- Hyperscalers Microsoft, Alphabet, Amazon, and Meta are expected to increase cloud and AI capital spending by $45 billion.
- Analysts foresee a three-year upcycle in capital expenditure within the industry, benefiting chipmakers AMD, Broadcom, Marvell, and Nvidia, among others.
- In addition to tech titans, industries like healthcare and finance are embracing AI models, driving demand for chips.
A new Bank of America report found that data center capital spending by four tech titans, Microsoft Corporation (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Amazon.com (NASDAQ:AMZN), and Meta Platforms (NASDAQ:META) bodes well for the fortunes of major chipmakers.
Those companies are known hyperscalers. The term refers to large companies that provide cloud services and infrastructure on a massive scale, dominating the cloud computing industry.
Other companies considered hyperscalers include Alibaba Group Holdings (NYSE:BABA), International Business Machines (NYSE:IBM), and Oracle Corporation (NYSE:ORCL).
According to analysts, after three-quarters of year-over-year declines, the hyperscalers are collectively expected to spend about $45 billion, an increase of 7%, led by Google and Microsoft.
Bank of America analysts said they believe the industry is in the early stages of capital expenditure, or capex, upcycle, which they estimate will last for three years.
Multiple Years of AI investment
"We remain confident in AI supporting multiple years of investment," they wrote, adding that the AI infrastructure cycle is only at the start of year two.
It should come as no surprise that AI chip powerhouse NVIDIA (NASDAQ:NVDA) is forecast as the top beneficiary of increased data center spending, but other top beneficiaries include Advanced Micro Devices (NASDAQ:AMD), Marvell Technology (NASDAQ:MRVL), and Broadcom (NASDAQ:AVGO).
Of course, AI demand extends well beyond the major hyperscalers. For example, according to B of A analysts, data-centric industries like healthcare and finance are actively pursuing AI models to increase operational efficiency and develop new insights into their data.
Supply of Chips Meeting AI Demand
This could be a case where supply and demand line up nicely: As hyperscalers increase their AI capacity, more chips are coming to market.
That is a good sign for technology stocks as a whole in 2024.
Even with the S&P 500 at all-time highs, analysts are forecasting further price gains in the coming months. When the broader market is seeing significant gains, it's typical that growth sectors, including technology, consumer discretionary stocks, and communications stocks are leaders.
Advanced Micro Devices
The Advanced Micro Devices chart shows the stock advancing 25.73% in the past month, consolidating above its 21-day moving average below a January 25 high of $184.92.
Advanced Micro Devices analyst forecasts show a consensus price target of $177.88, an upside of 5.95%. Bank of America sees the price rallying even higher to $195.
Risks for AMD include competition from larger companies, irregular consumer and enterprise spending and high reliance on one outsourced manufacturer. Bank of America didn't specify that company, but Taiwan Semiconductor Manufacturing (NYSE:TSM) is the main manufacturer for many of the top chip designers.
Broadcom
The Broadcom analyst forecast shows a consensus price target of $981.45, a downside of 19.73%. Analysts have a rating of "moderate-buy" on Broadcom stock.
Here again, Bank of America's forecast comes in above the consensus, with analysts seeing the price reaching $1,250, based on double-digit earnings growth and high profitability within the semiconductor industry.
In 2024, Wall Street is eyeing earnings of $40.88 a share, a decrease of 4%. However, that double-digit growth is expected next year, with analysts expecting Broadcom to earn $50.70 a share, up 24%.
Downside risks include high exposure to Apple (NASDAQ:AAPL) and Alphabet, bringing risks of changing designs that no longer rely on Broadcom chips.
Marvell
Marvell is smaller than the other chip companies B of A named in its recent report, both in market capitalization and in revenue.
Marvell analyst forecasts show a consensus view of "moderate buy," with a price target of $69.96, an upside of 4.29%.
On the Marvell chart, you'll see a pullback in the past three weeks from a high of $73.53 on January 25. However, Marvell stock has maintained a gain of 11.85% in the past month.
Marvell is expected to see a pretty steep decline in earnings this year, to 82 cents a share, but a rebound is forecast for 2025.
Bank of America cited competitive risks versus larger industry rivals among Marvell's potential challenges.
Nvidia
Bank of America has a $700 price target on Nvidia stock, adding that Nvidia's forward P/E, currently 35, is "justified given stronger growth opportunities ahead as gaming cycle troughs and data center demand potentially faces strong, long-term demand dynamics."
Nvidia analyst forecasts indicate a price target of $612.68, a downside of 10.20%.
Unlike other chip stocks that are taking a breather after recent rallies, Nvidia has continued to run up; so far in 2024, Nvidia stock is up 40%, leading the Technology Select Sector SPDR Fund (NYSE:XLK).
Risks for Nvidia include internal cloud projects, such as those being developed by Alphabet and Microsoft, and larger-than-expected impact from restrictions on shipments to China, or additional restrictions placed on activity in the region.