The growth potential for data-center servers in the age of artificial intelligence (AI) surpasses even the monumental rise of the internet. However, analysts caution that building too much too soon carries significant risks.

During the summer, Nvidia Corp., a leading graphics-processing unit provider, reported a staggering 141% surge in quarterly data-center sales to $10.32 billion. This remarkable growth resulted from the high demand for AI-focused chipsets from hyperscalers and public-cloud providers.

Bernstein analyst Toni Sacconaghi reminds investors that not long ago, the server market was a moderate single-digit-growth industry, despite the transformative power of the internet. He points out that over the past 25 years, the compound annual growth rate for servers was only 3%. Furthermore, there was virtually no growth between 1998 and 2014, a period encompassing the internet's expansion.

While remaining optimistic about AI in the long term, Sacconaghi expresses concerns about the rapid pace of AI-infrastructure development. He suggests that a necessary digestion period may be required, potentially leading to a pullback in AI-related stocks. In industry terms, a "digestion period" refers to a period of excess supply (a glut).

Sacconaghi acknowledges the profound impact of AI on the world and outlines three potential outcomes. However, he emphasizes that he does not have strong convictions regarding their likelihood.

Firstly, although numerous consumer-facing AI applications, such as OpenAI's ChatGPT, are in development, many lack a clear path to monetization. Secondly, while AI has the potential to drive a substantial increase in business spending, its adoption is still in its early stages and may not meet medium-term expectations. Finally, data-center growth could significantly cannibalize traditional servers and IT spending.

In conclusion, the future of data-center servers is poised for exponential growth, thanks to AI. Nevertheless, it is essential to strike a balance between rapid expansion and the associated risks. Only time will tell how AI will ultimately shape our world and industries.

AI Market Growth and the Impact on Tech Infrastructure Companies

As artificial intelligence (AI) continues to mature, it is predicted that Nvidia will not be the sole beneficiary of its success. Analysts at Bank of America (BofA) believe that other tech infrastructure companies will also thrive in this growing market.

While there may be some cannibalization within the industry, IT decision-makers are likely to struggle with justifying spending cuts on existing initiatives that are already yielding productivity gains. This indicates that the demand for AI solutions is expected to grow without significantly impacting other ongoing projects.

According to Bernstein analyst Sacconaghi, the AI market should be examined through the perspective of previous tech infrastructure buildouts and failures. For instance, the server market took approximately six to seven years to double after 2014. In the case of cloud service providers, the hyperscale server market has been experiencing an annual growth rate of around 17% since 2017, largely due to cannibalization of traditional servers.

Sacconaghi also noted that the projected compound annual growth rates of 75% or more over the next three years, with a doubling of the server market, represent an unparalleled level of growth.

Interestingly, it is not just major players like, Microsoft Corp., and Alphabet Inc.'s Google that are contributing to this surge in demand. Analysts have been surprised by the interest from smaller cloud and consumer customers as well.

Nvidia's stock has seen a significant increase of 200% year-to-date, while the PHLX Semiconductor Index has risen by 37%. Dell and HP Enterprise have also experienced positive growth with increases of 69% and 6% in their respective shares.

In summary, as the AI market continues to expand and mature, Nvidia won't be the only company benefitting from its growth. Other tech infrastructure companies like Dell and HP Enterprise are expected to thrive as well. With unprecedented growth projections, this market offers significant opportunities for those involved in the industry.

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