Is 'Fanatical Support' For Rackspace Shares Fading?

The three charts below are intended to help investors quickly put the Rackspace Hosting, Inc. (NYSE: RAX) trading activity following its Q1 earnings release into perspective.

Shares of cloud hosting innovator Rackspace plunged down over 12 percent in after-hours trading on Monday May 11; as the company commented on Q1 results and reaffirmed FY 2015 guidance on its earnings call.

Rackspace CEO Taylor Rhodes kicked off his prepared remarks by touting the "fanatical service" that his 5,900 'Rackers' provide to over 300,000 managed cloud customers worldwide, through nine RAX data centers on four continents, as well as at customer owned facilities.

However, Rackspace finds itself both competing and partnering with cloud service offerings from computing giants, such as: Amazon.com (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT) and Google (NASDAQ: GOOG).

Related Link: Digital Realty & Rackspace Partnership Sprouts Innovative Green Data Center

Essentially, it was management commentary and color surrounding how Rackspace is planning to expand in the fast growing and faster evolving cloud computing space that was both the good news, and perhaps the unsettling news, for some investors.

Here are three charts to help investors put things into perspective at a glance:

1. Tale Of The Tape - After Q1 Earnings Release

Rackspace shares immediately fell off sharply from its 4:00pm close of $53.13.

In a nutshell, with RAX shares trading at a P/E ~69x, and forward PE of ~45x; the forecasted rate of growth, and how that growth will have to be achieved, could be what spooked investors given the competitive dynamics of this space.

2. Rackspace Shares - Strong Performance TTM

The chart above, shows that Rackspace shares have a recent history of "gap downs," followed by a steady rise during the past year -- in fact up ~90 percent -- prior to the steep after-hours drop on May 11.

3. Five Year Chart - Now What?

The question which must be on every investors mind today: Are the best years for RAX ahead or behind for this cloud hosting leader?

Rackspace Q1 Earnings Call - Highlights

• Rackspace has shifted more sales focus and resources towards reeling in larger enterprise cloud deals, $100,000 deals vs. $1,000 sales. However, that also means that sales projections will be "lumpier" as larger deals can stretch out 30 to 90 days, and revenues fall into other quarters.
• During Q1 Rackspace revenue took a one time hit from the loss of a U.K. customer "production element," which was relocated to Africa, a continent where RAX does not have its own data center.
• Like many companies with international operations, FX was a headwind for Rackspace in Q1, which knocked revenue growth down from 16.6 percent "constant currency," to 14.1 percent.
• Rhodes announced the launch of a new cloud services offering -- supporting Microsoft Office 365 customers -- and he went on further to explain how Rackspace was "technology agnostic," and anticipates other initiatives beyond its own cloud offerings, (including supporting customers on Amazon and Google cloud platforms).

Investor Takeaway

Based upon what Rhodes shared on the call, it appears in many respects Rackspace is a work in progress this year; having to evolve its model in order to piggy-back managed services onto the growth of AWS and other larger cloud providers.

When asked by JMP analyst, Pat Walravens, "What do you need to accomplish first before managing workloads on AWS?" Rhodes responded that RAX is "developing internal resources... those are underway... and that's all I have for you today."

Managed services is a "capital light" model for Rackspace, which may turn out to be a highly profitable growth engine; however, based upon the limited information which Rhodes was able to share, many questions still remained unanswered after the call.