Recently, the I/O Fund team wrote an article in Forbes: “AI Power Consumption: Rapidly Becoming Mission-Critical” where it was stated: “Over the past few months, multiple forecasts and data points reveal soaring data center electricity demand, and surging power consumption. The rise of generative AI and surging GPU shipments is causing data centers to scale from tens of thousands to 100,000-plus accelerators, shifting the emphasis to power as a mission-critical problem to solve.”

As the analysis points out, eventually we will see million-plus accelerator data centers. Thus, AI’s electricity demand is forecast to surge, especially in the data center. Morgan Stanley’s base case is calling for 500% increase in power demand over the next three years. Wells Fargo is projecting AI power demand to grow 550% by 2026, before rising another 1050% by 2030, from 8 TWh to 652 TWh in a seven-year period.

Liquid Cooling plays an important role in reducing the heat that AI systems generate. We first covered Liquid Cooling in a Super Micro analysis in May of 2023, yet would like to double-click on this trend for our premium members as it’s becoming what we consider to be “the third realm of competition.” Liquid cooling technology has been around for decades, yet this technology is becoming mission critical due to the increasing levels of compute power from AI accelerators, starting with the GB200 systems and B200 GPUs.

Per the previous analysis: “In 2022, Supermicro stated that liquid cooling is being used in 10% of supercomputers but will grow to be used in the “vast majority” in order to offset the heat generated by power-consuming components.”

Although the GB200 will ship end of this year, and the B200 will fully ship in early 2025, vendors are scaling their liquid cooling capacity now. The capacity investments are being made right now, and we can see evidence of this in Super Micro’s most recent earnings report with an increase in inventory. We also find hints of this in Dell’s earnings report, with the company also reporting an increase in inventory as these leading AI server companies wait for Nvidia’s Blackwell to ship.

Last week, we clearly outlined that AI power consumption is a problem the industry must work diligently to solve. For our premium members, we take this further to discuss how liquid cooling is at the forefront of driving down energy requirements for AI systems. Below, we look at the beneficiaries of this important trend and what we are looking for in managing our positions – including our plans for re-entering Super Micro, how we view Dell given the weak earnings report, plus some brief analysis on Hewlett Packard Enterprises (HPE), Vertiv, to name a few.

Brief Overview of Liquid Cooling:

Liquid molecules are closer together than air molecules, which results in higher heat transfer. This results in liquid removing 4 times more heat than air. The heat capacity of water or glycol is higher than air, so the amount of heat being transferred is higher. Most servers today are air-cooled, yet AI necessitates a shift to liquid cooling are GPUs are already at 700W of power and are moving toward 1000W of power.

AI/ML require massive amounts of data processing, and as future generations of CPUs and GPUs are released, these systems will exceed air cooling capacity. Liquid cooling also solves throttling, which occurs when CPUs and GPUs overheat and are throttled back to avoid damage to the chip. In the case of high-performance computing, liquid cooling reduces total cost of ownership as air cooling requires air conditioning and server fans to run constantly.

Cooling data center servers is responsible for 40% of the data center energy consumption. According to Dell, enclosed DLC solutions can save up to 23% of energy compared to traditional air-cooled racks. McKinsey places this number at 27% savings when there is 75% liquid cooled and 25% air cooled servers.

There are a few different approaches to liquid cooling, such as:

• Direct Liquid Cooling: DLC uses liquid-cooled cold plates that in direct contact with GPUs and CPUs. The cold plates transport heat away from the processors. The process of circulating liquid directly over the components is also known as Direct to Chip Cooling, and is a closed loop system, or also known as a self-contained cooling system.
• Immersion Cooling: The system is immersed in liquid for cooling. The immersion tank has a coolant distribution unit, including a pump to circulate dielectric fluid to extract heat from the servers.
• Rear Door Heat Exchanger: Uses a specialized rear door to the rack where coolant absorbs the heat.
• In-row cooling refers to solutions designed to cool and distribute air in a data center aisle. When combined with row or rack containment, the in-row coolers capture 100% of the IT-generated heat.

