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What's happening: Shares of hosting and cloud computing company Rackspace (NYSE:RAX) tumbled on Tuesday after the company missed revenue estimates for the first quarter and provided disappointing guidance for the second quarter. The stock was down nearly 14% at 11:30 a.m. EDT.
Why it's happening: Rackspace reported first-quarter revenue of $480.2 million, up 14.1% year over year but just shy of analyst expectations. Net income came in at $0.20 per share, in line with analyst estimates and up about 11% year over year.
While Rackspace's first-quarter earnings weren't too far off the mark, the company's guidance for the second quarter left a lot to be desired. Rackspace expects revenue to grow sequentially by just 1.5% to 2.5% on a constant-currency basis, negatively affected by a couple of factors explained by management on the company's conference call.
First, Rackspace has been pursuing large enterprise deals, and the timing of one such deal with a leading financial services company pushed the resulting revenue growth back to the third quarter. Second, an existing customer needed to move some of its business to Africa from the U.K., and since Rackspace doesn't have a data center in Africa, the company will lose that business, hurting second-quarter results.
Along with weak guidance, Rackspace also sports a high P/E ratio, possibly contributing to the plunge in the stock price today. Rackspace trades at a P/E ratio of about 60 based on 2014 earnings, and it's growing at a much slower rate than competing public clouds, like Amazon's AWS and Microsoft's Azure.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Rackspace Hosting. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. 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.