Thursday, October 7, 2010

Volatile Data Center Stocks are Good for Data Center Businesses

By David Gross
As it was losing nearly a third of its value yesterday, Equinix (EQIX) saw 30 million of its shares change hands, representing nearly 70% of its float, and 40 times its normal volume.  3.1 million of these shares traded on Direct Edge, whose primary data center is Equinix's NY4, which is just across the Hudson from Wall Street in Secaucus.   Many investors are familiar with retail analysts who walk around malls to see how busy the stores are.   What if those investors could see where their Equinix trades were being executed?

Now it's not clear why Citrix (CTXS) should have dropped 14% because Equinix guided revenue down by 2%, but in the selling panic, nearly 18 million shares of Citrix stock traded hands.   Normally 3 million do.   F5 (FFIV) saw 7.6 million shares move compared to 1.6 million on a typical day.   Savvis (SVVS), which reaffirmed guidance for a quarter that's already ended, lost 10% of its value, and saw 5 million shares trade hands vs. 320,000 on an average day.  And with all the noise out there still ringing in your ears about a co-lo company starting with "E", I won't mention their name again in this post.

There were some days last quarter when these stocks were being bid up for no good reason where they did 2-4x normal volumes.   Savvis, for example, saw nearly 600,000 shares move on September 24th when it was up over a dollar.  F5 traded 5.5 million shares on July 22nd when it was up nearly 15% for the day.   Citrix was up nearly 20% on July 29th when 14 million shares of the company traded.

These sharp moves - up and down - reflect a manic psychology in many of these names, which is not uncommon for a sector that's getting a lot of attention.   But the financial strength of many data center providers depends on financial trades.  Savvis, for example, gets nearly 30% of its revenue from financial services, much of which is trades and market data to support those trades.     So data centers should continue to do well as long as investors keep having selling panics, irrational love affairs with certain stocks, and keep building more algos.   A wave of rational buy-and-hold investors is the last thing this industry needs.

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