- The big 4 hyperscalers are forecasted to grow capex spending on data centers by 40% YoY in 2025.
- Data center interconnect (DCI) providers are key benefactors that enable high-speed data transfers between data centers.
- Arista Networks stands to be a benefactor in data center capex spending by the big four hyperscalers, as Microsoft and Meta Platforms alone make up 39% of their total revenue.
According to Citi Research, the big four hyperscalers Microsoft (NASDAQ:MSFT), Amazon.com (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL) and Meta (NASDAQ:META) are forecast to grow their data center capital expenditures by 40% YoY in 2025. This is expected to be a windfall for companies that provide infrastructure products and services.
While artificial intelligence (AI) companies and clean energy providers will clearly benefit, Citi noted that data center interconnect (DCI) providers should also see a boost in their business. DCI providers supply the technology hardware and software solutions to connect multiple data centers, enabling them to share resources and exchange data quickly. More enterprises are also spreading out their applications and data among multiple hyperscalers using both private and public clouds to diversify and not place all their eggs into one basket.
DCI providers facilitate high-speed bandwidth, enhance disaster recovery capabilities, improve redundancy and offer network security solutions. Here are 3 stocks in the computer and technology sector to benefit from the capex spending growth in data centers.
Arista Networks: High-Speed Networking Solutions
As a leading provider of cloud networking solutions, Arista Networks (NYSE:ANET) is a key player in DCI. Datacenter capex spending will be used to construct new data center campuses and upgrade the capacity of existing data centers. Arista Networks stands to benefit from increased sales of its Ethernet switches, routers and software solutions utilizing its proprietary Arista EOS platform.
As it turns out, Arista is already a supplier of DCI solutions to Microsoft, Meta Platforms, Alphabet and Oracle (NYSE:ORCL). In fact, Microsoft and Meta Platforms are their largest customers, generating 39% of total revenue. As hyperscalers ramp up their spending, a good chunk will be going into Arista Network's coffers.
In its second quarter of 2024, Arista Networks reported earnings of $2.10 per share, which beat analyst estimates by 16 cents. Revenue rose 16% YoY to $1.69 billion, beating $1.66 consensus estimates. They were conservative in their guidance, with in-line forecasts of $1.72 billion to $1.75 billion in revenue versus $1.73 billion consensus estimates for Q3.
Cisco Systems: The Networking Giant Among the Giants
The original networker is Cisco (NASDAQ:CSCO) was an early pioneer and continues to supply the major hyperscalers with a robust portfolio of networking infrastructure, security and DCI solutions. AI is still a relatively small portion of its business but is continuing to expand. Meta Platforms added Cisco to its AI hardware portfolio after the company announced Disaggregated Scheduled Fabric, its latest AI network fabric. Citi raised its rating from Neutral to Buy and raised its target price from $52 to $62. They also raised their estimates on Cisco's earnings by 2% and 5% for 2025 and 2026, respectively.
Cisco reported its fiscal fourth quarter EPS of 87 cents, beating estimates by 2 cents. Revenues fell 10.3% YoY to $13.64 billion but still crushed consensus estimates for $13.53 billion as inventory headwinds eased. The company noted the steady improvement in customer demand with order growth driven by AI. Cisco is shifting investments toward cloud, security and AI. The company raised its fiscal Q1 2025 EPS guidance to 86 to 88 cents versus consensus estimates of 85 cents.
Coherent: Optical and Laser Systems to Enable High-Speed Data Transfer
DCI requires optical networking components in order to transfer data at high speeds. Coherent (NYSE:COHR) develops photonic solutions. The company makes high-powered fiber lasers and networking products like optical transceivers, which are devices that convert electrical signals into optical (laser) signals for transmission through optical fiber cables.
Coherent transceivers range from 100G and 400G to higher speeds. Their optical amplifiers boost the strength of the optical signals, which enables data transmission over longer distances without degradation. This is critical to ensuring data integrity in long-haul DCI and seamless interconnectivity.
Coherent reported Q4 2024 EPS of 61 cents, beating by a penny and 9% YoY revenue growth to $1.31 billion. Both top and bottom line guidance for Q1 2025 were in-line, which sets the bar low for upside beats as data center capex grows in 2025.