Micron technology (NASDAQ:MU) published its results for fiscal year 2024 on September 25. The released data provides a clear indication that the memory chip market is popular thanks to favorable supply-demand dynamics.
Micron reported fourth-quarter revenue of $7.75 billion, a stunning 93% increase year over year. Furthermore, the company’s operating profit margin increased to a positive 22.5%, compared to a negative 30.1% in the same quarter last year, thanks to the recovery in memory prices. The improvements allowed Micron to report non-GAAP (generally accepted accounting principles) profit of $1.18 per share for the quarter, compared to a loss of $1.07 per share in the same period last year.
The company’s full-year revenue rose 61% to $25 billion. Adjusted earnings were $1.30 per share, compared with a loss of $4.45 per share in the same period last year. Better yet, analysts expect Micron to maintain this impressive level of growth in the coming fiscal years.
The growth forecast is not surprising, as the memory market has received a tremendous boost thanks to growing interest in all things artificial intelligence (AI). The rapid adoption of this technology created a need for more memory chips for various applications ranging from data centers to smartphones and vehicles to personal computers (PCs).
Memory makers like Micron say they plan to spend more money to increase their production capabilities. This is good news for Lam Research (NASDAQ:LRCX)a supplier of semiconductor equipment that depends on the memory market for a significant part of its turnover.
Let’s take a look at the reasons why buying Lam Research stock could be a smart move after Micron’s impressive results.
Increasing memory investments will be a boost for Lam Research
Micron management pointed out during the company’s last earnings conference call that capital expenditures in fiscal 2024 were $8.1 billion. That was an increase of 16% compared to the previous financial year. The company plans to spend $3.5 billion on capital expenditures in the first quarter of fiscal 2025, indicating a much higher run rate than last year.
For the full year, Micron expects investments to be in the mid-30s of sales. Based on the estimated revenue of $38 billion for the company, as seen in the chart earlier, capital investment could increase to $13.3 billion in fiscal 2025 (at 35% of revenue). That would be an increase of 64% over the previous year.
Lam Research generates 36% of its revenue from the sale of memory production equipment. This explains why the company’s outlook for fiscal 2025 (which started in July this year) is much better than last year’s performance. Lam Research’s revenue for fiscal 2024 fell 14% from the previous year to $14.9 billion due to an oversupply in the memory market due to weak demand from PCs and smartphones.
The company’s adjusted earnings also fell to $29 per share from $33.21 per share in fiscal 2023. However, improved capital spending by memory specialists like Micron will ensure solid growth for Lam’s revenue in the current fiscal year and beyond.
The improved top performance will also carry over to the bottom line.
These improvements are not surprising, as Lam points out that memory demand is on track to improve due to the growing need for high-bandwidth memory chips (HBM) used in data center graphics cards to train AI models. Additionally, Lam CEO Timothy Archer noted the following during the company’s earnings conference call in August:
However, as the applications of AI expand, we believe that inference at the edge will drive the growth of low-power DRAM and NAND storage content in enterprise PCs and smartphones. Investments in AI-enabled edge devices play particularly well to Lam’s strengths.
These AI-related catalysts are expected to drive memory chip market sales to $260 billion by 2029, up from just $89 billion last year. This explains why other memory manufacturers such as Samsung and SK Hynix are also predicting huge increases in their capital investments. For example, SK Hynix’s capex is expected to rise by as much as 75% next year as the company ramps up HBM production capacity to meet booming end-market demand.
Investments in Samsung’s Dynamic Random Access Memory (DRAM) are expected to increase 9% to $9.5 billion this year, followed by a bigger jump to $12 billion next year. Lam Research noted in its annual filing that Micron, Samsung, SK Hynix and Taiwanese semiconductor manufacturing are the ‘most important customers’.
Thus, the increase in capital expenditure by these companies will be a robust growth driver for Lam Research, which explains why revenue and profits could rise nicely in the future.
The stock’s attractive valuation makes it worth buying
With a forward price-to-earnings (P/E) ratio of 28 and a forward earnings multiple of 22, investors are currently getting a good deal on Lam Research stock given the expected healthy upside to the bottom line. These multiples represent a discount on the Nasdaq-100 index’s earnings multiple of 32 (using the index as a benchmark for technology stocks).
At the same time, Lam’s price-to-earnings-growth ratio (PEG ratio), a forward-looking valuation metric that takes into account the company’s growth potential, makes buying this semiconductor stock a no-brainer.
A PEG ratio of less than 1 means a stock is undervalued relative to the earnings growth it will deliver. And as the chart shows us, Lam Research is indeed undervalued on this front. That’s why investors looking to add an AI stock to their portfolio would do well to buy Lam Research before it starts to rise.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds and recommends Lam Research and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
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