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Mentioned Companies: HPQ, IBM, NVDA, QCOM

How Large Is the Deep Learning Data Center Market?

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by James Wang, Analyst June 21, 2017
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Deep learning is having a profound effect on the microprocessor and server markets. In the face of a declining server market during the last six months, NVIDIA [NVDA] tripled its data center revenues. The reason? Deep learning applications like voice search, image recognition, and translation are taking off, and NVIDIA’s graphics processing units (GPUs)[1] are the fastest processors for training deep learning applications.

Data Center NVIDIA

NVIDIA’s rapid penetration of the data center has pushed its market capitalization to $90 billion. It has eclipsed Qualcomm’s [QCOM] market cap and is more than half that of Intel [INTL]. Now the market is grappling with whether or not its growth is sustainable. Important to ask, how large is the data center market for accelerator chips like the GPU?

At its 2017 Investor Day, NVIDIA provided an estimate of the total available market (TAM) for the data center—$30 billion by 2020. This is a startling number—it’s 19 times NVIDIA’s data center revenue run rate of $1.6 billion and larger than Intel’s $17 billion in data center revenue last year.

To do a reality check on these estimates and dimension the addressable market for GPUs and other accelerators, we analyze how server revenue flows into silicon revenue, shown in the chart below. According to IDC, global server revenues were $53 billion in 2016, of which $46 billion were x86 servers and $7 billion, non-x86 servers like mainframes and IBM [IBM] Power systems.

Data Center Server Revenue

The bulk of the $46 billion in x86 server revenue pay for components such as CPUs from Intel, GPUs from NVIDIA, and memory from Samsung. The rest is kept by server manufacturers such as HP [HPQ] and Dell as gross margin. According to our estimates, x86 manufacturers margin is roughly 10%, leaving 90% or $41 billion to the component manufacturers.

Intel’s Xeon server CPUs generated ~$13.6 billion [2] in revenue, accounting for roughly a third of the $41 billion server component market. Despite rapid growth, NVIDIA’s GPU revenues accounted for $0.8 billion, less than 3% of component spend. The remaining $26.6 billion of component sales went toward memory, storage, and motherboards.

Ultimately, NVIDIA’s revenue potential will be determined by the number and intensity of GPU accelerated data center applications. Basic web applications require no accelerators. Video streaming and analytics applications benefit from a single GPU per server. At the most extreme, training deep learning applications require up to 8 GPUs per server, allowing NVIDIA to capture 75% of the component TAM.

So, how large will the market be for accelerators in the data center? As shown below, in five years, if accelerators capture 10% of server component spend, we estimate that would generate $4.5 billion in silicon revenue. If adoption is particularly strong, say 20%, this doubles to $9 billion. In our view, $4.5–$9 billion is a reasonable range for potential data center accelerator revenues. To reach NVIDIA’s $30 billion scenario, accelerators would have to capture 65% of the component market within three years, which seems unlikely.[3]

Data Center TAM

A key assumption in this analysis is that total server spend will remain flat over the next five years. While this may seem overly pessimistic,[4] server revenue from 1996 to 2016 has not grown [5] despite a massive internet boom spanning PC, mobile, and cloud. Moore’s Law along with virtualization software made it possible for servers to do much more at a lower cost. We expect GPUs and other accelerators will continue this trend.