Mad Money

Sell Block: The Death of the Data Center?


By almost all metrics, looks like a great stock. The data-center company reported an upside surprise on Wednesday and announced a much-praised acquisition. The share price is just $4 from its 52-week high of $100, a 121% jump year-to-date. And of the 25 analysts that cover EQIX , 16 rate it a buy and nine say it’s a hold. Not one recommends selling.

But they’re wrong, Cramer said Thursday.

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Because only telco analysts follow Equinix, he said, these Wall Street researchers have missed the introduction of a game-changing technology that will make the date-center business model obsolete.

“All of these stocks, especially Equinix,” Cramer said, “are in the danger zone.”

These data-center firms own buildings in which they house the Internet’s servers. It’s a cost-prohibitive venture for the carriers themselves, so they outsource the work to companies like Equinix. Well, cost prohibitive until now, that is.

Intel last week on its conference call referenced brisk sales of its new family of Nehalem DP processors for servers, one of which takes the place of eight to nine older-generation servers. That means Equinix is about to have eight times more space than normal, in a commercial real estate business where growth is measured by the square foot. Cramer said it was doubtful the company could lease that extra space given the ailing commercial real estate market.

The analysts largely consider just the growth of Internet traffic, which before Intel meant more servers, and in turn, more space for those servers. That was great business for Equinix. But now the company’s clients don’t really need to outsource this work, what with cheaper, better product on the market. These clients can run their own data centers, leaving Equinix with a lot of empty warehouses.

Cramer chose to pick on Equinix specifically because of that aforementioned acquisition. The company will buy Switch & Data Facilities for $689 million, which the analysts herald as a key network expansion and enhancement of market position. But such a move in a business that’s about to get a lot weaker probably won’t pay off.

“Get out of the data-center stocks,” Cramer said. “I see an industry that’s about to be brought low by new technology, so I think you should sell, sell, sell.”

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