Dear Reader,
On July 20, Taiwan Semiconductor Manufacturing Company (TSMC) reported that chip demand would fall 10%.
Shares of the world’s largest chip manufacturer fell nearly 5% on weaker forecasts for chip sales.
That seems to support the idea that the AI bubble is about to burst. After all, TSMC manufactures virtually all high-performance AI chips being used today.
But not so fast.
The drop in share price is a minor correction for a stock that’s still up 31% on the year.
That’s because, despite the drop in overall sales, there’s a promising forecast for AI.
AI Market Will Double Every 1.8 Years
Buried inside of TSMC’s earnings call was a clue that AI was one of the few bright spots in the chip industry.
Here is what TSMC CEO C.C. Wei had to say about the future of AI server demand:
Today, server AI processor demand accounts for approximately 6% of TSMC’s total revenue. We forecasted this to grow at close to 50% compounded annual growth rate in the next 5 years.
Growing at a rate of 50% per year means that TSMC’s AI processor revenue will double every 1.8 years.
Over the past year, AI processors made TSMC about $4.35 billion. If Wei’s projections are right, it’ll grow to roughly $33 billion in sales. That’s nearly half of its total sales from the past year.
This AI growth prediction lines up with AMD CEO Lisa Su who said that the AI server market was going to expand from $30 billion per year to over $150 billion in 5 years.
TSMC Chairman Mark Liu said that tech companies are prioritizing AI chips over other hardware like those used in cloud computing.
That’s telling. Even amid a market with supply constraints and rising prices, companies are betting on AI being the future.
Over the next week, Intel and AMD will both report their quarterly earnings.
Here’s what I expect from them.
Uneven Playing Field
But Intel won’t be so lucky. Intel’s already announced that it’s working on Falcon Shores, its AI chip. But it’s already far behind AMD and Nvidia.
In May, AMD’s CEO Lisa Su unveiled more details on the MI300X chip. It will be AMD’s flagship AI chip once it’s released later this year. It’s supposed to be even more powerful than Nvidia’s H100 chip, which is the current market front-runner.
But investors were disappointed that Su didn’t name any big buyers. That’s why shares of AMD are up a modest 71% compared to Nvidia’s 208% gain this year.
When AMD releases its earnings, I expect it to either name buyers… or forecast strong demand. That’ll be a catalyst for a rally.
But neither AMD nor Intel will be immune from lower chip demand in other areas. In AMD’s case, its AI initiatives should outweigh lower demand for other hardware.
But Intel won’t be so lucky. Intel is likely to announce that it’s working on an AI chip. But it’s so far behind others like AMD and Nvidia, I don’t think the market will care.
Companies like Nvidia, AMD, and TSMC are already profitable without the expansion of the AI market. The growth in demand for AI chips gives them the chance to steal even more market share from stalwarts like Intel.
Regards,
Colin Tedards
Editor, The Bleeding Edge