Rackspace stock rating cut to Market Perform by Raymond James

Raymond James downgraded Rackspace (RXT) from Outperform to Market Perform following Q1 results that met expectations but indicated a longer timeline for improved growth and free cash flow, despite strong bookings and positive Q2 guidance; this aligns with RBC Capital's reduced price target from $3 to $2 while maintaining a Sector Perform rating, reflecting ongoing turnaround momentum but revised financial forecasts for fiscal years 2025 and 2026, even as Rackspace reported Q1 revenue of $665 million, surpassing expectations, and a smaller-than-expected non-GAAP loss per share.

Analysis

Rackspace Technology (RXT) has received a downgrade from Raymond James to Market Perform from Outperform, reflecting concerns over a more extended timeline for achieving improved growth and free cash flow (FCF) than previously anticipated, despite Q1 results that were in line to slightly ahead of estimates. Rackspace reported Q1 2025 revenue of $665 million, surpassing analyst expectations, and a non-GAAP loss per share of $0.06, which was better than the forecasted loss of $0.0762, marking its eleventh consecutive quarter of meeting or exceeding guidance. The company also issued positive Q2 guidance and reported strong bookings, with RBC Capital noting a 9% year-over-year increase in total bookings for Q1. However, the stock has experienced a significant decline of nearly 57% over the past six months, currently trading at $1.14 with a market capitalization of $271 million. InvestingPro data indicates a concerning gross profit margin of just 20.17% and a weak Financial Health Score. Aligning with a cautious outlook, RBC Capital Markets reduced its price target on RXT from $3.00 to $2.00 while maintaining a Sector Perform rating, citing the ongoing turnaround but adjusting financial forecasts. The strategic shift towards larger contracts is seen as a key part of Rackspace's long-term plan, but analysts emphasize this transition will require more time and presents challenges. A new strategic partnership with Rubrik for a cyber recovery solution is expected to contribute to future revenue, but the overarching market sentiment remains mixed, underscoring the protracted nature of the company's recovery.

Key Decisions for Investors

• Investors should carefully evaluate Rackspace's current low valuation against the explicitly stated longer path to improved growth and free cash flow, considering the execution risks inherent in its strategic transition to larger contracts.
• Monitor upcoming quarterly reports for sustained booking momentum, particularly the impact of larger deals, any improvement in the 20.17% gross profit margin, and concrete steps towards achieving positive and growing free cash flow.
• Given the stock's nearly 57% decline in six months and weak financial health indicators, a cautious approach is advisable, though the consistent meeting of guidance and potential from new partnerships like Rubrik might appeal to investors with a higher risk tolerance and a longer-term perspective on the turnaround.