ODMs Are Expected to Get a Boost from AI
$NVIDIA(NVDA.US)$ has become more important as a tech industry bellwether. The chipmaker's forecasts provide a window into the plans of some of the world's most valuable companies — and indicate how much those businesses are willing to spend to overhaul computer systems to accommodate AI.
A significant 2Q beat and raise, a repeat of 1Q's performance, suggests sustained demand strength in Nvidia's Data Center (DC) business, while guidance 29% above consensus for 3Q implies the company may get its hands on better-than-expected supply. Gross-margin upside (112 bps above consensus) is likely to continue as the DC contribution rises." — Kunjan Sobhani, BI technology industry analyst.
Like many of its peers, Nvidia doesn't operate its chip production and relies on outsourced manufacturing provided by $Taiwan Semiconductor(TSM.US)$ and $Samsung Electronics Co., Ltd.(SSNLF.US)$. That arrangement frees it from the huge expenditure and risks of investing in manufacturing.
Tech original design manufacturers have long been overlooked by investors due to the lack of growth catalysts despite their relatively stable earnings and high cash payouts, $Citigroup(C.US)$ said. However, investors have become increasingly bullish on these stocks in the face of an intensifying AI arms race. Citigroup strategist Scott Chronert says that the first wave of artificial intelligence breakthroughs lifted the stocks of companies such as Nvidia Corp. that are at the center of it all. The second will elevate the market at large.
Global shipments of AI servers are expected to grow at a compound annual rate of 29% between 2022 and 2026, according to Taipei-based research firm TrendForce. Analyst and researcher estimates have proven overly conservative this year, as Nvidia has in successive quarters shocked the market with blowout sales forecasts.
Forecast Market Size in 2025; Source: Arm Holdings
Wall Street banks remain optimistic about AI's potential applications and are busy figuring out which corners of the stock market stand to benefit. For example, Strategists $Goldman Sachs(GS.US)$ foresee a large jump in the earnings per share of the companies it's tracking that may gain the most from the new technology.
TSMC, the world's largest chipmaker, and top equipment supplier $ASML Holding(ASML.US)$ is poised to benefit from this growth. Despite facing its worst slump in over ten years largely due to declining sales in the computer and smartphone markets, TSMC is expected to receive orders for AI chips regardless of the designer. Currently, there is a significant shortage of cutting-edge fabrication technology, but TSMC's capacity remains tight. ASML is working diligently to keep up with the exponential growth in demand for advanced manufacturing by shipping costly chipmaking equipment as fast as possible.
Source: Bloomberg, Financial Post
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