This is The Takeaway from today's Morning Brief, which you can sign up to receive in your inbox every morning along with:
The chart of the day
What we're watching
What we're reading
Economic data releases and earnings
Investors are salivating in anticipation of Nvidia’s earnings today after the close of trading, with analysts rushing to boost their estimates.
The big question, of course, is whether Nvidia can live up to AI hype. But perhaps the bigger question for investors is what other companies are already benefiting and monetizing demand for artificial intelligence.
The answer right now seems to be none — or at least none near the scale at which Nvidia is already profiting. But there are firms, both chipmakers and those in the larger AI ecosystem, that are starting to see revenue come in related to AI, with the promise (they say) of much more.
One of the lesser-known names making an AI pitch is Synopsys (SNPS). Chipmakers use the company’s software to design and verify their products. Synopsys’s incoming CEO Sassine Ghazi told Yahoo Finance Live that AI currently accounts for about 10% of sales, and is only in its early stages.
According to Ghazi, there are two factors shaping chip demand: the trend toward "everything is smart" (fridge, car, watch), and AI.
"With AI, in order to make it happen and a reality, you need more sophisticated chips in the cloud or in the data center as well as more sophisticated chips on the edge. With those two factors, the demand for semiconductors is unprecedented," said Ghazi, who is set to succeed founder Aart de Geus as CEO on Jan. 1.
Synopsys last week reported third quarter revenue rose by 19% to $1.49 billion, and forecast fourth quarter earnings that beat analysts’ estimates. Earlier in the week, it announced a new contract with Intel to develop intellectual property for the company’s new factories, which will increasingly involve AI.
“When you look at the engineers available to develop and design these chips, they are at an all-time shortage,” Ghazi said. “This is where Synopsys plays a huge role in the automation and modernization of the chip design. You can implement AI for chip design where you can reduce the tasks from many engineers to fewer engineers in a much shorter time.”
All of that said, most of the current demand for chips is still being driven by the growth of Internet of Things (IoT), smartphones, and other processes that don’t involve generative AI.
Like Synopsys, Applied Materials (AMAT) sees most of the demand for AI in its future. The largest manufacturer of chipmaking equipment last week reported earnings, saying equipment for AI now accounts for 5% of its total sales, compared with 20% for data center and 10% to 15% for IoT. AMAT chief financial officer Brice Hill said peers have discussed a growth rate of 30% to 50% for AI demand. “So if you view 5% as a relatively small amount, we do think that it's growing rapidly and will be an important workload going forward,” he said on the call.
Of course, some investors want AI to be monetized now and aren’t willing to wait. Matthew Bryson, who covers the semiconductor industry as senior vice president of hardware equity research at Wedbush, says Nvidia is the way to go.
“I think it’s easiest to buy Nvidia and forget it,” he said. And he said it’s less important what Nvidia reports in terms of exact numbers and more important what it discusses around AI demand.
“There is a ton of demand out there right now,” Bryson said. “It’s not being satisfied. It takes 40-plus weeks to get it from Nvidia. There’s just not enough supply.”