The frontiers of technology are full of great new innovations
that quickly become commodities. The so-called cloud revolution for
data storage and software application usage may soon have its own
"commodity moment" for firms competing to win and sustain business.
And one company currently experiencing the pain of pricing
), a leading provider of hosting services in which the company
provides IT infrastructure and management for customers' Websites,
applications, and other computing needs through its data centers
and cloud services.
RAX slipped to Zacks Rank #4 (Sell) and then a Rank #5 (Strong
Sell) last week after analysts continued to lower earnings
estimates. Full year 2013 profit projections have been taken down
by over 11% in the past two months since the company's last
quarterly report on February 12.
The impetus for the downward revisions has been Rackspace's
announced pricing changes for certain cloud services, including a
33% reduction in the price for cloud bandwidth/CDN services and the
introduction of tiered pricing for its object storage service that
equates to volume discounts.
Here' the Zacks proprietary Price & Consensus chart which
tracks annual estimate changes and plots them against the stock
Expectations Coming Down from the Clouds
Last week also brought price concessions from a bigger name in the
) recently announced its decision to slash prices for its Windows
Azure cloud services as part of an effort to better compete with
) cloud computing platform.
The decision to slash prices by 21% to 33% for some of its online
data services will help Microsoft to match the prices offered by
Amazon Web Services (AWS). Once again, it appears that Amazon can
develop strong new revenue streams in new business areas by being
the lowest cost provider that everyone else must compete with.
The news from these behemoths was definitely a factor in the
analyst moves on RAX, as several have shifted to a "hold" rating on
the stock. Here's what one prominent Wall Street house wrote last
"We are reducing our estimates to reflect more conservative cloud
revenue growth assumptions. We believe recent pricing changes for
certain cloud services will likely result in near-term growth
headwinds on that side of the business (~25% of revenue)."
Bottom line: Though the decline in RAX has been very steep,
dropping the stock 40% from $75 to $45 in only 10 weeks, some
investors may still consider it a falling knife with its current
growth outlook. With a forward P/E near 50X, this is one that could
still fall further if its earnings visibility only gets cloudier.
Kevin Cook is a Senior Stock Strategist with
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RACKSPACE HOSTG (RAX): Free Stock Analysis
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