J.P. Morgan’s Mark Moskowitz and�his colleagues covering Asian hardware equities, Gokul Harlharan, Alvin Kwock, and Ashish Gupta, this morning offer their take on the progress being made by vendors of so-called white box server computers, the off-brand models that seem to be gaining increased acceptance in the data center.
Taiwanese computer assembler Wistron (3231TW) and also Quanta Computer (2382TW) had 16% and 20% of the hardware revenue for products sold into the data center last year, observe Moskowitz and his colleagues.
Both could both benefit from what JP Morgan calls a “Breakout year” for white box machines, driven largely by Intel’s (INTC) recently introduced “Romley” server chip:
We believe Intel’s launch of new server CPU (Romley) in 1Q12, after a two-year interval, should kick start refresh activity for Internet data centers in 1H12. In addition, most customers have been switching over to white-box server designs starting from the new Romley CPU family, implying that Quanta/ Wistron market share could rise sharply post Romley launch.
Part of the trend to white boxes is the need to provide efficient building blocks to the “cloud computing” providers such as Amazon.com (AMZN) and Microsoft (MSFT), among others, whom every server vendor wants to court, observe Moskowitz and his colleagues.
Another catalyst, of course, is China:
China has lagged behind the developed markets in deployment of cloud computing. But in the last 12 months, we have seen a lot more activity in this space, most of which is government-sponsored. For instance, the Chinese government has commenced cloud computing pilots with data centers in five cities�Beijing, Shanghai, Shenzhen, Hangzhou and Wuxi, with potential investments of RMB 40- 50bn each, during the duration of the 12th five-year plan. The early feedback from the companies like Supercloud, Skycloud, etc, who are involved in these projects suggest that the local government is likely to use a white- box like procurement system, which is unlikely to involve global server OEMs heavily. Already Wistron is seeing orders from SuperCloud for the Beijing data center project. The other area of growth in China is coming from Chinese Internet majors like Tencent and Baidu, who are moving away their procurement from global server OEM vendors and engaging white box hardware vendors like Wistron and Quanta. Wistron appears to have a lead over Quanta in this segment, since Quanta has been more focused historically on the global internet vendors. However, Huawei is
The total white box market in the data center may rise to $13 billion in value by 2014, he thinks, which would be up from $4.9 billion last year and perhaps as much as $7.5 billion this year.
Mind you, most of this year’s projection, about $6.3 billion, is for servers, but another $1.1 billion consists of white box storage hardware.
Moskowitz expects the white box trend will increasingly spread to storage as well as servers, though it will remain a small category of spend than servers.
That, writes Moskowitz, is the year that the data center use of server computers takes over from corporate or enterprise server deployments as the bulk of server demand:
According to Intel, its current server business is split into enterprise customers (80%) and data centers ((cloud and high performance computing) (20%). In 2014, Intel expects the data center and high performance computing market (which is the addressable market for this new business model) to account for 50% of the total market, implying a 30% CAGR for this segment, even if global server market does not grow at all in unit terms.
If Wistron and Quanta are the primary beneficiaries of the trend, Moskowitz warns Dell (DELL) and Hewlett-Packard (HPQ) could be victims:
Do not take white-box lightly. We think that the white-box model presents meaningful risk to Dell and Hewlett-Packard over the long term, given their low-end exposure.
JP Morgan has an Overweight rating on Wistron shares and a Neutral rating on Quanta shares. Moskowitz maintains an Overweight rating on Dell shares and an Underweight rating on HP stock.
Wistron shares today fell 60 cents in New Taiwan dollars, or 1.3%, to $45.80 in Taipei trading. Quanta shares rose $1.90, or 2.7%, to $71.50.
HP shares are currently down 18 cents, or 0.8%, at $23.71, while Dell stock is down 8 cents, or half a percent, at $16.62.
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