Dell'Oro Group forecasts the data center ethernet switch market will grow to near $100 billion in the next five years and remain resilient despite macro-economic headwinds, according to a new report from the market research firm.

Analysts anticipate a near double-digit compound annual growth rate (CAGR) between 2021 and 2026. Half of the forecasted spending will be on 400 Gb/s switches, though the firm noted 800 Gb/s will surpass the former in spend by 2025.

"Given the strong bookings and unprecedented levels of backlogs, we expect the demand in the market to remain strong in 2022," Dell'Oro Senior Director Sameh Boujelbene said.

Sales performance, however, will ultimately be determined by the state of the supply environment. "As we look into 2023, concerns started to arise regarding the sustainability of the demand level in the market. Those concerns are fueled by increased macro-economic uncertainties, which, combined with potential improvements in the supply situation, may put a break on the panic purchasing behavior we are currently experiencing in the market," Boujelbene said.

The firm also highlighted potential revenue slowdown in 2023 — "due in part to a tough comparison with 2022" — but remains optimistic about the ability of the data center switch market to stay, "for the most part, resilient," Boujelbene explained, referencing the importance of digital transformation amplified by the coronavirus pandemic and the resulting durability of the switch market.

"Additionally, our interviews with value-added resellers and system integrators revealed that many vendors have implemented some sort of non-cancellation policy for their orders, which should provide confidence in a strong revenue outlook, at least through the first half of next year," she added.

The firm's confidence in the long-term health of this market is how much of the spending is driven by cloud service providers. By 2026, Dell'Oro expects cloud service providers to represent 60% of spending on data center switches and support broader adoption of 400 Gb/s, 800 Gb/s, and 1,600 Gb/s speeds.

And as cloud service providers continue to speed up their networks, the firm predicts cloud providers will make distinct choices regarding chip capacity, switch radix, and network topology.

Dell'Oro recently reported similar growth and health of data center capex, deeming first quarter 2022 growth as the fastest in three years. But the firm also highlighted how lower cloud services demand and greater chances of stunted economic growth could threaten the industry’s momentum.

"The possibility of slower economic growth is growing," and with enterprise IT spending generally correlated with economic growth, that doesn’t bode well for cloud providers, Dell’Oro Research Director Baron Fung wrote in an earlier email to SDxCentral.

If cloud providers are losing revenue, and they eventually represent 60% of spending in the data center switch market, that may complicate the projected health of the market.