Corporations’ Shift to AI Initiatives Poses Challenges for Tech Hardware Vendors

by Warren Seah

Corporations are reprioritizing their budgets to invest in experimental artificial-intelligence (AI) projects. While this shift bodes well for Microsoft, it could spell trouble for tech hardware vendors.

In a recent survey conducted by Piper Sandler, 147 chief information officers shared insights into their future spending plans. The survey results indicate a potential moderation in IT budgets for 2023, with an aggregate growth rate of 3.6% year over year. This figure represents a decline of 1.3 percentage points compared to the findings from six months ago.

However, hidden within these numbers lies an important trend: Companies are placing greater emphasis on the development of new AI applications. Generative AI, in particular, has catapulted nine spots up the priority list, emerging as the foremost technology trend for the next three years. The survey also highlights that a significant three-quarters of CIOs are presently testing or implementing AI projects.

As a consequence of this AI-centric shift in enterprise spending, Microsoft (ticker: MSFT) stands to be a major beneficiary. The company stands to gain through increased demand for its Azure cloud-computing service and the introduction of new paid software features.

Recent evidence suggests that Microsoft is making substantial strides in both domains. According to Piper Sandler analyst Brent Bracelin, CIOs have expressed intentions to utilize more of Microsoft’s cloud services for AI purposes. Furthermore, Microsoft’s announcement of the upcoming AI-enabled Microsoft 365 Copilot software subscriptions, priced at $30 per user per month, has generated considerable excitement. This figure significantly surpasses Oppenheimer’s estimated price point of $20 per user and prompted a surge in investor interest. In fact, following this news, Microsoft stock witnessed a staggering increase of $102 billion in market value during a single trading session, propelling its shares to a record high this past Tuesday.

The Impact of AI on Hardware Suppliers

While Microsoft is thriving in the realm of AI, other vendors are encountering more difficulties. Based on responses from Chief Information Officers (CIOs), it is predicted that hardware suppliers, particularly computer server makers, will face budget pressures later this year.

Taiwan Semiconductor Manufacturing (TSM) provides further evidence of the AI-driven budget-shift trend. As a dominant player in the high-end chip manufacturing market, TSMC has valuable insights into market changes. According to TrendForce, TSMC has a 60% share of the third-party chip manufacturing business, followed by Samsung Electronics with 12%.

TSMC management recently reported a softening in semiconductor demand. They noted that the macroeconomic environment, expectations for China’s recovery, and end-market demand appeared weaker compared to three months ago. Since the majority of TSMC’s business comes from the declining smartphone and PC categories, the company significantly revised down its financial guidance for the year. They now anticipate a year-over-year decline of 10% in revenue.

Aligning with the findings of the CIO survey, TSMC also observed a notable increase in AI-related interest. However, this surge in AI orders did not compensate for the overall drop in semiconductor demand.

The most significant takeaway from TSMC’s earnings call was Chairman Mark Liu’s response to a question about whether AI would cannibalize data-center processors. Liu acknowledged that in the short term, AI would indeed divert sales from traditional server chips when cloud service providers have fixed capex budgets.

Considering the alignment between CIO sentiments and the insights from the world’s largest chip foundry, investors must be aware of the risks that AI could bring to computer server and server processor manufacturers.

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