I wish I could tell you this is going to change everything.
It’s a hyperbolic cliche that implies sweeping and fast changes are about to take place.
In most cases, it’s just not true.
Real changes take time. Often many years.
That’s what I want you to keep in mind today.
There is a major change underway.
It’s going to cause some major upheaval in one major and growing part of the tech sector.
Current leaders are going to fall by the wayside.
New entrants will rise to be the new leaders.
It’s a long, steady race to the top. But it’ll be worth it. There’s going to be a fortune waiting for investors in the companies you’re going to learn about today to make the wait all worthwhile.
Anatomy of an 871% Winner
Yesterday we talked about how the introduction of the iPhone kicked off the smartphone boom.
As smartphone sales rose from 10 million per year to 400 million+ today, there were a lot of winners made along the way.
The usual suspects like Intel and Qualcomm got a big piece of the action.
There smaller players right there too.
The example we used was Skyworks Solutions (SWKS) whose shares soared 871% since the launch of the iPhone.
The rise of the smartphone was a huge change in the world.
Of course, it didn’t happen overnight.
It’s been nine years since the iPhone hit the market.
It was slow, but enormously profitable for those positioned right.
Now, there’s another major change underway. It’s just as big as the smartphone boom. And it’s could produce similar gains.
Let me show you what I mean with two pictures.
First is a picture of a data center (source):
This is a Google data center located in Iowa.
It’s not much different than many other data centers located around the world.
It has rows and rows of servers and switches and modern cooling systems.
If you watch a Youtube or Netflix video, post a comment on Facebook, look at a picture or document on the cloud, or simply make a Google search, all the digital data related to that is going to and from these centralized repositories of processing and storage.
Data centers are the backbone of the modern Internet.
They’ve been around for years, but today they’re going through a major change.
Now have a look at the second picture.
Let’s call it the “data center of the future”:
Notice any differences?
It’s the same picture.
Now, I’m not trying to trick you.
Just trying to prove a point.
The second data center has no discernable exterior differences.
Looking at it from the outside, you won’t see any real differences between a five year old data center and one built five years from now either.
The differences are on the inside the endless rows of servers and switches.
You see, data centers are under ever-rising stress.
They say “90% of data was created in the last two years” and it’s true.
The amount of data they must process and store today is exponentially more than it was just a few years ago.
That’s a rising problem for data centers.
The older architecture and infrastructure wasn’t designed for modern use.
Think of driving an ‘86 Buick at common highway speeds today of 80 MPH compared to a fresh-off-the-line BMW.
The former will do it, but it’s shaking and rattling shows it’s not happy with it.
Data centers have a similar problem.
The size of the tasks required of them today are much, much bigger than they were a couple years ago.
However, building new data centers is expensive, time-consuming, and, even if total data center capacity increases 4X in the next five years, it will be barely enough to keep with demand.
As a result, the near-term and long-term solution is to get more out of what’s already there.
That’s going to take leaps and bounds in improvements in the flexibility of the hardware in these centers and the software powering it all.
The early leaders are already providing the software solutions that allow these data centers to meet the demands placed on them.
For example, Arista Networks (ANET) is a relatively small company ($6 billion market cap) devoted entirely to making networks like data centers run more efficiently.
It’s hardware and software solutions can reroute information coming and going out in the most efficient manner possible and do it in a lossless real time manner.
In other words, it’s a far better product.
The results are already showing up in market share too.
A recent report by Credit Suisse found the data center market for servers, switches, and other essential hardware is going through a bit of a shake-up.
The dominant player in the sector for well over a decade has been Cisco Systems (CSCO).
However, over the past few years, Arista and others have been taking away market share little bit by little bit.
Over time, the steady gains in market share will lead to accelerating growth, wider margins, and greater value for shareholders.