UPDATE: Tech’s Cloud Burst, Warning Sign?

Tech shares slumped on Wednesday, hit by worries that gains in cloud computing stocks were irrationally exuberant after Equinix lowered its full year revenue outlook.

Equinix as well as its rivals have seen an incredible run up over the past few months on the cloud computing craze and on Wednesday Rackspace , Savvis , and Terremark were just a handful of the many names punished by tech investors.

Is the price action a warning sign of what's to come?

Instant Insights with the Fast Money traders

Investors were spooked after Equinix said churn was higher than expected and discounting was sharper than expected, explains CNBC’s Herb Greenberg. That’s what dragged down the entire space.

In other words, prices are being driven down and there's only so much these firms can do to compete for business, adds host Melissa Lee.

Remember there’s a tremendous amount of speculative money going after these cloud plays, says Brian Marshall of Gleacher. Although I think the weakness will linger for a few more days on the other side of this I think there will be opportunities. Put VMWare as well as NetApp on your radar.

It’s also worth noting that I downgraded F5 Networks recently on valuations, Marshall adds. I just don’t see much more upside with shares at $112 this week. However, if F5 slides to $90 I’d be a buyer. The fundamentals are still strong.

I have no opinion of where valuations in cloud stocks should be, adds veteran trader Gary Kaminsky. But the catalyst here was the bidding war that erupted for 3PAR. Investors who go into these stocks looking for the next takeover are typically late to the party.

I love these names and continue to love these names but I suspect we'll see valuations that were in the clouds come back to earth, adds Pete Najarian. I agree with Gary that investors were building in a sharp takeover premium and now realize they may not get it.

If you're going to play the space you've got to learn about it, adds Jared Levy of Peak 6. Some are data hosting and some are data storage. Not all companies are created equal. Personally, I like Google and CRM, he adds. I’d play CRM by selling the October 95-85 put spread, which is a bullish bet.

I like playing the space with Qlogic and Emmulex, says Brian Kelly. They make the switches that go into data centers. I think investors can still get involved here.

What many people don’t know is that one of the big leaders in this space is Amazon , adds Steve Cortes. For me the play is long Amazon.

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Trader disclosure: On Oct. 6, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Guy Adami owns (AGU), (INTC), (BTU), (NUE), (C), (GS) and (MSFT); Tim Seymour is long (AA), (AAPL), (BBY) and (MON); Karen Finerman's firm is short (MDY); Karen Finerman's firm is short (SPY); Karen Finerman's firm is short (IWM); Karen Finerman's firm is short (IJR); Karen Finerman's firm is long Russell 2000 Puts; Karen Finerman's firm is long S&P 500 Puts; Pete Najarian is long (AKAM) calls; Pete Najarian is long (DD) stock; Pete Najarian is long (WFC) put spread; Pete Najarian is long (BP) call spread; Pete Najarian is long (GDXJ) stock; Pete Najarian is long (ABX) call spread; Jared Levy is long (SPX); Jared Levy is short (GLD); Steve Cortes is short (XLF); Steve Cortes is short (BAC); Steve Cortes is short Mex. Peso; Steve Cortes is short Euro; Steve Cortes is short (BIDU); Steve Cortes is short corn; Steve Cortes is long German bonds

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