Volatility Alert For Rackspace Hosting 3Q 2011: Company Reports Today

| About: Rackspace Hosting, (RAX)

by Brendan Gilmartin


Rackspace Hosting (NYSE:RAX) shares are up more than 40% from the recent low of $31.49, thanks in part to an impressive earnings release last month [see transcript] from its counterpart Equinix (NASDAQ:EQIX).

Rackspace, which specializes in data center hosting and cloud-computing solutions, has benefited from the migration of small and medium-sized businesses to the cloud. The company now services more than 130,000 business customers, manages more than 66,000 servers, and 417,000 cloud-hosting domains. Furthermore, Equinix attributed stronger than expected results and an upbeat outlook to growth in IP, mobile, video, and cloud – key markets Rackspace also serves.

Rackspace is expected to earn $0.14 per share in the 3Q period (range is $0.11 - $0.15), on revenue of $261.63 million, up 31% from the year-ago period (Source: Yahoo! Finance). Given the recent run-up in the shares and the positive news priced in at these levels, it will take results above the high end of guidance to push the stock toward the April high. Valuation is also a concern with the shares now trading at 54x forward earnings and a PEG ratio of greater than 2.0, leaving Rackspace vulnerable to any missteps. These concerns are evident by the relatively high short interest (10.28%).

Aside from Equinix, sympathy plays include: CenturyLink, Inc. (NYSE:CTL), Internap Network Services Corp. (NASDAQ:INAP), and Interxion Holding NV (NYSE:INXN).

Chart Review

  • Rackspace is at the recent highs near $42.50, a soft near-term resistance level, with further upside to the 52-week high of $46.49.
  • In the event of a disappointing earnings release, initial support is at $40, followed by the 200-Day SMA near $39, a previous support/resistance line at $38, and the 50-Day ($37.00).

Click to enlarge

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