What happened
Rackspace Technology (RXT) shares jumped ahead of the market early Thursday, rising over 15% by 10:30 a.m. ET before settling to a 3% increase by the early afternoon. The cloud tech developer's shares have been volatile in the past year and are currently down over 70% since early 2022.
Thursday's rally was powered by surprisingly strong earnings results for the selling period that ended in late December.
So what
Rackspace's management team said late Wednesday that sales in Q4 rose 1% to $787 million, while non-GAAP (generally accepted accounting principles) operating profit fell 40% to $74 million. While those figures weren't impressive in isolation, they both beat the outlook that executives had issued in early November.
That Q3 forecast called for sales to revenue to land at around $783 million, with adjusted profits between $65 million and $69 million. Given the stock's sharp decline in the past year, it's no surprise that this outperformance would spark a modest rally.
Yet the boost was tempered by the fact that Rackspace is still struggling to accelerate growth even as it posts losses. Operating loss expanded to $227 million in Q4, compared to a $27 million loss in the prior year period.
Now what
Management is hoping to put those poor trends behind them. "My focus is on changing the trajectory of the business and positioning Rackspace for sustained, long-term growth," CEO Amar Maletira said in a press release. Along those lines, it is encouraging that the company boosted its customer rolls in 2022 despite major pressures on IT spending among most tech enterprises.
Investors can expect more volatility ahead for this small-cap stock. Rackspace is not calling for a quick return to accelerating sales growth, after all, with sales likely to fall slightly in Q1. Operating cash flow trends are solid, although it might be a few more quarters before the company can start generating steady net profits.
As a result, investors might want to watch this rebound attempt from the sidelines rather than jumping into the stock following this Q4 earnings update.
