The billion dollar glitch

• In an increasingly connected and digitised world, we believe many of the core services that allow society to function increasingly depend on the resiliency and speed of our networks.
• We anticipate corporates of all sizes will be rethinking their infrastructure spend long term and accelerating their short term decisions given recent network outages.
• With a 40% increase in the data that is created annually, and as we move more services to the cloud, it must be done in the most efficient, economical, and sustainable way.(1)
• Shaped by SDG Goal 9 (industry, innovation and infrastructure), our focus on the Efficiency theme and Frontier Technology sub-theme led us to invest in Arista Networks (ANET US), an industry-leader, providing a transformational and resilient technology to help companies maintain and operate their network.

It has been one month since countless people woke to the dreaded 'blue screen of death' on their computer screens. The global IT outage, which wreaked havoc across the globe, was the result of a faulty software update from cybersecurity firm CrowdStrike that infiltrated millions of PCs worldwide.(2) What at first appeared to be an innocuous software error, quickly spiraled into chaos, causing severe delays to emergency services and the crashing of international banking and payment systems.(3) 

Whilst disruptive, these outages have prompted a much needed discussion on the brittleness of global technology infrastructure and the software that operates our most critical services.

Our networks are an important cog in the wheel, that all too often get overlooked. Networking infrastructure is mission critical and can create a heightened risk to businesses if left unchecked. Whilst on the surface, our digital networks appear robust, we believe cracks are emerging. Last months’ events were a stark reminder of network issues and outages that have caused disruptions in the last few years. In 2022 for instance, a massive network failure at Rogers, a Canadian telecoms giant, forced more than ten million customers (over a quarter of Canada’s population) off their internet, impacting critical functions such as banking transactions, government services, and emergency response capabilities.(4) 

As we move more services to the cloud, handle more data online, and bring increased connectivity to the world, we must do it in the most efficient, economical, and sustainable way. With a 40% increase in the data that is created annually, this is a challenge that our GIB AM Sustainable World team have been investigating.(1)Our process seeks to combine deep thematic work to identify where a change is happening (which ultimately helps us to identify the dollar spend shift), as well as uncover unique solution providers that can generate lasting profits from solving the world’s greatest challenges.

Shaped by SDG Goal 9 (industry, innovation and infrastructure), our focus on the Efficiency theme and Frontier Technology sub-theme led us to invest in Arista Networks (ANET US), the supplier of low-latency, reliable and resilient networking hardware and software on a global scale. Arista has devoted years to developing high-quality software and a unified platform that empowers customers to seamlessly monitor and manage their networks.(5)

Arista operates in the rapidly expanding and missioncritical field of data center networking, which is projected to grow through 2026, according to the 650 Group.(6)Notably, hyperscalers—large-scale data centers—are increasing their spending at a pace significantly faster than the broader market. Major cloud providers, for example, spend nearly three times more with Arista than Cisco, the largest competitor in this space, due to Arista’s technological leadership.(7)As networks undergo a significant technological transition, this spending and market share is expected to rise, with the AI Networking market projected to reach nearly $20 billion by 2025.(8)

 Whilst exposure is the first step, execution is just as important. As recent history has showed us, customer pain points are not just speed but also reliability. Our IT infrastructure is no longer a centralised but instead distributed over thousands of servers globally. Whilst this allows for a seamless experience, it adds complexity. However, Arista’s focus on quality is allowing it to win, with 90% fewer faults than their peers (perhaps in part, due to the 230,000 tests per day they conduct to stay ahead).(9) This has meant that Arista has been able to grow its market share from low single-digits to nearly 30% over the past 10 years.(7)

Quality is a competitive advantage and Arista materialises this advantage with superior margins, unit economics and client retention. Whilst many of these processes can be imitated by competitors, it is the cultural focus on quality that solidifies this advantage. In the words of the founder and current CTO Ken Duda, “business success comes after customer success”, and this is implemented in many ways.(12)Whether through incentives for sales personal, which prioritises quality versus timing of sales, to making engineers responsible for developing tests to monitor their code.

