This analysis is by Bloomberg Intelligence Senior Industry Analyst Woo Jin Ho. It appeared first on the Bloomberg Terminal.
Cloud and enterprise data center networking may be one of the areas of hardware that stay resilient amid a softening macroeconomic backdrop, with the market expected to expand 8% in 2023 to $20.9 billion in 2023, according to 650 Group. Investment activity by cloud providers remains healthy, as shown by Meta’s and Microsoft’s increased investments, while enterprise customers ramp up delayed digital transformation initiatives, with Cisco, Arista and Juniper as key beneficiaries.
Data center switching growth helped by better supply
An easing environment for supplies complements resilient cloud and enterprise data center networking sales, which are forecast to grow 8% to $20.9 billion in 2023, according to 650 Group. Cloud and enterprise customers are still playing catch-up from delayed product shipments related to supply-chain constraints, which could help leading vendors Cisco, Arista and Juniper weather a recessionary environment. Enterprise customers were most impacted by supply delays and may still need to invest in digital transformation. While sales to hyperscale cloud customers are on pace to grow 41% in 2022, we expect sustained investments in capacity, data center expansions and new initiatives such as Metaverse infrastructure.
Enterprise networks play catch-up
The spending dynamics in enterprise data centers should remain favorable in 2023 for the leading vendors, Cisco, Juniper and Arista. Corporate networks were among the segments most impacted by supply-chain disruptions. Despite a recessionary overhang, the segment is expected to grow 9% to $5.9 billion in 2023. We believe enterprises still need to invest in digital transformation activities due to the secular shift to public and private clouds driven by a more distributed workforce as flexible work environments are more broadly accepted.
Unlike cloud providers, enterprises still heavily rely on Cisco, Juniper and Arista for networking gear, and are the leading beneficiaries from the rise in enterprise data center spending.
Arista a beneficiary of Microsoft, Meta spending
Arista is among the leading beneficiaries in the uptick in hyperscale cloud investments in networking in 2023. Hyperscale cloud providers fared better than other markets in securing components in 2022, resulting in 41% growth for the year. Despite cloud providers’ heavy investment in 2022, they’re still investing for expansion as well as new artificial intelligence and machine-learning workloads, which should help vendor revenue growth in 2023. Meta’s roughly 10% increase in 2023 capital expense illustrates the need to invest into its networking infrastructure. Arista should be a key beneficiary in the increase in cloud spending, as companies expand and upgrade to 400G (gigabit) switching gear.
Cisco and Juniper should also be beneficiaries from 400G switching upgrades with Tier 2 cloud providers.
With 800G and 1.6T on horizon, 400G may come and quickly go
It may be time to start shifting our attention to the developments of 800G (gigabit) and 1.6T (terabit) switching despite a 400G ramp up in 2023. Sales of 400G switching gear are expected to expand 23% in 2023 to $3.7 billion, with branded vendors gaining footing in 400G in tier 1 and tier 2 clouds expansion rollouts. Arista leads its peers in 400G with 25-26% revenue share. But 800G is expected to be a $1 billion market in 2023 and $2.7 billion in 2024 from little sales in 2022, according to 650 Group. An increase in artificial intelligence and machine learning workloads is driving the growing capacity needs.
However, we expect 1.6T to underpin the buildout of meta- and omni-verse network infrastructure. Broadcom’s Tomahawk 5 chip is an enabling technology, which could further give Arista an edge.
100G remains the workhorse
Amid the high interest in 400/800G switching, 100G will play a more relevant role for switching providers and shouldn’t be overlooked, especially for Cisco and Juniper. 100G is expected to account for 49% of data center switching sales in 2023 and 45% in 2024 and remains a $9.6-$10 billion sales opportunity. The resiliency in 100G may come from two factors: stronger enterprise adoption as part of data center upgrades and more 100G ports deployed in the access layers of cloud networks.
We believe Arista’s leadership in 100G in cloud customers could give it a leg up in enterprise deployments, and we view it as a foundation for its 25% total sales growth in 2023. But we shouldn’t diminish Cisco’s networking leadership, and 100G’s expansion into the enterprise could help improve its 25-30% segment revenue share.
Bloomberg
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