AI Smartphones Could Fuel Chip Demand Even as Data Center Spending Cools: Nvidia Supplier

The rapid growth of artificial intelligence is creating a dynamic two-sided demand for semiconductors, with data centers and AI-powered smartphones emerging as key drivers. However, the global chip industry is bracing for potential turbulence as data center investment cycles mature, according to Doug Lefever, CEO of Advantest, a leading supplier of chip testing equipment to Nvidia, as reported by the Financial Times.

Lefever expressed concern over the potential for slowed AI-related spending by major US tech companies like Meta, Google, and Microsoft, which have heavily invested in data centers to support their AI initiatives.

"A fall-off may not last long and then it may go right back up, but because of the concentration [of hyperscalers] right now in the market, any slowdown in the data center buildout is going to have big reverberations in the supply chain," Lefever said.

However, Lefever highlighted a potentially offsetting force: the increasing demand for AI-enabled smartphones.

"Everyone is holding their breath, waiting for the killer app with the AI handsets... if that happens and people start replacing their phones, it's going to be crazy," Lefever noted.

Advantest, a key supplier of testing equipment for Nvidia's high-end graphics processing units (GPUs), is well-positioned to benefit from both trends. The company controls over half of the semiconductor testing market, and demand for its services has surged as chips become more advanced and expensive.

This dominance has driven Advantest's share price up by over 80% in the past year and 500% over five years. While the company recently experienced a dip in December amid uncertainty surrounding US policy towards China under the Trump administration, Advantest remains a vital player in the global semiconductor supply chain.

Advantest's chips are crucial in the testing process, with advanced chips being tested 10 to 20 times during their production, compared to single-digit testing cycles just five years ago. This increased testing intensity has significantly boosted Advantest's revenue, prompting the company to raise its net income target for 2024 by 16%.

Despite geopolitical complexities, Advantest remains confident about the long-term demand for its testing equipment, which is crucial for the production of advanced chips. The company, operating in 18 countries, still derives 20% to 25% of its revenue from China, a level Lefever says he's comfortable with.

"We thought it could be a year, and it was months," Lefever said, referring to the resilience of the market in compensating for sanctions-related losses from a major Chinese company. "It was remarkable."