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Why Shares of Rackspace Hosting Inc. Slumped on Monday

By Timothy Green - Jan 11, 2016 at 4:37PM

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Both Amazon's AWS and Microsoft's Azure are gaining mindshare among CIOs at the expense of Rackspace.

What: Shares of cloud-computing company Rackspace Hosting (RAX) slumped on Monday, driven in part by a note put out by Piper Jaffray that suggested that both Amazon's (AMZN -1.24%) AWS and Microsoft's (MSFT -0.26%) Azure have gained mindshare among CIOs.

So what: According to Piper Jaffray's recent survey of 135 CIOs, AWS gained 130 basis points of mindshare from competitors since the previous survey last year. The firm points to AWS' functionality, scalability, fast pace on innovation, and developer loyalty as the key drivers of the mindshare gains. According to the survey, 87% of CIOs intended to spend more on AWS in 2016 compared to 2015.

Microsoft's Azure cloud platform was also a big winner, gaining 810 basis points of mindshare. Piper Jaffray sees Azure as the only meaningful threat to AWS, although the firm points to heavy marketing as one of the drivers of Azure's growth. These gains in mindshare for both AWS and Azure came at the expense of smaller players like Rackspace.

Now what: Shares of Rackspace have declined by more than 50% over the past year, in part due to fears that the company will be unable compete with larger players like Amazon and Microsoft in the long run. Rackspace has focused on offering superior customer service, as opposed to trying to compete solely on price, and while the strategy makes sense, investors don't seem so sure.

Whether CIO mindshare has any predictive power at all when it comes to the cloud-computing market remains to be seen. Rackspace is still growing at a healthy pace, posting 10.7% year-over-year revenue growth during its latest quarter. That's peanuts compared to the growth of Amazon's AWS, but Rackspace certainly isn't falling apart. Only time will tell whether the smaller company can compete with Amazon and Microsoft in the long run.

Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends The Motley Fool recommends Rackspace Hosting. 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.

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