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Bear of the Day

Rackspace Hosting (RAX - Snapshot Report) reported its first quarter results on May 8. Although EPS missed the Zacks Consensus Estimate by just a penny, analysts revised their earnings estimates significantly lower for both 2013 and 2014.

This sent the stock to a Zacks Rank #5 (Strong Sell).

Despite a big selloff after the earnings report, expectations are still high for Rackspace with shares trading at more than 50x forward earnings.

Rackspace Hosting is an IT hosting company that provides cloud computing services. It is headquartered in San Antonio, Texas. The company was founded in 1989 and has a market cap of $5.9 billion.

First Quarter Miss

Rackspace reported its first quarter results on May 8. Earnings per share came in at 19 cents, missing the Zacks Consensus Estimate by a penny. It was the company's second consecutive earnings miss.

Net revenue rose 20% to $362 million, but this was well below the consensus of $371 million. CFO Karl Pichler stated in the press release that Rackspace "got off to a slow start for the year".

Meanwhile, the operating profit margin declined 50 basis points to 11.8% due in part to higher R&D costs and higher depreciation expenses.

Estimates Falling

Although Rackspace missed Q1 earnings estimates by just 1 cent, analysts have revised their earnings estimates significantly lower for both this year and next. This has sent the stock to a Zacks Rank #5 (Strong Sell).

The Zacks Consensus Estimate for 2013 is now $0.66, down from $0.95 just 30 days ago. The 2014 consensus has fallen from $1.30 to $0.86 over the same period.

You can see this negative earnings momentum in the company's 'Price & Consensus' chart:

Not a Value Stock

Shares of Rackspace plunged nearly -25% after the Q1 earnings report, but valuation still looks pricey at these levels. Shares currently trade at 51x 12-month forward earnings, a premium to the industry median of 17x.

The Bottom Line

With declining earnings estimates and premium valuation, investors might consider avoiding Rackspace until its earnings momentum turns around.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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