In addition to lowering power consumption, benefits from liquid cooling includes higher server density as the need to create space for airflow is removed. Liquid cooling also eliminates hot spots with more even distribution. The lower temperatures from liquid as opposed to air also extends the life of the server (removes throttling).

Nvidia’s Blackwell is Hot

Nvidia’s A100 released in 2021 operates at 300W, the H100s released in 2023 operate at 700W. The Blackwell architecture is a catalyst for liquid cooling as it nears 1000W, specifically the GB200 systems and the B200. This represents a 40% increase from the previous generation. Tom’s Hardware makes the argument that: “we can only refer to the basic rule of thumb with heat dissipation, which says that thermal dissipation typically tops out around 1W per square millimeter of the chip die area” and that “When it comes to high-performance AI and HPC applications, we need to consider the performance measured in FLOPS and the power it takes to achieve these FLOPS and cool the resulting thermal energy. What matters for software developers is how to use those FLOPS efficiently. What matters for hardware developers is how to cool the processors producing those FLOPS.”

Therefore, as computing power increases with each GPU generation, which is measured in FLOPS, cooling the GPUs is the crux, as it becomes a larger thermal dynamics issue that must be solved.

In terms of timing, the B100 is due out first and will be primarily air cooled. The B200 systems and chipsets will be the first release to be primarily liquid cooled. This is due to consuming upwards of 1,000 watts, which is too hot to be air cooled. The B200 doubles the transistor count compared to the H100 and provides 20 petaflops of AI performance compared to the H100s 4 petaflops. The resulting 3X leap in training performance and 15X leap in inference performance is shifting the focus to ways that power consumption can be lowered. Note: We’ve covered Nvidia’s upcoming Blackwell extensively, please see resources below.

The B200 will technically be out in late 2024 as a system that combines either 36 GPUs or 72 GPUs with Nvidia’s in-house Arm-based Grace Hopper CPUs. These superchips are called the GB200 NVL36/NVL72 and will operate as one supercomputer, allowing for trillion-plus parameter models to be trained.

The B200 chipset will ship in early 2025. As stated in a previous analysis on Nvidia, the B200 chipset will offer “a second-generation transformer engine that supports 4-bit floating point (FP4) with the goal of doubling the performance and size of models the memory can support while maintaining accuracy […] This is helpful because AI models are moving toward neural nets that lean on the lowest precision and yet still yield an accurate result. In this case, 4 bits double the throughput of 8-bit units, compute faster and more efficiently, and they require less memory and memory bandwidth.”

Nvidia offers SuperPODs that combine eight H100 GPUs connected with NVLink with the DGX SuperPOD connecting 32 nodes of eight GPUs for a total of 256 H100 GPUs. As the B200s come out, these SuperPODs will scale to provide more than 1 exaflop of AI compute power and move from FP8 precision to FP4. The DGX GB200 SuperPODs will connect up to tens of thousands of GB200 superchips with shared memory.

This section is included to help cement the inevitability that liquid cooling is becoming what Damien Robbins, equity analyst at the I/O Fund dubbed the third realm of competition.

Recent Commentary on Liquid Cooling:

At BofA’s Global Technologies Conference in early June, analyst Vivek Arya questioned Nvidia’s VP of Accelerated Computing Ian Buck about the increasing power requirements per GPU. Since liquid cooling’s catalyst begins with Nvidia’s second release in the Blackwell generation (GB200 and B200), it’s important for us to examine what is being said before we look more closely at the beneficiaries.

Vivek Arya:

How is the outlook around Blackwell as we look at next year? First of all, do you think that because of the different — the power requirements that are going up significantly, does that constrain the growth of Blackwell in any way?

Ian Buck, Nvidia:

“Data centers don't drop out of the sky. They're big construction projects. [Customers] need to understand what is a Blackwell data center look like and how is it going differ than Hopper. And it will. The opportunity we saw with Blackwell was to transition to a denser form of computing, to put 72 GPUs in a single rack, which has not been taken to scale before. … In Taiwan, for example, the people that are building the liquid cooling infrastructure, the power shelves, the WIPs, which is the cables that go down into the bus bars. The opportunity here is to help them get the maximum performance through a fixed megawatt data center and at the best possible cost and optimized for cost. By doing 72 GPUs in a single rack, we need to move to liquid cooling. We want to make sure we had the higher density, higher power rack, but the benefit is that we can do all 72 in one NVLink domain.

