Cloud Computing Brews The Perfect Storm at Rackspace Hosting


Rackspace Hosting faces the perfect storm. This fast-growing cloud-computer technology stock just got hit by a double whammy. It has disappointed the market with less than stellar results in its most recent earnings report.
And its lost its CEO.

Management has admitted to difficulties competing with the bare-bones profit model of its chief competitor, Amazon Web Services, who is dead set on owning this industry sector. RAX management has already undertaken steps to cater to a more service-oriented, upscale corporate clientele, but this will probably be a bit of a learning curve, and growth and earnings may both suffer a bit along the way. At current market prices, around $31.50 at time of writing, a Reverse Cash Flow analysis reveals that the market projects an 18% growth rate over the next 10 years. I think that is too ambitious, given the competition.

To add insult to injury, RAX faces management upheaval, with its CEO Lanham Napier announced his retirement today, and no planned successor is on the horizon.

The market should punish this high-flier severely. It has already lost 33% of its value in just two days. But the damage may not be done. A glance at technical charts reveals that after a possible bounce at current prices, the stock may move much lower, possibly to $15, with a pause along the way at the $25 support level.

rax technicals
click to enlarge

This presents the following opportunity for aggressive investors, based on a a bearish options bet. It will lose a limited amount of money if we are wrong, and could hit big if the stock drops.

The Opportunity

  • Probability : 70% (my subjective guesstimate)
  • Risk : Reward : around 1 to 5
  • Duration: 7 day trade
  • Minimum Investment:$433
  • Maximum Investment: none


Log in |
Lost your password?

Please login to view the MEMBERS ONLY content. (Register here.)
You can leave a response, or trackback from your own site.

Leave a Reply

You must be logged in to post a comment.

Disclosure:This web site discusses exchange-traded options issued by The Options Clearing Corporation. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 TradeJolt.com is not a registered investment advisor or broker-dealer. We do not make recommendations as to particular securities or derivative instruments, and do not advocate the purchase or sale of any security or investment by you or any other individual. By continuing to use this site, you agree to read and abide by the full disclaimer.