How has the year 2009 been for the colocation sector?
From an investor point of view, not too bad (slight understatement, here). Two charts say it all: for clarity we will divide the sector into a) Companies who were priced for bankruptcy at the beginning of the year (whose performance was obviously outstanding), and b) everyone else (whose performance was still in the triple digits, with only one exception reaching a “poor” +50%…)
Charts from Google Finance, data from January 2 to December 23 - you may click to enlarge:
A few random comments:
Dupont Fabros (DFT) and Navisite (NAVI), for different reason, were punished by the stock market at the beginning of 2009 as doubts existed on their capacity to finance their operation (the credit crunch was hurting most Companies and the economy in a post-Lehman scenario). Their stories (+700% and +400% to date) have probably pleased investors with appetite for "very speculative bets".
If we have a look at the other Companies in the sector, we notice that a bottom was reached around March 2009. Furthermore, if we exclude Switch and Data (SDXC), which is benefitting from the Equinix acquisition’s premium, and Digital Realty (DLR), a REIT, overall performances were, over the year, quite similar to each other (from +76.6% to +108.8%), as if the sector had basically seen its market cap double in a year (it should anyway be remembered that most stocks did rebound from their lows this year).
So, what will happen in 2010, after such a good run up?
Our crystal ball still sees a very good market, with an imbalance between supply and demand that should guarantee strong pricing and good margins to the existing players for another year at least. Switch and Data and Equinix, in their internal forecasts, showed optimism in their predictions for the next few years (on average +20% growth per year in revenues with EBITDA margins continuing to improve – see our Seeking Alpha article for a more detailed explanation of their analysis).
Will this mean another positive year for investors in the sector? From past experience, our crystal ball may be reliable for overall trends, but the stock market itself is a different story, with too many variables involved. In the meantime, it’s still nice to exit 2009 with such a strong result on average.