AI phones may keep US chip sector afloat as data center growth slows

AI-powered smartphones could rescue the US chip industry as data center investments begin to slow. With tech giants like Meta, Google, and Microsoft scaling back their spending, the semiconductor market risks a significant downturn.

Doug Lefever, CEO of chip-testing machine giant Advantest, warns that any cutbacks in data center development could ripple through the supply chain with brutal force.

“The concentration of hyperscalers in the market makes any slowdown in data center buildout a major issue,” Lefever said. While he avoided labeling it a “bubble,” he cautioned about cycles that could hit the industry hard.

And with no immediate slowdown in sight, all eyes are on the next possible growth catalyst: artificial intelligence smartphones.

AI smartphones: Waiting for the killer app

AI smartphones are still a gamble, but the potential for a breakout moment keeps the industry on edge. Lefever described demand as “slow” but predicted a revolution if the right app triggers mass adoption.

“Everyone’s waiting for that killer app. When it happens, people will replace their phones like crazy,” he said. For companies like Advantest, the stakes are high. Based in Tokyo, the company supplies chip-testing machines critical to Nvidia’s advanced GPUs.

Advantest holds more than half of the global market in this niche, and demand for its equipment has exploded as semiconductors become more advanced. These machines now test chips 10 to 20 times throughout production, compared to just a handful of tests five years ago.

The testing process has grown even more complex with Nvidia’s new Blackwell GPUs, which require three to four times longer to test than their predecessors. This trend allowed Advantest to raise its fiscal 2024 income target by 16%, aiming for ¥122 billion ($792 million).

Increased demand has also driven massive stock gains. Advantest’s share price soared 80% this year and over 500% in the past five years. However, concerns about US-China tensions under President-elect Donald Trump briefly cooled investor enthusiasm.

US-China tensions and chip resilience

The company’s exposure to China has decreased, with 20–25% of its revenue now tied to the region. Although US sanctions want to restrict China’s chip production capabilities, Advantest has largely avoided direct impact.

When a major Chinese customer was hit by sanctions, Advantest quickly recovered lost sales through other clients. “We thought it could take a year to offset those losses, but it only took months,” Lefever said.

Despite these challenges, Nvidia continues to dominate Wall Street. The company’s stock, up more than 180% this year, has propelled its market cap to over $3 trillion. NVDA is now the second-most valuable company in the US and a top performer on the Dow Jones Industrial Average.

Retail investors are also fueling Nvidia’s momentum. The company has nearly doubled net inflows compared to the SPDR S&P 500 ETF Trust (SPY). It’s on track to surpass Tesla as the most-bought stock, a feat amplified by its 10-to-1 stock split earlier this year.

While Nvidia hasn’t experienced the inflated price-to-earnings multiples seen with Tesla or Palantir, its retail investor base remains substantial. This enthusiasm was evident during a New York City watch party in August, where fans gathered to celebrate Nvidia’s earnings report.

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