Connect them all up with copper instead of having to go to optics, which adds cost and adds power. And every time you add cost and power, you're just taking away from a number of GPUs you can put in your 10-, 50-, 100-megawatt data center. So that is driving us towards reducing cost, increasing density.

So when you look at a Blackwell, you may say, well, it's really hot, that's actually going to be significantly improving the total throughput of a fixed power data center. So there's a strong economic and technological driver to transition to more denser and more power efficient and more — and next-generation cooling technologies than just air.

Water is a fantastic mover of heat. Your house is built with insulation that is nothing more than just trapping air. Air is actually an insulator. It's not a good transfer to heat, but water is excellent at it. If you ever jumped from a 70-degree pool from a 70-degree air, it feels really cold.

That's because water is sucking the heat right out of you. It's really good at moving heat around. And that efficiency goes right to more GPUs, more capabilities and denser, more capable AI systems.”

–End Quote

Buck’s response did not directly touch upon increasing power requirements, but hinted that this shift to Blackwell and beyond, with larger racks and denser compute, will be built upon liquid cooling, which will allow these more powerful and power-hungry GPUs to operate efficiently at scale.

Nvidia CEO Jensen Huang also discussed liquid cooling in Q1’s earnings call: “the Blackwell platform has expanded our offering tremendously. The integration of CPUs and the much more compressed density of computing, liquid cooling is going to save data centers a lot of money in provisioning power and not to mention to be more energy efficient. And so it's a much better solution.”The integration of CPUs and the much more compressed density of computing, liquid cooling is going to save data centers a lot of money in provisioning power and not to mention to be more energy efficient. And so it's a much better solution.”

Super Micro: Leader in Liquid Cooling

Super Micro’s ascent in the server market has been breathtaking. In 2021, the company ranked #6 among server companies with $2.5 billion in revenue compared to Dell’s $14 billion in server revenue and HPE’s $12 billion. Fast-forward and SMCI is on a direct path to reaching $25 billion in revenue over the next year. That’s a 10X revenue increase in about 3-4 years’ time.

Super Micro expects liquid cooling to be rapidly adopted over the next year and a half. The company is deploying three of the “world’s largest DLC liquid-cooled” systems in the current quarter, ending in June. The Nvidia HGX AI supercomputers with liquid cooling are expected to “potentially” save customers up to 40% of energy costs compared to air-cooled systems.

SVP and CFO, David Weigand, explained at BofA’s conference:

“we have started to ship liquid cooling at really at scale, at larger volumes in this core. And so, there's no question that that industry is coming up to speed with the reality of where we're going, which is the fact that power is constrained all around the world. And then — and therefore, when you build these large data centers, you're going to have to think twice now about using liquid cooling, because by you using liquid cooling, you can not only — we say that it's free with a bonus, and that's because it's free because you're not only having to put in smaller chillers, you don't have to use air conditioning.

If you have really liquid cooled racks, you can put more dense racks and more racks into a data center, so it's more efficient if you're using liquid cooling. And so, it's really the cutting-edge companies right now that are putting in liquid cooling, liquid cooled racks into their data centers so that it's — the huge use of power right now is going to really drive liquid cooling. As much as the fact that all the GPUs and CPUs are running at higher wattage as they go over 1000, it's going to start to become painfully obvious.”

–End Quote

SMCI’s management has stated that liquid cooling will cost more as it takes longer to assemble and test, and the company plans to charge for this. It’s also expected that SMCI will be the first to ship liquid cooled AI systems before its competitors.

At a recent investors conference, management stated the company has a rack capacity of 5,000 per month and a liquid cooled rack capacity of 2,000 racks per month. This means that SMCI plans to utilize direct liquid cooling (DLC) in 30% of its racks, to start.

