Nomura today :
• Data centers networks are increasingly shifting to Network Function Virtualization (NFV) with a goal to use common server platform in implementing network functions such as load balancing or packet forwarding. However, implementing these network functions on common servers (x86) is not efficient on key design considerations such as compute resources, power consumption, and latency.
• As such, NFV implementation requires use of hardware acceleration for transport offload, vSwitch acceleration, and several other compute intensive functions. Network interface cards or NICs are becoming a universally accepted place to implement this acceleration.
• Consequently, we think, over time, a large portion of the Ethernet NIC market (~$700m in revenue in 2014) will convert from a ‘vanilla NICs’ into ‘intelligent NICs’ supporting hardware acceleration. We believe this is a secular trend which should benefit Mellanox over the next several periods. We believe Mellanox is ahead in its support for 25/40/50G NICs and has a higher throughput and lower latency implementation vs. competition.
• We estimate that Mellanox currently has a 15-18% share of the overall 10/40G NIC market (90% share in 40G), with Intel at ~40% and QLogic and Emulex (acquired by Avago) with 10-12% share each. We expect Mellanox to gain share against all key vendors in this space. We believe Intel likely launches its vSwitch accelerated NICs in ’16 giving Mellanox a 2-3 year lead. In addition, we believe Avago will likely exit the NIC business (~$80-100m in revenue), which should mostly benefit Mellanox.
• Furthermore, we believe that for NFV to work efficiently (with a predictable low latency), the NIC functionality will stay isolated and is not likely to be integrated in a standard CPU, which would otherwise also defeat the very purpose of the shift toward NFV. We expect this space to grow much faster than the growth of workloads in data centers at 30-40% yoy for next several periods, and see Mellanox extremely well positioned to benefit from this trend.
• We believe that EZchip’s acquisition will further boost Mellanox’s roadmap of intelligent NICs by integrating more acceleration (DPI, security, etc) into its NICs.
• We maintain our Buy rating and $75 price target. |
