Rackspace Shorts Change Their Tune

Business is looking up for cloud-company Rackspace. And it’s pushing shorts to change their tune.

$RAX The narrative around this company has changed at least short term. We have had months to short it successfully. Doing it now = foolish

— who (@CoolBreeze) May. 13 at 10:59 AM

The company, which hosts and runs software for businesses on its remote servers, posted first quarter financial results Monday evening that beat Wall Street consensus estimates on EPS and sales. Rackspace said net revenue grew 16%, year-over-year, to $421 million. It posted EPS of $0.18 versus consensus’ $0.12-per-share estimate. Rackspace forecast sales between $434 million and $440 million for the current quarter. Shares rose more than 8% by noon.

“We are encouraged by qualitative factors, including the thousands of new customers we added in the quarter, including one of the largest we’ve ever landed,” said Rackspace CEO Graham Weston, in a statement.

But the shorts are not gone and many still believe that Rackspace has a tough road ahead. The hosting company has nearly 11.6% short interest, according to shortsqueeze.com.

$RAX Still too many deep pocketed bears betting against this as the cloud price wars thesis eventually spells doom for Rackspace's growth.

— •ZΩZΩ• (@AgentZero) May. 13 at 10:08 AM

Fueling that short interest are the prices of Rackspace’s tech giant competitors. Google, $GOOG, Amazon, $AMZN, and Microsoft, $MSFT, each offer cloud services for far less than Rackspace. Google, for example, offers a suite of cloud-hosted Google software, including mail, video chat, data storage, and document editing, for $50-a-year. Google says it offers some tech support with that package as well. Rackspace charges $100 for managed hosting.

Rackspace insists it has an edge with customer service. Its managed cloud comes with a “dedicated team” to help run hosted software and troubleshoot problems. “Rackspace’s strategy is to be the leader of the managed cloud category, the higher value alternative to the unmanaged approach,” said CEO Graham Weston on the conference call.

And some investors are starting to believe.

$RAX Stock was over sold and had better than expected ER and better than expected guidance and valuation based on 2015 eps not stratospheric

— Omar (@TheStacks) May. 13 at 09:44 AM


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