BREAKINGVIEWS-AI understudies bask in a flickering spotlight

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Sebastian Pellejero

NEW YORK, Nov 19 (Reuters Breakingviews) - Artificial intelligence’s understudies are ready to take center stage. As investors brace for results from the latest technology boom’s leading player, Nvidia NVDA.O, suppliers of everything from memory chips to networking and cooling have already benefitted handsomely from a spending splurge. The risk now is that once-boring businesses are pushed back out of the spotlight by hard physical realities, as a power crunch threatens further building.

Companies behind the AI stars are already sharing in the glamor. Micron Technology MU.O, which supplies silicon crucial for storing data on circuit-boards, recorded $9.3 billion in sales in the third quarter, a 37% year-over-year jump. Demand is stretching supplies, edging prices upward: Korean rival SK Hynix 000660.KS turned in a best-ever 47% operating profit margin. News that peer Samsung Electronics 005930.KS would charge more for its catalog of chips sent the group’s shares up on Friday.

Running all these chips full-throttle requires lots of power and cooling, too. Specialist Vertiv VRT.N reported 29% sales growth and a $9.5 billion backlog, while competitor Eaton ETN.N said data center orders rose 70%. Then there’s the task of connecting all this computational muscle together: networking companies Cisco CSCO.O and Broadcom AVGO.O similarly turned in strong numbers.

As leading AI model developers and operators of the server farms on which they run scramble for capacity, their suppliers boast of order books stretching out into 2026. Analysts foresee capital spending by Amazon.com AMZN.O, Alphabet GOOGL.O, Meta Platforms META.O and Microsoft MSFT.O reaching roughly $471 billion next year and $524 billion in 2027, excluding leases, according to Visible Alpha.

There’s another input crucial to all of them, though, that is much more difficult to ramp up: electricity. Finding a connection to power utilities can take up to five years, Bain & Company says. Orders for power transformers now take more than two years to fill.

Delays are widespread. When CoreWeave CRWV.O, which stands up giant chip-stuffed data centers for AI giants, flagged one holdup alongside its most recent results, its stock plunged 16% the following day. Executives nonetheless tried to reassure investors that demand remains insatiable, saying that the affected customer agreed to an adjusted delivery schedule.

The risk is that temporary setbacks turn into serial deferrals. It’s happened before: back during the initial pre-pandemic investment cycle in cloud computing, swollen server and memory orders eventually gave way to cancellations and supply gluts in key markets.

Investors seem sanguine. An S&P index tracking AI infrastructure firms is up 25% this year, ahead of the S&P 500's .SPX 13% gain. Nonetheless, the lights might yet cut out on the would-be stars of the boom.

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CONTEXT NEWS

CoreWeave shares are down more than 40% since reporting earnings on November 10, after the company said it was facing delays delivering capacity to one customer due to insufficient power.

(Editing by Jonathan Guilford; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on PELLEJERO/ Sebastian.Pellejero@thomsonreuters.com))