In our ever-connected digital age, servers are the unseen force behind every webpage refresh, email, app launch, and online purchase. This week, Poseidon Partners delves into the server industry, exploring technological trends, market dynamics, and future directions, presenting diverse investment opportunities within this sector.

Summary

• Servers operate in data centers, forming the backbone of modern internet and enterprise networks.
• The upstream of the server industry mainly consists of component manufacturers and software suppliers, with high industry concentration. Representative companies include Intel and AMD.
• In the midstream, server manufacturers purchase core components from upstream suppliers and design, assemble, and produce servers according to downstream customer needs.
• In the downstream, early server users were primarily traditional customers like banks, telecoms, government institutions, and large enterprises; nowadays, cloud computing giants such as Amazon, Microsoft, and Google have become the main incremental customers in the server market.
• With the proliferation of AI and big data applications, the technical requirements of the server industry are continuously evolving.

‍Industry Overview

Servers are high-performance computers engineered to process network requests and deliver a myriad of services. They manage and store data, run applications, and provide web and email services, among others. With robust processing capabilities, substantial storage space, and high reliability, servers operate around the clock, catering to the demands of numerous users and applications. Nestled within data centers, they form the backbone of the internet and corporate networks we rely on.

The server industry’s upstream is dominated by component manufacturers and software providers, such as Intel and AMD, who supply the critical hardware and software support needed for servers to function efficiently.

Midstream lies the server manufacturers, who design, assemble, and produce servers tailored to customer needs, sourcing core components from upstream suppliers. These manufacturers are not mere assemblers; they are integrators and optimizers of server technology, ensuring performance meets the demands of various applications. Notable players include SMCI, Dell, HP, and Lenovo.

Downstream, traditional clients like banks, telecoms, government agencies, and large corporations have historically dominated server usage, requiring reliable data processing and storage solutions. However, the explosive growth of global data and computational power, coupled with the migration of storage and computing resources to the cloud, has ushered in new market demands. Cloud computing giants like Amazon, Microsoft, and Google have become major incremental clients in the server market, necessitating vast numbers of servers to support their extensive cloud service infrastructures and seeking efficient, reliable, and scalable server solutions to handle growing data processing needs.

As AI and big data applications become ubiquitous, the server industry’s technological demands continue to evolve. Modern servers require not only formidable computational power but also efficient data storage and transfer capabilities. The demand for high-performance computing (HPC) and AI applications is particularly pronounced, with rapid growth in fields like scientific research, financial services, and healthcare, propelled by advancements in server technology, including multi-core processors and accelerators like GPUs and FPGAs.

The Ecosystem

The global server market has maintained steady growth over the past few years and is poised for continued expansion. Key drivers include the rising demand for cloud services, accelerated data center construction, and the widespread adoption of emerging technologies. Leading server suppliers like Dell Technologies, Hewlett Packard Enterprise (HPE), Super Micro Computer, and Lenovo Group continue to solidify their market positions through innovative technologies and quality services.

These firms boast flagship products such as Dell Technologies’ PowerEdge server series, HPE’s ProLiant server series, and Lenovo’s ThinkSystem server series. Emphasizing intelligent infrastructure and automated management, they enhance product performance and reliability through collaborations with tech partners like Intel, AMD, and NVIDIA.

Dell Technologies, one of the world’s largest server suppliers, diversifies its offerings from PCs and peripherals to enterprise servers, storage, and AI solutions1. Its long-term growth in the ISG (infrastructure solution group) and leadership in enterprise servers, storage, and AI solutions make it a preferred choice for businesses2.

Hewlett Packard Enterprise (HPE) holds a significant position in the server market. Its latest financial report highlights a cumulative AI order value of $4.6 billion, surpassing the previous quarter’s $4 billion. Despite a positive EPS performance, it includes revenue from its subsidiary H3C; overall, the performance is robust, though management’s revenue guidance offered few surprises.

Lenovo Group, a global leader in PCs, smartphones, and servers, provides various end devices for AI technology. An early beneficiary of the AI PC trend, Lenovo faces cyclical lows in PCs and general servers. With a relatively small scale in AI servers, improved GPU supply could bolster its AI server shipments.

IBM holds a place in the server market, albeit with a noticeable downward trend. Its main product lines include Power Systems and z Systems. In the short term, IBM collaborates with server OEMs like Dell and Lenovo to enhance its influence and market entry, offering RHEL (Red Hat Enterprise Linux operating system) subscriptions per GPU on enterprise AI servers.

Super Micro Computer (SMCI) specializes in high-performance, high-density, and energy-efficient server solutions. With long-term partnerships with major AI component suppliers like NVIDIA, AMD, and Intel, its product range covers cloud computing, HPC, and enterprise servers. The latest financial report shows a record backlog for SMCI, and while AI server sales competition may dilute potential profit margins, SMCI reaffirms its long-term gross margin target of 14-17%.

Outlook

Looking ahead, the server industry will continue to be influenced and propelled by multiple sectors. The proliferation of AI and machine learning will significantly drive the demand for high-performance servers, especially those supporting large-scale data processing and training. As AI applications diversify and grow more complex, servers will need to possess higher computational and storage capabilities. Additionally, the rise of edge computing presents new opportunities and challenges. The prevalence of IoT devices necessitates servers with low latency and high bandwidth for real-time applications. Moreover, as communication technologies advance, more data processing will occur at the edge, further driving the growth of the edge server market.

Energy efficiency and sustainability are also key directions for the server industry’s development. With increasing environmental awareness and rising energy costs, the industry must actively explore energy-saving technologies and renewable energy applications. For instance, liquid cooling technologies and high-efficiency, low-power processor designs will become mainstream. These technologies not only significantly reduce data center energy consumption but also enhance server operational efficiency. Furthermore, security and data privacy issues will become focal points for enterprises. With the rise in cyberattacks and data breaches, server suppliers must strengthen hardware-level security technologies and encryption to ensure data safety.