Bullish indicating open at $55-$60, IPO prices at $37
On Monday, Raymond (NSE:RYMD) James analysts announced a downgrade for Rackspace Technology Inc . (NASDAQ:RXT) stock from Outperform to Market Perform. The decision comes in the wake of the company’s first-quarter results, which, while in line to slightly ahead of Raymond James’ estimates, highlighted a longer path to improved growth and free cash flow (FCF) than previously expected. According to InvestingPro data, RXT currently trades at $1.14, with a market capitalization of $271 million, suggesting the stock remains undervalued despite recent challenges.
Rackspace reported strong bookings and issued positive guidance for the second quarter, signaling that the company is making progress. However, the analysts at Raymond James believe that the transition to larger contracts, which is underway at Rackspace, will require more time for the company to adjust to than initially anticipated. InvestingPro data reveals the company generated $2.7 billion in revenue over the last twelve months, though with a concerning gross profit margin of just 20.17%.
The analysts’ comments reflected a cautious stance on the company’s near-term prospects. "We are downgrading shares of Rackspace to Market Perform from Outperform following 1Q results and adjusting for the current outlook," said the Raymond James analyst. They further explained the rationale behind the downgrade, stating, "Rackspace performed in line to ahead of our 1Q estimates with strong bookings and issued positive 2Q guidance as the ship continues turning, but the path to improved growth and FCF is longer than anticipated." This caution appears warranted, as InvestingPro analysis shows the stock has declined nearly 57% over the past six months, with additional challenges indicated by its weak Financial Health Score.
The downgrade indicates a change in expectations from Raymond James regarding Rackspace’s performance. While the company seems to be on the right track with its current operations and near-term forecasts, the analysts suggest that investors take a more measured view of the stock’s potential, given the extended timeline for the company to fully realize its growth strategies.
Rackspace’s focus on securing larger contracts is part of its long-term growth plan, but as the analysts noted, this strategic shift is not without its challenges and will take time to fully implement. The company’s efforts to turn the ship around are ongoing, and the second-quarter guidance provides a positive outlook, yet the journey to robust growth and stronger FCF is set to be a protracted one.
In other recent news, Rackspace Technology Inc. reported its Q1 2025 earnings, revealing revenue of $665 million, which surpassed analysts’ expectations. The company also reported a non-GAAP loss per share of $0.06, which was better than the forecasted loss of $0.0762. This performance marked the eleventh consecutive quarter where Rackspace met or exceeded its guidance, showcasing a positive trend in its financial results. Meanwhile, RBC Capital Markets adjusted its outlook on Rackspace, reducing the stock price target from $3.00 to $2.00 but maintaining a Sector Perform rating. This adjustment followed Rackspace’s earnings report, which exceeded expectations for both revenue and earnings. RBC Capital noted the company’s ongoing turnaround momentum, with total bookings for the quarter increasing by 9% year-over-year. The firm revised its financial forecasts for fiscal years 2025 and 2026, adjusting revenue, EBITDA, and EPS estimates slightly. Additionally, Rackspace announced a strategic partnership with Rubrik to launch a new cyber recovery solution, expected to drive future revenue.
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