Rackspace Technology, Inc. (NASDAQ:RXT) Held Back By Insufficient Growth Even After Shares Climb 33%

Those holding Rackspace Technology, Inc. (NASDAQ:RXT) shares would be relieved that the share price has rebounded 33% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 34% in the last twelve months.

Although its price has surged higher, Rackspace Technology may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.1x, since almost half of all companies in the IT industry in the United States have P/S ratios greater than 1.8x and even P/S higher than 5x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Rackspace Technology

How Rackspace Technology Has Been Performing

While the industry has experienced revenue growth lately, Rackspace Technology's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

Keen to find out how analysts think Rackspace Technology's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The Low P/S Ratio?

Rackspace Technology's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 2.8%. Regardless, revenue has managed to lift by a handy 16% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Looking ahead now, revenue is anticipated to slump, contracting by 4.4% during the coming year according to the seven analysts following the company. That's not great when the rest of the industry is expected to grow by 11%.

In light of this, it's understandable that Rackspace Technology's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Rackspace Technology's P/S?

Despite Rackspace Technology's share price climbing recently, its P/S still lags most other companies. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It's clear to see that Rackspace Technology maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. As other companies in the industry are forecasting revenue growth, Rackspace Technology's poor outlook justifies its low P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 5 warning signs for Rackspace Technology (1 can't be ignored!) that you should be aware of before investing here.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.