Rackspace Serves Mistrust to Its Shareholders

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Shares of Web hosting and cloud provider Rackspace Hosting Inc. (NYSE: RAX) were getting slammed Tuesday, a day after reporting disappointing earnings and the sudden retirement of its 43-year-old CEO.

The company reported a 30% drop in net income to $21 million for the fourth quarter, even as revenue grew 16% to $408 million. Earnings of 14 cents a share were in line with Wall Street estimates.

At the same time, the company said CEO Lanham Napier retired. This was the “real” big news. Lanham, 43, has been CEO for six years. The San Antonio company said Chairman Graham Weston, is taking over as CEO on an interim basis. The company will start a search for a new CEO. Weston helped found the company in 1998 and was CEO for six years.

There is more reason to be skeptical of the stock besides Napier’s departure. In a statement, he says he plans to “invest in and advise other entrepreneurial companies.” Also, how many guys under 45 years old announce a CEO departure as a retirement? Also, Rackspace’s Leadership website already lists Napier as “Consultant and Former CEO.”

Rackspace has been a sizable player in Web hosting in recent years and operates 103,886 servers in nine data centers around the world. But a new cloud computing platform — OpenSource — has failed to win much business from existing customers, forcing the company to spend more money to boost its existing web-hosting business. It faces significant competition for hosting websites from Amazon.com Inc.’s (NASDAQ: AMZN) Amazon Web Services and others. Amazon’s web-hosting business is 14 times larger than all its competitors combined.

Shares were off $6.58, or 16.4%, to $33.78. That is not surprising. A sudden CEO departure often causes selling, which a number of analysts conceded was a problem on Tuesday. Rackspace shares are now down 58% from its intraday peak of $81.36, reached on Jan. 13, 2013. With Tuesday’s drubbing, the shares are off 13.5% this year alone.

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