Data Center Sector Stung by Equinix Selloff

Many investors and analysts see Equinix as a bellwether for the broader data center and colocation sector. Thus, it's not surprising that shares of most data center stocks are sharply lower today as investors pummel Equinix after the company lowered its revenue guidance last night. The selloff accelerated as the close of trading neared. Here's the final tally:

The selloff reverses the prevailing trend in which data center stocks have outperformed the market. The burning question is whether the revenue warning from Equinix has implications for the broader sector, or is a single-company event driven by issues specific to Equinix.

Equinix said 50 percent of its revenue dip came was related to discounts for strategic providers in their digital media ecosystem - a discount on a long-term, high-volume deal.  Equinix executives say these discounts are reserved for "magnetic" customers whose presence in an Equinix data center will attract additional business, and thus not likely to be broadly replicated in lower pricing. Nonetheless, securities analysts are concerned that awareness of these deals may embolden other customers in price negotiations.

The other 50 percent of the revenue shortfall was related to lower-than-expected income from the former Switch and Data facilities Equinix acquired earlier this year. Revenue from the Switch and Data sites came in about 4 percent lighter than Equinix had expected, as some deals that were in the pipeline remained unsigned.

It's worth noting that many of Switch and Data's data centers are located in secondary markets, while Equinix has historically focused on network-centric hubs near major Internet markets. Are these markets proving more competitive than expected? The results from the Switch and Data sites will be closely scrutinized by investors going forward.