THIS ARTICLE IS SYNTHESIZED BY THE SEMICONDUCTOR INDUSTRY (ID: ICVIEWS).
Ethernet is becoming increasingly important for high-performance server systems.
Arista Networks' stock took another hit after comments from the CEO of Nvidia.
Investors in Arista Networks, a provider of data center network design and software, have another concern, and this time it's none other than Nvidia.
Arista manages a powerful empire of small, Ethernet-based data centers, but Wall Street analysts downgraded their expectations for Arista in April after news indicated that the company could face new competition from Nvidia. Nvidia CEO Jensen Huang told analysts on a May 22 earnings call that his company was "going all-in on Ethernet," and that concern was heightened.
However, even as concerns mount, Arista shares are still up nearly 30% so far in 2024 and more than double last year.
Arista's first-quarter revenue rose 16% year-over-year to $1.57 billion. Management expects second-quarter revenue to grow at least 11% year-over-year. Notably, this is on top of a 34% revenue growth in 2023 and a 49% growth in 2022. In other words, Arista is benefiting from the current data center construction boom.
And the company's earnings per share in the first quarter rose 48% year-over-year. Free cash flow (FCF) increased 37% to $505 million, with a free cash flow margin of 32%.
Not only does Nvidia design data center GPUs for AI, another key to its success is networking hardware, which it acquired when it merged with Mellanox in early 2020. In addition to InfiniBand networking technology helping to simplify the adoption of the latest and greatest AI hardware, NVIDIA has also acquired some Ethernet technology from Mellanox.
And that's why Nvidia's recent shift to Ethernet has made the market a little nervous. The company's Spectrum-X Ethernet platform hopes to build on the early success of InfiniBand and become a more direct competitor to Arista for its data center customers. Arista's top clients include Microsoft, Meta, large financial institutions, and other large enterprises.
Ethernet is becoming increasingly important for high-performance server systems
According to IDC, there are enough 200 Gb/s and 400 Gb/s networks in hyperscalers, cloud builders, some HPC centers, and large enterprises to grow the InfiniBand and Ethernet markets at the same time.
Of course, Ethernet is everywhere – at the edge, on campus, and in the data center – unlike InfiniBand, which is specifically used in data centers. Therefore, it is important to distinguish between the sale of Ethernet switches in data centers and other places. According to the statistics of the third quarter of 2023, sales of data center Ethernet switches increased by 7.2% year-over-year, which is a reasonable, if not explosive, increase, and reflects the fact that sales are rising as prices fall in the port speed range.
IDC did not provide revenue data for data center Ethernet switch sales in its public statement this time, but we tracked IDC's historical data, and our math shows 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 back in Q4 2022, which means we can't calculate the ports shipped to the data center, and we've made estimates to fill that gap. These are all speculations based on the interplay of volume and price, as the supply chain in the data center Ethernet switch space is loosening. However, there is still a backlog, so the price does not collapse. Regardless, our best guess is that 32.1 million ports were shipped to data centers in Q3 2023, which translates to a 20.3% year-over-year increase in outbound ports and a 24.5% quarter-over-quarter increase.
That's a far cry from Nvidia's 5x increase in InfiniBand network revenue in the most recent quarter. Over the past 12 months, we estimate in our model that Nvidia's InfiniBand revenue has grown 3.2x to $5.53 billion, including switches, network interfaces, DPUs, cables, and software. But the data center Ethernet switch market is still running at an annualized rate of about $20 billion, and if switching accounts for about half of InfiniBand revenue, data center Ethernet switching is still about 7 times larger than InfiniBand switching — and the pressure to migrate more and more AI clusters to Ethernet and bring Ethernet technology on par with InfiniBand is increasing. So, in most cases, companies don't have to deploy anything other than Ethernet.
IDC said sales grew faster in the non-data center segment of the Ethernet switch market, up 22.2% in the third quarter of 2023 and 36.5% in the first three quarters, as the company upgraded its campus network and built an advantage. Based on IDC's historical data and growth trends, we estimate sales in the non-data center market at $6.9 billion, with an estimated shipment of less than 250 million ports at various speeds.
In the third quarter of 2023, the market size for Ethernet switches for data centers, campuses, and edges reached $11.7 billion, up 15.8% year-over-year. The companion Ethernet router market fell by 9.4% to just under $3.7 billion, which is not surprising as routers are increasingly built with commercial chips that include switching and routing capabilities.
In the data center segment, sales of 200 Gb/s and 400 Gb/s Ethernet switches increased by 44% year-over-year, and shipments increased by 63.9% year-over-year. Sales of 100 Gb/s Ethernet switches for data centers, edge, and campuses increased by 6 percent.
*Disclaimer: This article was created by the original author. The content of the article is his personal point of view, and our reprint is only for sharing and discussion, and does not mean that we agree or agree, if you have any objections, please contact the background.