According to the CFO, the Malaysia site will offer the opportunity to “double eventually our worldwide capacity” and will offer both air cooled and liquid cooled servers. With this in mind, Super Micro CEO Charles Liang expects direct liquid cooling (DLC) adoption to reach 15% in the next 12 months and 30% over the next two years, a rapid shift up from 1% of the market. The CEO updated this on xAI, stating they now foresee DLC adoption growing from <1% to 30% in a year.

Super Micro is Seeing Higher Inventory Levels and Lower Cash Levels

Per our recent SMCI earnings write-up, inventory increased to 92 days compared to 67 days in the previous quarter. The company’s Q3 closing inventory was $4.1 billion, which increased by 67% quarter-over-quarter from $2.5 billion in Q2 due to the “purchase of key components.” Our post-earnings analysis explained that the increase of inventory and key components was partly related to liquid cooling.

The CEO stated: “Two reasons we had to increase inventory: One is because Q4, I mean, June quarter, we will have a strong revenue growth; a second reason because we're preparing for high-volume liquid cooling. Again, we have more than 1,000 of 100k watt, I mean, liquid cooling rack we have to ship to customers in Q4. And liquid cooling as you know, is pretty new. So we had to prepare enough inventory so that we can deliver liquid cooling rack scale product to customer on time or with minimal lead time. So both factor, indeed, is a positive factor. And with our economic scale continuing to grow, indeed, our inventory average [ daily ], indeed, will slightly improve.”

Super Micro has further discussed its plans to fund its capacity expansion efforts through short-term debt, or perhaps by diluting shareholders. In the last earnings writeup, I called cash Super Micro’s “Achilles heel” as the seemingly invincible company has one drawback – in order to keep growing, they must build more facilities, which requires more cash. Liquid cooling also necessitates more components, which means inventory levels will rise. This combination is putting a wrench in SMCI’s cash flow.

Ruplu Bhattachary:

David, let's talk about working capital. So, to support growth, you need to support a lot of working capital. When do you make the determination, or how do you make the determination that you need to raise more capital? And how should investors think about your trade-off between using more debt or doing another equity raise?

David Weigand:

Yeah. We've had to do a couple of raises in the past six months, because we saw the permanent level of our business going up higher. So it wasn't temporary. Now, remember, as a manufacturer, if we sell a billion dollars, an additional billion dollars in a quarter, we have to. And remember, when I first started, we were doing about $3.5 billion a year, and now we're doing well, more than that per quarter.

So, when you're increasing by a billion dollars in a quarter, you've got to go out and you've got to, let's say even if the margin is 20%, you have to buy 80% of materials and you have to carry those through inventory. You have to carry them through accounts receivable until they convert to cash. And so it becomes an immediate problem. And we've had some very large customers come that I've sat across the table from, and they say, we have two questions. Do you have the capacity, do you have the capital to take this project on? And so we had to go out and get some more permanent capital so we could answer that question always, yes. So, we finished out with $2 billion at the end of last quarter.

We think that the things that we've done in terms of raising the visibility of the company, raising the profits, raising the sales, have been good for our shareholders, and we want to continue to balance that because we don't like dilution. We previously used to repurchase shares that's still in our tool bag. But right now, it's about being able to deliver against our backlog. And so therefore, we will get as much capital as we need to in order to do that. And so, it's really about whether you see, with short term debt, we can address temporary increases, but if we see sustained orders such as we have seen, then we're going to have to do some more permanent debt raises like we've done with the convertible bonds and also with the common stock equity raise.

–End Quote

The rise in inventory due to liquid cooling components plus Super Micro needing to increase capacity to further meet AI server demand may lead to a lower entry price, which we will gladly take.

Barron’s published just today that SMCI is the top performing stock in the S&P 500 for the first six months of the year. This is on the heels of being the second-best performing stock of 2023, ending the year a tad bit higher than Nvidia. We’ve participated since mid-2023 for a roughly 300% return in less than a year. We have plans to re-enter Super Micro which can be found here.

