Nvidia has dominated the AI story in the stock market, captivating investors and the media after rising 2,190% over the past five years and briefly becoming the world’s most valuable company (currently No. 2).
However, Nvidia is far from the only option in AI or semiconductors. One chipmaker just reported more than 400% year-over-year data center revenue growth and 84% total revenue growth to $8.7 billion in its latest earnings report (for the quarter ending November 28).
I’m talking about Micron technology (NASDAQ:MU)the memory chip specialist that, despite this enormous growth, is surprisingly down 44% from its recent peak. That discount and its potential in AI make the stock an attractive buy right now. Let’s first review the company’s recent results and then dive into the buying case.
Image source: Getty Images.
Micron is a leader in memory chips, including DRAM, NAND and high-bandwidth memory (HBM). The company is also an integrated device manufacturer, meaning it both designs and produces its own chips Intel And Samsung Doing.
Memory chips are a highly cyclical industry, sensitive to price fluctuations and industry gluts, and owning its own foundries gives Micron more exposure to the boom and bust cycle in the semiconductor industry. Running foundries requires high levels of capital, but the integrated business model allows the company to better utilize margins when the business performs well.
The chart below, which shows Micron’s price compared to its previous high, gives an idea of how volatile the stock has been. As you can see, the stock has fallen 40% or more four times in the past decade before hitting a new all-time high.
Data per YCharts.
Cyclicity and volatility are part of the risk of investing in Micron, but there is no doubt that the semiconductor sector is currently experiencing a boom, driven by the explosive growth of AI, although some subsectors such as PCs and smartphones are weaker. In addition to Nvidia’s enormous growth, the sector is also changing Taiwanese semiconductor manufacturing recently reported 36% revenue growth in the third quarter to $23.5 billion, indicating strong growth in the sector.
Management noted strong demand for AI and said data center revenue surpassed 50% of total revenue for the first time in the quarter, following a path Nvidia first set in the chip sector. That now gets the vast majority of Micron’s revenue from the data center, where AI computing takes place.
After reporting fiscal first-quarter results on Wednesday, Micron shares fell as much as 19% on Thursday on weak second-quarter guidance. However, the company has a history of conservative policies, and the weakness has been due to consumer markets such as smartphones, while the AI business remains strong.
HBM, the part of the company closely linked to AI, is experiencing impressive growth. The company said it is on track to achieve its fiscal year HBM target and achieve a “substantial record” in HBM revenues, including “significantly improved profitability and free cash flow” in the fiscal year.
Micron expects sequential declines in revenue and adjusted earnings per share (EPS) in the second quarter, from $8.7 billion to $7.9 billion, and a decline in adjusted earnings per share from $1.79 to $1.43 .
However, management’s explanation for the weak outlook should reassure investors. CEO Sanjay Mehrotra said the company had previously warned that seasonality and customer inventory reductions in consumer-facing segments such as smartphones would impact second-quarter results. He added: “We are now seeing a more pronounced impact from customer inventory reductions,” and continued: “We expect this adjustment period to be relatively short and expect customer inventories to reach healthier levels in the spring, driving stronger bit shipments will be possible in the second half of 2019.” fiscal and calendar 2025.”
In other words, the issues that caused the weak second-quarter outlook look like a speed bump for the company rather than a sustained headwind, and management expects to return to sequential growth in the second half of the year. If a stock falls 17% after a one-time guidance cut, it feels like a misread by the market and a buying opportunity for investors.
A sell-off driven by short-term news often provides a good buying opportunity, but there’s more to Micron’s buying case than that. Micron is clearly benefiting from the AI boom with data center revenues surging, and with its largest customer, likely Nvidia, now accounting for 13% of its revenue. A close relationship with Nvidia is clearly a boost at this stage of the AI boom, as Nvidia just reported 94% year-over-year revenue growth in its Q3 report.
Micron’s results are notoriously lumpy and cyclical, but the company has the ability to generate huge profits under the right circumstances – and those appear to be taking shape as the AI boom develops. For example, Micron expects the addressable market for HBM to increase from $16 billion in 2024 to $64 billion in 2028 and to $100 billion in 2030. Even if it simply maintains its market share in that segment, HBM revenues will decline in four years be four times as high. years and 6x and six years.
Finally, Micron shares are also much cheaper than their AI and chip stocks, with a price-to-earnings ratio of just 10 based on this year’s estimates. While these estimates are likely to drop after the guidance, Micron still seems like a bargain at any price close to that.
Micron investors should keep a close eye on the chip and AI cycle, but there is a lot of upside potential in the stock. A return to its peak this summer would represent a 75% jump for the stock, and the stock could continue to rise over the next two years, especially if it continues to see strong data center growth.
Micron is the rare AI stock that currently offers fast growth and good value.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Down 44%, This AI Stock Is a Screaming Buy Right Now (Hint: It’s Not Nvidia) was originally published by The Motley Fool
