Barefoot Networks' Tofino Switch Chip Could Challenge Broadcom

 | Jul 18, 2016 | 2:30 PM EDT
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A Palo Alto, Calif.-based startup is looking to topple ethernet switching giant Broadcom (AVGO) with its recently revealed transformative technology for the data-center market.

Barefoot Networks emerged from stealth mode in the middle of June, announcing the fastest switch ever: the Tofino switch chip, which boasts speeds of 6.5 terabits per second. But more importantly, Tofino is fully user-programmable. This allows network owners to specify the behavior of the packet-processing devices in their network, offering greater flexibility to enterprises based on their needs.

Through P4, an open-source programming language, Barefoot customers can write their own programs, then compile and run them on the Tofino chip -- allowing for a simplified and customized data plane.

"It empowers network owners and their infrastructure partners to design, optimize and innovate to their specific requirements," said Barefoot Networks' co-founder and chief scientist Nick McKeown in a statement.

Barefoot looks to transform two major industries with its technology: Cloud operators and original equipment manufacturers (OEM).

"[Barefoot] will allow for the cloud to be optimized for different purposes," said Ed Doe, Barefoot's vice president of products and marketing, in a phone interview. Doe added that the OEM market will be better served by specialized code, putting the network in a developers' hand.

The technology has already attracted attention from industry giants including Hewlett Packard Enterprise (HPE) , China-based Huawei Technologies and LinkedIn (LNKD) (Microsoft (MSFT) bid $26.2 billion to acquire the professional social network in June). Alphabet's (GOOGL) Google led the most recent round of investments totaling $57 million, along with Goldman Sachs (GS) Principal Strategic Investments and other strategic investors. Alphabet is a holding in Jim Cramer's Action Alerts PLUS portfolio. 

Meanwhile, Broadcom's Tomahawk ethernet switch series rules the data-center market. But its switch chip is half as slow as Tofino, with an aggregate switching bandwidth of 3.2 Tbps, and it is not user-programmable.

While it works in Broadcom's favor to have multiple chips on the market, Barefoot targeted an area that has remained underdeveloped for decades.

"The basic fixed-function switch architecture was set in 1996 and has remained unchanged for twenty years," said McKeown.

Barefoot CEO Martin Izzard elaborated, saying in a phone interview with Real Money that Barefoot's programming platform also has the ability monitor the network, which is something that has people "super excited."

Barefoot's chips can fit into the same application as a Broadcom chip and can be programmed to do the same things. But Broadcom's ethernet switches are built with fixed functions and can only serve that market -- limiting innovation -- as it is not programmable. Still, it has been able to capture a majority of the ethernet switch-chip market, which has a current total available market of greater than $2 billion.

According to Broadcom's most recent quarterly results (prior to Barefoot's launch from stealth), its wired infrastructure accounts for 58% of its net revenue, generating revenue from the sales of ethernet switching among other products for data center and enterprise networking. 

Broadcom did not immediately respond to requests for comment.

Analysts have mostly been silent regarding Barefoot's market entry and the direct effect it could have on Broadcom. In a research note Monday on Broadcom, analysts at Pacific Crest Securities were more focused on the impact from the upcoming iPhone 7. The analysts noted that they are looking for in-line fiscal third-quarter results but lowered fourth-quarter guidance. They maintained their Overweight recommendation on the stock, with a price target of $180. Shares were up slightly Monday morning, trading around $162. But there was no mention of any challenge from Barefoot.

The fourth quarter is key, as the startup is on the brink of sending out chips, with plans to make the hardware available at that time. It's P4 development environment is already available through its website, allowing people to develop software ahead of time.

With companies like Alphabet, which is reportedly building 10 new data centers, according to Data Center Knowledge, and others already interested in the open-source programming platform and speedy switch chip, Barefoot seems poised to take some sales away from the dominant force in the market.

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