Dell

Dell has a long way to go to catch up with Super Micro as the company reported $2.6 billion in AI-optimized server revenue and AI server backlog of $3.8 billion. This represents 7.6% of Dell’s revenue. Compare this to Super Micro with over 50% of its revenue from AI and this number is surely higher today.

Due to Dell’s scale, it will take some time before Dell sees this level of AI concentration, as Client revenue is a large portion of Dell’s overall revenue. Therefore, for Dell to become a full-fledged AI stock, it will need AI PCs to participate. It’s only a matter of time before AI PCs provide the next leg up for AI investors, with our best guess being 2025 on the early side and late 2026 on the late side.

Dell may have a long way to go to see the levels of concentration that Super Micro has, but AI also has a long way to go. In our Dell write-up, the base case is for 15% of Dell’s revenue to be from AI, yet the more likely outcome is we will see something in the 30% range by 2027. This does not factor-in AI PCs which will rapidly accelerate this percentage once the trend is in play.

It's doesn’t require much speculation to think Dell will be the runner-up when SMCI reaches capacity. Jensen Huang of Nvidia recently stated: “Everybody who is building these chatbots and Generative AI, when you are ready to run it, you need an AI factory and nobody is better at building end-end systems of very large scale for the enterprise than Dell.” you need an AI factory and nobody is better at building end-end systems of very large scale for the enterprise than Dell.” Last week, we saw Elon Musk’s xAI announce the AI project is ordering servers from both Super Micro and Dell.

Dell’s Power Edge Servers with Liquid Cooling

Dell’s Power Edge servers are designed for AI and HPC (high-performance computing) workloads. In September, the servers were launched with support for four H100 Tensor Core GPUs with liquid cooled GPUs with higher efficiency due to liquid cooling and higher GPU capacity per rack.

In May, Dell announced a new Power Edge server “L” version with liquid cooling and eight Blackwell Tensor Core GPUs. The eight GPUs communicate seamlessly with NVLink across memory and cores, which helps to support the training of large language models. Independent industry analysts have described the new Power Edge Server XE9680L as “the densest rack scale architecture in the industry.” The ”L” version is expected in the second half of this year and offers “33% more GPU density per node.” The air-cooled version can support 64 GPUs whereas the liquid cooled rack scale design supports 72 GPUs.

Upcoming AI Releases for Dell

Dell has a few more important AI release coming out this year. AI factories integrate Nvidia’s AI Enterprise software to allow companies to go-to-market quickly on AI workloads. The goal is to reduce setup time for AI development by up to 86%. The fully integrated solution combines Dell’s Hardware with Nvidia’s infrastructure and software.

As of now, Nvidia has three software businesses: Nvidia AI Enterprise, Omniverse and newly-announced Nvidia NIM. Dell’s AI factories set up Nvidia’s road map for both AI Enterprise software and NIMs, which provides models as optimized containers for generative AI application development. You can think of NIMs as something similar to an app store, to where developers can develop and market AI apps.

We’ve stated numerous times that Nvidia’s AI software revenue will rival the company’s GPU revenue. This is one of many examples where the stage is being set. In this case, Dell will ship fully integrated systems to enterprises, startups and SMBs who want to skip critical steps to deploy quickly.

Dell NativeEdge is another recent announcement, and is a software platform that reduces the amount of resources required for deploying an AI application at the edge. The platform targets the immense amount of operations work that is needed for when AI applications are deployed across many endpoints and devices. The most obvious first customer will likely be the Federal Government or hospitals and other industries that manage very large data sets at the edge.

Dell is Reporting Higher Inventory, Too

There were comments on the call that inventory is higher-than-usual at Dell, as well. If the higher-than-usual inventory levels at both Dell and SMCI are due to building out liquid cooling systems, then we will likely see higher inventory again this quarter. Inventory should alleviate in Q4 to Q1 when Blackwell’s GB200s and B200s ship. There are some cases where higher inventory is a good thing, such as when companies prepare for a spike in demand. It’s likely these companies are preparing for a spike in demand on DLC systems, rather than the opposite, which is that inventory is building because demand is waning.

Here is what Dell’s CFO stated:

“Our cash conversion cycle was negative 47 days, flat sequentially, with higher inventory related to our AI business, offset by strong collections performance.”

