As more earnings reports roll out, one trend has become increasingly clear: the surge in artificial intelligence demand is leading to supply shortages, and that's affecting tech companies across the board.
Earnings season has given investors a lot to digest, including just how strong demand for AI truly is. Hyperscalers like Microsoft and Alphabet raised their capital expenditure expectations as they spend hundreds of billions of dollars to build out the infrastructure needed to power AI. Chip makers Advanced Micro Devices and Intel both recently reported knockout financial results as customers buy up CPUs, or chips that can power inference, the process of running models.
It's been widely talked about this year that this rise in demand has led to a shortage of memory supply, which is not only used in PCs and smartphones, but is also a critical component needed to power AI. Original equipment makers like Apple, HP Inc., and Dell Technologies have all pointed to how memory shortages have boosted costs.
Management commentary on recent earnings calls highlighted that more than supply constraints go beyond memory, and it's impacting these companies' ability to complete deals.
Arista Networks CEO Jayshree Ullal clearly laid out what components are experiencing supply constraints on the company's May 5 earnings call.
"We are experiencing industry-wide shortages across the board, be it wafers, silicon chips, CPUs, optics, and of course, memory that I referred to last quarter, coupled with elevated costs to procure these," Ullal said.
She added that the networking equipment maker has been engaging with vendors to strengthen supply agreements, but anticipates gross margin pressure ahead. Arista stock dropped 14% on May 6 as investors were unhappy with news that margins would be impacted.
Arm Holdings is now a CPU maker, and strong demand has been a boon for the company, which has seen sales soar. But an inability to meet that demand has become a concern.
Arm stock sank on Thursday despite the company reporting better-than-expected fiscal fourth-quarter financial results. Arm kept its revenue forecast at $1 billion as it tries to gather the supplies needed to meet demand.
Intel, another CPU maker, said on its earnings call on April 23 that first-quarter revenue of $13.6 billion "would have been meaningfully higher, but demand continues to outpace our growing supply."
Server maker Super Micro Computer said on its May 5 earnings call that fiscal third-quarter revenue of $10.2 billion was "impacted by customers' site-readiness delays," as several customer sites, like data centers, were not yet equipped with the equipment needed to power cloud capabilities.
Arista declined to provide further comment on the impact of these supply shortages. Arm, Intel, and Super Micro didn't immediately respond to Barron's requests for comment.
Strong demand is normally a positive for companies and their stocks, but as supply constraints continue, investors should be prepared for more impacts to revenue growth, margins, and deal timings.
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