Rackspace Drops 20 Percent as Sales Trail Analyst Estimates

Rackspace Hosting Inc., the provider of Web-based computing, tumbled the most since its 2008 stock market debut after reporting revenue that trailed analysts’ estimates, fueling concern that growth may slow.

The stock plunged 20 percent to $60.30 at the close in New York. That’s the largest drop since Aug. 8, 2008, the day after the company’s initial public offering, when the percentage decline was about the same.

Sales in the fourth quarter rose 25 percent, the slowest pace in more than two years. The slowdown may continue this year, according to analysts at Stifel Nicolaus & Co. Before today’s decline, San Antonio-based Rackspace had been one of the top-performing U.S. stocks in the past four years, outperforming every member of the Standard & Poor’s 500 Index.

“The slower rate of growth is likely a function of the law of large numbers and some uncertainty with respect to the growth trajectory of Rackspace’s cloud business,” Todd Weller, an analyst at Stifel Nicolaus, wrote in a research note today. He reduced his rating on Rackspace to hold from buy.

Revenue rose to $352.9 million, compared with the $355.4 million average analyst estimate, according to data compiled by Bloomberg. Net income increased 19 percent to $29.9 million, or 21 cents a share, matching analysts’ predictions.

Investors are accustomed to Rackspace beating predictions, with the company having topped analysts’ sales estimates in each of the previous 12 quarters.

Capital Spending

Rackspace executives said on a conference call that capital expenditures will be $375 million to $445 million this year. At the midpoint, that spending would lead to revenue growth of 21 percent this year, according to Weller.

Rackspace Chief Executive Officer Lanham Napier said the company remains bullish on its prospects as businesses migrate to cloud data centers from slower, more expensive servers managed internally. In the cloud-server market, Rackspace competes with Amazon.com Inc. and is fending off competition from Microsoft Corp. and Google Inc.

“We’re a company that’s investing in a long-term gain,” Napier said, in an interview after yesterday’s report. “We’re going through a transition with respect to growth.”

Sales in the company’s cloud-computing service rose 49 percent to $87.3 million. The business now accounts for 25 percent of total sales, up from 21 percent a year ago.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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