Why Rackspace Hosting, Inc. Fell 18.8% in September

Nothing to see here, except perhaps a fantastic buy-in opportunity.

Anders Bylund
Anders Bylund
Oct 7, 2015 at 8:30PM
Technology and Telecom

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What: Shares of Rackspace Hosting (NYSE:RAX) fell 18.8% in September according to data from S&P Capital IQ. It was the second terrible month in a row for the purveyor of data center management and specialized networking solutions. From the end of July to the start of October, the stock lost a hair-raising 27.5% of its former value.

So what: The August drop sort of made sense, since Rackspace bears could hang their hats on a decent second-quarter report with a side of disappointing forward guidance. September's continued plunge, on the other hand, rested on no particular news at all.

If I bent over backwards to find a negative catalyst, I'd point out that fellow data center manager Internap (NASDAQ:INAP) slashed its revenue and profit estimates near the end of the month. And if you're into mixed signals, a rash of analysts either downgraded Rackspace or lowered their target prices around the 11th of September -- rebuked by a comparable number of companies moving in the opposite direction. I suppose that should trigger a slide if investors trust the bearish analysts more than their bullish counterparts.

Now what: Rackspace has started to bounce back from this senseless slide, rising 14% in the first four trading days of October. The positive catalyst here is a brand-new partnership with Amazon.com (NASDAQ:AMZN), which allows Rackspace to bundle its prize-winning support services with Amazon's market-leading cloud computing platform.

The company actually signed a similar deal with Microsoft (NASDAQ:MSFT) in July, adding Rackspace's trademark "fanatical support" to Redmond's Windows Azure platform. Locking arms with Windows Azure obviously didn't lift Rackspace's shares, but landing a deal with Amazon's dominant cloud products sure did.

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.

These deals undermine Rackspace's own cloud computing solutions, but they also give the company a way to stay relevant even if the Rackspace Cloud fades into obscurity. The company has always prided itself on first-class support services, and it may now become a bundled support partner for pretty much any of the largest cloud platforms on the market today.

None of that played into September's market action, of course. I'm just painting a picture of what's next for Rackspace -- and why this two-month plunge shouldn't be seen as a harbinger of impending doom. This company can still find a useful place in the emerging big data and Internet of Things markets.

Meanwhile, Rackspace shares are selling at rock-bottom price-to-earnings ratios not seen since 2009. I can't guarantee that you'll ever be able to sell this stock high, but you can certainly buy low right now.