Blogs -Big Tech Continues To Buy Semiconductors At Record Levels In 2022

Big Tech Continues To Buy Semiconductors At Record Levels In 2022


October 19, 2022

author

Beth Kindig

Lead Tech Analyst

This article was originally published on Forbes Oct 14, 2022,09:31am EDT

Semiconductors have been rocked this year due to slower consumer spending on PCs, mobile and also slowing enterprise budgets that further affect hardware purchases, including PCs, notebooks and servers. The silver lining is Capex spending by Big Tech companies, which we’ve covered in the past for our premium members, when we stated that the increased Capex from companies like Google, Microsoft and Amazon and other big tech companies greatly benefit the semiconductor market.

The news has been in an uproar about crypto mining and the consumer-related PC markets. However, it has been our stance for some time that Big Tech capex is the true leading indicator for AI semiconductor companies. Despite an enormous increase in Big Tech capex primarily driven by data centers, this line item does not get the attention it deserves in terms of follow-through to the semiconductor industry. Below, we look at FY2022 budgets to draw the conclusion that H2 spending on data center chips is equal if not greater than the first half of 2022.

Market Opportunity

According to Gartner, the overall IT spending is expected to grow 3% to $4.5 trillion in 2022. It is lower than the 10% growth in 2021. The slowdown was mainly due to the cutdown in spending on personal computers, tablets, and printers.

The Data Center Systems segment, however, is expected to grow fastest among all the segments. It is expected to grow 11% YoY to $212 billion, higher than the 6.4% growth in 2021.

Hyperscale data centers, which are very large data centers primarily operated by Amazon, Microsoft and Google, are expected to outpace overall data center systems.

According to data from Allied Market Researchthe global hyperscale data center market is expected to grow from $59 billion in 2020 to $585 billion by the year 2030, representing a Compound Annual Growth Rate of 26% from 2021 to 2030.

Similarly, the Artificial Intelligence chip market is expected to grow from $8.02 billion in 2020 to $194.90 billion by the year 2030, representing a CAGR of 37% from 2021 to 2030.

According to a report published by Dell’Oro Group, the global data center Capex is expected to be $377 billion by the year 2026 – which implies the majority of the growth noted by Allied Market Research will occur in the next few years.

The private markets are also signaling growth will continue as there has been quite a bit of deal activity in data centers.

According to data from Synergy Research Group, 87 data center focused merger and acquisition deals were closed in the first half of 2022, worth $24 billion. There is an additional $18 billion of pending deals in the pipeline that are agreed and are yet to be officially closed. The research group mentioned that 209 deals were closed in 2021 for over $48 billion, up 41% from 2020.

One of the more significant deals this year that was completed is the acquisition of CyrusOne for $15 billion by KKR and Global Investment Partners. John Dinsdale, Chief Analyst at Synergy Research Group, said, “There is an ever-increasing demand for data center capacity, driven by rapidly growing cloud markets, aggressive expansion of hyperscale operator networks and continued growth of data-rich digital services.”

Earnings season kicked off this week and our premium members are receiving deep-dive tech earnings analysis straight to their inbox each week. We also offer real-time trade notifications, weekly webinars, a completely transparent portfolio of 20+ positions and more. Learn more about our premium membership.

Big Tech Capex H2 2022

Alphabet’s Q2 Capex grew by 24% YoY to $6.9 billion. Ruth Porat, CFO of Alphabet, said“Turning to CapEx. The largest investments in the second quarter were in servers followed by data centers and office facilities.” The company had invested $24.6 billion in Capex in the year 2021, up 11% YoY. The management expects Capex to rise in 2022. In the Q2 2022 earnings call, Ruth Porat said“We continue to expect an increase in CapEx in 2022 versus last year. For the balance of 2022, the increase will be particularly reflected in investments in technical infrastructure globally with servers as the largest component.” Earlier this year, the company announced its plan to invest about $9.5 billion in data centers and offices in the U.S. for the year 2022. This is up from about $7 billion spent in 2021.

