It was not a pretty picture on Tuesday for Data Center Stocks after VMWare's earnings report last night. Here's a snapshot of some cloud/data center stocks I follow. Some were bucking the trend, but for most part, anything that was related to cloud computing software or spelled Hosting, Colo, REIT, was getting slashed by the street.
Now to be fair, these stocks have had a nice run for the past year as shown in the chart comparing a few of them to the S&P 500 (.INX)
But what caught my attention was the drag on two leader stocks like Equinix and Rackspace, and on a day where major indexes were breaking out to new multi-year highs.
One way to look at this story would be that it is an over-reaction and this was just a one day event. Another way would be that most of these stocks have top heavy PE ratios (EQIX 92, RAX 104, CoreSite 217) compared to the S&P (17) and they need to undergo a minor reversion to the mean.
The worse case would be that the street has figured that this space is getting saturated and needs a breather to catch up. That's called sector rotation, as those darling companies go out of favor. That's a version of the story that we're not particularly thrilled to hear as it takes many months to unfold and could put a drag on the entire sector.
We hope it is the former!!