We use a target EV/EBITDA range of 6x-9x (based on forward estimates) which represents a slight discount to RXT’s peer set. We believe the discount is appropriate given Rackspace is still fairly early in its transformation story and has a limited track record, i.e., there is obvious execution risk. When we apply an ~6.5x EV/EBITDA multiple to our 2025E adjusted EBITDA of $476 million and take into account RXT’s net debt position, we arrive at our $1.25 target price.

This stock is High Risk based upon our quantitative model and we believe this rating is appropriate given the execution risks in the stock.

The key risks to our investment thesis include: 

• Execution Risk – Rackspace is still fairly early in its transformation journey with the management team still being relatively new and a limited track record in results. Management will need to prove sustainability of performance and inflection points.

• Potential Competition from Partner Ecosystem – Largest cloud partners could choose not to use Rackspace and also increase their core capabilities in a highly competitive and constantly evolving market.

• Declining OpenStack Public Cloud Segment Impact on Headline Numbers – Rackspace has chosen to no longer market its OpenStack Public Cloud solution and the declining segment results will represent a headwind to total company revenue growth and total company margins as the segment loses scale.

• Controlled Company – Rackspace is a controlled company of Apollo which could choose to substantially influence the strategic direction of the company.

• Debt Level – Rackspace has a relatively high net debt level as compared to its peers which could become a competitive factor and also impact its ability to invest in the business. 

If any of these risk factors has a greater upside impact than we anticipate, the stock price could exceed our target price.