Intel To Buy Barefoot Networks, Gain Ethernet Chip-Making Tech

Intel (NASDAQ:INTC) recently inked a deal to acquire Barefoot Networks, a startup chipmaker company, which specializes in providing Ethernet-based customized networking technology.

However, the financial terms of the deal have been kept under wraps. Notably, per Crunch base data, Barefoot Networks raised $155.4 million as a private entity. Moreover, Barefoot Networks has garnered financial support from bellwethers like Alibaba (NYSE:BABA), Google (NASDAQ:GOOGL) and Tencent Holdings, to mention a few.

Santa Clara, CA-based Barefoot Networks’ robust programming functionalities which enable hyperscalers to address high-performance needs compelled Intel to pursue the deal. It offers high-speed Ethernet-based switch chips and software required to empower chips with flexibility.

The transaction is anticipated to close in the third quarter of 2019.

Barefoot Networks Expertise to Boost Intel’s Growth

Barefoot Networks’ flagship offering Tofino utilizes “Protocol Independent Switch Architecture.” Reportedly, Tofino 2 series of switch chips offers data transmission rate of up to 12.8 Tbps, which can support full duplex 64-port switch designs with 100GbE.

The company’s chipsets enable its networking customers to “program” their respective needs and accordingly adjust the functionalities on the chips.

Intel expects Barefoot Networks to enhance capabilities in providing cloud-capable networking infrastructure, which will consequently augment its data center customer base.

Additionally, Barefoot Networks will aid Intel in bolstering development of switch silicon, P4 compilers, network telemetry, driver software, and innovate computational networking, among others.

Intel is expected to benefit considerably by upscaling Barefoot Networks’ robust interconnect technology.

Key Takeaways

The semiconductor industry is evolving beyond traditional processers to AI chips and more in this era of cloud computing.

Notably, per recent IDC estimates, the global datasphere will grow to 175 zettabytes (that is a trillion gigabytes) by 2025, from 33 zettabytes in 2018. This growth in data has compelled hyperscalers and cloud networking players to opt for sturdy hardware infrastructure which can support machine learning, AI-based automated workloads, to mention a few.

Additionally, per a Gartner report, spending on “Data Center Systems” is projected to reach $207 billion in 2020 from anticipated $204 billion in 2019. We believe Intel’s latest move is strategically in sync with the growing clout of customized hardware among hyperscalers.

Moreover, the demand for Ethernet-based interconnect switches stems from the cloud-computing needs of data centers to support complex workloads and manage exponential growth in data.

In fact, per IDC data based on fourth quarter of 2018, Ethernet switch market (Layer 2/3) raked in $7.8 billion in revenue, exhibiting year-over-year increase of 12.7%. Per IHS Markit data as revealed by reports, merchant silicon will lead the data center Ethernet switching market, reflecting shipping of 63% of all chips in 2022.

In this regard, we believe Intel is well poised to benefit considerably from the deal.

Posing Challenge to Broadcom

Intel had reportedly pursued the deal to acquire Mellanox, which holds noteworthy Ethernet expertise, for $6 billion. However, NVIDIA (NASDAQ:NVDA) secured the deal to acquire Mellanox for approximately $6.9 billion.

Notably, Ethernet market has been evolving ever since and with Barefoot Networks deal, we believe Intel is positioned well to meet the demand for high-speed network performance.

The latest acquisition is expected to aid Intel challenge Broadcom’s (NASDAQ:AVGO) dominance in the Ethernet market. Markedly, prominent Ethernet switch makers including Cisco (NASDAQ:CSCO), Arista (NYSE:ANET) and Juniper, among others utilize Broadcom’s Ethernet’s chips.

With Intel in the Ethernet chip-making market, networking players are likely to ease dependence on Broadcom, which can impact pricing parameters in favor of the industry. With more innovation in the space and expanding presence in a market dominated with single major player (Broadcom), we believe Barefoot Networks deal will open new avenues for Intel.

Zacks Rank

Intel carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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