Generative AI is driving the demand for cloud computing, as more enterprises want to train and run large AI applications in the cloud. However, only a fraction of the existing cloud infrastructure can handle the massive data and computation needs of artificial intelligence (AI). Hyperscalers like Google, Microsoft, and Amazon are investing in new AI data center architectures, which are different from the traditional cloud and high performance computing (HPC) architectures. These new architectures have more GPU-based servers and back-end networks, which offer much higher bandwidth and connectivity than the front-end networks. The schematic below shows that different networking topology is needed to run AI/machine learning (ML) applications with back end network needing most of the upgrade (Exhibit 1).
Exhibit 1: Front End and Back End Network
The network architecture today is mainly designed for east-west traffic, which is the data transfer between servers within or across data centers. East-west traffic is affected by the degree of virtualization and containerization of the applications and infrastructure, which makes them widely distributed and scalable. North-south traffic, which is the data transfer between servers and external locations, is influenced by the number of users and apps. Generative models, which are a type of AI application, require more bandwidth for east-west traffic, as they involve large amounts of data and computation. However, this can cause congestion and packet loss at the network switches, which leads to latency and interruption of the model training or inference.
The problem of increased latency with more networking traffic can be solved by various methods, similar to how road traffic can be improved - by adding faster, smarter, extra, or smoother lanes. Hyperscalers are using all these methods to cope with the higher bandwidth requirements and lower latency expectations. Faster lanes involves upgrading networks to higher speeds, such as 400G, 800G, or 1.6TB, which can handle more data traffic, especially from GPU workloads. Smarter lanes means using advanced load balancing, which can redirect or pause traffic to avoid congestion and packet loss. Extra lanes means adding more switches, which can provide more options for data transfer. Smoother roads means using InfiniBand, for bigger packet sizes and less utilized networks. InfiniBand can also be more costly and less common than other standards.
Component companies in the supply chain benefit the most from adopting faster speeds, as they can charge higher prices and face less competition for their products. For example, market forecasts for Ethernet transceiver (a crucial component) show a big increase in demand for 400G and above speeds in 2024 (Exhibit 2).
Exhibit 2: Ethernet Transceiver Sales Mix by Speed
Source: Light Counting, BNP Paribas Exane
In our strategies, we have invested in various companies that make networking gear, semiconductor, and optical components. These companies will benefit from the networking upgrades that are needed by the growing use of Generative AI.
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