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Rackspace Hosting Inc. Tumbles Following Microsoft Azure Price Cut

By Timothy Green - Jan 15, 2016 at 3:40PM

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With Microsoft and Amazon engaged in a cloud computing price war, investors are growing pessimistic about smaller players in the industry.

What: Shares of cloud computing and web hosting company Rackspace Hosting (RAX) slumped Friday on news that Microsoft (MSFT -0.26%) had slashed prices for some of its Azure cloud computing services. At 2:45 p.m., the stock was down about 9%, after being down as much as 11.4% earlier in the day.

So what: When infrastructure-as-a-service leader Amazon (AMZN -1.24%) cuts prices on its core computing services, Microsoft is committed to following suit. The latest such price cut from Amazon came on Jan. 5, when the company announced that it was lowering prices of a few different types of computing instances by 5%.

On Friday, Microsoft responded to Amazon by announcing a price cut of its own. Microsoft is slashing prices by as much a 17% on its D-series of virtual machines, continuing the price war between Microsoft and Amazon that has been a boon for users of public cloud services.

Rackspace, being much smaller than either Amazon or Microsoft, is unable to compete solely on price, and concerns about this price war hurting its business has led to the stock tumbling by more than 50% over the past year. This latest price cut from Microsoft has only intensified these concerns.

Now what: Rackspace is focused on providing managed cloud services while offering superior customer service, as opposed to both Amazon and Microsoft, which sell commodity cloud computing services. Rackspace loses in a price war, so its strategy makes a lot of sense.

However, investors have not been buying into the company's strategy over the past year, despite continued revenue growth and rising profits, and the drop in the stock price on Friday marks the continuation of that trend. Only time will tell whether Rackspace's strategy will pay off, but investors don't seem very optimistic at the moment.

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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