Rackspace (RAX) Trades Lower Despite Potential Amazon (AMZN) AWS Partnership

Shares of Rackspace (NYSE: RAX) are lower today (-2.3%) despite reports in the Wall Street Journal that the company is partnering with rival Amazon's (NASDAQ: AMZN) AWS. The partnership is likely to be announced at the AWS re:Invent conference occurring in Las Vegas October 6-9. The report said Rackspace will provide support to corporate customers who need help in moving from internal data centers to the AWS service.

Wells Fargo analyst Gray Powell is positive on the potential partnership. "We do not see any near term to medium term revenue impact from this partnership but we view it as a positive to investor sentiment on RAX," Powell said.

"Today, RAX is supporting small and medium businesses on Google Apps, MSFT's Office 365 and SharePoint as well as customers using MSFT's Azure cloud service (announced in July)," he notes. "We think the potential agreement with AWS in addition to the Google and MSFT partnerships expands RAX's addressable market. And longer term, it should help RAX reduce its capital intensity and improve capital returns."

With shares of RAX trading at 16x 2016E EV / FCF with low double-digit top-line growth, they believes valuation is attractive. The firm maintained an Outperform rating.

You May Also Be Interested In

• Royal Caribbean Cruises (RCL) PT Raised to $168 at Mizuho
• HOOKIPA Pharma Inc. (HOOK) PT Lowered to $5 at H.C. Wainwright
• BofA Securities Downgrades Hertz Global (HTZ) to Underperform