Operating in a large and fast growing market, with a product set that is differentiated through its quality and customer value proposition, places Arista in a strong position to generate good returns, whilst also combatting customer pain points.

Our process draws on deep thematic analysis to find companies, such as Arista, who we believe will provide long-term solutions to our global challenges and create value for our end investors: 

• Deep thematic work: we identify areas where significant change is occurring and where future money spending will shift. This involves extensive research and analysis to identify emerging trends that are poised to drive growth. 
• Sustainable investing: Beyond what many call sustainability, we consider this approach good investing. We firstly focus on understanding the interplay of different stakeholders, the way they treat their employees, suppliers and customers, and we then couple that with competitive dynamics, unit economics and customer value proposition.

The ultimate goal of our Sustainable World Strategy is to find unique companies that can capitalise on thematic tailwinds and generate positive impacts. These companies not only address significant challenges, but also offer compelling solutions that create value for investors and society alike.

This content should not be construed as advice for investment in any product or security mentioned. Examples of stocks are provided for general information only to demonstrate our investment philosophy. Observations and views of GIB AM may change at any time without notice. Information and opinions presented in this document have been obtained or derived from sources believed by GIB AM to be reliable, but GIB AM makes no representation of their accuracy or completeness.  GIB AM accepts no liability for loss arising from the use of this presentation. Moreover, any investment or service to which this content may relate will not be made available by GIB to retail customers.

1. Michael Shirer, 2024 (Worldwide spending on public cloud services)

    

2. Reuters, 2024 (https://www.reuters.com/technology/microsoft-says-about-85-million-its-devices-affected-by-crowdstrike-related-2024-07-20/)

    

3. Emily Atkinson, 2024 (https://www.bbc.co.uk/news/live/cnk4jdwp49et) 

    

4. BBC News, 2022 (https://www.bbc.co.uk/news/world-us-canada-62174477) 

    

5. Sriram, Akash, 2024. (https://www.reuters.com/technology/arista-networks-forecasts-quarterly-revenue-above-estimates-ai-boom) 

    

6. Arista Networks, 2024. (https://www.arista.com/en/company/news/press-release/19493-arista-unveils-etherlink-ai-networking-platforms) 

    

7. Crehan Research Data Center Switch Market Share Report 4Q, 2023.

    

8. Goldman Sachs, 2023. (https://www.goldmansachs.com/insights/articles/ai-investment-forecast-to-approach-200-billion-globally-by-2025) 

    

9. Ed Amoroso, Katie Taylor, 2021. (https://www.arista.com/assets/data/pdf/Whitepapers)

    

10. BNP Paribas Exane estimates2024

     

11. Crehan Research Data Center Switch Market Share Report Q42023 

     

12. Tech Field Day, 2024. (https://www.youtube.com/watch?v=Zpj7efXyKYw&list=PLinuRwpnsHaf-E0qY3_JRbeuETzKnx42I&index=15) 13 Bloomberg & GIB AM Analysis 2024

This document has been prepared by Gulf International Bank (UK ) Limited (GIB UK ). GIB UK is authorised by the Prudential Regulation Authority (‘PRA’) and regulated by the Financial Conduct Authority and the PRA. GIB UK is registered as an Investment Adviser with the Securities and Exchange Commission in the United States. None of the content in this communication is investment advice, and the information contained herein is for information purposes only. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.

The views expressed in this publication are those of the author(s) alone and are subject to change without notice. GIB UK has no obligation to update this publication. The information contained in this publication has been obtained from sources that GIB UK believes to be reliable, but makes no representation that the information contained herein is accurate, reliable, complete, or appropriate. Views, forecasts, projections and statements as of July 2024 constitute our judgment and are subject to change without prior notice. There can be no guarantee they will be met.