Investors Have a New Frontier in the Cloud

In the on-demand world of cloud data centers, speed is everything. Speed endows scale. Speed separates winners from losers.

Among those winners are a whole new crop of semiconductor makers that most investors have never heard of. These are not the old-school names like Intel (INTC) or Qualcomm (QCOM). They are not your father’s chips.

One fast-rising leader is Inphi Corp (IPHI), which develops and manufactures cutting-edge digital-signal processors, amplifiers, modulator drivers and optical equipment. It’s the stuff data center and service providers need to build out faster networks and expand bandwidth.

With the explosion of Internet traffic and massive migration to cloud-based services, such as e-commerce and big data analytics, its business is growing exponentially.

Between 2012 and 2015, Inphi reports compound annual revenue growth was 76%, to $193 million. Reported sales surged to $185 million in the first three quarters of 2016. You can bet that more strength lies ahead.

And there are many more names where IPHI came from. It’s inevitable. Cloud computing is silent and powerful. These outfits are the invisible army of silicon that helps us store thousands of photos on Facebook, and stream Netflix on-demand with no greater effort than touching a button.

In the new Gilded Age, cloud computing is the new electric power grid. Entrepreneurs have been supercharged by scalable pools of ubiquitous, on-demand computing resources. And they have come through. Since 2009, cloud-dependent entrepreneurs have cracked the code on self-driving cars, gene-editing, real-time biometrics and language translation.

Not that long ago, the first modern, public-cloud computing platform was born. In 2006, Amazon Web Services evolved out of a decision by Amazon to sell excess storage and compute power to third parties. It started a paradigm shift.

Over the years, Fortune 100 companies like General Electric and Netflix were attracted. They could buy storage and compute power as needed and at a fraction of the cost of building their own facilities. Businesswise, it was no-brainer. It was cost-effective, and there were no infrastructure hardware headaches.

Old-school chips are getting blown away by a new products developed for cloud computing.

A 2016 report from consultants McKinsey & Co, IT as a service: From build to consume, found that “more large enterprises are likely to move workloads away from traditional and virtualized environments toward the cloud, at a rate and pace that is expected to be far quicker than in the past.” 

While smaller companies and startups, often cash-strapped, get the same resources and cost savings, the main attraction is scale. Many of these companies have been able to develop disruptive technologies that would have been otherwise cost-prohibitive.

Ride-hailing company Uber built real-time, logistic software in the cloud to monitor and to match up millions of riders and taxis on a global scale. Spotify built a database in the cloud capable of streaming on-demand any song, from any album for tens of millions of customers.

“This is just the start of the cloud-computing story. This is that Edison-light-bulb moment. It gives bright people access to unlimited computer power.”

Change this mighty creates massive opportunities for investors. Research firm Gartner projects the public cloud-computing sector grew to be worth $204 billion in 2016. That was up 16.5% over 2015. And the future looks even brighter.

While the large public clouds from Amazon, Microsoft and Alphabet are growing fast, there are other investment angles you should know.

In addition to all the new software companies that will be born, building out physical data centers is an important aspect of cloud computing. Several public companies play in this field. It’s a specialized, mission-critical business involving complex heating and air-conditioning schemes, massive power demands and miles upon miles of fiber-optic cable.

The idea that in this day and age, powerful data centers are still linked by miles of bulky cable seems anathema. Yet they, too, are vital.

Facebook and Microsoft are set to build a 160-terabit-per-second transoceanic cable that will connect massive data centers in northern Virginia to the northern coast of Spain in Bilbao. From there, junction points will spiderweb into Africa, the Middle East and Asia, where they will connect with other massive data centers.

And every network-equipment maker wants new modulators, switches and other fiber components that will allow the centers and service providers to get the long-haul bandwidth to their end customers. Many of the companies that make this equipment, like Inphi, will also make their investors rich.

This is just the start of the cloud-computing story. This is that Edison-light-bulb moment. It gives bright people access to unlimited computer power. Investors in the industry will have a field day.

Best wishes,

Jon Markman