Credit Suisse Lowers Rackspace PT, Sees 2 Big Challenges Ahead; Stock Falls In Pre-Market

Credit Suisse sees two challenges for Rackspace Hosting, Inc. (NYSE: RAX), and slashed its price target by $2 to $20 after the company reported mixed first-quarter results.

Analyst Sitikantha Panigrahi said the cloud service company would find it difficult to retain its existing public cloud customers and compete against existing AWS consulting partners, apart from near-term disruptions from the sales reorganization.

The analyst highlighted Amazon.com, Inc. (NASDAQ: AMZN) as a key competitor, stating that it offers cloud computing services in the form of Amazon Web Service, or AWS, which the analyst says consist of 1,356 partners, including 47 premier consulting partners.

Rackspace reported first-quarter revenue of $518.1 million with GAAP EPS of $0.37 versus consensus estimates of $518.9 million and $0.22, respectively.

For 2016, Panigrahi raised its revenue and EPS estimates to $2.124 billion and $1.07 from $2.119 billion and $0.93, respectively. However, the analyst maintains a Neutral rating on the stock.

Related Link: Breaking Down Morgan Stanley's $40 Bull And $12 Bear Case Scenarios On Rackspace

A revamp in sales and marketing, along with tepid macro environment, led Rackspace to report its first-quarter revenue below consensus estimate. The company is focusing more on the new emerging opportunities in third-party cloud services and OpenStack private cloud, according to the report.

Rackspace reaffirmed its 2016 revenue guidance of 4–8 percent growth, which implies a significant drop from 11.5 percent growth in 2015 due to softer first half, sales reorganization and the business model transition to provide third-party cloud services on Amazon AWS and Microsoft Corporation (NASDAQ: MSFT)'s Azure.

"Although the current valuation provides somewhat limited downside risk, we do not expect much upside on the stock price until the company shows progress in its business model transition," Panigrahi elaborated.

Shares of Rackspace closed Monday's regular trading at $22.54 and was trading down by more than 4 percent in Tuesday's pre-market session.