Chip Makers Catch AI Wave

"Tech giants are moving fast on artificial intelligence, even if they have to hit the brakes elsewhere.

The latest confirmation of that trend came from an unexpected source: Broadcom used its fiscal first-quarter results late last week to discuss an increase in business from customers scrambling to beef up their networks for generative AI -- the technology made popular by the ChatGPT chatbot tool that Microsoft is wrapping into its Bing search engine to take on Google. Google is responding by working to integrate its own generative AI technology into its search tool.

The search announcements from both companies took place last month and don't seem to have been the result of years of quiet planning. Broadcom Chief Executive Hock Tansaid on Thursday's earnings call that a jump in AI-driven demand for his company's data-center components "happened over the last 90 days." He expects sales of the company's Ethernet switch products deployed for AI uses to exceed $800 million this year compared with $200 million last year.

Broadcom is hardly the only chip maker looking to capitalize on the AI boom. The computational demands of generative AI are such that even those running already massive cloud-computing networks need to boost their capabilities to handle the extra load. In its own earnings call two weeks ago, Nvidiaprojected a pickup in sales for its data-center segment and announced a new business to provide access to its AI software tools. Nvidia's shares have jumped 13% since those results and are now up 61% for the year. Broadcom's shares rose nearly 6% on Friday -- the stock's biggest postearnings move in more than a year.

Still, data-center suppliers won't be getting blank checks this year. The tech titans that operate the largest networks -- Amazon.com, Microsoft, Google parent Alphabet and Facebook parent Meta Platforms -- spent $99 billion combined last year on data-center capital expenditures, according to estimates from Dell'Oro Group. That is up 36% from the year before, setting up a major step down this year as those companies digest their spending and deal with their own slowing core businesses. Dell'Oro Research Director Baron Fung estimates that data-center capital expenditures by those four companies will rise only in the high-single-digit percentage range this year.

That deceleration won't be shared equally, though. Marvell Technology's shares slipped nearly 5% on Friday following its own results that included a disappointing revenue forecast for the current fiscal quarter ending in April. The company says data-center customers are working through inventory in areas such as controllers for data storage, though CEO Matt Murphy noted on the company's call that the same customers are "prioritizing key growth areas such as AI and [machine learning], with potentially much larger investment over the next few years."

That is a good situation for Broadcom, which has been relatively quiet about its AI efforts and is sometimes penalized by investors for its heavy exposure to Apple Inc. given the iPhone maker's well-known desire to design more of its own chips. Analyst Stacy Rasgon of Bernstein says Broadcom's latest disclosures makes it an underappreciated play in AI, with a valuation far cheaper than other chip makers such as Nvidia and AMD that have ridden high on the market's hype about the technology.

It is a good time to have some chips in the AI game." [1]

1. Chip Makers Catch AI Wave
Gallagher, Dan.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 07 Mar 2023: B.12.