AI & the Hardware Lottery

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The current enthusiasm for artificial intelligence, a phenomenon I view with the detached amusement one reserves for particularly extravagant house parties, is predicated on a staggering appetite for computational power. Goldman Sachs anticipates, with the sort of optimistic certainty favoured by investment banks, that a sum exceeding half a trillion dollars will be devoted to related capital expenditure by 2026. The bulk of this, naturally, will flow towards the fabrication of data centre hardware – the chips, the memory, the networking – a distinctly unglamorous arena for such a revolutionary undertaking.

It is a curious asymmetry. While the consumer-facing applications of this technology – the chatbots, the image generators – operate largely on hope and borrowed money, the underlying infrastructure is, for the moment, a comparatively solid proposition. This suggests a strategy, if one is inclined to indulge in such things, of backing the pick-and-shovel merchants rather than the gold prospectors. Two companies, Micron Technology (MU 2.61%) and Broadcom (AVGO 1.02%), present themselves as plausible beneficiaries of this digital rush.

Micron Technology

Micron’s recent performance – a threefold increase in share value over the past twelve months – is, admittedly, rather startling. One might almost suspect competence. The demand for memory hardware, driven by the insatiable maw of artificial intelligence, has, for the time being, outstripped supply. This, of course, cannot last. The history of technology is littered with booms and busts, and memory chips are notoriously susceptible to cycles of overproduction and price collapse. However, for the moment, Micron finds itself in a favourable position.

For years, Micron languished, a victim of commoditization. Its products were, shall we say, indistinguishable from those of its rivals. This led to a relentless price war, and a corresponding lack of investor enthusiasm. The arrival of generative AI has, temporarily, disrupted this pattern. Revenue jumped 57% in the last quarter, fuelled by purchases from cloud data centres. Whether this constitutes a genuine turning point, or merely a temporary reprieve, remains to be seen. The company anticipates continued shortages until 2027, which provides a convenient, if somewhat optimistic, narrative for investors.

At a forward price-to-earnings multiple of 12, Micron appears relatively inexpensive, particularly when compared to the stratospheric valuations of companies like Nvidia (whose forward P/E stands at 22). This discrepancy suggests that the market, with its usual blend of irrationality and short-sightedness, has yet to fully appreciate Micron’s potential. Or, of course, it simply recognises the inherent risks involved.

Broadcom

The financial realities of generative AI are, to put it mildly, sobering. Companies like OpenAI and Anthropic are projected to burn through tens of billions of dollars in 2026. This profligacy is, in part, attributable to the exorbitant cost of Nvidia’s graphics processing units. Broadcom offers an alternative, in the form of application-specific integrated circuits – custom chips tailored to specific workloads.

The appeal of custom chips is straightforward: they eliminate unnecessary features, reducing both cost and operational complexity. Broadcom has recently secured several lucrative contracts with leading AI companies, including a strategic partnership with OpenAI to deploy 10 gigawatts of AI-designed accelerators. Furthermore, the company is a key supplier to Alphabet’s Google, which designs its own Tensor Processing Units to compete with Nvidia. The market for custom chips appears poised for continued expansion, as clients seek to reduce costs and improve profitability.

Broadcom’s fourth-quarter revenue jumped 28% year-over-year, driven by a 74% surge in AI semiconductor revenue. At a forward P/E multiple of 31, the shares trade at a premium. This, however, seems reasonable, given the company’s relatively stable business model and its potential to capture market share from Nvidia as the AI industry matures. One might even venture to suggest that Broadcom represents the more sensible investment.

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2026-02-11 00:52