Home| Features| About| Customer Support| Leave a Review| Request Demo| Our Analysts| Login
Gallery inside!
Technology

How Much More Will the Chip Market Suffer if Tech Giants Keep Cutting Their Orders?

Nvidia's quarterly results were down 1.46%.

November 18, 2022
7 minutes
minute read

This has been a confusing week for the chip industry, but one thing is clear: its near-term fate may be in the hands of the same tech giants who are under pressure to slash their own costs. These companies are facing pressure from shareholders and consumers alike to keep prices down, and they may see chips as one area where they can cut costs. Only time will tell whether this will be good or bad for the chip industry in the long run.

Nvidia's quarterly results were down 1.46%.

Nvidia's strong results and optimistic outlook for 2023, compared to Micron's production cut warning, paint two different pictures. Nvidia managed to beat Wall Street's estimates for its key data center and videogames businesses, while Micron says it plans to slash production in order to produce less DRAM memory next year. Morgan Stanley's Joseph Moore, who has covered Micron for more than a decade, called the move "unprecedented" in a note to clients.

The updates from both companies show that the chip industry is still facing a major slowdown, with the timing of a recovery unclear. Nvidia's gaming segment revenue plunged 51% from a year earlier, while its data center segment growth of 31% was nearly half the growth rate of the previous quarter. Both segments are not expected to see much improvement in the company's fiscal fourth quarter ending in January.

Nvidia is banking on new chips to power a revival next year. Of particular import is a graphics processor called Hopper that is designed for artificial intelligence computing in data centers. Nvidia Chief Executive Jensen Huang said Wednesday that the company is planning to ship “large volumes” of the chip in the first quarter, adding that “customers are clamoring to ramp Hopper as quickly as possible.” This is important because data centers have finally overtaken gaming to become Nvidia’s largest segment; analysts expect data center revenue to top $15 billion in the current fiscal year compared with about $8.8 billion for gaming.

The overall data center market is largely dependent on the continued willingness of major tech companies to keep investing billions of dollars each year in capital expenditures. However, this is far from certain, as these companies are now working to reduce their own costs. On Thursday, Amazon Chief Executive Andy Jassy said that the company is planning cuts for next year that are expected to affect around 10,000 employees of its corporate operations. Microsoft MSFT -0.02%
Alphabet has initiated fewer layoffs and is taking additional steps to reduce spending.

Google has signaled plans to watch its spending and has been targeted by an activist investor this week seeking substantial job cuts at the search giant. The three largest public cloud services have spent a combined $120.6 billion in capex over the past four quarters.

Then there is Facebook. It's a social networking site that allows users to connect with friends and family. It's a great way to stay in touch with people, and it's also a great way to share information and experiences.

Parent Meta Platforms has seen a sharp increase in spending over the past year as it transitions into a "metaverse company." However, this has led to a slowdown in online advertising, sparking an investor revolt that has seen the company's market capitalization drop by more than two-thirds since the plan was first announced. Last week, the company announced layoffs affecting around 11,000 employees, along with plans to reduce its planned capex for 2023 by $1 billion.

Operating expense cuts don't always mean capex cuts. However, while Facebook wasn't around as a public company during the last major U.S. recession following the global financial crisis, Amazon, Microsoft, and Google were. All three companies showed a propensity to scale back capex during that time. When the crisis hit in 2007, capex growth at each company slowed considerably compared with the previous year. Combined capex for the three companies averaged 1% annual growth for the three-year period ranging from 2007 to 2009, compared with an average of 62% annual growth for the three-year period right before, according to data from S&P Global Market Intelligence.

Micron's decision to cut production may actually be a bet on Big Tech. Tim Arcuri of UBS says that cloud giants have ended up with too much memory in their inventories and have been cutting back on orders as a result. However, he says that Micron's production cuts next year should result in price increases once the inventory is used up, especially with new, memory-hungry processing chips from suppliers like Nvidia on the way. "There's a big increase in DRAM consumption for servers that the cloud guys have to buy next year," Mr. Arcuri said in an interview. "If they wait too long, prices could go up pretty sharply." Here's hoping that Big Tech is still in a spending mood by then.

Tags:
Author
Cathy Hills
Associate Editor
Eric Ng
Contributor
John Liu
Contributor
Editorial Board
Contributor
Bryan Curtis
Contributor
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

Subscribe to our newsletter!

As a leading independent research provider, TradeAlgo keeps you connected from anywhere.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Explore
Related posts.