Rackspace's Cloud Transformation Is Promising But The Risks Are High

Summary

• Rackspace's shares are hovering around all-time lows. The company's growth outlook is moderating and its profitability is declining.
• The business still has a solid recurring revenue base. It also has very strong free cash flow, generating a 24% FCF yield in the past twelve months.
• Management says that demand trends are still positive. The company is positioning itself to benefit from the public cloud computing market.
• The company's very high leverage is a major concern. At 6.6 times LTM EBITDA, this debt burden could reduce potential shareholder returns for years.

Jian Fan

Investment Thesis

Rackspace (NASDAQ:RXT) has an impressive revenue profile. The company has a robust recurring revenue base and generates strong free cash flow. But the business is experiencing severe margin pressure. Its debt burden is also extremely high. For these

Analyst’s Disclosure:I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.