Rackspace Earnings – Did the Market Overreact?

rackspace uncertaintyRackspace took quite a beating last week after announcing on Tuesday that cloud revenue growth appears to be decelerating.  The stock ended up down nearly 20%, reflecting the fact that Wall Street expectations for growth were high.  Rackspace is actually one of the few vendors that makes cloud services growth numbers public, making them subject to more scrutiny than other service providers.   Given that every cloud vendor is probably hitting similar bumps on the road, it raises the question of whether the market overreacted this week.

As it’s still early days in enterprise cloud, many questions remain around the shape and trajectory of enterprise cloud adoption from both a private and public cloud perspective.  One of the fascinating things about Rackspace is the unique position they occupy in the cloud market given OpenStack and the vested interested they now have both in public cloud and on-prem private cloud models.  While potentially a tremendous strategic asset, OpenStack also creates go-to market complexity that few others in the market face.   Rackspace may very well end up being a big winner in the battle for enterprise cloud, but it may be a bit bumpier and longer ride than Wall Street expected.

Despite this week’s announcement, there are a number of trends and potential enterprise cloud end-game scenarios that suggest that this week’s market reaction was a bit overdone:

  • Open platforms – there’s no doubt that as CIOs take a look at their cloud strategies and future architectures, many are seeking ways to avoid the “VMware tax”.  It’s also true that some aren’t comfortable with AWS, due to perceived performance issues, availability, cost or actual experience.  The Rackspace mantra of an “Open” that prevents lock-in to either vendor or cloud delivery model could hit a sweet spot.  OpenStack could end up becoming the de facto infrastructure platform winner in enterprise cloud as a result of the vision, value proposition, and momentum from the OpenStack community.
  • Corporate IT and private clouds – ignoring cloud and hoping it goes away is rapidly becoming a career-limiting move for CIOs.  Given they need to so something, many enterprise IT shops are rapidly coming to the conclusion that private clouds are their best way of maintaining relevance and control in a next generation world.  If enterprises end up trending towards wide-scale deployment private clouds instead of taking the lead into public cloud IaaS, Rackspace and OpenStack will be very well positioned to ride the wave.    
  • The role of support – enterprises who are deploying private clouds are still largely innovators and early adopters, to borrow from the Crossing the Chasm framework.  These customers tend to enjoy getting the basic “box of parts” that they assemble how they see fit, versus working with a finished solution.  In many cases, they also have the luxury of time and resources to experiment that others don’t.  At some point the market will move to less technically sophisticated customers will need more complete solutions, services and support, particularly around deployment and management of OpenStack private clouds.  For these customers, Rackspace’s focus on “Fanatical Support” could end up being a significant differentiator, if required services are effectively translated for the enterprise.

That being said, Rackspace also faces some headwinds as it looks to crack the code on enterprise cloud.  Some of these challenges include:

  • The enterprise IT pivot – Rackspace was one of the early pioneers of the enterprise IT “end-run”.   Rackspace sold hosting and cloud services directly to business users in the enterprise, the majority of whom were using Rackspace for website and web applications.  Now with a focus on OpenStack, Rackspace needs to completely pivot to CIOs and enterprise IT.  Rackspace needs to sell CIOs on its end-to-end vision for open, next generation infrastructure, whether it be on-prem or hosted OpenStack based private cloud or Rackspace’s OpenStack public cloud.  Not only does Rackspace need enterprise IT to buy into the vision, it also needs to effectively sell it to them.   This means building a big enterprise sales, delivery and support capability in relatively short order. While certainly not impossible, the degree of difficulty is non-trivial.          
  • Extending beyond infrastructure – much of the transformational adoption of cloud models is being driven by business stakeholders and change agents.  In many cases even PaaS and IaaS decisions are being made by line-of-business application developers to support business-driven use cases and applications.  Without a stronger story around the application layer and PaaS Rackspace runs the risk being relegated to the world of commodity IaaS infrastructure, which likely won’t be a very attractive place to play in the enterprise cloud end-game. 
  • Crowded competitive landscape – Rackspace isn’t the only player selling OpenStack clouds, whether they be private or public.  Rackspace will be facing competition from HP, AT&T, Red Hat, IBM and other competitors who in some cases are also are major OpenStack contributors.  Many of these players have enterprise relationships and go-to market machines that Rackspace doesn’t possess today.  The competitive challenges that Rackspace may face while attempting to break the “trusted relationships” that enterprise CIOs have with current enterprise IT vendors may pose a significant challenge.

It’s way too early to have a strong perspective on how these issues will play out over time, but it’ll certainly be fascinating to watch.


  1. Enterprise buyers don’t yet understand how to buy open cloud. What makes us think that investors know how to value it?

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