Rackspace Technology's market capitalization has fallen below $1 billion for the first time since 2015 or so, as investors and customers fret about a Hosted Exchange ransomware attack that has knocked out email service to some Rackspace customers.
The cyberattack -- never a welcome event -- surfaces during a particularly touchy time for Rackspace. Amid multiple business shifts, the MSP's business valuation has fallen from about $8 billion in 2020 to about $865 million as of December 7, 2022.
The bigger picture: Although Rackspace is a Top 250 Public Cloud MSP, the company's growth rate has generally underperformed the MSP and MSSP markets in recent years. The evidence:
- The MSP, MSSP and MDR sectors are growing roughly 12% to 18% annually, depending on which market segment you study.
- In stark contrast, Rackspace's revenue grew only 3% in Q3, the company announced in November 2022.
Ransomware Attack Further Pressures Rackspace ($RXT) Stock Price
Striving to pull out of the nosedive, Rackspace over the past year has overhauled its executive team, reorganized its business and considered potential asset sales. But those steps haven't helped to prop up Rackspace's stock -- which is down more than 70% over the past year, according to SeekingAlpha.
Rackspace's stock has fallen additional percentage points in recent days amid a ransomware attack that hit the company's Hosted Exchange business on December 2, 2022. That particular business generates about $30 million in annual revenues, the company disclosed on December 6, 2022.
Generally speaking, stocks typically bounce back quickly once a ransomeware attack is resolved. But the recovery process at Rackspace seems particularly daunting. The evidence: Rackspace is now offering free Microsoft 365 services to impacted customers for an undetermined amount of time.
Migrating to the new service requires some manual steps that have frustrated some customers, and Rackspace has not announced a timetable for potentially restoring Hosted Exchange. Still, some analysts say Rackspace's public timeline shows that the company has "an executable incident response plan," SC Media reported.
Rackspace: MSP's Valuation Plummets
Rackspace's growth challenges aren't new, and the company's business valuation has been in downward spiral since around 2019. Among the key business indicators to note:
- August 2016: Private equity firm Apollo Group acquired Rackspace for $4.3 billion.
- March 2018: Rackspace explored a potential IPO with a target valuation of $10 billion.
- August 2020: Rackspace's actual IPO valuation was closer to about $8 billion.
- July 2021: Rackspace announced a "growth" plan that quietly included 10% layoffs.
- February 2022: Rackspace delivered a disappointing financial forecast.
- March 2022: Rackspace's valuation was down to $2.2 billion.
- May 2022: Rackspace began to evaluate "strategic alternatives" -- jargon for a potential company sale.
- July 2022: Rackspace confirmed a reorganization around private and public cloud managed services.
- August 2022: Rackspace conceded that no serious buyers have emerged for the company.
- September 2022: Rackspace promoted CFO Amar Maletira to succeed Kevin Jones as CEO.
- November 2022: Rackspace announced 3% revenue growth for Q3 of 2022.
- December 2022: Rackspace disclosed Hosted Exchange outage on December 2. Four days later, the company confirmed the outage involved a ransomware attack.
Rackspace Ransomware Attack Recovery and Reorganization: What's Next?
It's unclear if or when Rackspace will reactive the Hosted Exchange Service, and the company continues to urge impacted customers to embrace Microsoft 365.
Meanwhile, Rackspace has been realigning the company into a two business unit model. Rackspace expects to operate and report in that new structure beginning January 2023, Maletira said as part of the company's Q3 financial results in November 2022.
In theory, the two business unit model could make it easier to for Rackspace to sell off one or both pieces of the company, ChannelE2E believes. One unit represents faster-growth cloud opportunities, while the second unit represents more mature infrastructure and hosting opportunities.
We'll be watching to see if or how the ransomware attack influences Rackspace's priorities for 2023.
