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Why Rackspace Hosting, Inc. Will Bounce Back to $45

By Brian Pacampara – Mar 25, 2014 at 1:10PM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Rackspace Hosting (RAX) soared 6% today after Morgan Stanley upgraded the cloud computing services specialist from equal weight to overweight.

So what: Along with the upgrade, analyst Keith Weiss planted a price target of $45 on the stock, representing about 40% worth of upside to yesterday's close. So while momentum traders might be turned off by the stock's sharp pullback over the past six months, Weiss' call could reflect a growing sense on Wall Street that Rackspace's growth prospects are becoming too cheap to pass up.

Now what: Morgan expects Rackspace's top line to grow 17% in 2014. "After a challenging year, we saw Rackspace showing improved bookings momentum exiting 2013, a trend we expect to continue in 2014," wrote Weiss in a note to investors. "The public cloud space is seeing aggressive competition from AWS and others, but we believe that a combination of strong industry growth and differentiated service offerings should allow RAX to deliver profitable growth over time." When you couple those tailwinds with Rackspace's cheapish EV/EBITDA of 10, it's tough to disagree with Morgan's upgrade. 

Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends Rackspace Hosting. We Fools may not 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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