Data-Center Stocks Poised to Deliver

Most stories about tech stocks focus on well-known names such as Apple (NASDAQ:AAPL) or Google (NASDAQ:GOOG). Yet some of the sector’s highest gainers are not superstar names.

Consider a company like Savvis (NASDAQ:SVVS), which has seen its stock price rise an astounding 500% in two years.  Or Equinix (NASDAQ:EQIX), which has jumped by more than 50% during the same period.

These companies have been around for more than a decade, but the stock rises have occurred only recently.

Why the sudden rise? The answer can be summed in two words: increased demand.

The rising tide of Web-based (so-called cloud) computing has lifted several other boats, including that of data center companies. That’s because cloud computing depends on an infrastructure of server clusters concentrated in physical locations known as data centers.

Data centers are the backbone of the information highway. They enable e-commerce on the Internet and switching networks for routing telephone calls in communication. Until recently, complex data centers were set up by large organizations. However, all that has changed with cloud computing.

According to Tier 1 research, the market for data center space has grown by more than 20% annually in the past two years. The cloud computing revolution is expected to produce revenue of $148.8 billion by 2014.

There are three great benefits to investing in data center companies right now.

First, the premise of their business is enticing. Much like the outsourcing industry, data center companies offer the twin benefits of scalable infrastructure and reduced complexity at manageable costs. They use a variety of methods such as colocation (or managing servers for multiple vendors within the same physical space) to produce cost savings for customers.    

Second, increased complexity and need also translates into greater switching costs for customers. Combine this fact with an industry that is still evolving and has not consolidated (although initial moves have already begun), this can be a great virtue.  Translated into simple terms, if major companies such as Equinix play the game right, there is enough room for everyone to grow.

Third, although the recession has barely ended, companies are still on a cost-cutting spree. This, coupled with the rise of cloud computing, should provide momentum and sales to data center companies.

To be sure, there are drawbacks as well. Along with internet companies, the dot-com bust busted data center companies as well because they had racked up extra space and servers in anticipation of demand that did not exist. However, much has changed since then, including the phenomenal growth of ecommerce sales (which require backend infrastructure for execution) and cloud computing platforms.

Because it is mission-critical to their business, many companies such as Facebook and Amazon (NASDAQ:AMZN) prefer to build their own data centers instead of outsourcing it. However, increased complexities of data center market, including a trend toward efficiencies and green technologies, are expensive investments for small- to mid-cap companies. This customer base should ensure continued growth.

Besides the companies mentioned above, others data-center plays include Verizon (NYSE:VZ), Digital Realty Trust (NYSE:DLR), Level 3 Communications (NASDAQ:LVLT) and Colt Group (NASDAQ:COLT).

Data-center companies because represent the cusp of a future trend. If their moves are correct, these stocks should see major gains.

Article printed from InvestorPlace Media,

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