Four of the biggest purchasers of servers in North America are Meta Platforms (META 0.80%), Microsoft (MSFT 0.13%), Alphabet (GOOG +1.61%)(GOOGL +1.75%), and Amazon (AMZN +1.63%). These cloud giants and their rapid growth have been a major source of demand for companies that make components that go into those servers. In 2022, for example, Meta ramped up its server procurement quantities by nearly 20%, according to TrendForce.
Times are now changing. An uncertain economy is leading all four cloud giants to pull back on server purchases in 2023. Microsoft and Amazon have already warned that demand for cloud computing services is slowing as customers look to slash cloud bills and optimize usage, while both Meta and Google are feeling the impact of a slumping e-commerce market.
For 2023, Meta now reportedly plans to reduce server procurement by around 3% compared to 2022. Microsoft will aim to grow procurement by 13.4%, down from a 17.6% growth rate in 2022, while Alphabet and Amazon are planning to boost purchases by 5.2% and 6.2%, respectively. Notably, Amazon's growth rate in 2023 will be less than half of what it was in 2022.
A major headwind for Intel and AMD
One of the pricier components that go into a server is the CPU. While there are options beyond the industry-standard x86 server chips that Intel (INTC 3.75%) and Advanced Micro Devices (AMD 0.17%) sell -- Amazon designs its own ARM-based Graviton chips, for example -- Intel and AMD account for the overwhelming majority of server CPU shipments.
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Intel has already reported disastrous fourth-quarter results for its data center segment. The chip giant saw data center sales tumble 33% year over year, while operating profit for the segment evaporated. AMD is actively winning market share, but it won't be immune to a downturn in demand.
Most troubling for Intel and AMD in the TrendForce report is a tidbit about demand for the latest server chips from both companies. Because inventory reductions across the supply chain have been a slow process, production of servers powered by Intel's Sapphire Rapids and AMD's Genoa chips has reportedly been reduced.
While Microsoft is still planning a significant increase in purchases this year, TrendForce doesn't rule out a downward correction. Corporate downsizing and layoffs could hurt sales of Microsoft's various software products, while cloud computing customers are actively working to spend less. Alphabet, on the other hand, is reportedly not satisfied with the total cost of ownership of Sapphire Rapids- and Genoa-based servers.
Demand for server chips will eventually bounce back, but Intel and AMD may be in for a long period of subdued demand.
Micron is in trouble
Memory chips are another component that goes into servers. The big difference between CPUs and memory chips is that memory chips are largely a commodity, meaning that pricing is dictated by supply and demand.
There's already an unprecedented downturn occurring in the memory chip market. Micron (MU +4.44%) has said that this downturn is the worst in over a decade. Initially, plunging demand for PCs and smartphones drove demand and pricing for consumer memory chips lower. Now, the same story is playing out in the market for server memory chips.
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TrendForce expects average selling prices for server DRAM to tumble by 20% to 25% in the first quarter compared to Q4. Micron warned in its earnings report in December that cloud demand would be below the historical trend in 2023, but the downturn may be worse than the company expected. TrendForce's estimate for server DRAM price declines has worsened in just a few weeks, and there's still room for the cloud giants to slow down purchases further.
Meanwhile, memory chip market leader Samsung doesn't appear to be slowing down production or investments in any meaningful way. That could change, but for now, far too many memory chips are being made.
A rough 2023
It's going to be a rough year for the semiconductor market in general. Gartner predicts a 3.6% decline in global semiconductor revenue, and that slump will be much worse in some areas. Gartner made this prediction in November, when enterprise demand was still strong, so the ultimate decline may be greater as the cloud giants and other big buyers of servers and components pull back.
In the long run, demand for semiconductors should rise as chips find their way into a growing assortment of products. But for now, the semiconductor industry is facing a post-pandemic reckoning.
