I Feel the Need for Speed – And Market-Beating Profits

Michael Robinson

Friday, January 26, 2024

My name is Michael Robinson, and I am a bona fide speed freak.

No, I'm not referring to any illegal hobbies. I'm talking about my obsession with fast Internet connections.

You see, I have a fiber optic connection in my home. As a result, I get speeds roughly seven times faster than the average U.S. Internet user enjoys.

But as it turns out, I'm not the only one with a need for speed. You see, there’s a race going on in the cloud-computing sector to create even faster operating speeds...

And a new breakthrough in a field known as silicon photonics — essentially using the power of light to move data — has the potential to double speeds.

This is a relatively new field. But its potential is enormous. In fact, it could disrupt the $480 billion cloud-computing market...

And today, I'll explain how we can profit from it.

Traffic Jam

First, though, let's shift gears and talk about increasing the speed at data centers.

This may not sound like something that would affect your day-to-day experience online, but it's central to the modern economy.

You see, data centers power things that work through the cloud. And nowadays, that's practically everything — streaming services, payment processors, e-mail, social-media sites, smartphones, appliances, thermostats, mobile apps, cars, etc. If you can think of it, it probably relies on a data center.

Unfortunately, the sheer volume of devices talking to the cloud can cause traffic jams, resulting in data delays. And those delays are only going to get more common with billions of connecting devices accessing data centers at the same time.

In fact, we've already seen an increase in these delays since 2019. That's when 5G wireless technology began to deploy. Compared to 4G, 5G is up to 100 times faster, and cuts down the delay in communicating between handsets and cell towers by a factor of ten or more.

It's no wonder, then, that the same year 5G got rolled out, mobile-data traffic grew at a staggering 68% annually, according to cell-tower equipment manufacturer Ericsson (ERIC).

The Importance of 5G

5G allows for many more devices to be connected at once without interfering with each other. Less signal congestion means devices can be closer together, great news for anyone who's ever experienced just how slow wireless data, or even calls, can get at sporting events or concerts.

But this technology is especially important for the Internet of Things, which promises to have refrigerators, ovens, toasters, washing machines, alarm clocks, traffic lights, and anything else you can think of connected to the internet.

Handling all this extra data traffic from these new devices is pushing existing technology to its limits. That's why a recent breakthrough from a technology giant is so important.

A Key Switch

I'm talking about a silicon photonics networking switch. This ranks as the world's first functional-optical switch and will be commercially available soon.

This switch can route data to the right destination at more than 51 terabits per second, twice that of its predecessor. For reference, at those speeds, you could download all of Netflix's (NFLX) library of movies in less than 20 seconds.

This is important because information simply can't move inside the data center, or onto the Web, without going through a switch connected to a server.

Large cloud-data-center providers like Amazon (AMZN), Alphabet (GOOGL), and Meta (META) spend 10 times more on optical and photonics equipment than they do on regular electronic switches. They need to be able to power the huge data needs of artificial-intelligence algorithms...

Not to mention that silicon-photonic switches also draw less power and generate less heat than their traditional silicon counterparts.

A $4 Billion Market

For the so-called "hyper scale" data centers — the largest ones around — the top costs are usually powering equipment and cooling it down. Silicon photonics promises to cut both expenses while boosting performance at the same time.

To be clear, silicon photonics is a subset of cloud computing and is growing at nearly 29% a year. Forecasters at market-research company Mordor Intelligence peg this sector's value at $4.2 billion by 2027.

So far, I've only mentioned the technology's use in cloud servers. But medicine is another area where silicon photonics is increasingly important.

Modern-medical imaging and testing is highly effective at spotting even the tiniest flaws in our bodies. But the amount of data being generated by, say, MRI or CT scans is close to reaching the limits of our capacity to deal with it.

Allowing advanced algorithms, even Artificial Intelligence (AI), to analyze all this medical data requires huge transfer speeds. That's another instance of silicon photonics playing a starring role.

The same is even true for augmented and virtual reality (AR/VR), where hardware makers are experimenting with headsets that use silicon photonics to recreate a more lifelike gaming experience.

An Unstoppable Transition

Wherever you look, the push for more data — and more data moving faster — makes the transition to silicon photonics unstoppable.

And as investors, it’s a transition we don’t want to miss out on.

Take a look at MACOM Technology Solutions (Nasdaq: MTSI), a mainstay of the semiconductor industry for more than 70 years.

MACOM is unique as it combines profitability, strong growth, and a broad portfolio of products. It’s also deeply invested in the use of silicon photonics, meaning we can capture the profit potential of this technology with an investment in its business.

Cheers and Good Investing,

Chief Investment Officer
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