Chip Stocks Saved From IPhone Fate by Data Center Building Boom
Bloomberg | May 25, 2018
The end of the smartphone boom was supposed to hammer chipmakers. But the internet has come to the rescue.
Semiconductor companies’ financial results for the March quarter showed the $400 billion industry buoyed by demand from technology giants like Amazon.com Inc., Google, Microsoft Corp. and Facebook Inc. They’re spending heavily to build huge networks of data centers to run retail operations, search engines, cloud services and social networks over the internet.
What data centers need most are powerful chips for crunching and storing data. That’s a welcome development for chipmakers that have chased an increasingly saturated smartphone market for years.
"Over the last decade the semiconductor industry was at the mercy of the Apple product cycle," said Mehdi Hosseini, an analyst at Susquehanna Financial Group LLP. Yet in recent months, many chipmakers like Micron Technology Inc. and Western Digital Corp. have beat earnings estimates and raised forecasts despite disappointing sales of Apple Inc.’s flagship iPhone X, Hosseini said.
The reason is surging cloud-infrastructure spending. Last year, Amazon, Google parent Alphabet Inc., Facebook and Microsoft together spent about $40 billion on new plants and equipment, most of it data center-related. The spending -- a lot of it on machines full of products from companies like Micron and Western Digital -- by those big tech companies is expected to rise to more than $58 billion in 2018, according to analyst estimates compiled by Bloomberg. Add in what Chinese internet companies like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. are investing and the expenditures are even greater.
[iframe id="google_ads_iframe_/3834/dcknowledge.home/article/business_8" title="3rd party ad content" name="google_ads_iframe_/3834/dcknowledge.home/article/business_8" width="300" height="250" scrolling="no" marginwidth="0" marginheight="0" frameborder="0" style="box-sizing: inherit;border-bottom-width:0px;border-left-width:0px; border-right-width:0px;border-top-width:0px;height:250px;vertical-align:bottom; width:300px"] [/iframe] Even though smartphone unit sales are projected to shrink for the first time ever this year, there are still billions of devices constantly generating and demanding reams of data. That’s in addition to the surging use of cloud computing as companies increasingly outsource the work of storing and crunching corporate data to providers such as Amazon Web Services. Data center demand has propped up prices and fueled revenue at semiconductor companies, which have been among the best performing stocks. The Philadelphia Semiconductor Index has more than doubled in the past two years, close to twice the gains by the tech-heavy Nasdaq Composite Index and three times better than the broader Standard and Poor’s 500 Index.
Among chip companies, the most obvious new beneficiary is Nvidia Corp., which has successfully adapted its graphics chips to perform work like voice and image recognition in the burgeoning field of artificial intelligence. Graphics chips, typically used in personal computers to help make games look more realistic, are good at performing multiple small calculations at the same time, something that cloud providers are increasing finding useful in servers. The company’s data center revenue rose 71 percent in the quarter it just reported to $701 million. In 2016, Nvidia’s server unit had less than half that amount for the whole year.
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