Here was a discussion on the earnings call relating to the higher inventory, and why this may be a bullish indicator for determining demand over the next six months and beyond:

Amit Daryanani

[…] And then, Yvonne, could you also just clarify, the inventory was up dramatically in the quarter and it's somewhat unusual for it to be up in this quarter. So just talk about what's driving that and is it AI pre-builds or strategic inventory? Any help on that would be great as well. Thank you.

Yvonne McGill

Sure. So let me start with inventory, because I think that's pretty straightforward. So inventory was up and I would say slightly, for 25 days, really representing about a $1.2 billion increase quarter over quarter. We mentioned inventory was up slightly as we ramp our AI server business. So I think it's nothing substantial. I don't know, Jeff, if you have anything to add on inventory.

Jeff Clarke

No, but we didn't go out and make any strategic purchases. Some of the terms of the AI gear we need to deploy means we take ownership of it. We did and we have it in backlog. We'll ship it as those customer orders are fulfilled. That was the driver. We weren't out buying strategic or making strategic investments of inventory across the large component basins.

Vertiv

Super Micro, Dell and Vertiv are three stocks with fantastic returns this year. SMCI is up about 200% (down from a high of about 300%), Dell is up 83% (down from a high of 118%) and Vertiv is up 82% (down from a high of 117%).

Vertiv offers power management and thermal management to data centers and telecom companies, such as Alibaba, AT&T, China Mobile, Tencent and Verizon. The company was formed in 2016 after spinning off from Emerson, and reported $6.8 billion in revenue last year. The company is considered one of the larger players in data center technologies, in terms of power management and thermal management, with 24,000 employees and 30 manufacturing facilities. Vertiv’s thermal management technologies include liquid cooling for servers and racks.

The data center accounts for 75% of Vertiv’s business with communications networks and commercial/industrial facilities at 25% of revenue. Most recently, their management team stated that AI-related projects have doubled in the past two months.

“The ramp-up of production of liquid cooling globally continues as planned, and I'm happy to report we have production underway already at two of the three plants we shared with you we were planning to activate in 2024. We are on track with the capacity ramp-up as shared in February. We continue to see strong momentum with AI-related orders. While we are not disclosing specific detail on our liquid cooling orders, or more broadly AI-related orders, we did see the pipeline for AI projects more than double in the last two months.”

Vertiv offers many thermal management solutions. Among them is the Liebert XDU, which is a compact unit that sits in the row near the rack or on the perimeter. The liquid-to-liquid cooling distribution unit (CDU) functions as a heat exchanger between the data center and IT equipment, and is used in all forms of liquid cooling: direct-to-chip, rear door heat exchange and immersion. The Liebert XDU offers a secondary fluid cooling loop so that alternative cooling fluids can be used alongside water.

In 2023, Vertiv acquired a company called CoolTera after partnering with the company for three years to add advanced cooling technologies to its thermal management portfolio. One of the main areas of need for data centers and colocation sites is to convert air-cooled equipment to liquid cooled equipment. Retrofitting existing air-cooled infrastructure is an area where Vertiv specializes, as opposed to only providing thermal solutions for new servers and racks.

In May of 2023, Nvidia selected Vertiv to design a cooling system that secured a $5 million grant from the COOLERCHIPS program. In 2024, Vertiv joined the Nvidia Partner Network with a statement that Vertiv is “collaborating to build state-of-the-art liquid cooling solutions for next-gen NVIDIA accelerated data centers powered by GB200 NVL72 systems.”

In late 2023, Vertiv announced a partnership with Intel to supply air-cooled and liquid-cooled servers for the Gaudi3 AI accelerator.

