In 2019, Nvidia made a bold move by acquiring Mellanox, a leader in networking technology. What seemed an ambitious leap has since proven a masterstroke, setting the stage for a new era in data center evolution in the age of AI.
Beefing up networking systems is like upgrading a major highway to handle a tsunami of traffic: While GPUs are busy crunching torrents of data for AI workloads, networking technology provides the high-speed thoroughfare that keeps all that information moving through the broader network.
Modern data centers are equipped with multiple GPUs, CPUs, and specialized processors to tackle intricate processes efficiently. The number of XPUs (custom AI accelerators) per computer cluster is projected to reach 1 million in the next 4 to 5 years, up from roughly 30K in 2024.1 More supercars on the road means more fast lanes are required: A cluster with 100,000 XPUS may require 500,000 optical interconnects, but a cluster with 1 million XPUs might need 10 million interconnects.2
But connecting computers within a single cluster—called intra-data-center networking—is just the beginning. As data centers draw more power and require more physical space, demand for inter-data-center networking continues to rise. If intra-data-center networks are akin to local roads in a city, inter-data-center networks are Germany’s Autobahn, connecting different cities at high speed. Microsoft recently partnered with Lumen Technologies to supply the networking infrastructure to connect its AI data centers, which increasingly require fast inter-data-center connectivity. Lumen Technologies also announced a deal with fiber cable giant, Corning, reserving 10% of Corning's fiber capacity for the next two years.
With the networking market expected to hit nearly $26 billion by 2028, up from $10.4 billion in 2023,3 big players are placing their bets: For example, Nokia is acquiring Infinera to expand its data center interconnect (DCI) business into the U.S. market, while Verizon is acquiring Frontier to expand its fiber footprint.
We believe this market’s rapid growth presents tremendous opportunities for innovative players that make the crucial components that drive these networks—including processors (like Broadcom and Marvell), switches (like Arista Networks and Cisco), optical transceivers (like Coherent and Lumentum), and optical cables for inter-data-center networks (like Corning and Fujikura). In our view, investors would be wise to connect those dots.
