.
Citi analysts noted that Rackspace's sustained investments in technology, service levels, ecosystem partnerships and sales helped it get positioning in the large and growing multicloud end market. However, certain factors have impacted the company.
The first is mix (lower-margin revenues); second is that a larger focus on profitability (partly by chipping away at less attractive work) has hurt growth and growth prospects; and third, while cash flow initially improved, balancing mix and investments can affect this, according to the analysts.
The firm added that execution risk remains and the multi-year transformation may take even longer. Given the analysts view that the current valuation level does not fully reflect some of these downside risks, they have a Sell/High Risk rating on the company's shares.
Rackspace restructured to a new operating model last quarter — Public Cloud and Private Cloud segments — and has hired several industry leaders into management roles, however the analysts think that the tough challenge is whether Rackspace can, not only pivot to growth but also attain growth levels which attract investors in a reasonable time.
The analysts added that despite multiple quarters of consistently lowering forward expectations, they still see downside potential to estimates from continued macro challenges and investments required for the business.
Yet, the stock has soared 90%+ on no news since last earnings (up 115%+ after the negative T+1 reaction) even though the company had reduced estimates meaningfully; the analysts think that the current valuation does not reflect the downside potential which they think still remains, thus leading to a more negative view.
The firm expects a slight top-line beat and an in-line bottom-line from Rackspace. The company has a relatively good track record of setting (and meeting) in-quarter expectations but also seems to consistently lower forward expectations, according to the analysts. The firm expects this trend to continue in the quarter. The analysts expect Q3'23 outlook to be below expectations due to a sustained macro-related headwinds and reduced operating leverage leading to less of a sequential Q/Q margin improvement than consensus is modeling.
RXT -7.78% to $$2.37 premarket July 25
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Rackspace stock slumps after Citi downgrades on further downside potential