Shares of semiconductor and data center infrastructure stocks Broadcom (AVGO 2.66%), Taiwan Semiconductor Manufacturing (TSM +0.40%), and Arista Networks (ANET 1.34%) were all rallying today, up 3.2%, 3.2%, and 4.4%, respectively, as of 3:39 p.m. EDT.
While these gains may not have been extremely eye-opening, they were in the context of the Nasdaq Composite index being down around 0.65% at that time. These three are large components of that index, so to see them defying their peers is notable.
The divergence is likely due to one large tech giant significantly raising its full-year outlook for capital spending, most of which will go to artificial intelligence (AI) data centers. Fears of a large AI spending war among the very biggest tech giants caused those stocks to plunge today, but the increased spending should be a boon for these infrastructure players.
NYSE: TSM
Key Data Points
Meta's spending benefits these three
Last night, Meta Platforms surprised investors with its first-quarter earnings report. While Q1 revenue and earnings beat estimates, the company also raised its 2024 guidance for capital expenditures to $35 billion to $40 billion, up from its prior forecast of $30 billion to $37 billion.
That big increase in spending caused Meta's stock to plunge this morning, but it's actually great news for the recipients of all that spending. In particular, Meta is known to be a huge customer of Arista Networks' data center ethernet switches. In fact, Meta was Arista's largest customer in 2023, accounting for 21% of its revenue.
Datacenter plays are reaping the early benefits of the AI wars. Image source: Getty Images.
So, Meta's big spending should be good news for Arista. And Arista's switches use Broadcom networking chips, so the increased revenue for Arista should also filter down to Broadcom. Not only that, but Meta is also a direct customer of Broadcom's custom ASIC business, as Meta uses Broadcom IP in its own house-designed AI accelerators.
On the conference call with analysts last night, Meta CEO Mark Zuckerberg noted that the company was attempting to keep its AI costs in check by using more of its own data center accelerators, as opposed to Nvidia graphics processing units (GPUs).
The good news for TSMC is that it makes both Nvidia GPUs and the new Meta AI accelerator in its foundries, with the new-generation Meta chip currently produced on TSMC's 5-nanometer process. However, Mark Zuckerberg has recently indicated he may switch to Samsung's foundry in the future, given the tensions between China and TSMC's home country of Taiwan.
AI hardware is still all the rage
The Nasdaq Composite was down not only due to Meta's outsized spending but perhaps also on fears a new competitive spending race for AI supremacy will break out between all the big cloud infrastructure and internet platform companies. Zuckerberg's comment on this front didn't exactly help:
As we're scaling capex and energy expenses for AI, we'll continue focusing on operating the rest of our company efficiently. But realistically, even with shifting many of our existing resources to focus on AI, we'll still grow our investment envelope meaningfully before we make much revenue from some of these new products.
Big spending without an immediate payoff is clearly scaring investors off the big cloud companies today. However, that multiquarter or even multiyear spending race should continue to benefit chip and hardware companies like these three key players. As of now, it looks as though the immediate spoils of the AI wars will go to leading semiconductor and hardware companies and not necessarily the cloud giants -- at least in this early stage of the AI era.
