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By itself, Equinix fell 33% after reducing third-quarter and full-year guidance. But many other somewhat-related stocks also took a beating. Here's a partial list:
|Citrix (Nasdaq: CTXS )||(14.07%)|
|F5 Networks (Nasdaq: FFIV )||(12.52%)|
|Rackspace Hosting (NYSE: RAX )||(11.14%)|
|NetSuite (NYSE: N )||(10.17%)|
|Internap Network Services||(9.8%)|
|VMware (NYSE: VMW )||(8.99%)|
Source: The Wall Street Journal's markets data center.
Not all of these sell-offs make sense. But before we get into the buying opportunities created by Mr. Market's spasmodic irrationality, let's briefly review what happened.
Churn and burn
Equinix's management cited churn and discounting as two of the major forces eating away at its short-term outlook, while also reiterating its belief in the long-term growth opportunity available to the company as a provider of data center and interconnect services.
Equinix's data centers provide the physical connections between providers of cloud computing software and data network providers, such as AT&T (NYSE: T ) . As goes Equinix's data centers, so goes a big chunk of the cloud -- that's the thinking, anyway.
That idea isn't entirely wrong. But if Equinix loses some big customers to lower-cost data center operators, that's not even remotely a knock on VMware, a virtualization specialist, or Rackspace, which operates an entirely different model for hosting. Both are worth buying as a result of this sell-off. Here's why:
- VMware is more important to cloud computing than Equinix is. Without virtualization -- the ability to transform one physical server into many virtual servers -- cloud computing would be economically unsound. Many years of growth await this business.
- Like Equinix, Rackspace provides hosting services, but that's where the similarities end. Rackspace isn't a data center operator, nor does it own land or facilities, as Equinix does. Because of this, Rackspace had at one point been an Equinix customer, members of the finance team confirmed in an interview yesterday. Assuming these two companies share the same risk profile is a mistake.
More than anything else, debt makes Equinix risky. It has to keep making interest payments even when tenants leave its facilities. For Equinix, those payments aren't small: $205 million over the last 12 months.
But it gets worse. Equinix doesn't just have debt; it has expensive debt. According to Capital IQ, the company has several short-term loans and credit lines charging 7% or more, including an 8% mortgage loan. But even the cheap loans aren't as cheap as they appear. Take Equinix's 4.75% convertible bonds, due in 2016. Not bad, right? Well, it wouldn't be if management were producing higher returns on capital (ROC). Instead, ROC sits around 4% today. Equinix is a capital destroyer.
By contrast, neither of my picks faces this sort of debt dilemma, yet each is also a front-line foot soldier in the cloud-computing revolution. Buy them before Mr. Market realizes how crazy this sell-off is.
Now it's your turn to weigh in. Is yesterday's cloud computing sell-off a buying opportunity? Please vote in the poll below and then leave a comment to explain your thinking. And if you're interested in Equinix, click here to add it to your Foolish watchlist.