Similarly, Microsoft’s Capex including financial leases, grew by 19% YoY to $8.7 billion in the Q4 FY2022 quarter (i.e., Q2 CY2022). Amy Hood, CFO of Microsoft, said, “Maybe let me start by talking about Q4's capital spend. Obviously, the big driver of our growth this quarter was in data center spend, both new and newbuilds as well as adding capacity to existing data centers. We are seeing, obviously, good demand signal.” The management expects a sequential decrease in the next quarter due to the normal variability in the quarterly spend. In the CY 2021, Microsoft’s Capex including financial leases, grew by 33% YoY to $27.5 billion.

Amazon incurred capital expenditures, including equipment financial leases, of about $60 billion in 2021. About 40% of this is made up of technology infrastructure supporting AWS and worldwide stores business. The management expects Capex to increase over the last year with the increase in technology infrastructure.

Brian Olsavsky, senior VP and CFO, said in the Q2 2022 earnings call, “For full-year 2022, we do expect to spend slightly more on capital investments than last year, but the proportion of capital spending shifts among our businesses. We expect technology infrastructure spend to grow year-over-year, primarily to support the rapid growth in innovation we are seeing with AWS. We expect infrastructure to represent a bit more than half of our total capital investments in 2022.”

Meta’s capital expenditures in Q2, including principal payments on finance leases were $7.75 billion, up 64% YoY. The company’s CFO, Dave Wehner, said in the Q2 earnings call, “Capital expenditures, including principal payments on finance leases, were $7.7 billion, driven by investments in servers, data centers and network infrastructure. The big step-up in CapEx, both year-over-year and sequentially related to server spend, including for our AI infrastructure.”

The company expects 2022 capital expenditures, including principal payments on financial leases, to be $32 billion at the mid-point of the guidance, representing a 66% YoY growth. Tracking the Capex in the first two quarters, Meta Platforms had spent $13.3 billion which suggests the spend will be higher in 2H 2022. When we deduct from the mid-point of the guidance, it comes to $18.7 billion for H2.

Meta also recently announced its plan to expand the Eagle Mountain data center project. It is Phase 3 expansion plan and brings the total investment in the project to over $1.5 billion.

Earnings season kicked off this week and our premium members are receiving deep-dive tech earnings analysis straight to their inbox each week. We also offer real-time trade notifications, weekly webinars, a completely transparent portfolio of 20+ positions and more. Learn more about our premium membership.

Conclusion

Thanks to very big Big Tech capex budgets, Nvidia’s data center revenue grew 71% YoY to $7.6 billion in 1H 2022. Similarly, AMD’s data center revenue grew by 83% YoY to $1.5 billion in Q2 2022 and doubled in Q1 2022.

Due to consumer-related weakness, the data center is now the leading segment for these companies, which we had predicted would occur in 2018 in my free weekly newsletter. We also provide regular deep dives for our premium research Members on a more granular level as to what will happen next in the semiconductor industry.

Royston Roche, Financial Analyst for the I/O Fund contributed to this article.

Gains of up to 2,880% from our Free Newsletter.


Here are sample stock gains from the I/O Fund’s newsletter --- produced weekly and all for free!

2,880% on Nvidia

750% on Bitcoin

*as of Nov 20, 2024

Our newsletter provides an edge in the world’s most valuable industry – technology. Due to the enormous gains from this particular industry, we think it’s essential that every stock investor have a credible source who specializes in tech. Subscribe for Free Weekly Analysis on the Best Tech Stocks.

If you are a more serious investor, we have a premium service that offers lower entries and real-time trade alerts. Sample returns on the premium site include 4,490% on Nvidia, 900% on Chainlink, and 1,120% on Bitcoin. The I/O Fund is audited annually to prove it’s one of the best-performing Funds on the market, with returns that beat Wall Street funds.

beth

More To Explore

Newsletter

https://images.prismic.io/bethtechnology/Z02eD5bqstJ978X5_960x0.jpg?auto=format,compress

Nvidia’s Stock Has 70% Potential Upside For 2025

Nvidia once again posted a $2 billion beat to consensus revenue estimates in Q3, reporting YoY growth of nearly 94% to over $35 billion in revenue. Data center revenue more than doubled in the quarter

