Goldman Starts Rackspace At Neutral As Co. 'Still In The Midst Of Its Pivot'

• The share price of Rackspace Hosting, Inc. (NYSE: RAX) has declined 46.78 percent year-to-date, falling close to its 52-week low on October 1 at $24.03.
• Goldman Sachs’ Heather Bellini has initiated coverage of the company with a Neutral rating and price target of $27.
• Bellini believes that there could be 8 percent upside to the stock valuation, given that cloud vendors are changing the market dynamics, which could pressure Rackspace’s business.

Analyst Heather Bellini mentioned that increased competition in the public cloud segment has continued to compress Rackspace’s public cloud revenue growth, decreasing from 61 percent year-on-year in CY2012 to an estimated 17 percent in CY2015.

Bellini also believes that the company's new strategy would take time to bear fruit. Rackspace launched its new service Fanatical Support in mid-2015 to “offset the shift in the market towards the largest public cloud vendors.”

“We expect this new business to help offset the decline in cloud growth, although we see it pivoting the company to more of a pure managed service provider,” Bellini stated, while cautioning that this business would only be able to make a meaningful revenue contribution by CY2020.

Public cloud competition has also been impacting Rackspace's dedicated cloud, which saw 20 percent growth in 2012, 11 percent in CY2013 and 12 percent in CY2014. However, the dedicated cloud business is expected to decelerate to 9 percent year-on-year in 2015.