Notes from the Consultant’s Jungle

Well, now I know why I’ve never come out on top whenever I buy one of Jim Cramer’s recomendations.

In a recent (10/22/2009) Mad Money piece on CNBC, Jim Cramer used the Equinix acquisition of Switch and Data to make the point that data centers are obsolete.  In his diatribe about why anyone with Equinix stock should immediately sell, he made the following nearly unbelievable points.

First, he blamed the strong buy and hold recommendation of industry analysts on the fact that these analysts are experts in their field.  His logic rests on the position that because these are data center industry analysts, they’re unaware of broader technology issues.  That’s right.  He’s blaming data center industry analysts for having expertise in their field of knowledge.  If you grant some credit to Cramer that maybe he is in fact an expert of his own (which before today I sort of did the same), you’ll perhaps think differently after the following.

Jim Cramer cited the recent Intel earnings call content about the Nehalem processor yielding an 8:1 advantage in server power.  Somehow, Cramer did some math to convince himself that every eight servers out there will soon turn into one,… ergo, there is eightfold less demand for data center real estate.  If Jim Cramer had any understanding of technology… or even the technology sector in general, he’d have jerked himself back into reality with the recollection of Moore’s Law.  Moore’s Law has been in play for decades, is in play today, and will be in play tomorrow.  Throughout this time, the demand for data centers has grown to grossly outstrip supply.  Is this really the extent of the gray matter behind Cramer’s financial recommendations?

Perhaps even more fundamental than the point about Moore’s Law is the basic economics underlying the costs of mission critical facilities.  Unless Cramer thinks that risk management is also a stale concept, we must acknowledge the demand for secure and highly available computing facilities into the distant future.  While in better economic times, there may have been some enterprises with the resources to invest hundreds of millions of dollars in data center construction and operations, but in the current economic times the natural alternative is to buy colocation services.  This is one of the fundamental drivers in today’s demand for colocation real estate, and the justification for colocation provider expansions and M&A activity.

We can excuse the fact that Cramer isn’t able to correctly pronounce Nehalem (or Equinix for that matter).  However, if he had spent any time at all in the technology sector this sort of tongue slip would be just about impossible.  Furthermore, even if data center space is becoming an unwanted commodity as Cramer led his audience to believe, the shallowness of his analysis is further evidenced by the missed observation that by acquiring Switch and Data, Equinix not only elevates its status as a premier colocation services provider but also strategically defends its turf from any global competitor (by blocking other global providers from gaining a strong US presence).

This whole thing was sort of a welcomed revelation to me.  I was almost thinking that I must be some sort of evil curse on Cramer’s stock recommendations since every time I take his advice my fortunes move in the opposite direction.  It would be unfare to expect Jim Cramer to be an expert on all businesses, but I did expect that his backoffice support was better than this.  Because I happen to be an expert in this space, I now realize the shallowness of this show’s analysis.  As such I can take it with the grain of salt it deserves.