For investors in Rackspace Hosting (NYSE:RAX), the past couple of years have been painful, with the share price having lost two-thirds of its value between its early 2013 highs and its 2014 low point. Since then, though, investors have started to get more optimistic about Rackspace's prospects to cash in on the lucrative cloud-computing industry, and the month of November in particular has seen a resurgence of interest in Rackspace stock.
Even with shares up almost 20% in November, Rackspace still faces plenty of questions about how it can hold its own in the increasingly competitive cloud space. Let's take a closer look at Rackspace Hosting to find out why it jumped so high in November, and whether it can build on that success for the rest of 2014 and beyond.
Why Rackspace Hosting fell so far
There's no disputing that cloud computing has captured the attention of tech investors, with seemingly limitless potential to encourage customers to transform their IT operations from costly in-house operations to more efficient outside solutions that can cut costs substantially. But for Rackspace, competition between behemoths Amazon.com (NASDAQ:AMZN) and Google (NASDAQ:GOOG) made it substantially more difficult for the smaller company to sustain its growth. Rackspace has tried to stick with higher-end solutions that it can customize to the particular needs of its customers, looking to justify its premium pricing compared to Amazon and Google. Yet the pricing-war environment has made it harder for Rackspace to find customers willing to pay up for better service, and that has played a large part in Rackspace's stock slump in 2013 and 2014.
Given those pressures, Rackspace hired a Wall Street consultant to help it evaluate options for putting itself up for sale, or selling off pieces of its business. Those efforts came to naught, though, as the company gave up on its strategic review back in September. Rackspace has therefore had to figure out how to navigate the turbulent cloud environment on its own, without a rescue from an outside acquirer.
What made Rackspace bounce back?
A couple of weeks ago, Rackspace showed that it's far from down for the count. In its third-quarter financial report, Rackspace fared better than investors had feared, producing revenue growth of 18% to $459.8 million. More importantly, earnings per share soared 64% from year-ago levels, topping the consensus prediction and encouraging investors that Rackspace still has the ability to produce substantial profits. Rackspace also set a new record for monthly revenue per server, and better margins and returns on capital showed that the company has managed to respond to the competitive pressures in the industry more effectively.
Unfortunately, Rackspace's future still includes plenty of clouds. The cloud-services provider's fourth-quarter revenue guidance came in below the levels investors had hoped to see, and foreign-currency impacts could continue to take a toll on Rackspace's results into the future.
Rackspace also helped goose its stock higher by announcing a major share repurchase program. Rackspace intends to spend $500 million in buying back its stock, and in its release, it said it planned to use $200 million of that money during the current year. With so many companies waiting until their share prices soar through the roof to implement buybacks, Rackspace investors applauded the cloud company's decision to repurchase shares more cheaply.
After the rise in Rackspace Hosting's stock, the next step will be for the company to prove that it can keep competing even with the ongoing heavy competition among tech giants. Cloud computing is a huge market, and there's plenty of room for Rackspace to occupy a valuable niche, even with Google, Amazon, and other players sharing the space. Still, it'll take more than a stock buyback to convince investors that Rackspace's November gains will last and build into a more substantial advance in the future.
Dan Caplinger owns shares of Google (C shares). The Motley Fool recommends Amazon.com, Google (C shares), and Rackspace Hosting. The Motley Fool owns shares of Amazon.com and Google (C shares). 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.