The novel coronavirus pandemic has led to a surge in internet traffic thanks to the shift toward telecommuting and online education, as well as a bump in video gaming and streaming video demand on account of shelter-in-place orders and lockdowns.
This is forcing data center operators to upgrade their capacities and capabilities to handle the increased load. Chinese giant Alibaba recently announced that it will spend $28 billion to bolster its data center infrastructure over the next three years in preparation for a post-COVID-19 world. Market research firm TechNavio estimates that spending on data center construction could increase at an annual rate of 10% through 2024.
According to another estimate, cloud computing demand is expected to increase at an annual pace of 12.5% through 2021. Software-as-a-service (SaaS) solutions are expected to account for a lion's share of this growth.
This is why investors should be looking at companies providing cloud services and data center equipment in these times. NVIDIA (NVDA -0.85%) and Twilio (TWLO 0.22%) are two tech stocks to watch as they stand to win big from more capable data centers and the widespread adoption of cloud computing in a post-pandemic world.
Image Source: Getty Images.
NVIDIA is driving the data center revolution with its graphics cards
NVIDIA's data center looked set for a breakout performance in 2020 thanks to the growing demand for artificial intelligence (AI) applications and the company's partnerships with key data center operators across the globe.
So it wasn't surprising to see NVIDIA's data center business record terrific annual growth of nearly 80% in its recently reported fiscal first quarter that ended April 26. The business now supplies just over 37% of the graphics specialist's total revenue, up from 29% in the prior-year period. The impressive growth in NVIDIA's data center business helped lift overall revenue 39% year over year.
However, NVIDIA isn't done yet. The company recently launched the A100 graphics processing unit (GPU) for data center applications based on its latest Ampere architecture. NVIDIA promises a huge leap in performance during AI training and inference workloads with its latest data center GPU as compared to its Tesla V100 GPU.
More specifically, NVIDIA claims that the A100 data center GPU is three to six times faster than the V100 Tesla card during AI training workloads. On the other hand, it could be seven times faster while carrying out inferencing workloads.
Another big advantage of the A100 GPU is that it can be divided into seven separate instances. This feature allows multiple users to accelerate different applications, and NVIDIA claims that it can boost the utilization of the server and reduce the total cost of operation for the data center operator. And when needed, data center operators can connect multiple A100 graphics cards to tackle bigger tasks.
As it turns out, NVIDIA has scored several customers for its latest data center GPU already. CFO Colette Kress said this on the latest earnings conference call:
The A100 will be deployed by the world's leading cloud service providers and system builders, including Alibaba Cloud, Amazon Web Services, Baidu Cloud, Dell Technologies, Google Cloud Platform, HPE, and Microsoft Azure, among others. It is also getting adopted by several supercomputing centers, including the National Energy Research Scientific Computing Center and the Julich Supercomputing Centre in Germany and Argonne National Laboratory.
Finally, demand for NVIDIA's data center GPUs isn't going to fizzle out anytime soon. That's because GPUs are expected to corner the biggest portion of the data center accelerator market through 2023 as compared to central processing units (CPUs) or field-programmable gate arrays (FPGAs). Third-party research claims that the overall data center accelerator market could clock a compound annual growth rate of nearly 50% through 2023, paving the way for further growth in NVIDIA's data center business.
The pandemic is giving Twilio's business a boost
Wall Street wasn't impressed with Twilio earlier in 2020 after the company's growth trajectory for this year turned out to be weaker than anticipated. The cloud communications specialist guided for a big loss this fiscal year, while investors were looking for a profit -- a drop-off in top-line growth turned out to be another disappointment.
But the COVID-19 outbreak has given Twilio's business a shot in the arm as its solutions allow companies to shift their customer care centers to the cloud. The company's latest quarterly results (released in the first week of May) blew past the market's expectations, while the guidance indicates that the coronavirus pandemic won't dampen its momentum.
Twilio is expecting 34% annual revenue growth at the midpoint of its guidance range this quarter, but the bigger picture appears to be more attractive. That's because the pandemic has triggered a switch toward cloud-based contact centers to follow social distancing and shelter-in-place orders.
Traditional customer care centers require employees to go to an office and work in close quarters with each other. As a result, organizations have been moving their employees to a work-from-home model, accelerating the shift to cloud-based contact centers. This is where Twilio comes into play as its solutions allow organizations to create applications that customer service agents can use from the comfort of their homes.
Management explained over the latest earnings call that it saw a 25% spike in average daily sign-ups in the period from March 18 to April 30 as compared to the first 11 weeks of the quarter. COO George Hu anticipates that this is just the beginning as more and more companies are going to shift their contact centers to the cloud:
Prior to this outbreak, it was estimated that of the roughly 15 million contact center seats in the market, about 17% were in the cloud. Now, it is expected to be 50% by 2025, and Flex provides us a great opportunity to help companies with this transition with a fully-programmable contact center platform.
This transition should open up a huge opportunity for Twilio. The cloud-based contact center market is expected to clock annual growth of 24.5% through 2025, hitting a size of $49 billion after five years, according to a third-party estimate.
Twilio has generated $1.27 billion in revenue over the past year, so there's a lot of room for growth in the future considering the end-market opportunity at hand. Still, COVID-19 could turn out to be the shot in the arm that Twilio needed as the pandemic forced organizations to recognize the importance of cloud-based contact centers.
