How Big Is the Datacenter AI Chip Market?


By: Mary Jander

This could be the Year of the AI Chip. Despite claims that the artificial intelligence hype cycle is slowing a bit, AI component news keeps coming as 2024 gets underway. And there are predictions that strong, even meteoric, growth could build this year. The question is, how high can the upward line go?

Late in 2023, Advanced Micro Devices (Nasdaq: AMD) boldly declared that the total addressable market (TAM) for datacenter AI chips will reach $400 billion by 2027, representing a compound annual growth rate (CAGR) of more than 70%. AMD’s prediction got mixed reactions (more on that momentarily), but it spoke to the momentum behind the components designed to process the large language models (LLMs) at the heart of generative AI (GenAI) applications.

The size of the potential market for these chips is demonstrated by the success of NVIDIA (Nasdaq: NVDA), the market leader in graphics processing units (GPUs) used to train LLMs. NVIDIA’s stock price has grown 217% over the past year. Over the past three years, it's grown 140%.

In its latest earnings report in November, NVIDIA posted revenues of $18.12 billion, of which $14.51 billion was datacenter revenue. Overall sales were up 206% year-over-year, and datacenter sales were up 279% in the same period. Added to this is the well-known shortage of H100 GPUs NVIDIA has experienced. All of this makes it conceivable that datacenter chip sales are on a steep upward trajectory. The question is whether that line tracks as high as AMD hopes.

Given that NVIDIA by nearly all accounts owns at least an 80% share of the datacenter AI GPU market, it's possible to envision sizable growth over the next three years. But a whopping $400 billion TAM would call for NVIDIA to perform even better than it has and for other players to exceed expectations as well.

How High Can the Market Go?

One well-known Wall Street analyst wrote in detail about what AMD’s projected TAM would mean for the market. This kind of growth would have lots of huge implications for how cloud providers allocate capital spending (capex) in the future.

“Nvidia and all other silicon suppliers would massively beat expectations, even if this scenario only partially materializes,” stated Pierre Ferragu, managing partner at New Street Research, in a post on X on January 10, 2024. In a chart on the same post, he indicated that the top four public cloud providers – presumably AWS, Microsoft Azure, Google Cloud, and Oracle – would have to increase their datacenter capex by 150% over what his firm currently projects for 2027. Tier 2 providers would have to grow their datacenter capex by 253% over New Street’s projection, and other spenders would have to exceed their New Street number by 208%.