Why Rackspace Shares Got Crushed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Web-hosting company Rackspace Hosting (NYSE: RAX  ) plunged 18% today after its quarterly results disappointed Wall Street.

So what: Rackspace's fourth-quarter profit managed to meet estimates, but a small miss on the top line -- revenue of $353 million versus the consensus of $355.4 million -- reinforces serious concerns over slowing demand. Management blamed the slowdown on its transition to the next-generation cloud, but given that it is the fifth straight quarter in which growth has slowed, investors just aren't buying it.

Now what: For 2013, management expects to spend between $375 million and $445 million in total capital expenditures. "We have ambitious plans; plans that involve making significant investments in new product and service development, fanatical support capability, branding, OpenStack community support and geographic expansion," said CEO A. Lanham Napier in a conference call. "[I]n the cloud era, we're taking a more proactive role in the development and technologies that we manage for our customers." With the stock now off about 25% from its 52-week high, betting on that bullishness might not be a bad idea.

Interested in more info on Rackspace? Add it to your watchlist.

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