NVIDIA has dominated the stock market AI narrative, captivating investors and the media after soaring 2,190% over the past five years and briefly becoming the world’s most valuable company (it is currently the number 2).
However, Nvidia is far from the only opportunity in the AI or semiconductor space. In fact, one chipmaker just reported more than 400% year-over-year data center revenue growth and 84% overall revenue growth to $8.7 billion in its latest earnings report (for the quarter which ends on November 28).
I’m talking about Micron technology (NASDAQ:MU)the memory chip specialist that is surprisingly down 44% from its recent peak, despite that breakneck growth. 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 get into the buy 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 embedded device manufacturer, meaning it designs and manufactures its own chips such as Intel and Samsung do.
Memory chips are a highly cyclical business, prone to price fluctuations and industrial excesses, and owning its own foundries makes Micron more exposed to the boom-and-bust cycle of semiconductors. Running foundries requires a high level of capital, but the integrated business model allows the company to capture better margins when the business is performing 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, over the last decade, the stock has fallen 40% or more on four occasions before reaching a new all-time high.
Cyclicality and volatility are part of the risk of investing in Micron, but there is no doubt that semiconductor sector is booming right now, fueled by the explosive growth of AI, although some subsectors like PCs and smartphones are weaker. In addition to the spectacular growth of Nvidia, the industry leader Semiconductor manufacturing in Taiwan It recently reported 36% revenue growth in the third quarter to $23.5 billion, showing strong growth in the sector.
Noting strong demand for AI, management said data center revenue surpassed 50% of total revenue for the first time in the quarter, following a path first blazed by Nvidia in the chip sector. That now makes the vast majority of Micron’s revenue come from the data center, where AI computing takes place.
After reporting fiscal first-quarter earnings on Wednesday, Micron shares plunged as much as 19% on Thursday due to its weak second-quarter guidance. However, the company has a history of being conservative with its guidance, and the weakness was due to consumer markets such as smartphones, while the artificial intelligence business remains strong.
HBM, the part of the business closely tied to AI, is experiencing impressive growth. The company said it is on track to meet its HBM target for the fiscal year and achieve a “substantial record” in HBM revenue, including “significantly improved profitability and free cash flow” in the fiscal year.
Micron expects a sequential decline in revenue and adjusted earnings per share (EPS) in the second quarter, falling from $8.7 billion to $7.9 billion and for adjusted EPS to fall from $1.79 to $1.43.
However, management’s explanation for the weak outlook should reassure investors. Chief Executive 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 anticipate customer inventories will reach healthier levels by the spring, which will allow stronger drill bit shipments in the second half of the year.” fiscal and calendar year 2025.”
In other words, the issues caused by the weak second-quarter guidance appear to simply be a headwind for the company rather than a sustained headwind, and management expects a return to sequential growth in the second half of the year. That a stock falls 17% due to a specific cut in forecasts seems like a misinterpretation by the market and a buying opportunity for investors.
A short-term news-driven sell-off often presents a good buying opportunity, but Micron’s buying argument is more than that. Micron is clearly capitalizing on the AI boom with data center revenue increasing and with its largest customer, believed to be Nvidia, now accounting for 13% of its revenue. A close relationship with Nvidia is clearly a tailwind at this stage of the AI boom, as Nvidia just reported 94% year-over-year revenue growth in its third quarter report.
Micron’s results are notoriously uneven and cyclical, but it has the ability to generate huge profits under the right circumstances, and these appear to be taking shape as the AI boom unfolds. For example, Micron expects HBM’s addressable market to grow from $16 billion in 2024 to $64 billion in 2028 and $100 billion in 2030. Even if it maintains its market share in that segment, Your HBM income will increase fourfold by four. years and 6x and six years.
Finally, Micron stock is also much cheaper than its AI and chip peers, trading at a price Direct P/E from only 10 according to this year’s estimates. While those estimates are likely to drop after its guidance, Micron still looks like a bargain at any price close to that.
Micron investors should follow the chip and AI cycle closely, but there is plenty of upside potential in the stock. Returning to its peak this summer would mean a 75% jump for the stock, and the stock could continue to rise even higher over the next year or two, especially if it continues to see strong growth in the data center.
Micron is the rare AI stock that offers fast growth and good value right now.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Intel, Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
