Rackspace Technology (NASDAQ:RXT) just reported its fourth-quarter results, showcasing signs of business improvement amid a challenging market. Revenue stabilized with only a slight decline, losses narrowed significantly, and key metrics beat analyst expectations.
This comes on the heels of its recent partnership with Palantir Technologies (NASDAQ:PLTR | PLTR Price Prediction), aimed at accelerating AI deployments. Yet, despite these positives, the stock is tumbling about 10% in morning trading today, after surging roughly 69% the previous day on the earnings beat and initial enthusiasm. Yet, as I had previously recommended investors avoid Rackspace even after the Palantir deal, did I get it wrong and is its stock now a buy?
Things Are Looking Up
Rackspace’s Q4 highlighted incremental progress in its turnaround effort. Revenue came in at $683 million, a modest 0.4% drop year-over-year but above guidance and consensus estimates of around $675 million. For the full year, revenue totaled $2.69 billion, down 2% from 2024.
The private cloud segment, a core focus, saw a slower ramp-up and declined 10% due to timing, impacting the overall mix, while the public cloud outperformed expectations. Non-GAAP operating profit reached $41 million, exceeding the high end of guidance, with margins expanding 120 basis points sequentially. Net losses also narrowed meaningfully, with Q4 at approximately $33 million and adjusted losses at $0.01 per share, far better than the expected $0.04 loss. Cash flow from operations was $60 million, bolstering Rackspace’s year-end liquidity to $397 million.
Looking ahead, management guided 2026 revenue to $2.6 billion to $2.7 billion (flat to a slight decline at midpoint), with non-GAAP operating profit targeted at $160 million to $170 million (up 31%) and private cloud revenue growth of 6% — the first sustained increase in years — anchored by AI-driven enterprise deals. Public cloud, though, may decline 6% due to a large contract transition, but overall, the outlook signals stabilization and selective growth in high-margin areas.
The Palantir deal — announced Feb. 18 — positions Rackspace as a strategic partner to deploy and manage Palantir’s Foundry and Artificial Intelligence Platform (AIP) in production environments. Rackspace provides governed managed services, including cloud hosting, data migration, security, and compliance, especially for regulated sectors like finance, healthcare, and sovereign clouds, such as U.K. data centers. This accelerates deployments from months or years to weeks or months, leveraging Rackspace’s private cloud expertise to meet strict data residency needs.
From Penny Stock to Profit-Taking
Rackspace’s stock journey has been volatile. Trading as low as $0.42 before the Palantir pact, it tripled shortly after then surged another 50%, amid excitement over the deal. Overall, shares climbed over fivefold from those lows to recent highs around $2.67. Now, with the company signaling firmer ground through better-than-expected results and positive 2026 private cloud targets, the post-earnings drop smells like classic “buy the rumor, sell the news,” as investors locked in gains after the multi-day run-up.
I had urged avoiding Rackspace due to its heavy $2.76 billion debt load against limited cash reserves, ongoing quarterly losses without a clear path to profitability, stalled and declining revenue, and fierce competition from giants like AWS and Azure that dominate the hybrid cloud market
Do Earnings Shift the Narrative?
The Q4 report addresses some concerns modestly. Losses are narrowing faster than anticipated, revenue decline was minimal, and beats on key metrics suggest it is stabilizing. The Palantir tie-up — combined with the 6% private cloud growth guidance — could drive meaningful AI-related upside in higher-margin segments.
However, debt remains burdensome, but improved cash flow offers Rackspace some breathing room. Core issues also remain: overall revenue is still down year-over-year, profitability remains elusive with ongoing net losses, and 2026 guidance implies tepid topline recovery at best. Competition hasn’t eased, and execution risks in scaling AI deals linger. These earnings improve the picture incrementally but don’t fundamentally alter the high-risk profile.
Key Takeaway
The improving business metrics are certainly a positive for Rackspace, offering real hope in a tough sector. But one quarter (and one forward-looking outlook) doesn’t make a trend. The company still needs to prove it can consistently grow revenue, deliver sustained private cloud expansion, and secure more high-profile deals like Palantir to build lasting momentum.
It continues generating net losses, carries substantial debt, and faces intense competition. While the turnaround appears more hopeful than before, it’s far from assured. Investors should still avoid the stock for now and wait for it to prove it can actually execute on its plan.
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