This is a thematic analysis on liquid cooling, and thus, we have not done a deep dive into Vertiv’s financials. Briefly, the company reported revenue of $1.63 billion in Q3, up 7.76% YoY yet down sequentially from $1.86 billion. The operating margin of 12.6% expanded from 9.6% for operating profit of $206 million. The adjusted operating profit was $249 million. Net margin decelerated from 3.3% to (-0.36%). Cash flow was $101 million in the most recent quarter and the company repurchased $600 million for share repurchases in the quarter,

Hewlett-Packard Enterprise (HPE)

HPE is another commoditized hardware company that is seeing a revival due to its large portfolio of liquid cooling technologies and patents. The company has over 300 patents related to direct liquid cooling (DLC) with four of the world’s top 10 supercomputers featuring liquid cooled servers from HPE. According to HPE, their Apollo DLC System reduces fan power by 81%.

The HPE Cray EX Liquid-Cooled Cabinet offers liquid-cooled cabinetry that provides DLC to all the components in a compact design. This is for CPUs and GPUs in excess of 500W, and can help to reduce the interconnect cabling systems that are required, which further reduces operational expense. As a reminder, Cray is a supercomputer built by HPE that ranks as the #1 and #2 supercomputers in the world. Therefore, the liquid cooling for these systems is quite advanced as the #1 Cray supercomputer contains hundreds of thousands of AMD EPYC CPUs and 37,000 AMD Instinct GPUs. The cooling technology for Cray features a bladed cabinet that allows for the mixing and matching of various CPUs and GPUs, and allows for easy upgrading as new generations of CPUs and GPUs are released. At one point, a system the size of Cray was reserved for only supercomputers, but the AI market is driving forth 24,000-plus GPU clusters today and Broadcom believes we will see million-plus GPU clusters by 2027.24,000-plus GPU clusters today and Broadcom believes we will see million-plus GPU clusters by 2027. HPE’s experience on liquid cooling the Cray supercomputers will be helpful as GPU clusters continue to scale.

HPE held a recent conference with Nvidia’s Jensen Huang, who appeared at a recent HPE conference to showcase the strength of the partnership between the two companies. There was a string of announcements, the primary one being that HPE and Nvidia are partnering on a private cloud (presumably to compete with Broadcom’s VMWare integration). You can find more information here in the press release on Nvidia-HPE announcements.more information here in the press release on Nvidia-HPE announcements.

In the most recent earnings report, HPE provided the following color related to AI sales: “Our cumulative AI system product and service orders since Q1 2023, rose approximately $600 million sequentially to $4.6 billion. I am very pleased with our AI system product revenue more than doubled sequentially to over $900 million. This strong revenue growth allowed us to make progress against our backlog, which is now $3.1 billion.” The company also stated that enterprise is “north of 15%” of the AI orders, which is a key market for both HPE and Dell (as opposed to predominately hyperscalers like SMCI).

The stock has risen about 20% YTD, quite a bit less than SMCI’s outperformance, and is lagging Dell and Vertiv considerably, as well.

Conclusion:

As pointed out in our AI power consumption write-up, AI power demand is forecast to rise at a rapid rate. GPU demand is showing no signs of slowing as Big Tech continues to spend billions on AI infrastructure, with each GPU generation seeing higher peak power consumption. The industry is quickly taking steps to address this, and power consumption, or more specifically, power efficiency per chip, looks to be emerging as the third realm of competition.

The first two realms of competition are raw computing power and memory; both have been extensively covered for our premium members. Now, we turn toward keeping an eye on the AI power consumption space as new winners will emerge now that power consumption has become mission critical.

As of now, our plans are to jump aboard the AI bullet train again (i.e., Super Micro) at key levels and to also follow our trading plan on Dell. If we decide any others are a good fit, then you will surely get a deep dive into those stock names.

To view our recent Advanced Market Signals webinar with SMCI and DELL trading plans, click here.click here.

Damien Robbins, Equity Analyst at the I/O Fund, contributed to this article.

Resources:

• Super Micro FYQ3: Cash is the Achilles Heel
• Super Micro Q3 Pre-Earnings: Puts and Takes for the AI Bullet Train
• Dell Q1 Pre-Earnings: It’s All About the QoQ AI Revenue Growth
• Dell Q1 Earnings: AI Server Shipments up 113% QoQ, Margins Contract
• Lam Research: Eyeing Strong 2024 Exit Boosted by Memory Rebound
• AI Power Consumption: Rapidly Becoming Mission-Critical