After rumors surfaced that Microsoft (MSFT 1.47%) was interested in making a chip design acquisition, the software titan made it official. It is purchasing data center infrastructure start-up Fungible for an undisclosed amount, though the rumor has the final price tag somewhere in the ballpark of $190 million. Financial filings in the coming months will likely help confirm the final purchase price.
Most investors are focused on Microsoft's pending takeover of video game developer Activision Blizzard for $69 billion, and its reported talks of making an additional $10 billion investment in ChatGPT parent company OpenAI. A $190 million investment in a little-known semiconductor start-up isn't going to show up as much more than a blip on the market's radar. But this acquisition has big implications for the chip industry, and semiconductor investors should be wary.
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Key Data Points
Disruption could be real
All on its own, Microsoft acquiring a small company like Fungible doesn't add up. But a wave of disruption could be coming to the semiconductor industry.
The same week Microsoft made its chip announcement, news reports surfaced that Apple is designing some new silicon to try to cut Broadcom at least partially out of its supplier mix. Broadcom designs various components used in 5G wireless and Wi-Fi communications, and derived a little over 20% of its sales from smartphone companies in its latest quarter. Apple has also been working on chips to replace Qualcomm in the last few years, though it has been unsuccessful in completing a design up to this point.
Since almost the beginning of its push into the smartphone world, Apple has also handled the design of the processors in its iPhones. A few years ago, it unveiled the M-series processors for its MacBooks, which supplanted Intel as a supplier. Alphabet's Google also designs the processors for its Pixel phones.
Cloud computing giants Amazon Web Services and Alphabet's Google Cloud also offer some custom semiconductor designs used for AI-specific work. Besides specific use cases, both companies often offer these processors to customers as a more cost-effective compute alternative to high-end designs from the likes of Intel, Nvidia, and Advanced Micro Devices.
Suffice to say semiconductor companies are already being raided by big tech. With massive scale to cost-effectively design and consume their own basic tech building blocks, it's in the best interest of companies like Microsoft, Apple, Alphabet, and Amazon to explore ways to save money when it comes to semiconductors.
What will Microsoft do with Fungible?
Back to the Fungible acquisition. In isolation, this ranks as a small effort from Microsoft to make a foray into the world of chips. Nevertheless, Fungible could eventually play a pivotal role in the data center industry (which is the basic computing unit of cloud computing, data, and apps housed in a remote data center and accessed via internet connection).
Fungible designs a specific type of part called a data processing unit (DPU). If that sounds familiar, you may have heard the term when Nvidia announced it was getting into the DPU business a few years ago. Or maybe you've read about leading DPU company Marvell Technology Group, which designs these parts for everything from data centers to 5G mobile networks to internet service providers.
Basically, a DPU is a critical component in moving data around a computing system. For Fungible, that means data centers. Think of the network of wires, switches, and processors that data travels along in a massive data center like a city's transportation infrastructure, facilitating the movement of people and goods from one place to another. DPUs are the grand coordinators of this infrastructure. Fungible's DPU boasts top-notch computing power balanced with energy efficiency -- an equally important priority for data center operators like Microsoft these days.
Fungible also has a product called the Storage Cluster that helps data center operators with data storage challenges.
Based on Microsoft's announcement, the Fungible team will be joining the Microsoft family as it looks for new ways to increase the productivity and energy efficiency of its tech infrastructure -- including that for its fast-growing Azure public cloud unit.
I'll reiterate here that semiconductor investors shouldn't worry too much about Microsoft's latest acquisition. Fungible is a tiny start-up, and it's unlikely to completely displace Microsoft's chip supply partners anytime soon. However, big tech's growing interest in designing chips is real. With semiconductor designers focused on AI, and the cloud growing fast and raking in hefty profit margins, companies with massive scale like Microsoft are certain to be attracted to the smell of money as they try to track down more profitable growth in the coming years.
