Is Rackspace Undervalued?

With shares of Rackspace (NYSE:RAX) trading around $47, is RAX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Rackspace offers a diverse portfolio of cloud computing services, including public, dedicated and private cloud, and hybrid hosting. The global company sells its services to business customers in more than 120 countries.  Rackspace’s service offering combines hosting on dedicated hardware and on multi-tenant pools of virtualized hardware in a way that suits each customer’s requirements. The company’s public cloud services refer to pooled computing resources delivered on-demand over the Internet. As cloud technology becomes increasingly popular, Rackspace stands to make increasing profits into the future.

T = Technicals on the Stock Chart are Weak

Rackspace has seen an amazing bullish run since its initial public offering in 2008. The stock has had issues lately and has declined from all-time high prices. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Rackspace is trading below its declining key averages which signal bearish price action in the near-term.

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RAX

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Rackspace options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Rackspace Options

56.43%

93%

91%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

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As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion…

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Rackspace’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Rackspace look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

16.67%

35.71%

38.46%

70%

Revenue Growth (Y-O-Y)

24.59%

26.99%

29.03%

31.03%

Earnings Reaction

-19.57%

-4.73%

8.45%

-8.92%

Rackspace has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have expected more from Rackspace’s last four earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Rackspace stock done relative to its peers, Equinix (NASDAQ:EQIX), Internap (NASDAQ:INAP), Web.com (NASDAQ:WWWW), and sector?

Rackspace

Equinix

Internap

Web.com

Sector

Year-to-Date Return

-35.52%

5.43%

22.58%

12.36%

9.34%

Rackspace has been a relative underperformer year-to-date.

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Conclusion

Rackspace provides cloud products and services to consumers and businesses around the world. The stock has seen a monster run since its initial public offering. However, Rackspace stock has come down significantly in recent years as earnings and revenue figures have not impressed investors anymore. Relative to its peers and sector, Rackspace has trailed by a wide margin. WAIT AND SEE what Rackspace does this coming quarter.

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