Market Is Wrong About Rackspace Technology, Inc.; Share Price Could Double

Investors Undervaluing This Cheap Stock

Sometimes the second go-around works out, but that hasn’t been the case with multicloud solutions provider Rackspace Technology, Inc. (NASDAQ:RXT). Rackspace stock has undergone two initial public offerings (IPO) and, so far, it hasn’t been working out.

After being taken private by Apollo Global Management Inc (NYSE:APO) in 2016, Rackspace underwent some operational changes. Thinking it was a good time to go through its second IPO, Rackspace Technology, Inc. debuted again in the public market in August 2020.

After climbing to a record $26.43 on April 9, RXT stock retrenched by nearly 50% to a 52-week low of $13.32 on August 12.

Chart courtesy of StockCharts.com

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Some inconsistency in the company’s financial results, including a softer outlook for the third quarter, drove the selling in Rackspace stock.

So while the stock market likes to reward financial growth and consistent results, I feel the market was overly hard on RXT stock.

Attractive Valuation Makes RXT Stock Compelling

The 50% shave in the price of Rackspace stock was excessive.

We’re talking about a company that generated $2.8 billion in revenues in 2020, up by 11% from 2019. And it was during the COVID-19 pandemic.

Based on the company’s 2020 results, Rackspace Technology, Inc. trades at slightly over one times its 2020 revenues. This is dirt cheap and should provide some cushioning.

Fiscal YearRevenues (Billions)Growth
2017$2.14N/A
2018$2.4514.4%
2019$2.44-0.6%
2020$2.8111.0%

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

Consider that the company’s revenue estimates have been rising, which makes the price deterioration even more confusing.

Analysts estimate that Rackspace will increase its revenues by 11.7% to $3.0 billion this year and by another 10.7% to $3.4 billion in 2022. (Source: “Rackspace Technology, Inc. (RXT),” Yahoo! Finance, last accessed August 17, 2021.)

The company has generated four straight years of earnings before interest, taxes, depreciation, and amortization (EBITDA) income. But again, the stock market doesn’t like the inconsistency.

Fiscal YearEBITDA (Millions)Growth
2017$637.2N/A
2018$689.18.2%
2019$686.6-0.4%
2020$570.0-17.0%

(Source: MarketWatch, op. cit.)

Rackspace Technology, Inc. has been burning through generally accepted accounting principles (GAAP) losses, but the company is expected to produce strong adjusted earnings per share (EPS) for the next two years.

Fiscal YearGAAP Diluted EPSGrowth
2017-$0.29N/A
2018-$2.31-685.7%
2019-$0.5078.3%
2020-$1.37-173.0%

(Source: MarketWatch, op. cit.)

For 2021, Rackspace Technology, Inc. is expected to report an adjusted $1.01 per diluted share, followed by $1.23 per diluted share in 2022. (Source: Yahoo! Finance, op. cit.)

If the numbers come anywhere close to that, I’m sure the market will reward RXT stock with a much higher share price.

Rackspace Technology has been a consistent free-cash-flow (FCF) machine, albeit, in the last two years, it saw declining FCF.

Fiscal YearFCF (Millions)Growth
2017$102.2N/A
2018$135.532.6%
2019$94.9-29.9%
2020$58.2-38.7%

(Source: MarketWatch, op. cit.)

The major risk with Rackspace Technology, Inc. is the $4.2 billion of debt on its balance sheet. (Source: Yahoo! Finance, op. cit.)

While this is high relative to the company’s market cap and will need to be addressed, I’m not overly concerned at this time if Rackspace’s revenues increase, it’s profitable, and its FCF is positive.

Analyst Take

Rackspace Technology, Inc.’s insiders seem confident about the future of the company. Over the last six months, insiders added a net 4.7 million shares to their investment portfolios. (Source: Yahoo! Finance, op. cit.)

Given that Rackspace trades at 0.9 times its consensus 2022 revenue estimate and 11.6 times its consensus 2022 EPS estimate, the current risk/reward situation is intriguing.

I think the market has incorrectly priced Rackspace stock too low, providing investors with a great opportunity here.