How Cloud Computing Upgrade Cycle To 400G Could Drive Tech Stocks
Amazon.com (AMZN), Facebook (FB), Alphabet (GOOGL) and Microsoft (MSFT) are in the driver’s seat as computer networking firms and optical communications device makers await a cloud computing upgrade cycle that promises to push data through at faster speeds.
The internet giants plan this upgrade via so-called “hyperscale” data centers. Many Wall Street analysts expect the move to 400 gigabits per second, or 400G, to unfold in the back half of 2019. However, high volume production of devices may wait until 2020.
“We expect Amazon and Google to lead the hyperscale data center migration to 400G in 2019 followed by Microsoft, Facebook, and Apple in 2020,” said Alan Weckel, founder of 650 Group.
Brad Casemore, analyst at market research firm IDC, says the move to 400G basically creates more bandwidth — essentially fatter pipes that allow for more data to pass through at once. Enterprises that need to increase their workloads will want 400G to keep their cloud services fast and reliable.
“In time, consumers would see an impact if the hyperscalers did not adopt higher-bandwidth networks,” Casemore told Investor’s Business Daily. “Bandwidth constraints can and do affect the performance and responsiveness of applications.”
Network gear makers Arista Networks (ANET), Cisco Systems (CSCO) and Juniper Networks (JNPR) have a big stake in how soon the tech giants upgrade their cutting edge data centers to 400G technology from current 100G levels. So do optical device makers such as Ciena (CIEN), Acacia Communications (ACIA), and Finisar (FNSR).
How Intel Might Get Involved
And, you can add Intel (INTC) into the mix. Intel is developing new devices using silicon photonics technology. Silicon photonics would replace the optical devices used to transmit data by light instead of through electronics, like semiconductor chips. Silicon photonics integrates optical light switching and electronics and consumes less power.
The upgrade cycle to 400G could be an opportunity for Intel and startups in silicon photonics to gain share in the optical communications market, some analysts say.
Amazon, Facebook, Alphabet’s Google and Microsoft have pushed data center computing performance to higher levels. The data centers are packed with servers that deliver content to mobile devices. Hyperscale data centers also provide cloud computing services to businesses.
The cloud giants moved to 100G technology long before corporate and telecom data centers. “We already see a notable gap developing between the speeds needed by hyperscalers, which are accounting for a larger share of overall expenditures on data center networks as a result of cloud-service growth, and those required by enterprises that continue to operate their own data centers,” IDC’s Casemore said. “The gap is likely to widen.”
Waiting For Prices To Fall
While Amazon, Facebook and Microsoft are cash-rich, they’re also thrifty. They’ll wait until prices on 400G devices and networking gear becomes appealing.
“The early adopters (in 2019) will be the hyperscalers, whose data centers function figuratively and literally as the engines of their businesses,” added Casemore. “They are building data center networks at unprecedented speeds and scales, and that will continue. Among the hyperscalers, we see limited interest in 200 Gbps, and we believe most hyperscalers will move directly to 400 Gbps.”
Vladimir Kozlov, head of the market research company LightCounting, says Google has moved ahead this year with some 400G deployment. He says all the cloud computing titans have different road maps.
Kozlov says he expects the 400G market to take off steadily. He says revenue from 400 Gbps products may not overtake the 100 Gbps market until 2023.
The 400G market will jump to $9.89 billion in 2022, up from $24 million in 2018, forecasts 650 Group.
Round Two Of Arista, Cisco Battle
Stakes will be huge for Arista. Santa Clara, Calif.-based Arista’s revenue growth boomed in 2016 and 2017 as it beat Cisco to the 100G market. In 2018, Arista’s sales growth has slowed.
Arista sells network switches that speed up communications among racks of computer servers. Its top customers include Microsoft and Facebook.
Arista on Oct. 24 announced two new 400G products. Arista expects production to ramp up next year. Kozlov says Broadcom (AVGO) is ramping up production of a 400G chip that Arista and other gear makers plan to use.
Cisco, though, aims to grab more business from internet companies during the shift to 400G products, analysts say.
Then, there’s Juniper. Its sales to cloud computing giants have lagged. But Juniper aims for a comeback during the 400G upgrade cycle. Juniper is expected to discuss its 400G strategy at an analyst day set for Nov. 9.
Ciena A Strong 400G Player
Optical device makers target the data center market in two ways. They sell products that connect data centers over long distances as well as devices that speed up communications within data centers.
Some analysts see a chance for Acacia to rebound during the 400G upgrade cycle. Acacia stock boomed in mid-2016 following its initial public offering. But, Acacia stock tanked as sales to China weakened.
Piper Jaffray, meanwhile, calls Ciena a potential leader in 400G optical systems that connect data centers.
“Ciena has a comfortable lead in the 400G market with an exceptional pipeline of hyperscale data center opportunities,” Piper Jaffray analyst Troy Jensen said in a recent note to clients.
A UBS report speculated that Amazon is a key customer of both Juniper and Ciena for 400G gear. Google, though, is expected to continue buying optical devices from China’s Zhongji Innolight.
The Coming Of Silicon Photonics
Silicon photonics, meanwhile, looms as a wild card in the data center market. While Acacia has used silicon photonics technology to make devices, more companies are pushing into the market.
Intel, Luxtera and startups such as Elenion Technologies and Sicoya are among the players, says Cowen & Co. Intel in September said it expects 400G optical modules to enter volume production in the second half of 2019.
If silicon photonics takes off, Cowen & Co. says it could shake up the optical and computer networking sectors. It says Inphi (IPHI), MaxLinear (MXL) and Applied Optoelectronics (AAOI) could be among the device makers impacted.
“We see a relatively broad number of potential acquirers of SiP companies,” Cowen analyst Paul Silverstein said in a note to clients. “These include larger optical component and module suppliers, Finisar and Lumentum; Corning (GLW) and Molex; and, most notably, a broad range of semiconductor companies including Intel and Broadcom.”