Data center infrastructure investment is entering a period of accelerated growth, according to a forward-looking report published by UBS on Tuesday. The report analyzes the earnings outlook for four networking and optical communications companies, including Arista Networks (ANET.US), Celestica Inc. (CLS.US), Extreme Networks, Inc. (EXTR.US), and Lumentum Holdings Inc. (LITE.US). A key highlight for the sector is robust demand for products like network switches, with revenue for most covered companies likely to surpass consensus estimates. However, supply chain bottlenecks are identified as a common constraint limiting the full realization of earnings potential across the industry.
Analyst David Vogt noted in the report, "Over the past three months, global data center infrastructure investment has continued to accelerate, poised to drive simultaneous high growth in industry demand, orders, and backlogs. However, extended delivery cycles for critical components like networking chips and CPUs, as well as key raw materials such as Indium Phosphide (InP), may curb revenue growth, as surveys indicate companies are unable to fully meet underlying demand."
The analyst added, "Our industry checks show demand for data center network switches has strengthened over the past few months, supporting expectations for strong quarterly results and outlooks from Arista and Celestica, despite Broadcom networking chip shortages. For Extreme Networks, demand for both wired networking and WiFi business remains robust, and its revenue is likely to modestly exceed expectations. Within the optical communications supply chain, increased production of Optical Circuit Switches (OCS) and strong demand for transceiver components like EML and pump lasers are expected to benefit Lumentum's performance. However, checks also indicate that optical supply chain bottlenecks persist, which may limit the conversion of orders into revenue."
Vogt further analyzed that Arista Networks benefits from establishing and deepening partnerships with hyperscale cloud service providers and new cloud platforms, which should drive its revenue and profit above expectations. He added, "More critically, due to steady order growth over the past 9-12 months and an acceleration in deferred revenue, we anticipate the company could raise its fiscal 2026 revenue growth guidance from 27.5% to 33%."
The situation for Celestica Inc. is slightly different, as recent channel checks suggest previously troubling supply chain headwinds have eased. Vogt stated, "Our intra-quarter tracking indicates the supply chain issues that hampered server/TPU revenue last quarter have been resolved, while demand for Ethernet switches from Meta and Amazon remains strong. Consequently, our analysis suggests Celestica's revenue this quarter could be 3% to 4% above expectations, reaching approximately $4.5 billion. Corresponding EPS is likely to be about 5% higher than our $2.29 forecast, reaching $2.40, also above the company's guidance range of $2.14 to $2.34."
Market demand for Extreme Networks, Inc.'s wired and wireless networking equipment is described as "strong," which Vogt believes will drive the company's revenue above expectations and near the high end of its prior $335 million guidance. Vogt explained, "Potential revenue growth and gross margin improvement from pricing strategies should result in EPS slightly above our prior forecast of $0.29, within the company's guidance range of $0.28-$0.30. However, we note the current stock price already reflects the positive catalysts of an earnings beat and guidance raise. For fiscal 2027, we expect the company to provide revenue guidance of $1.37 billion to $1.40 billion, representing approximately 8% year-over-year growth at the mid-point. Our prior estimate was $1.37 billion, with the consensus at $1.388 billion; investor expectations may be slightly higher."
Vogt also noted that steady growth in Optical Circuit Switch revenue and sustained strong demand for 200G EML (Electro-absorption Modulated Laser) at Lumentum Holdings Inc. could drive its revenue above $1 billion. Vogt wrote, "Although supply constraints may result in Lumentum shipping below potential demand, operating leverage should dilute unit costs, driving diluted EPS 3%-4% above our prior $3.00 forecast. For the quarter ending September 26, we expect revenue between $1.15 billion and $1.20 billion, slightly above our prior $1.149 billion estimate, representing approximately 120% year-over-year growth at the mid-point. Despite some supply constraints, investor expectations for performance remain slightly elevated."
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