Switch vs. Server: ODM, EMS, OEM Comparison & AI Cycle Investment Outlook

Switch life cycle used to be 5-7 years for upgrade, while server 4-5 years. In this AI cycle, both switch and server accelerated upgrade - most Server and Switch ODM/EMS/OEM have enjoyed >30% CAGR in past 2 years in this AI cycle. Into 2026, besides growth, we believe investor will also focus on :

1) ROE, given several rounds of financing conducted in 2024-2025, 

2) margin impact from rising memory cost , likely start from 1Q26 or 2Q26.

3) competition - there are more AI server competitors (all ODMs directly competing with OEMs, plus new OEMs like SMCI and Gigabyte), but in switch there is only 1 new entrant Celestica. For each switch brand OEM, there's different O/S but yet need to be able to communicate with each others - hence creating a natural moat for new entrant.

We prefer switch over server on less peers, higher ROE, in addition to higher software moat.  Also less memory in BOM (3-5%). Within ODM/EMS and OEM, we prefer the former, especially switch ODM, and see server OEMs’ margin and availability to be negatively impacted by memory (11-20%). Server ODM with bigger hyperscaler customers would be better off than server OEM.

Pecking order : Switch ODM > Switch OEM > Server ODM > Server OEM

Long – A, B, on share gain, upside % and ROE: 

Top pick A has highest ROE among all , and memory is consigned by customer. Both see rising share gain from brand makers in datacenter, while A valuation only half of peer B despite healthier balance sheet.

Short – A, B, on margin pressure: 

Both are server OEMs. We see their GM/OPM to be negatively impacted by memory by 0.6-1.2 pts out of their average 5-10% OPM even if they can pass through 75%. 

Top pick A is less prepared for memory inventory per mgmt with weaker branding power.

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ROE rank (2025E) - Accton highest, Hon Hai the lowest

Net cash to Equity rank (2025E) - Arista the best, HPE the lowest