Rackspace Technology's AI and Cloud Transformation: A Hidden Opportunity in a Troubled Stock

The stock market often confuses short-term pain with long-term promise. Rackspace Technology (NASDAQ: RXT) is a case in point. For years, the company has struggled with declining revenue and unprofitability, yet its recent pivot to AI-driven managed services and hybrid cloud innovation suggests a compelling story of reinvention. At a price-to-sales (P/S) ratio of 0.1x—far below the IT sector average of 2.7x—RXT trades at a discount that fails to reflect its strategic progress. For investors willing to look beyond quarterly volatility, this undervaluation represents a rare opportunity.

Strategic Reinvention: From Decline to AI-Driven Growth

Rackspace's transformation began with a painful acknowledgment: its traditional managed hosting model was no longer sufficient in an era dominated by hyperscalers like AWS and Microsoft. The company's 2024 financials underscored this challenge, with a 7% revenue decline and a net loss of $863 million. Yet, 2025 has marked a turning point. The launch of the Rackspace Cloud Management Platform and the Foundry for AI by Rackspace (FAIR) signals a deliberate shift toward high-margin, AI-powered services.

The FAIR initiative, in particular, is noteworthy. By identifying over 500 AI use cases across industries, Rackspace is positioning itself as a bridge between enterprise clients and cutting-edge AI tools. Its partnership with Sema4.ai to deploy enterprise-ready AI agents is a masterstroke. These agents, capable of automating workflows in HR, finance, and customer support, eliminate the need for complex prompt engineering and reduce time-to-value. For example, the integration of Sema4.ai's SAFE platform with Rackspace's infrastructure allows clients to deploy AI agents in production environments at scale—a capability that 24% of enterprises still lack.

Financial Resilience Amid Revenue Headwinds

Despite ongoing revenue declines, Rackspace's Q2 2025 results reveal a narrowing of losses and improving operational efficiency. Non-GAAP operating profit rose 34% year-over-year to $27 million, while cash flow from operations turned positive at $8 million. These metrics suggest that the company's cost-cutting and margin-optimization efforts are paying off.

The key to Rackspace's long-term viability lies in its ability to monetize AI and hybrid cloud adoption. The 2025 AI Research Report highlights a critical insight: enterprises that embed AI into their core operations (the so-called “AI Leaders”) are three times more likely to scale AI deployments. Rackspace's hybrid cloud infrastructure is already favored by these leaders, who are three times more likely to use such platforms. With AI investments surging by 250% in 2025, Rackspace's role as a trusted partner in secure, scalable AI deployment could drive revenue stabilization and growth.

Valuation Disconnect: A Mispriced Opportunity

Rackspace's stock currently trades at a 50.6% discount to its intrinsic value, as estimated by a discounted cash flow (DCF) model. At $1.27 per share, the stock is 25% below the $1.59 average analyst price target. This disconnect stems from two factors: the market's focus on short-term earnings and the company's unprofitable status, which limits the relevance of traditional metrics like P/E.

However, the P/S ratio tells a different story. Rackspace's 0.1x P/S is far below the IT sector average of 2.7x and even more so compared to peers like Kyndryl (0.5x) and DXC Technology (0.2x). This suggests that the market is underestimating the company's ability to convert its AI and cloud initiatives into revenue. The intrinsic value of $0.84 per share, derived from DCF analysis, further reinforces the case for a re-rating as the company executes its turnaround.

Risks and Mitigants

No investment is without risk. Rackspace's Private Cloud segment, which accounts for 38% of revenue, continues to decline at 6–13% annually. Additionally, the AI market is highly competitive, with hyperscalers and startups vying for dominance. However, Rackspace's partnerships with Sema4.ai and Rubrik provide a differentiated edge. The Cyber Recovery Cloud, for instance, addresses a critical gap in AI-driven cybersecurity—a sector where demand is expected to grow exponentially.

Moreover, the company's liquidity position is robust, with $414 million in total liquidity and a new revolving credit facility. This provides flexibility to fund innovation and weather near-term headwinds.

Conclusion: A Buy for the Patient Investor

Rackspace Technology is at an inflection point. Its AI and cloud transformation, while still in early innings, is laying the groundwork for a sustainable turnaround. The stock's current valuation, which discounts its strategic progress and long-term potential, offers a compelling entry point for investors with a multi-year horizon.

For those who can stomach the near-term volatility, Rackspace represents a classic case of “buying the company, not the earnings.” As AI adoption accelerates and hybrid cloud demand grows, Rackspace's ability to deliver secure, scalable solutions could drive a re-rating of its stock. The question is not whether Rackspace can succeed—it is whether the market will recognize its potential before it's too late.