Why Rackspace Rallied Today

Shares of Rackspace (NASDAQ: RXT) rallied on Tuesday, surging as much as 21.2% before settling at a 5% gain, as the semiconductor sector sold off later in the day.

Rackspace announced an expansion of its partnership with Advanced Micro Devices (NASDAQ: AMD) today, as the two companies look to deploy 30 MW of compute capacity for Rackspace's enterprise customers in highly regulated industries.

While the amount of compute isn't massive for AMD, which fell on the day, it could be a bigger deal for Rackspace, given its beaten-down stock price and just $1.5 billion market cap.

Rackspace signs up AMD, cuts 15% of its workforce

Rackspace announced that it will deploy 30 MW of AMD-based compute, beginning in late 2026 and continuing through 2028, for highly regulated Rackspace clients, such as healthcare providers. The computing stack will incorporate an end-to-end system that includes both AMD Instinct GPUs and AMD EPYC CPUs.

Rackspace has had a tough go of it in the markets over the past few years, as a private and hybrid cloud provider to highly regulated industries that need an extra layer of protection and governance between their private data and the public cloud. The transition to agentic AI is only intensifying the risks of data leakage, so it appears as though Rackspace's services are back in demand. To that end, the stock has already surged 543% in 2026, though it remains well below its $21 IPO price back in 2020.

In addition to the AMD announcement, Rackspace also announced it would be reducing its workforce by 15%, saving between $75 million and $85 million annually, after severance payments are made. Rackspace is deprioritizing certain legacy product lines and refocusing the company on the AI opportunity, which makes sense. Rackspace grew revenue by only 2% last quarter, and it's still generating slight operating losses. So, reducing operating costs while focusing on value-add AI services makes sense.

Image source: Getty Images.

Rackspace is still a big risk

Given how badly Rackspace has disappointed as a public company, there could be significant upside in the stock if management executes this turnaround. Today's AMD deal certainly helps that effort, but it remains to be seen whether it will actually reaccelerate profitable growth going forward. Moreover, Rackspace has significant debt on its balance sheet, making it a risky stock.

That said, given its small size and the ability of meme-stock investors to spark surges in these types of stocks, Rackspace could be a worthwhile speculation -- though not a safe investment.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices. The Motley Fool has a disclosure policy.