2 Kings of the Virtual Office

11/22/2011 10:34 am EST

Focus: STOCKS

Peter Staas

Managing Editor, Capitalist Times and Energy & Income Advisor

The amount of data that enterprises generate is increasing at an exponential rate as firms computerize processes and documents for ease of access, transmission, and analysis, writes Peter Staas of Personal Finance.

Not all of this data is generated internally; individuals also live in a virtual world, producing reams of profitable information about consumption patterns and behavioral trends. This primary data is wrapped in metadata that include situational details such as time and location.

Simply put, data collection and analysis are key components of the new economy.

International Data Corp (IDC), a market research firm that tracks trends in information technology, estimates that the amount of data created and replicated has grown nine times over the past five years and will surpass 1.8 zettabytes in 2011. One zettabyte is equivalent to the information stored on about 250 million DVDs.

The data-storage industry is at the heart of these structural trends, both enabling and benefiting from the virtual revolution.

NetApp (NTAP) has posted a remarkable track record of revenue growth, thanks to robust demand for its higher-margin virtualization services. Not only did NetApp avoid a down calendar year throughout the Great Recession, but the firm also grew its revenue at a compound annual rate of more than 20% over the past five years.

The appeal of virtualization is simple: The escalating cost of running a data center has prompted many IT departments to focus on efficiency. In addition to purchasing equipment, enterprises also bear the recurring costs associated with housing these systems and electricity to power and cool them.

Server virtualization has been high on many IT departments’ priority lists in recent years, particularly after budgets were slashed during the Great Recession. The majority of enterprise servers run at 10% to 15% of processing capacity; virtualization software increases utilization rates, in turn reducing the number of servers and lowering electricity bills. Electricity usually accounts for 30% to 40% of the cost of running a data center.

Virtualization enables companies to run multiple applications on a single server and dynamically allocate resources to where they’re needed most. In 2010, the data-storage industry shipped more virtual servers than physical servers, and NetApp enjoyed a blowout year.

The firm traditionally has focused on midsize enterprises, providing them with highly rated equipment and scalable software solutions. Offering a wide range of security and optimization features, NetApp’s software packages enable small and midsize purchasers to do less with more—a value proposition that should continue to resonate with its customers.

A leading provider of global data services, Equinix (EQIX) also stands to benefit from the rise of big data and the simultaneous push to reduce the costs associated with running a data center.

The firm butters its bread by providing physical space for networks to exchange critical information; instead of building and maintaining their own data centers, customers lease capacity and locate their equipment in one of Equinix’s international business exchanges.

Over the past decade, the company has grown its geographic footprint to include 95 data centers in 38 strategic markets, including locations in Europe and the Asia-Pacific region.

Equinix recently entered Brazil with the purchase of ALOG Data Centers of Brazil for $83 million. Management reports that the deal has already generated 60 new business opportunities for Equinix and that the firm has inked leasing agreements with a high-growth provider of cloud-computing services and a leading provider of financial services data.

More important, the company’s business model creates an internal marketplace where sellers (network providers) can provide local, regional, and global services to Equinix’s more than 4,000 customers.

In a world where security, speed, and reliability are essential to doing business, leading companies such as Bloomberg, Facebook, and Netflix (NFLX) relish the opportunity to purchase connectivity and access cloud-based computing services from leading providers such as Verizon (VZ) and Amazon.com (AMZN).

This network effect essentially transforms data storage from a cost center to a revenue base, a compelling proposition for potential customers.

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