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Should You Buy Rackspace Technologies on the Dip?

Even though the shares of cloud technology company Rackspace Technology (RXT) have lost momentum over the past month, the company has made several operational advancements through various strategic collaborations. So,...

This story originally appeared on StockNews

Even though the shares of cloud technology company Rackspace Technology (RXT) have lost momentum over the past month, the company has made several operational advancements through various strategic collaborations. So, let's evaluate if it is worth buying the dip in the stock. Read on. - StockNews

San Antonio, Tex.-based multi-cloud technology services company Rackspace Technology Inc. (RXT) operates through Multicloud Services and Apps & Cross-Platform. The company accelerates clients' adoption of cloud computing by providing end-to-end services that include advising, design, migration, administration, and optimization across apps, data, and security.

RXT's shares have slumped 23.7% in price over the past three months, closing yesterday's trading session at $10.26. In addition, the stock is currently trading 61.1% below its 52-week high of $26.43, which it hit on April 09, 2021.

However, RXT's robust growth in its core revenue, which has been driven by progress across all its business segments, and recent strategic collaborations, should aid its overall performance in the coming months.

Click here to check out our Cloud Computing Industry Report for 2022

Here's what could shape RXT's performance in the near term:

Strategic Partnerships

This month, RXT achieved the Premier Partnership Level with Snowflake. Snowflake, a Data Cloud startup, picked Rackspace Technology to help it grow by leveraging data services knowledge and capabilities and the potential to expedite value for clients. The new status puts Rackspace Technology in the top 30 list of partners in the Snowflake partner ecosystem in the United States.

Last month, RXT extended its Strategic Collaboration Agreement (SCA) with Amazon Web Services (AWS) with a multi-year strategic investment to drive customer value and innovation. RXT's AWS business has risen by 250% over the last three years, and the company was selected 2021 AWS Migration Partner of the Year (US & Canada). The two companies will also work together to help customers embrace a cloud-built approach by expanding RXT's Elastic Engineering, a service designed to assist customers in building and operating modern cloud environments while delivering ongoing innovation and transformation, as well as world-class 24x7x365 operations.

Also last month, RXT announced an expanded strategic partnership with Cloudflare to provide expert services for Cloudflare Zero Trust, assisting businesses in achieving cloud-centric goals faster, supporting remote workers, and providing a Secure Access Service Edge (SASE) for their cloud applications, data, users, and devices. RXT's Rackspace Elastic Engineering for Security portfolio, which is offered to clients worldwide, includes managed services for Cloudflare Zero Trust.

Discounted Valuation

In terms of forward Non-GAAP P/E, the stock is currently trading at 11x, which is 44.3% lower than the 19.75x industry average. Also, its 1.81x forward EV/Sales is 46.2% lower than the 3.37x industry average. And RXT's 0.68x forward Price/Sales is 79.8% lower than the 3.34x industry average.

Consensus Rating and Price Target Indicate Potential Upside

Of the eight Wall Street analysts that rated RXT, five rated it Buy, and three rated it Hold. The 12-month median price target of $14.31 indicates a 39.5% potential upside. The price targets range from a low of $9.00 to a high of $19.00.

POWR Ratings Reflect Solid Prospects

RXT has an overall B grade, which equates to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. RXT has a B grade for Value. The company's lower-than-industry multiples are in sync with the Value grade.

Among the 55 stocks in the C-rated Technology – Communication/Networking industry, RXT is ranked #13.

Beyond what I stated above, we have graded RXT for Growth, Quality, Sentiment, Stability, and Momentum. Get all RXT ratings here.

Bottom Line

While the company's shares have lost significant momentum over the past few months, the company's continuing efforts to boost its operational performance and revenue growth should help its stock rebound in price in the coming months. In addition, an increasing reliance on cloud services across businesses to improve their seamless operations should further propel RXT's performance. Therefore, we think the stock could be a great bet now.

How Does Rackspace Technology Inc. (RXT) Stack Up Against its Peers?

RXT has an overall POWR Rating of B, which equates to a Buy rating. Check out these other stocks within the same industry with A (Strong Buy) ratings: Extreme Networks Inc. (EXTR), Viavi Solutions Inc. (VIAV), and AudioCodes Ltd. (AUDC).

Click here to check out our Cloud Computing Industry Report for 2022

RXT shares were unchanged in premarket trading Friday. Year-to-date, RXT has declined -23.83%, versus a -8.82% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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