Rackspace Technology Inc. (RXT) shares took a beating Thursday, plunging more than 29% after the cloud services provider cut its full-year revenue outlook. The market wasn't impressed, even as the company rolled out ambitious artificial intelligence plans and a shiny new partnership with Palantir Technologies Inc. (PLTR).

Sometimes you have to take a step back to leap forward, but investors aren't always patient. Rackspace lowered its fiscal 2026 revenue forecast to a range of $2.45 billion to $2.55 billion, down from its previous outlook of $2.60 billion to $2.70 billion. Adjusted EBITDA guidance also got trimmed, to $285 million to $295 million from $305 million to $315 million.

The company explained that the lower outlook reflects a planned exit from low-margin businesses — think public cloud resale, colocation, and basic hosting services. The idea is to redirect resources toward higher-margin enterprise AI opportunities. Rackspace also cited supply timing and geopolitical factors that are delaying near-term deployments.

For the second quarter, the company expects revenue of $641 million to $649 million and an adjusted loss of 8 cents to 11 cents per share. Private Cloud revenue is projected at $242 million to $246 million, while Public Cloud revenue should come in at $399 million to $403 million.

But here's the thing: Rackspace isn't just cutting back; it's betting big on AI. The company plans to increase Enterprise AI capacity to 15 megawatts by the end of 2027 and 30 megawatts by the end of 2028. At full deployment, Rackspace expects the business to generate $450 million to $600 million in annual revenue with adjusted EBITDA margins above 50%. That's the kind of math that gets investors excited — eventually.

On the partnership front, Palantir Technologies has named Rackspace a preferred partner for regulated and sovereign markets. The two companies signed a definitive operating framework to deploy Palantir Foundry and Artificial Intelligence Platform (AIP), building on a partnership announced earlier this year. Rackspace said it has trained about 400 Palantir-certified professionals and has already completed its first joint customer deployment.

CEO Gajen Kandiah said recent partnerships with AMD, Palantir, Rubrik, Uniphore, and VMware by Broadcom, together with the company's planned capital raise, will help accelerate Rackspace's enterprise AI strategy beginning in 2027. The specific financial terms of the raise were undisclosed.

So, the story here is a classic tale of short-term pain for long-term gain. Rackspace is deliberately shrinking its low-margin business to make room for a higher-margin AI future. But on Thursday, the market only saw the pain: shares were down 29.03% at $4.665 at the time of publication.