) reported its first quarter results on May 8. Although EPS missed
the Zacks Consensus Estimate by just a penny, analysts revised
their earnings estimates significantly lower for both 2013 and
This sent the stock to a Zacks Rank #5 (Strong Sell).
Despite a big selloff after the earnings report, expectations are
still high for Rackspace with shares trading at more than 50x
Rackspace Hosting is an IT hosting company that provides cloud
computing services. It is headquartered in San Antonio, Texas. The
company was founded in 1989 and has a market cap of $5.9 billion.
First Quarter Miss
Rackspace reported its first quarter results on May 8. Earnings per
share came in at 19 cents, missing the Zacks Consensus Estimate by
a penny. It was the company's second consecutive earnings miss.
Net revenue rose 20% to $362 million, but this was well below the
consensus of $371 million. CFO Karl Pichler stated in the press
release that Rackspace "got off to a slow start for the year".
Meanwhile, the operating profit margin declined 50 basis points to
11.8% due in part to higher R&D costs and higher depreciation
Although Rackspace missed Q1 earnings estimates by just 1 cent,
analysts have revised their earnings estimates significantly lower
for both this year and next. This has sent the stock to a Zacks
Rank #5 (Strong Sell).
The Zacks Consensus Estimate for 2013 is now $0.66, down from $0.95
just 30 days ago. The 2014 consensus has fallen from $1.30 to $0.86
over the same period.
You can see this negative earnings momentum in the company's 'Price
& Consensus' chart:
Not a Value Stock
Shares of Rackspace plunged nearly -25% after the Q1 earnings
report, but valuation still looks pricey at these levels. Shares
currently trade at 51x 12-month forward earnings, a premium to the
industry median of 17x.
The Bottom Line
With declining earnings estimates and premium valuation, investors
might consider avoiding Rackspace until its earnings momentum turns
Todd Bunton is the Growth & Income Stock Strategist for
and Editor of the
Income Plus Investor service
RACKSPACE HOSTG (RAX): Free Stock Analysis
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