Ethernet is becoming increasingly important for high-performance server systems.
After comments from Nvidia's CEO, Arista Networks' stock took another hit.
Investors in Arista Networks, a data center network design and software supplier, have another cause for concern, and this time it's none other than Nvidia.
Arista manages a robust mini-empire of data centers based on Ethernet technology, but in April, Wall Street analysts lowered their expectations for Arista, as news indicated that the company might face new competition from Nvidia. This concern intensified when Nvidia CEO Huang Renxun told analysts on the earnings call on May 22 that his company is "fully committed to Ethernet."
However, despite the increased concern, Arista's stock price has still risen nearly 30% so far in 2024, and last year it more than doubled.
Arista's first-quarter revenue increased by 16% year-on-year to $1.57 billion. The management expects at least an 11% year-on-year increase in revenue for the second quarter. It is worth noting that this is achieved on the basis of a 34% increase in full-year revenue in 2023 and a 49% increase in 2022. In other words, Arista is benefiting from the current data center construction boom.
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Moreover, the company's earnings per share in the first quarter increased by 48% year-on-year. Free cash flow (FCF) grew by 37% to $505 million, with a free cash flow margin of 32%.NVIDIA not only designs data center GPUs for artificial intelligence, but another key to its success is network hardware, which it acquired when it merged with Mellanox in early 2020. In addition to InfiniBand network technology that helps simplify the adoption of the latest and best AI hardware, NVIDIA also acquired some Ethernet technology from Mellanox.
And it is NVIDIA's recent shift in focus to Ethernet that has the market a bit nervous. The company's Spectrum-X Ethernet platform aims to build on the early success of InfiniBand and become a more direct competitor to Arista for its data center customers. Arista's top customers include Microsoft, Meta, large financial institutions, and other large enterprises.
Ethernet is becoming increasingly important for high-performance server systems.
According to IDC research, in hyperscale enterprises, cloud builders, some HPC centers, and large enterprises, there is already a sufficient construction of 200 Gb/s and 400 Gb/s networks, and the InfiniBand and Ethernet markets can grow simultaneously.
Of course, Ethernet is ubiquitous - at the edge, in the campus, and in the data center - which is different from InfiniBand, which is specifically used for data centers. Therefore, it is very important to distinguish the sales of Ethernet switches in the data center and elsewhere. According to the statistical data of the third quarter of 2023, the sales of data center Ethernet switches increased by 7.2% year-on-year, which is a reasonable growth, even if not explosive, and reflects the fact that sales are rising as prices fall within the port speed range.
IDC did not provide revenue data for data center Ethernet switch sales in its public statement this time, but we have tracked IDC's historical data, and our calculations suggest that data center Ethernet switch revenue reached $4.8 billion, accounting for 41% of all Ethernet switch sales.
IDC stopped providing the growth rate of ports by type and speed as early as the fourth quarter of 2022, which means we cannot calculate the ports shipped to the data center, and we have made estimates to fill this gap. These are all guesses based on the interaction of quantity and price, as the supply chain in the field of data center Ethernet switches is loosening. However, there is still a backlog, so prices will not collapse. In any case, our best guess is that 32.1 million ports were shipped to the data center in the third quarter of 2023, which means that the shipment of ports increased by 20.3% year-on-year and 24.5% quarter-on-quarter.This is far from the 5-fold increase in NVIDIA's InfiniBand network revenue in the latest quarter. Over the past 12 months, we have estimated NVIDIA's InfiniBand revenue to have grown by 3.2 times in our model, reaching $5.53 billion, including switches, network interfaces, DPU, cables, and software. However, the annualized run rate of the data center Ethernet switch market is still about $20 billion. If the switch accounts for about half of the InfiniBand revenue, then the data center Ethernet switch is still about 7 times larger than the InfiniBand switch—and the pressure to migrate more and more AI clusters to Ethernet and to put Ethernet technology on par with InfiniBand is increasing. Therefore, in most cases, companies do not need to deploy anything other than Ethernet.
IDC said that in the non-data center part of the Ethernet switch market, sales grew faster, with a 22.2% increase in the third quarter of 2023 and a 36.5% increase in the first three quarters, as companies upgraded campus networks and established advantages. Based on IDC's historical data and growth trends, we believe that the non-data center market's sales are $6.9 billion, with an estimated less than 250 million ports shipped at various speeds.
In the third quarter of 2023, the Ethernet switch market for data centers, campus, and edge reached $11.7 billion, with a year-on-year growth of 15.8%. The accompanying Ethernet router market declined by 9.4%, slightly below $3.7 billion, which is not surprising, as routers are increasingly built using commercial chips that include both switching and routing functions.
In the data center field, the sales of 200 Gb/s and 400 Gb/s Ethernet switches increased by 44% year-on-year, and the shipments increased by 63.9% year-on-year. The sales of 100 Gb/s Ethernet switches for data centers, edge, and campus increased by 6%.
