Rackspace Technology, Inc.: Private Equity Favorite Breaking Out

RXT stockRackspace Stock’s Second IPO Could Be a Big Winner

It’s seldom that we see publicly traded companies go private and then resurface with a second initial public offering (IPO). But that’s the case with multicloud solutions provider Rackspace Technology, Inc. (NASDAQ:RXT)—and I’m intrigued by the results so far.

Rackspace stock initially debuted with its IPO in August 2008. After struggling for a few years, Rackspace Technology was acquired and taken private by major private equity firm Apollo Global Management Inc (NYSE:APO) in 2016.

As is often the case when private equity gets involved, Rackspace Technology, Inc. underwent changes and re-emerged on the public market in August 2020. The aim was to create a better, more focused technology company.

RXT stock is still 64% owned by Apollo Global Management, which should provide investors with some confidence that there will be support if needed.

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The following chart shows Rackspace stock rallying off a bullish double bottom, followed by a strong upside breakout.

RXT stock could fall back toward the 50-day moving average if it fails to hold the second upside move toward $25.00. This would be an opportunity.

Chart courtesy of StockCharts.com

Stronger Fundamentals Support Bull Case for RXT Stock

In its three years under the umbrella of Apollo Global Management, Rackspace Technology, Inc. delivered reasonably improved revenues.

Fiscal Year Revenues (Billions) Growth
2017 $2.14 N/A
2018 $2.45 14.4%
2019 $2.44 -0.6%

(Source: “Rackspace Technology Inc.” MarketWatch, last accessed February 17, 2021.)

The company’s upcoming 2020 earnings report is expected to see revenues ramp up to $2.7 billion, followed by growth of 8.9% to $2.9 billion in 2021. (Source: “Rackspace Technology, Inc. (RXT),” Yahoo! Finance, last accessed February 17, 2021.)

Along the way, Rackspace Technology has delivered positive earnings before interest, taxes, depreciation, and amortization (EBITDA).

Fiscal Year EBITDA (Millions) Growth
2017 $637.2 N/A
2018 $689.1 8.2%
2019 $686.6 -0.4%

(Source: MarketWatch, op. cit.)

While Rackspace Technology, Inc. has been reporting generally accepted accounting principles (GAAP) losses, its earnings-per-share (EPS) loss narrowed in 2019 and should improve.

Fiscal Year GAAP Diluted EPS Growth
2017 -$0.29 N/A
2018 -$2.31 -685.7%
2019 -$0.50 78.3%

(Source: MarketWatch, op. cit.)

Adjusting for one-time charges, analysts estimate that Rackspace Technology earned $0.79 per diluted share in 2020 and will earn $1.11 per diluted share in 2021. (Source: Yahoo! Finance, op. cit.)

Rackspace Technology, Inc. has managed to generate positive free cash flow. That’s good news, given the company’s high debt of $4.2 billion. (Source: Yahoo! Finance, op. cit.)

Fiscal Year Free Cash Flow (Millions) Growth
2017 $102.2 N/A
2018 $135.5 32.6%
2019 $94.9 -29.9%

(Source: MarketWatch, op. cit.)

Analyst Take

While I’m concerned about Rackspace Technology, Inc.’s debt, the fact that the company has been ramping up its revenues and profits—along with free cash flow—helps.

The company’s valuation is compelling. Rackspace stock trades at 1.6 times its consensus 2021 revenue estimate and 21.6 times its consensus 2021 EPS estimate.

These metrics are reasonable, considering some of the outrageous valuations that many other technology stocks and the Nasdaq trade at. RXT stock could rise 50% and still trade below the price-earnings multiple for the Nasdaq.