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Why Rackspace Technology Shares Crashed Hard Today

By Anders Bylund - May 11, 2021 at 1:47PM

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The cloud-computing expert beat the Street in the first quarter, but analysts and investors found a few market-moving concerns anyway.

What happened

Shares of Rackspace Technology (RXT -15.70%) suffered a sharp correction on Tuesday following the cloud-computing company's first-quarter earnings report. The stock fell as much as 28.1% in the morning session, stabilizing near a 21% drop by noon EDT.

So what

Rackspace's sales rose 11% year over year to $726 million. Adjusted earnings increased by 44%, landing at $0.23 per share. Your average Wall Street analyst would have settled for earnings of roughly $0.21 per share on revenues near $724 million.

Looking ahead, Rackspace's management set up mixed guidance targets for the second quarter with revenues running slightly ahead of current Street projections, while earnings are behind the average analyst's pace by a penny. The full-year earnings guidance pointed to bottom-line profits of roughly $1.00 per share. Here, analysts had been looking for $1.11 per share. Market makers jumped to the conclusion that Rackspace's earnings growth is slowing down, and that's why the stock is falling today.

A businessman looks down at a red charting arrow crashing down through the floor at his feet.

Image source: Getty Images.

Now what

Order bookings were up 6% year over year, which could be a bad sign for revenue growth in future quarters. Of course, it's hard to match the incredible results that were recorded during the coronavirus lockdowns and work-from-home trends of 2020.

"We are lapping our own efforts and are up against tough compares from a bookings-growth standpoint," CEO Kevin Jones said in the earnings call. "This will continue throughout the year as we landed a number of marquee multicloud deals, including the state of Texas deal in the second quarter of last year. So while we expect continued strong bookings in 2021, the year-over-year compares will be more modest."

Furthermore, Rackspace's stock has gained a market-beating 41% over the last six months, including today's sudden takedown. The market has been jumpy in this earnings season, holding back lots of high-flying growth stocks like Rackspace. There was nothing seriously wrong with this earnings report, despite the dramatic market reaction. Opportunistic investors might want to take a second look at Rackspace at these lower stock prices.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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