Cloud Reality Check: Wall Street Keeps Rackspace In Perspective

Cloud Reality Check: Wall Street Keeps Rackspace In Perspective

There's no cause for panic. And don't press any alarms. But here's a timely cloud computing reality check. Rackspace's partner program continues to grow, the Rackspace OpenStack initiative is gaining momentum and a new Rackspace AppMatcher tool allows VARs and MSPs to more easily find SaaS applications for customers. Sounds great. But Wall Street is quietly raising a caution flag, suggesting that Rackspace shares have reached a near-term peak. Here's the update.

First, a friendly reminder: Wall Street analysts routinely upgrade and downgrade stocks all the time. Some upgrades and downgrades involve strategic news that will surely impact a company's short- and long-term performance. But in the case of Rackspace it seems like Wall Street is merely reminding investors that cloud stocks can't rise forever.

According to the Barron's Tech Trader Daily blog, Rackspace shares are trading lower this morning following a pair of downgrades, both on a valuation basis. Barron's reports:

  • RBC Capital analyst Jonathan Atkin cut his rating on the stock to Sector Perform from Outperform, while actually raising his price target to $29, from $23. “Following recent strength in RAX shares, we are downgrading our rating…on a less favorable reward/risk,” he writes in a research note. “We await further execution and scaling before taking a more aggressive view on the stock at this point.”
  • Morgan Stanley analyst Simon Flannery cut his rating to Equal Weight from Overweight, writing in a research note that “the risk/reward outlook is in balance” after a 34% year-to-date rally. “Although we maintain our positive view on the longer-term exposures to robust secular growth areas (cloud computing, enterprise IT outsourcing), and the differentiated competitive position, to turn more positive we would need to see further evidence indicating a higher likelihood for significant  revenue acceleration next year,” he writes.
Bottom line: Wall Street doesn't see any inherent problem with Rackspace's business. And on the channel front, MSPmentor continues to hear about more and more MSPs signing up for Rackspace's partner program. But cloud stocks can't rise forever. And in the case of Rackspace, some Wall Street pundits seem to be calling for a breather.

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