Nvidia (NVDA) and Arista Networks (ANET) have had success selling high-end technology to cloud-computing giants, but now they’re competing head-to-head for the first time as their customers upgrade internet data centers for artificial intelligence.
Heavyweight contender Nvidia is a leading supplier of AI accelerator chips that exponentially boost the processing power of computer servers, while Arista makes money from computer switches and routers that run inside data centers and connect racks of servers to long-distance communications networks.
What’s new in the advent of “generative” AI is that cloud computing giants are building new data centers with clusters of AI computer servers, potentially expanding to hundreds or even thousands of servers, and these AI server clusters are connected by high-bandwidth computer networking technologies.
AI Ethernet market grows rapidly
What’s more, cloud computing giants are turning to new versions of Ethernet networking technology to connect clusters of AI servers: Market research firm 650 Group predicts that revenue for the “back-end” AI Ethernet market will surge to $8.74 billion by 2028, up from $577 million in 2023.
“The good news is that the market is growing very rapidly and Arista, Cisco Systems (CSCO) and Nvidia are all likely to show strong growth in absolute terms,” said Alan Weckel, analyst at 650 Group.
But that doesn’t mean a fierce marketing war isn’t looming, as Nvidia and Arista are both seeking big contracts from cloud-computing giants Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT), and Google-parent Alphabet Inc. (GOOGL), as well as other companies making big investments in AI infrastructure, including Meta Platforms Inc. (META), Tesla Inc. (TSLA), and Apple Inc. (AAPL).
Additionally, Nvidia and Arista have different strengths that they can leverage in the AI wars.
“The market share question is a little tricky,” Weckel told IBD. “Nvidia is a challenger entering Ethernet with very little market share yet, so they’re going to take share. Arista and Cisco are incumbents, so we’re likely to see increased competition between the number one, two and three vendors.”
Ethernet Overtakes InfiniBand
But it hasn’t all been smooth sailing for Nvidia. The new AI Ethernet network switch competes with Nvidia’s InfiniBand chips, which transfer data quickly from computer servers to storage devices. Nvidia acquired InfiniBand chipmaker Mellanox for $6.9 billion in 2020.
Nvidia is also developing Ethernet network switches to hedge against the risk as it is expected to dominate the market for performance reasons.
Analysts say this will allow Nvidia to offer product bundles that combine Ethernet networking devices with artificial intelligence accelerator chips.Nvidia’s overall strategy is to provide customers with an AI ecosystem, including its CUDA software platform for developing AI apps and workloads.
Nvidia aims to offer a broad AI ecosystem to its customers, but the flip side is that some cloud computing buyers may not want to be tied to a single supplier.
“NVIDIA’s pitch of a fully integrated system will win it some fans, but hyperscalers and enterprises will continue to push for a multi-vendor approach (and open ecosystem), driving demand for Arista,” William Blair analyst Sebastian Nagy said in the report.
Additionally, Nvidia stock is up 162% in 2024 as of August 19. Arista stock is up 49%. Nvidia and Arista are also among the top AI stocks to watch.
Arista, Cisco and HPE support the consortium
In 2023, Arista partnered with Cisco, Hewlett Packard Enterprise (HPE), and other companies to form the Ultra Ethernet Consortium, which currently has more than 60 member companies. Other players in the AI Ethernet networking market include Celestica (CLS) and Nokia (NOK).
“Building an AI backend network to connect server clusters is an entirely new opportunity,” said Dell’Oro analyst Sameh Boujerbene. “Almost everyone can benefit to some degree.”
Bugelbein said Nvidia should be given credit for pivoting from InfiniBand to Ethernet: “They saw it coming. Their marketing strategy changed,” he said.
While some cloud computing giants may want to reduce their reliance on Nvidia, Boujelbene added that Nvidia still offers the best product bundle.
Arista AI Revenue Forecast
Arista executives, meanwhile, expect AI-related revenue to reach $750 million in 2025, with the majority of that coming from Ethernet networking.
“We think Arista’s AI forecast is reasonable, but bulls would be expecting double or more (revenues),” Raymond James analyst Simon Leopold said in a report.
“Arista has announced a set of products optimized and designed for AI clusters called Etherlink AI, which includes software agents that run on third-party network cards (from members of the Ultra Ethernet Consortium and Nvidia), which could help accelerate momentum.”
Additionally, Arista has designed its Ethernet platform to work with AI accelerator chips from Broadcom (AVGO), AMD (AMD), and Intel (INTC) — in fact, Broadcom and Arista have an AI marketing partnership.
650 Group’s Weckel said Arista’s popular network operating system, EOS, could give the company an edge over Nvidia and Cisco.
Nvidia Stock: Spectrum-X Gains
Raymond James’ Leopold said the debate on Wall Street is no longer about market share shifting from InfiniBand to Ethernet, but rather about who will grab the lion’s share of the AI Ethernet market.
He said Nvidia expects its Ethernet brand, Spectrum-X, to become a multi-billion-dollar product line within a year.
Meanwhile, Nvidia is delaying shipments of its next-generation Blackwell B200 AI chips due to manufacturing issues, with mass shipments to cloud computing customers not expected until early 2025.
But that’s not expected to slow demand for the company’s Spectrum-X Ethernet gear, and analysts say Tesla could be Nvidia’s first customer.
Arista’s two biggest customers for its computer network switches are Microsoft and Meta. Arista has not told Wall Street analysts whether it is buying its Ethernet network devices. In its second-quarter earnings call, Arista said it has four major AI network trials underway.
“While the company says these four major AI trials are being conducted in collaboration with Cloud Titans and could be for clusters approaching 100,000 GPUs, we note that there are several other major AI trials in the works,” Morgan Stanley analyst Meta Marshall said in the report.
For the latest in artificial intelligence, cybersecurity, and cloud computing, follow Reinhardt Krause on Twitter @reinhardtk_tech.
You may also like:
Want to trade options? Try these strategies
To find companies that have hit new buy points, check out IBD’s ” Breakouts of the Day ” list.
IBD Digital: Get IBD’s premium stock lists, tools, and analysis now
Get the next big stock hit with MarketSurge
