Consider The Server Industry’s Recession Officially Over

by Tony Daltorio, Investment U Research
Monday, April 19, 2010

Intel (Nasdaq: INTC) recently delivered 18,000 of its new Xeon 7500 8-core chips to France’s atomic energy commission.

If 18,000 doesn’t sound impressive enough, consider that each unit sells for $2,500. And also keep in mind that the shipment represents the mere tip of the iceberg. Intel is practically guaranteed increased orders in the coming months.

Why? Because, after a difficult 2009, individuals and institutions around the world are more than ready to upgrade their servers and high-performance computing.

The normally tame global computer-server industry has a once-in-a-decade opportunity for sales growth thanks to the perfect cocktail of economic recovery, big technological advances and soaring data-handling needs.

And you’d better believe they’re going to take advantage of all three.

Smart investors should do the same.

The Server Movers and Shakers

Technology research firm IDC notes that the real shift came during the fourth quarter of 2009, as businesses shook off the affects of the recession.

During that larger year, businesses apparently deemed servers as unnecessary purchases. So instead of buying on the normal, working lifespan of about five years, they held onto their old ones. The Gartner research firm reports that the recession delayed over a million server upgrades.

That led to revenues for the entire industry declining by 18.9% to 43.2 billion worldwide.

But that was then. This is now.

This year, JP Morgan analysts expect server revenue to grow faster than that of PCs, printers and storage. Analysts more than doubled their estimates for 2010 from 6.2% to 14.3%. And the biggest players are more than ready for that change of pace.

IBM (NYSE: IBM), Hewlett Packard (NYSE: HPQ) and Dell (Nasdaq: DELL) lead the worldwide server market. IBM carried 32.9% of the global market last year, HP had 29.9% and Dell 12.1%.

These companies have all rushed to bring out a range of new server products. For that matter, so have processor makers Intel and Advanced Micro Devices (NYSE: AMD).

New Technology

So businesses are buying servers again. Not that they had any choice, considering that technology moves forward at an ever-increasing rate.

About 40% of the installed base of higher-end servers still run single-core processors. Yet switching to energy-efficient, multi-core servers can have a dramatic effect. It dramatically cuts how much power, space and cooling needed for servers in data centers.

This means that new servers can pay for themselves in months… not years.

For example, one of Intel’s recently debuted, high-end eight-core can be set up in a single server. It replaces 20 older, single-core servers. And according to Intel, it also reduces energy costs by over 90%.

Not to be left out, Intel’s smaller rival, AMD, has introduced similar eight-core and 12-core servers.

A Perfect Storm… Or Cloud… Either Way, It’s a Good Thing

Both chipmakers and server manufacturers have timed their new offerings to perfection.

Jim Ganthier, the VP of marketing for HP Industry Standard Servers definitely seems to think so. “We’re seeing a perfect convergence of new products coming along at just the right time and we are able to deliver radical [returns on investment] to our customers.”

Some of the surplus cash that IT departments expect from all of that should go into new projects. That then requires new equipment, according to Dell’s head of large business deals, Steve Schuckenbrock. He believes that “we’re going to see this run for a long time.”

He’s probably right too, especially since demand is also being driven by virtualization software. That allows servers to be split into many virtual machines and pooled with others to allow greater task sharing.

Add to that the fact that businesses require their information served in real-time. Not to mention the growth of cloud computing, where web services and applications are stored and delivered from remote data centers.

Many industry insiders believe cloud computing is the next, big thing. Just ask the head of cloud services at data storage company EMC (NYSE: EMC), Howard Elias. He believes it will affect “the way IT infrastructure is operated, produced and consumed.”

One way or the other, investors in the server industry should hold on tight for a very interesting ride. Mike Eastwood of IDC’s enterprise server group summed it up nicely:

“Optimal conditions for market inflection occur only once a decade. And IDC believes that market shares could shift dramatically as the winners and losers of this new market cycle are determined.”

Let the games begin.

Good investing,

Tony Daltorio

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