Amazon Said To Be In Talks To Invest In Cloud Company Rackspace

Amazon is said to be in preliminary talks to invest in US services provider Rackspace Technology Inc to help strengthen its cloud business operations.

As part of the deal Amazon would (AMZN) buy a minority stake in Rackspace, Reuters reported. Shares in Nasdaq-listed Rackspace surged 13% to $18.76 on the news. There is no certainty that Amazon and Rackspace, which is majority-owned by private equity firm Apollo Global Management Inc, will agree to a deal. If there is one, it could take one to two months to negotiate it.

Rackspace helps companies migrate their data to Amazon Web Services, and the investment would strengthen the ties between the two companies. Rackspace also migrates companies to Google (GOOGL) Cloud, Microsoft’s Azure and VMware Inc.

Rackspace leases server space and helps corporations store and access data in the cloud. It was acquired by Apollo in a $4.3 billion leveraged buyout in 2016, and was listed in the stock market earlier this month. The Texas-based company has market capitalization of more than $3 billion, almost as much as its debt pile.

Amazon’s cloud services is benefiting from higher demand from companies switching to virtual offices amid the coronavirus outbreak. Its revenue from Amazon Web Services, which sells data storage and computing power in the cloud, rose nearly 29% in the second quarter to $10.81 billion.

If Rackspace brings in Amazon as an investor, it would be the second Apollo-owned company to secure such a deal with a major technology company this year.

Earlier this month, Google disclosed that it snapped up a 6.6% stake in ADT for $450 million as part of a long-term partnership to create the next generation of smart home security devices. Apollo had bought ADT in a nearly $7 billion deal in 2016, and still owns a majority stake in the company.

Shares in Amazon have been on a steady winning streak jumping a stellar 72% so far this year, with the $3,725.59 average analyst price target implying another 17% upside potential is lying ahead in the coming 12 months.

Stifel Nicolaus analyst Scott Devitt on July 31 raised Amazon’s price target to $3,500 from $3,300 and maintained a Buy rating saying that the stock remains one of his favorite large cap growth names. Devitt views Amazon as well-positioned to continue to benefit from the accelerated shift to e-commerce and cloud services.

“The environment for e-commerce remains favorable as the ramifications of the pandemic are staying with us for longer than anticipated. While some have concerns of deceleration in the AWS business, we believe the weaker economic backdrop will lead more customers looking to adopt cloud services to lower costs,” Devitt wrote in a note to investors. “The continued migration will be gradual over time. As the leader in e-commerce and cloud services, Amazon remains a core holding.”

Overall, AMZN scores 38 Buy ratings from analysts versus 1 Hold rating adding up to Strong Buy consensus. (See Amazon stock analysis on TipRanks).