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5 Stocks That Could Benefit From the Edge Computing Revolution

Nicholas Rossolillo, The Motley Fool

Cloud computing has been a big win for investors over the past decade, and it's still a double-digit growth investment motif. In fact, according to researcher Gartner, global spending on centralized data centers and infrastructure will grow 17.5% to $214 billion in 2019 and will surpass $330 billion by 2022.

And though growth of the cloud market shows no signs of letting up, a new related trend is only just beginning: the edge (not "The Edge" of U2 fame). Massive data centers deployed by the likes of Amazon, Microsoft, and Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) provide enormous amounts of computing power for businesses. However, the rapid proliferation of connected devices in recent years, the rise of new processes like artificial intelligence, and the need for faster response times and real-time data monitoring have combined to create a demand for hubs that allow data to travel shorter distances. Thus, smaller localized data centers and technologies that allow for heavier lifting to be done at the device level are starting to emerge. 

This move from a centralized cloud to a dispersed one is picking up momentum. Estimates vary, but researchers have forecast this industry subset will grow by anywhere from around 20% to 50% every year over the next five years, with upper estimates pegging global spending on it in the $30 billion ballpark in a few years time. Research group Chetan Sharma Consulting thinks spending on the edge will eventually climb to the trillions of dollars level in a few decades.

Those are all arbitrary figures, but here's the point: Much of the cloud is being relocated closer to the end users, and with it, incredibly powerful computing power that will pave the way to new services and further industry transformation. Here's three ways and five companies to take advantage of the potential.

Starting with nuts and bolts

First, there's the construction of these edge data centers themselves. The market for data center infrastructure equipment has long been dominated by Cisco, but Arista Networks (NYSE: ANET) has been steadily chipping away at its lead for years. Not only is the company's hardware and suite of software management tools open source and designed to be custom-fitted to the needs of its clients, it's leading the charge with faster network hardware, and has launched a new campus networking segment -- private data centers built onsite or near an office or facility to handle local computing needs.

It's a new segment for Arista, and there's a risk that the edge won't deliver as a solid growth catalyst for the company, given all of the other competitors out there selling network hardware. However, as CEO Jayshree Ullal pointed out on a recent earnings call, the cloud was a new business segment for Arista at one point, too. Now it's the company's bread-and-butter. With a lot of overlap between the cloud and edge computing hardware, I like Arista's chances at making this a profitable high-growth area in the years ahead.

Xilinx (NASDAQ: XLNX) is another hardware vendor that is picking up steam due to the edge and the technologies it supports. The chipmaker specializes in field programmable chips -- semiconductors that can be customized by a systems engineer as they are not pre-programmed for a specific task. Due to their flexibility, these chips can often be reused later for different tasks.

The technology isn't new, but the advent of AI and other complex computing needs have boosted the demand for Xilinx's brand of silicon as of late. The company has also built software and other services atop its field programmable units to aid in the deployment of complex systems. As the burgeoning wave of edge computing spreads, hardware suppliers are a good place to start a search for investments, and both Arista Networks and Xilinx look likely to benefit in the years ahead.

A silhouette of a human filled in with illustrated data, signifying artificial intelligence.

Image source: Getty Images.

The operators of the edge

After an edge facility is built, someone needs to manage it. Many data centers will be privately owned to support individual businesses'  operations, but not all of them. Verizon (NYSE: VZ) is looking become an edge leader by pairing its ultra-fast 5G network based in dense urban centers -- which is in the early stages of deployment -- with its nation-spanning 4G network. Recent tests it has conducted demonstrate how the company will be able to offer ultra-fast connectivity for businesses with low latency (the time it takes data to travel between two locations), opening up new use cases for enterprise use and for Verizon's leading mobile network itself.

Verizon isn't exactly a high-growth company, but its move to the edge could help sustain its slow-and-steady pace, support a generous dividend that currently yields 4.3%, and further cement the wireless leader into the fabric of the internet. As the current leader in telecom here in the U.S., I like the company's chances at maintaining that lead by using 5G to offer edge computing for the masses.  

Here's a less obvious potential beneficiary of the edge movement: CenturyLink (NYSE: CTL), which has been beaten down and can't seem to turn things around. Its legacy consumer communications business is to blame for its current woes, as the cord-cutting trend continues, but management is looking for strategic alternatives elsewhere that could deliver growth, and in that effort, it's investing in over 100 edge centers around the country. The company is beleaguered, but its fiber optic network has real value. Repurposing it for new connectivity uses that meet the demands of larger organizations looks like a winning strategy.

CenturyLink has been announcing upgrades of its network geared toward businesses at a steady clip for some time, but this transition will require some patience. A turning point could likely come once it either sells off its ailing consumer services business or otherwise reorganizes it; regardless, its newer services catering to businesses need time to build momentum. In the meantime, this will be a volatile stock -- so plan accordingly.  

Look for new emerging services on the edge

There are a lot of other companies that could get a big boost from incorporating edge computing into their operations, and one article is not enough to cover them all. So instead, I'm picking Google parent Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). Though over 80% of Alphabet's revenues are derived from advertising, the tech giant has its hands in all sorts of cookie jars. And it is investing proceeds from that highly lucrative ad business into a plethora of businesses like cloud computing, data science and analytics, autonomous vehicles and logistics, and connected entertainment -- all of which could benefit from a healthy dose of faster, lower-latency computing.

Investors may be worried that increased scrutiny from antitrust regulators will put a damper on Alphabet's prospects, but that in itself is a reason for the search and advertising leader to keep its foot on the gas when it comes to innovation. With many of its subsidiaries and strategic investments dependent on a faster internet and higher-level computing power, the edge could help accelerate the development of Alphabet's portfolio of new ventures and boost profits as they grow. 

This is a high-level overview of edge computing and the businesses that could benefit as a result of its development, so investors should do their own due diligence and research before buying any of the stocks mentioned. But the edge could help push the boundaries of what is possible in the next decade, and that makes it a trend worth digging into. Whether the total market ends up being worth billions or trillions every year, this tech trend is poised to provide needle-moving results for investors' portfolios.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Alphabet (C shares), Arista Networks, CenturyLink, Microsoft, Verizon Communications, and Xilinx. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Arista Networks, and Microsoft. The Motley Fool has the following options: long January 2021 $85 calls on Microsoft. The Motley Fool recommends Gartner, Verizon Communications, and Xilinx. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com