As the spotlight remains on major players like Nvidia (NVDA) and Broadcom (AVGO), smaller specialized companies are increasingly becoming key contributors to the fast-growing sector of artificial intelligence (AI) spending. A recent report from Bank of America analyst Vivek Arya highlights several small- to mid-cap firms that are emerging as pivotal players in the semiconductor market, underscoring their vital role in the AI ecosystem.
In a call with reporters on December 19, Arya emphasized the significance of companies such as Credo, MKS Instruments, Advanced Energy, MACOM, and Teradyne. He noted that while these firms do not boast the towering margins characteristic of Nvidia, they are reaping benefits as primary providers of essential technologies in AI infrastructure.
The potential market for AI data center systems is staggering, with Bank of America projecting it will exceed $1.2 trillion by 2030, bolstered by a 38% compound annual growth rate (CAGR). While AI accelerators are expected to account for around $900 billion of this market, a significant $300 billion remains for necessary secondary technologies, including networking, cables, and power systems.
Arya provided a breakdown of how spending on AI hardware is allocated. For every $100 spent, between $15 to $20 is directed toward networking, with a substantial portion flowing into interconnects—wires and optical components that facilitate communication between GPUs. As the demand for AI clusters grows, these components are experiencing a direct spike in demand.
Among the highlighted companies, Arya pointed out Credo for its leadership in active electrical cables, a technology that data centers are increasingly prioritizing for maximizing “performance per watt.” He explained, “They want to make sure that all these GPUs talk to each other, very effectively.”
Another company of interest is Astera Labs, recognized for its advancements in high-speed connectivity through PCIe 6.0, which is essential for data transfer between computer motherboards and hardware. Arya noted, “They were the ones who invested in specific technologies … nobody cared about these categories. So now, they are benefitting from being the only people standing in those specific niche technologies.”
Other notable players include MKS Instruments and Advanced Energy, which supply the precision power and vacuum systems required for chip manufacturing. If Nvidia serves as the architect of AI technology, these firms provide the machinery and high-voltage power essential for keeping operations running smoothly. MACOM offers high-speed analog and optical components, enabling communication between various AI systems, while Teradyne‘s automated testing equipment ensures that these complex components function correctly before they are shipped.
However, caution is advised. Unlike Nvidia, which can command prices of up to $30,000 for a single GPU, companies like Credo and Astera face challenges including pricing compression. Arya remarked, “Of course, they are not going to get these multiples forever,” citing that transceiver prices can drop from $1 per gigabit to $0.50 in just a few months.
He elaborated on the harsh realities that these companies face: “They can never hold pricing right, so you will never see them quite grow as fast as the accelerator or the logic companies.” Currently, their gross margins hover between 35% to 40%, significantly lower than Nvidia’s exceptional margins, which exceed 70%.
The increasing importance of these small- to mid-cap companies in the booming AI sector underscores a broader trend in technology investment, where specialized players are carving out niches that could prove lucrative as the market evolves. While the path ahead may be fraught with challenges, the significant investment opportunities in essential AI technologies suggest that the contributions of these smaller firms will become increasingly crucial in the years to come.
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