The Ratings Game: Rackspace stock rallies after earnings mark a ‘modestly positive’ step forward

Rackspace generated revenue of $763 million, up from $682 million a year prior, the company noted its in Monday afternoon earnings report. Analysts tracked by FactSet were modeling $756 million.

Shares are up about 12% in Tuesday’s session. If the gains hold through the close, this would mark the first time that Rackspace shares increased following aon earnings report since the company reemerged on the public market in Aug. 2020.

The company also issued a fourth-quarter outlook calling for $766 million to $776 million in revenue and 23 cents to 25 cents in adjusted earnings per share. The FactSet consensus was for $771.4 million in revenue and 24 cents in adjusted EPS as of late October.

Rackspace won some praise from analysts after the report. “We think this print was better than prior reports as not only did we get a positive revenue trajectory, but also importantly, gross margins were fairly stable and free-cash flow came in at $81 million for the quarter,” wrote Evercore ISI analyst Amit Daryanani in a note titled “The Start of Something New?”

He has an outperform rating and $24 price target on the stock.

Oppenheimer analyst Timothy Horan acknowledged that “gross margins were weak and likely will remain so for another year,” but he saw other positives in the report, including strong cloud demand. “Also, the company is focused on larger and higher-margin business, and has aggressively taken expenses out of the business,” he wrote, while maintaining an outperform rating and $28 target price.

BMO Capital Markets analyst Keith Bachman wrote that he lowered his estimates following several recent Rackspace reports, but this time the company posted in-line results and “essentially confirmed” the implied fourth-quarter outlook.

“While we are not declaring that RXT’s business transition journey is concluded, we nevertheless believe that meeting/guiding in line with consensus is a modestly positive step in the course of the transition,” wrote Bachman, who has an outperform rating and $18 target price on the shares.

Barclays analyst Ramsey El-Assal wrote that while the company saw bookings decline on a sequential and year-over-year basis, “the company remains on track to hit their FY21 target of ~$1 billion, helped by a single large deal in Q4, which should, in turn, support the likelihood of achieving double-digit core revenue growth again in F22.” He rates the stock at equal weight with a $15 price target.

El-Assal noted that Rackspace likely faced a “more pessimistic outlook from the buy side,” which could be helping its stock Tuesday. Short interest represented about 20% of the stock’s float, according to data from FactSet.