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Why Rackspace Hosting, Inc. Shares Plummeted

By Steve Symington – Feb 11, 2014 at 4:55PM

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Is Rackspace's drop meaningful? Or just another movement?

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 Rackspace Hosting (RAX) fell more than 18% Tuesday after the company announced the resignation of its CEO, mixed quarterly results, and light forward revenue guidance.

So what: After 14 years from the time he co-founded Rackspace, 43-year-old CEO Lanham Napier has decided to step away from public company executive leadership. Instead, he plans to invest in and advise other entrepreneurial companies going forward.

Rackspace is currently in the process of identifying Napier's long-term successor, but for now he'll be replaced by Fellow Rackspace co-founder Graham Weston, who previously served as CEO for seven years from 1999 through 2006.

Meanwhile, quarterly revenue rose 16% year over year to $408 million, which translated to a 33% decrease in net income per diluted share to $0.14. Analysts, on average, were looking for Rackspace to turn in earnings of $0.14 per share on lower sales of $404.56 million.

In the current quarter, Rackspace expects revenue to grow sequentially between 2% and 3.5%, resulting in a range between $416.16 million and $422.28 million. Rackspace also expects full-year 2014 revenue to grow between 15% and 18%, or to a range between $1.765 billion and $1.811 billion. The midpoint of both ranges falls just barely short of analysts' estimates, which on average call for Q1 and full-year 2014 revenue of $421.28 million and $1.79 billion, respectively.

Now what: But it still appears much of today's pullback is the result of the young CEO's move to step down -- or, as Rackspace curiously worded it, to "retire" from the company. Perhaps Napier simply needs to scratch an entrepreneurial itch he couldn't appease at his current post, but investors understandably don't like seeing a co-founder step away to foster what he potentially sees as more promising ventures.

That hardly means Rackspace is doomed, but shares do look pricey given its growth and trading around 34 times next year's estimated earnings. As a result, and until the dust settles, I'm perfectly happy watching from the sidelines for now.

Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Rackspace Hosting. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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