In what has been a confusing week for the chip industry, one thing is clear: its near-term fate may be in the hands of the same tech giants who are under a lot of pressure to slash their own costs.
Quarterly results from
and a production cut warning from Micron, both on Wednesday, seemingly painted two different pictures. Nvidia managed to beat Wall Street’s estimates for its key data center and videogames businesses while also sounding an optimistic note for 2023, because of new products for both segments. Micron, on the other hand, says it plans to slash production in order to produce less DRAM memory next year than it will this year, as part of an effort to address oversupply caused by the rapid deterioration of major chip markets such as PCs and smartphones. Morgan Stanley’s
Joseph Moore,
who has covered Micron for more than a decade, called the move “unprecedented” in a note to clients.
Taken together, the updates from both companies show the chip industry is still mired in a major slowdown, with the timing of a recovery unclear. Nvidia’s gaming segment revenue plunged 51% from a year earlier as the company is still working through an inventory glut, while its data center segment growth of 31% year-over-year was nearly half the growth rate of the previous quarter. Both aren’t expected to see much improvement in the company’s fiscal fourth quarter ending in January.
Rather, Nvidia is banking on new chips to power a revival next year. Of particular import is a graphics processor called Hopper that is designed for artificial intelligence computing in data centers. Nvidia Chief Executive
Jensen Huang
said Wednesday that the company is planning to ship “large volumes” of the chip in the first quarter, adding that “customers are clamoring to ramp Hopper as quickly as possible.” This is important because data centers have finally overtaken gaming to become Nvidia’s largest segment; analysts expect data center revenue to top $15 billion in the current fiscal year compared with about $8.8 billion for gaming.
But the overall data center market depends in large part on the continued willingness of the biggest tech companies to keep shelling out many billions a year in capital expenditures. And that is far from certain given that they are all now working to bring down their own costs.
Chief Executive
Andy Jassy
said on Thursday that the company is planning cuts for next year; about 10,000 employees of the company’s corporate operations are expected to be affected.
has initiated a smaller number of layoffs and is taking further actions to cut spending. Google parent
has signaled plans to watch its spending and has been targeted by an activist investor this week seeking substantial job cuts at the search giant. The three run the largest public cloud services, and have spent a combined $120.6 billion in capex over the past four quarters.
Then there is
parent Meta Platforms, which ramped up spending sharply over the past year to power its transition into a “metaverse company.” That, along with a slowdown in online advertising, sparked an investor revolt that has taken more than two-thirds off the company’s once $1 trillion market capitalization since the plan was first announced. The company announced layoffs last week affecting about 11,000 employees, along with plans to trim the midpoint of its planned capex range for 2023 by $1 billion.
Operating expense cuts don’t always mean capex cuts. But while Facebook wasn’t around as a public company for the last major U.S. recession following the global financial crisis, Amazon, Microsoft and Google were, and all three showed a propensity to scale back capex. When the crisis hit in 2007, capex growth at each slowed considerably compared with the previous year, and combined capex for the three averaged 1% annual growth for the three-year period ranging from 2007 to 2009 compared with an average of 62% annual growth for the three-year period right before, according to data from S&P Global Market Intelligence.
Micron’s move to cut production also may ironically reflect a bet on Big Tech. Tim Arcuri of
says cloud giants have ended up with excess memory in their inventories and have thus been cutting back on orders. But he says Micron cutting production next year should result in price jumps once the inventory is consumed, especially with new memory-hungry processing chips from suppliers such as Nvidia on the way. “There’s a big step up in DRAM consumption for servers that the cloud guys have to buy next year,” Mr. Arcuri said in an interview. “If they wait too long, prices are going to go the other way on them pretty hard.” One only hopes that big tech is still in a spending mood by then.
Write to Dan Gallagher at dan.gallagher@wsj.com
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