Chip Shortages Could Pump the Brakes on Data Center Boom

Many tech hyperscalers have revealed ambitious plans to construct AI data centers in different jurisdictions. Their plans are lofty; their finances are nearly endless. However, one hurdle could stand in the way of realizing these expansion dreams, and that is a shortage of the needed AI chips.

AI chips come in many forms, and high-bandwidth memory chips are turning out to be the Achilles’ heel that could slow down the AI data center boom. AI companies seem unable to lay their hands on enough of these HBM chips at the time they need them.

To understand how serious this shortage is, consider the growing list of companies that have either started or are planning to make their own chips. Meta is slated to start rolling out its MTIA chips (Iris chips) this September and plans to unveil a new generation of those chips every six months. For many years, Google has been producing its own TPUs and plans to ramp up their production. Microsoft has also been designing and producing AI chips.

Chip manufacturing isn’t a core function of those companies, but they felt pushed to make their own chips in order to scale their data center footprint without having to entirely depend on other companies that would charge them a premium while also requiring lengthy wait-times before the needed components are delivered.

Another indicator of how serious the chip shortages are is the way the share prices of companies that make these chips have skyrocketed over the last one or two years. Investors are clamoring to own stock in those companies because they are raking in record revenues as prices soar amid a rush by clients to purchase inventory.

The situation has become so serious that manufacturers of other consumer electronics, such as smartphones and laptops, have been compelled to raise product prices because the soaring cost of the needed chips could no longer be absorbed entirely by the companies without passing on the added costs to consumers.

For example, Microsoft has added up to $500 to the price of its Surface PCs and laptops as a result of the high cost of the chips used in the production of those devices. Many other companies are following suit, and consumers are beginning to feel the pinch.

The big question now remains: can companies like Micron Technology Inc. (NASDAQ: MU) ramp up their production of AI chips quickly enough to support the data center build-out, or will we see a slowdown in these facilities as hyperscalers tone down their ambitions in response to a supply shortage that is unlikely to be fixed quickly enough?

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