A San Antonio shareholder is suing Rackspace Technology and two of its top executives, alleging the cloud computing giant misled investors about how its aggressive artificial intelligence push would gut its bottom line. The proposed class action, filed on behalf of investor John Morgan-Reed, who holds 22,149 Rackspace shares, lands just weeks after the company's stock suffered its worst single-day collapse since returning to public markets in 2020.
The lawsuit, filed in U.S. District Court in New York, accuses Rackspace, CEO Gajen Kandiah, and CFO Mark Marino of making misleading statements about the costs of the company's AI business, according to the San Antonio Express-News. Filed under case number 1:26-cv-06491, the suit alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, according to court filings, and shareholders have until September 28 to move for lead plaintiff status. A pretrial conference has been set for November 12.
A Steep Fall From a Multi-Month High
The class period covers purchases made between May 7 and July 8, a stretch during which Rackspace shares climbed as high as $7.53 on June 17 before crashing to $4.37 on July 9 — a one-day decline of 33.6%, or $2.21 per share, after the company released preliminary second-quarter results. Rackspace shares were trading up less than 1% as of midday Thursday, per the Express-News report. The company is scheduled to release its official second-quarter results next Tuesday.
The plunge followed months in which Rackspace executives had reassured investors the company's annual outlook remained on track, even as it rolled out a string of AI initiatives. The company had signed an infrastructure agreement with Advanced Micro Devices on May 7 and, on June 16, announced its largest-ever round of layoffs — cutting about 750 workers, or 15% of its roughly 5,000-person workforce, in a move it said would generate $75 million to $85 million in annualized savings. Those announcements, along with a February partnership with Palantir Technologies to help clients deploy its Foundry and AI Platform software, had briefly sent Rackspace's stock surging more than 200% earlier in the year, the company said at the time.
What Rackspace Disclosed on July 9
The trouble, according to the lawsuit, is what came next. On July 9, Rackspace disclosed that its AI investments would require significant reprioritization of resources, cutting its full-year Private Cloud revenue outlook by $25 million and slashing overall 2026 revenue guidance by $150 million — bringing the full-year revenue midpoint down from $2.65 billion to $2.5 billion and the EBITDA midpoint from $310 million to $290 million. Rackspace attributed the reduced guidance to upfront growth investment and restructuring ahead of AI revenue ramping up.
The lawsuit alleges Rackspace moved resources and capital away from its more profitable Private Cloud segment, which generated $235 million in the first quarter and carries an estimated 24.7% operating margin, compared to $443 million from the lower-margin Public Cloud segment, which had declining revenue per the lawsuit. Private Cloud gives customers dedicated systems with greater control and customization, while Public Cloud helps customers run systems on shared platforms such as Amazon Web Services, Microsoft Azure, and Google Cloud. June's layoffs, the largest in company history, were driven by cuts to its cloud businesses amid the shift toward AI.
A Company Already Mid-Transformation
Rackspace had reported its first quarterly profit in about two years in May, aided in part by a $56 million debt buyback, even as it posted a $17.8 million operating loss that same month. The company declined to comment on the lawsuit, according to the Express-News.
The legal fight arrives as Rackspace continues a broader, years-long restructuring that has reshaped its San Antonio-area footprint. The company's former 1.2 million-square-foot headquarters complex in Windcrest is getting a $40M business park makeover after the company's downsizing, part of a shift toward remote and hybrid work that predates this year's layoffs. Rackspace has also long ranked among San Antonio's top employer petitioners for H-1B visas, securing 200 approvals between 2020 and 2025, trailing only USAA, UT Health San Antonio, H-E-B, and UTSA in that category.
Rackspace's pivot toward AI is not new — the company launched its Foundry for AI by Rackspace division back in June 2023 and reported that 70% of its global workforce had completed generative AI training by March 2024, per Rackspace's own research report. The company has been chasing revenue-generating AI deals since being taken private by Apollo Global Management in a $4.3 billion 2016 buyout and later re-listing on the Nasdaq in August 2020, when its shares dropped 20% on their first day of trading, according to Data Center Knowledge.
Whether a lead plaintiff will move to consolidate additional shareholder complaints before the September 28 deadline remains an open question, as does how Rackspace's management will demonstrate AI revenue conversion when it reports second-quarter results next week.
