Digital Transformation And Cloud Migration Will Expand Managed Services

Key Takeaways

• Shifting to high-value, long-term service contracts and expanding in data, security, and AI services is accelerating earnings and strengthening operating leverage.
  
• Strong positioning in regulated, critical sectors and continued innovation in AI and cloud solutions drive resilient revenues, pricing power, and market share gains.
  
• Ongoing revenue and margin pressures from cloud commoditization, customer attrition, and intensifying competition threaten Rackspace's long-term growth and earnings stability.

Catalysts

Operates as a cloud and artificial intelligence solutions company in the Americas, Europe, the Middle East, Africa, the Asia Pacific, and Japan.

• While analyst consensus expects strong private and public cloud bookings to merely stabilize or modestly grow revenues, current momentum and consistently rising win rates in larger enterprise deals suggest Rackspace is positioned for a sharp inflection to high single-digit top-line growth and a rapid return to sustained net margin expansion as product mix shifts toward higher-value, long-term contracts.
  
• Analysts broadly agree that pivoting from infrastructure resale to high-margin services will lift margins, but this may actually understate the boost-Rackspace's land-and-expand model, coupled with fast-growing cross-sell in data, security, and AI services, is likely to meaningfully accelerate operating leverage and drive double-digit annual earnings growth over the next several years.
  
• Rackspace's direct exposure to regulated and critical sectors such as healthcare, energy, finance, and sovereign cloud positions it as a unique beneficiary of the accelerating, multi-year wave of digital transformation and rising data privacy regulations, supporting resilient recurring revenue streams and strong pricing power.
  
• The company's rapid pace of product innovation-including groundbreaking solutions in cyber recovery and AI-optimized private clouds-gives Rackspace early-mover advantage in specialized, high-growth segments of the managed cloud market; this supports outsized market share gains and expanding addressable revenue opportunities.
  
• Ongoing operational discipline, CapEx efficiency programs, and upfront customer investments are driving structurally improved cash flow conversion, enhancing Rackspace's ability to invest in strategic growth while supporting a faster de-leveraging and improved return on equity.

Rackspace Technology Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Rackspace Technology compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Rackspace Technology's revenue will grow by 1.5% annually over the next 3 years.
• Even the bullish analysts are not forecasting that Rackspace Technology will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Rackspace Technology's profit margin will increase from -10.7% to the average US IT industry of 7.4% in 3 years.
• If Rackspace Technology's profit margin were to converge on the industry average, you could expect earnings to reach $209.3 million (and earnings per share of $0.76) by about August 2028, up from $-289.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 3.7x on those 2028 earnings, up from -1.0x today. This future PE is lower than the current PE for the US IT industry at 26.4x.
• Analysts expect the number of shares outstanding to grow by 5.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Rackspace Technology Future Earnings Per Share Growth

Risks

• Rackspace's core business faces long-term headwinds from industry-wide cloud vendor consolidation and client insourcing, as more enterprises move workloads and management directly to hyperscalers, potentially shrinking Rackspace's customer base and pressuring long-term revenues.
  
• The company's guidance and current financials show year-over-year revenue declines in both private and public cloud segments, reflecting continued secular pressures from cloud services commoditization and automation, which may challenge Rackspace's ability to return to sustained topline growth.
  
• Private cloud revenues continue to decrease due to customer roll-off from legacy offerings and the shrinking relevance of traditional hosted and data center solutions, which limits future revenue mix and compresses gross margins.
  
• Rackspace's focus on capital efficiency and reduction in low-margin infrastructure resale indicates ongoing difficulties in maintaining pricing power and defending net margins, particularly as competition intensifies and managed cloud services become commoditized.
  
• Growth in regulated industries and new offerings may not offset broader macroeconomic uncertainties, the risk of customer onboarding delays, or the loss of key enterprise contracts, all of which could lead to revenue unpredictability and increased earnings volatility.

Valuation

• The assumed bullish price target for Rackspace Technology is $2.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Rackspace Technology's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $2.0, and the most bearish reporting a price target of just $1.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $209.3 million, and it would be trading on a PE ratio of 3.7x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $1.22, the bullish analyst price target of $2.0 is 39.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.