Data centers are the physical facilities that house networks of servers and storage systems. Enterprises rely on those facilities to safeguard data, run applications, and manage business workflows. In short, data centers are the heart of the modern information technology (IT) ecosystem.
In the future, the evolution of technologies like cloud computing, artificial intelligence, and data science will continue to drive IT spending in the data center. That should be a tailwind for Nvidia (NVDA 0.95%) and Arista Networks (ANET -0.27%), two companies that have become synonymous with the data center industry.
With that in mind, these two growth stocks look like smart long-term investments. Here's what you should know.
Nvidia revolutionized gaming and design with the invention of the graphics processing unit (GPU), a semiconductor designed to process large amounts of data very quickly. Today, Nvidia is still a dominant force in both industries, and it holds over 90% market share in workstation graphics. But the company has also become a key player in the data center, where its GPUs power complicated workloads like scientific computing and artificial intelligence (AI) applications. In fact, Nvidia also holds over 90% market share in the supercomputer accelerator industry.
What's driving that success? The company takes a comprehensive approach to accelerated computing. It has reinforced its portfolio of cutting-edge semiconductors with data center networking solutions and subscription software products. For instance, Nvidia AI Enterprise is a suite of tools for AI and data science workflows, and Nvidia Omniverse is a suite of 3D design and simulation applications. Thanks to its broad portfolio, Nvidia has become the gold standard in graphics and AI, and that competitive edge continues to fuel impressive financial results.
In the latest quarter, revenue surged 53% to $7.6 billion, driven by particularly rapid growth in the gaming, professional visualization, and data center businesses. Better yet, gross margin expanded 230 basis points to 65.4%, and earnings more than doubled to $1.18 per diluted share.
Looking ahead, shareholders have plenty of reasons to be optimistic. Nvidia puts its addressable market at $1 trillion, and its product pipeline is bursting with potentially game-changing technologies. That includes the Grace central processing unit (CPU), a chip that management says will be the fastest and most energy-efficient server processor on the market. Grace is set to launch in 2023. It also includes the Atlan system-on-a-chip, a supercomputer designed to power self-driving cars. Atlan will be in vehicles by 2025. That's why now looks like a good time to buy this growth stock.
2. Arista Networks
Arista specializes in high-speed networking technology. Its portfolio consists of switching and routing platforms, all of which are powered by its Extensible Operating System (EOS). Arista also provides a number of adjacent software products, including tools for network automation, performance monitoring, and security. To that end, Arista allows clients to deploy and manage a seamless network that connects their entire IT ecosystem, from the public cloud to the enterprise campus.
According to management, Arista's networking platforms offer best-in-class capacity, speed, and power efficiency. And while Cisco still leads the ethernet switching industry with a 41% market share, that figure has been cut in half over the last decade. Meanwhile, Arista's market share has grown from 4% in 2012 to 19% in 2021. Better yet, Arista is actually the leader in the high-speed category, meaning switches offering at least 100 gigabits per second.
That strong competitive edge led to another impressive financial performance in the first quarter. Despite supply chain pressure, revenue climbed 34% to $877 million, and earnings soared 49% to $0.85 per diluted share. More importantly, Arista's leadership in the high-speed switching category should help it maintain that momentum for years to come.
Going forward, the proliferation of connected devices and cloud computing will place incremental strain on data centers, creating a need for faster networking solutions. That's where Arista excels. On that note, management puts its market opportunity at $35 billion by 2025, up from $23 billion in 2021. That's why this high-conviction growth stock is a smart buy right now.