Shares of Rackspace (NYSE: RAX) declined on Tuesday after Google (Nasdaq: GOOG) lowered prices on some cloud computing services. These included 10% price reductions for compute and 60% for high end storage, according to reports. In the view of analyst Gray Powell, the announcement isn't a major change.
"RAX will likely trade down on the news as the headline indicates that competition is increasing in the cloud space. While a 60% price cut on high end storage looks very bad we would simply note that these headlines can often be very misleading," said Powell.
"The compute component of a cloud offering is typically the bulk (75%+) of a customers' bill and a 10% price reduction on compute is somewhat normal for the space. Ultimately, we think everyone is chasing AWS which based on its latest earnings report appears to be running at $3.0B+ in revenue and growing north of 60%/yr. In fact, if we add up Azure, Google, IBM and RAX cloud revenue AWS is larger than all combined. Ultimately, we do not see this announcement marking a major change in the competitive landscape in the IaaS space. That said, we expect RAX to remain under pressure on the back of the announcement and believe that investors need to see improved sequential growth in Q4 before coming back to the story in a material way," he added.
Wells Fargo has an Outperform rating on Rackspace.
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Shares of Rackspace closed at $37.50 yesterday, with a 52 week range of $33.91-$81.36.