Technology stock

Why Rackspace Technology shares jumped 23% this morning

What happened

Shares of Rackspace Technology (NASDAQ: RXT) posted a peak gain of 23.4% just after the opening bell on Tuesday morning. The stock cooled a bit as market makers pondered Monday night’s Street-stumping earnings report. As of 12:45 p.m. EST, Rackspace was trading up 12.6%.

So what

In the third quarter of 2021, Rackspace sales increased 12% year-over-year to $763 million. The multicloud technology services vendor posted adjusted earnings of $0.25 per diluted share, a 32% increase over the prior year period. Your average Wall Street analyst would have settled for earnings close to $0.24 a share on revenue of around $756 million.

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Now what

Rackspace’s new order bookings were around $200 million, well below the $315 million of the previous year. Chief Financial Officer Amar Maletira insisted his company is on track to deliver $1 billion in order bookings in fiscal year 2021 as a whole, as very large deals are being signed in the fourth trimester. The sales strategy has shifted from a focus on new customers in 2020 to an expanded customer relationship in 2021.

“It tipped the sales equation toward deals with relatively smaller gross bookings, but higher profitability,” Maletira said.

The figures reported by Rackspace confirm Maletira’s claims so far. Investors should keep an eye on this anticipated increase in order intake three months from now. Reaching the stated goal of $1 billion for the full year requires fourth quarter bookings of approximately $300 million, slightly above the $293 million bookings in the fourth quarter of 2020.

Rackspace shares suffered a punishing haircut in the spring, and the effects of this dramatic correction linger as shares trade at a reasonable valuation of 14x forward earnings today. Rackspace looks like a solid idea for investors in the cloud computing space, where corporate rivals and partners tend to demand price-to-earnings ratios of at least twice that size.

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