December 02, 2024
https://images.prismic.io/bethtechnology/Z0SBDq8jQArT1RkS_960x0.jpg?auto=format,compress

Nvidia Stock Is A Buy On Dips Before Blackwell Arrives In 2025

Nvidia’s stock broke to all-time highs recently, trading at $148 in early November and $147 yesterday. The stock has left many investors wondering “what comes next” after the unrelenting, historic sur

November 24, 2024
https://images.prismic.io/bethtechnology/ZzyXba8jQArT1B7v_960x0.jpg?auto=format,compress

AI Spending To Exceed A Quarter Trillion Next Year

Big Tech’s AI spending continues to accelerate at a blistering pace, with the four giants well on track to spend upwards of a quarter trillion dollars predominantly towards AI infrastructure next year

November 19, 2024
https://images.prismic.io/bethtechnology/ZzNO3K8jQArT0wUy_PalantirStock-HowHighIsTooHigh_.png?auto=format,compress

Palantir Stock: How High Is Too High?

Palantir proved again in Q3 that it’s undeniably one of the stronger AI software stocks in the market outside of the cloud hyperscalers. The company reported visible AI-driven growth and persisting bu

November 12, 2024
Bitcoin bull market update: December 2022 projection of $75,000 - $132,000 adjusted to $82,000 - $106,000 after reaching $73,757 in March 2024.

Bitcoin Bull Market Intact as Risk Increases

In December 2022, we boldly stated that “Bitcoin is a buy” when it was trading around $17,000. We were positioning for a new bull cycle and projected a target between $75,000 - $132,000. Despite Bitco

November 01, 2024
https://images.prismic.io/bethtechnology/ZyGyUK8jQArT0Aju_TeslaStock-MarginsBounceBackForAI-Leader.jpg?auto=format,compress

Tesla Stock: Margins Bounce Back For AI-Leader

Tesla is arguably one of the most advanced AI companies in the world, yet its stock is dictated by margins. Over the past three years, Tesla’s average gross profit per vehicle has declined by 60%, fal

October 30, 2024
https://images.prismic.io/bethtechnology/ZxejEoF3NbkBX11O_PalantirStockIsCrushingItsPeersInAIRevenue.png?auto=format,compress

This Stock Is Crushing Salesforce, MongoDB And Snowflake In AI Revenue

In this article, I break down how Palantir’s AIP is putting it a step above peer Salesforce, MongoDB and Snowflake with visible AI growth, and its undeniable ‘secret sauce’.

October 22, 2024
https://images.prismic.io/bethtechnology/Zw5myoF3NbkBXdms_Nvidia%2CMag7FlashWarningSignsForStocks.jpeg?auto=format,compress

Nvidia, Mag 7 Flash Warning Signs For Stocks

In this report, my team will address the risks brewing in the market. The strange behavior in the bond market could be signaling that the FOMC has made a policy error. This coupled with key tech stock

October 15, 2024
Why the I/O Fund is Not Buying Nvidia Right Now Video Interview

Why the I/O Fund is Not Buying Nvidia Right Now: Video Interview

In an interview with Darius Dale, Beth Kindig stated: “We ultimately think you can get Nvidia lower than where it is trading now. We are likely to take gains between $120 and $150 based on technical l

October 04, 2024
https://images.prismic.io/bethtechnology/ZvuHobVsGrYSwLe2_CybersecurityStocksSeeingEarlyAIGains.jpg?auto=format,compress

Cybersecurity Stocks Seeing Early AI Gains

Below, I look at the demand environment for leading cybersecurity stocks CrowdStrike, Zscaler, Palo Alto, and Fortinet, and which ones have key metrics hinting toward underlying strength.

October 01, 2024
newsletter

Sign up for Analysis on
the Best Tech Stocks

https://bethtechnology.cdn.prismic.io/bethtechnology/e0a8f1ff-95b9-432c-a819-369b491ce051_Logo_Final_Transparent_IOFUND.svg
The I/O Fund specializes in tech growth stocks and offers in-depth research for Premium Members. Investors get access to a transparent portfolio, a forum, webinars, and real-time trade notifications. Sign up for Premium.

We are on social networks


Copyright © 2010 - 2024