Data storage: Room to grow?

Technology firms that help store mountains of corporate data claim they're recession-proof. The amount of data just keeps multiplying.

But the economy has slowed the rate of growth for data storage products, and the firms that sell them are no longer the Wall Street darlings they were a year ago.

"The economy is affecting everybody in data storage," said Clint Morrison, an analyst at Feltl & Co. in Minneapolis. "But corporations have to manage [a growing amount of] data, and they can only put off data storage upgrades and add-ons just so long."

Market research agrees. The software to manage data storage (but not the hardware) was a $10.6 billion worldwide market in 2007, up 12.2 percent from 2006, according to research firm Gartner. Some analysts believe the overall growth rate of the data storage market is now about half that much because of the economy.

As a result, the stock of Compellent Technologies of Eden Prairie, a storage networking firm, is trading at less than $11 a share, down from its $13.50 public offering in October and a post-IPO surge to nearly $25 a share. Despite its losses -- it was in the red $7.8 million last year on revenue of $51.2 million -- investors were hungry for one of the last IPOs in what was considered a hot sector.

Compellent expects to become profitable later this year.

The stock of Datalink, a Chanhassen-based value-added reseller of data storage gear, is in the $4.50 range, down from more than $12 a share in October 2006 and well off its 52-week high of $6.14 last July. Datalink, which reports earnings Wednesday, earned $1.2 million last year on revenue of $177.8 million.

The data storage sector got a shock this past week when VMware, a much-watched data storage software company, said it would lower its 2008 revenue projections for the second time in six months and its stock tumbled 24 percent in a day.

Besides the economy, demand for data storage products is affected by new technology. In particular, "virtualization" software allows companies to pool the capacity of many data storage devices and reallocate parts of the pool as needed. That means they can stretch the capacity of existing equipment without adding more -- at least for a while. This has had a mixed impact on Compellent and Datalink, since they sell both data storage equipment and virtualization software.

Eric Martinuzzi, an analyst at Craig-Hallum in Minneapolis, remains optimistic about Compellent's prospects.

"There is less discretionary corporate spending on technology now, but when you're growing off a small revenue base like Compellent is, I think you can maintain momentum through the end of 2008," Martinuzzi said. "I've talked to Compellent's independent value-added resellers, and they see no change in pace."

That optimism is shared by California-based Crescendo Ventures, which sold 300,000 shares of Compellent last month, reducing its holdings to 4.23 million shares.

"Crescendo Ventures remains a significant investor with an extremely positive outlook on the company," said David Spreng, a managing general partner.

Philip Soran, Compellent's CEO, says that while the rate of sales growth has slowed a bit, his firm should benefit by selling modular systems, starting at $30,000, that allow corporations to increase storage capacity as they need it. The new virtualization technology supports the buy-as-you-go strategy by reallocating storage to computing tasks as needed, he said.

In addition to poor conditions in the stock market, Datalink faces some problems of its own, analyst Morrison said. Its contracts are signed at irregular intervals, sometimes causing uneven quarterly results. And its chairman, Greg Meland, sells 30,000 shares a month, seemingly without regard to the stock's relatively low price. Until February, he only sold shares if the price was over $5 a share; when the stock dipped below $5, he revised his plan to sell if the price was over $3.50.

"If Meland would stop selling when the stock went down, investors would feel a whole lot better," Morrison said. "He still holds well over 2 million shares, so this could go on for years."

Datalink officials confirmed Meland's selling plan, but declined to comment for this report because of the upcoming earnings report.

In its first-quarter conference call in April, Datalink officials said customers had an eye on the economy but were implementing storage projects that saved money or led to productivity gains.

No matter how their prices move up and down, data storage stocks are good longer-range investments, Morrison said.

"There's a never-ending driver out there: the growth of data."

Steve Alexander • 612-673-4553