Data Centers Part IV: Addressing the Looming Threats to Analog – Capacity & China – TD Securities
By: Joshua Buchalter CFA, Sam Reiff CFA, Lannie Trieu CFA, Matthew D. Ramsay, Krish Sankar
Massive investments are being made at leading-edge semiconductor facilities in a geopolitical "AI arms race," but the over USD 200 billion mature-node market is similarly seeing supply side disruption marked by increased investment, particularly in China. In this report, we analyze implications on long-term supply and demand of mature node semiconductors and where there is the most risk of disorder from China investment.
The economic and geopolitical importance of "legacy" semiconductors has been illuminated by shortages that disrupted global supply chains in multiple industries. We have written extensively about the fundamentals of these shortages in previous initiation reports. The industry has reacted by meaningfully increasing capacity investment.
At the same time, China has been cut off from equipment needed to manufacture leading-edge digital semis with its goal of self-sufficiency in more mature technologies emboldened. Investors are understandably concerned that structural overbuild could disrupt supply and demand equilibrium driving pricing pressure and underutilization.
Our industry-wide supply and demand model suggests mature node semis capacity will not fall victim to structural oversupply as we forecast through-cycle utilization rates around optimal 80% levels. Increased investment and a modest move back toward internal manufacturing from foundries will inherently drive more cyclical revenue and margins. However, we argue this will be countered by growing exposure to less price-sensitive and stickier auto and industrial sockets at the expense of consumer-facing verticals that were larger drivers of growth in the 2000s and 2010s.
China’s market share to date is limited, but its semicap Wafer Fab Equipment (WFE) spending has not been. Progress should be monitored closely given its potential to disrupt our more benign supply and demand conclusions. We examine trends by component and application exposure across the space, as not all risk is created equally.
We built a comprehensive model to forecast capacity by component group, process node, and geography, indicating ~4% growth for analog and trailing edge logic and discrete capacity through the decade against our estimate of high single-digit (%) demand growth. Our forecast indicates utilization near 80% through-cycle not predicated on a sharp cyclical recovery near term.
China has gained less than 200bps of market share over the last two years, but there are important differences by component and end market. We deconstructed China’s share gains to date and where capacity is being built to inform our view of where there is more industry risk and insulation. We also estimate that China’s semiconductor ambitions are currently accounting for ~30% of industry-wide WFE across products.
Subscribing clients can read the full report, The Next Datacenter Decade, Driven By Acceleration & GenAI – Ahead Of The Curve, on the TD One Portal
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Director, TMT – Semiconductors Research Analyst, TD Cowen
Director, TMT – Semiconductors Research Analyst, TD Cowen
Director, TMT – Semiconductors Research Analyst, TD Cowen
Joshua Buchalter is a director covering the semiconductor and mobility technology sectors. He has been working on the semiconductors team at TD Cowen since 2018.
Prior to joining TD Cowen, Mr. Buchalter covered the semiconductor sector as an equity research associate at Oppenheimer & Co and Needham & Co.
Mr. Buchalter received a BSc in economics from Tufts University, an MBA in finance and accounting from Boston College, and is a CFA® charterholder.
Managing Director, TMT – Semiconductors Research Analyst, TD Cowen
Managing Director, TMT – Semiconductors Research Analyst, TD Cowen
Managing Director, TMT – Semiconductors Research Analyst, TD Cowen
Matthew D. Ramsay is a Managing Director and senior research analyst covering the semiconductor sector. Prior to joining TD Cowen, Mr. Ramsay worked as an analyst at Canaccord Genuity, where he also covered semiconductor stocks. He previously worked as a senior design engineer at AMD and held senior performance engineering roles at Sun Microsystems and Spansion.
Mr. Ramsay holds a BS in computer engineering from the University of Evansville, where he was a NCAA Division I Men’s Soccer athlete. He holds an MS in electrical engineering & computer architecture from the University of Wisconsin, and an MBA from Indiana University’s Kelley School of Business.
Managing Director, TMT – Semiconductor Capital Equipment, IT Hardware Research Analyst, TD Cowen
Managing Director, TMT – Semiconductor Capital Equipment, IT Hardware Research Analyst, TD Cowen
Managing Director, TMT – Semiconductor Capital Equipment, IT Hardware Research Analyst, TD Cowen
Krish Sankar is a Managing Director and Senior Research Analyst covering the semiconductor capital equipment and IT hardware sectors. He joined TD Cowen’s Technology, Media & Telecom team in February 2018. Prior to joining TD Cowen, Mr. Sankar worked as a top-ranked analyst at Bank of America Merrill Lynch for almost 14 years, where he covered the semiconductor capital equipment, EDA software, and alternative energy sectors. Before joining Bank of America-Merrill Lynch, Mr. Sankar was a product manager at Applied Materials. Mr. Sankar is ranked among the top semiconductor capital equipment analysts in Institutional Investor polls.
Mr. Sankar holds a B.Tech (with Honors) in ceramic engineering from IIT (BHU), Varanasi, and an MS in materials science and engineering from the University of Minnesota.
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