Mixed Year for Data Center Stocks in 2007

Shares of publicly-held data center specialists had a mixed year in 2007, with most issues trailing the performance of major market indices and falling far short of the sector's stellar performance in 2006. Data center stocks were buffeted by concerns about competition and pricing in the content delivery network (CDN) sector, and in some cases, investor concerns about data center demand and the cost of building new facilities.

The bright spot in 2007 was virtualization, which produced the year's hottest IPOs and best performers. The sector's largest players, Equinix (EQIX) and Digital Realty Trust (DLR) had the strongest showing among data center builders as they continued to grow through acquisitions and new construction.

The Dow Jones Industrial Average gained 6.4 percent in 2007, while the NASDAQ Composite Index improved by 9.8 percent, its best gain since 2003. Here's a look at how the leading data center stocks fared in 2007:

The top performer for the year was VMware (VMW), which has been a hot stock since its IPO on Aug. 14 at $29 a share. Buoyed by growing adoption of virtualization, VMware shares surged higher and closed the year at $84.99. The second-best performer, Bladelogic (BLOG), was also a 2007 IPO whose shares have been boosted by investor enthusiasm for data center virtualization.

Shares of Equinix (EQIX) gained 34 percent in 2007, following up on an 85 percent gain in 2006. Equinix surged 17 percent on Nov. 1 after an investor presentation in which the company outlined the benefits of its $555 million acquisition of IXEurope and the expansion of its ambitious data center construction program.

Digital Realty Trust (DLR) also outperformed broader market averages, gaining 15 percent on the year. Like Equinix, Digital Realty focused much of its new investment in Europe, expanding its presence in London, Amsterdam and Dublin. Digital was also boosted by strong leasing in its Turn-Key Datacenter program.

All other data center stocks wound up with losses on the year, including single-digit declines for two data center operators that went public in 2007. Shares of Switch and Data (SDXC) were 5.8 percent lower, while DuPont Fabros (DFT) ended the year down 6.7 percent from its IPO pricing.

The other 2007 IPO, Limelight Networks (LLNW) was among the content delivery network providers whose shares were battered among investor wariness about competition and pricing. Limelight shares surged 48 percent after its June 10 IPO, but reversed course after the company lowered its revenue guidance two months later.

Akamai (AKAM), NaviSite (NAVI) and Internap (INAP) also saw the impact of investor worries about the CDN market (which some market watchers believe are overblown). The slippage in these shares should also be viewed in the context of their 2006 performance, in which all three companies gained 166 percent or more. Here's a review of our roundup of 2006 data center stock performance:

By comparison, the Dow Jones Industrial Average gained 16.3 percent in 2006, while the S&P 500 rose 13.6 percent.