Nvidia has dominated the AI narrative in the stock market, captivating investors and the media after soaring 2,190% over the past five years and briefly becoming the world's most valuable company (it's No. 2 at the moment).
However, Nvidia is far from the only opportunity in the AI or semiconductor space. In fact, one chipmaker reported 400%-plus year-over-year data center revenue growth and overall revenue growth of 84% to $8.7 billion in its most recent earnings report (for the quarter ending Nov. 28).
I'm talking about Micron Technology (NASDAQ: MU)the memory chip specialist is surprisingly down 44% from its recent peak, despite that blowout growth. That discount and its potential in AI make the stock an appealing buy right now. Let's review the company's recent results first 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 integrated device manufacturer, meaning it designs and manufactures its own chips. Intel a Samsung make
Memory chips are a highly cyclical business, prone to price fluctuations and industry shortages, and owning its own foundries makes Micron more exposed to the boom and bust cycle in semiconductors. Running foundries requires a high level of capital, but the integrated business model enables the company to retain better profits when the business is performing well.
The chart below, which shows Micron's price relative to its previous high, gives a sense of how volatile the stock has been. As you can see, over the past 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 about it semiconductor sector is currently booming, fueled by the explosive growth of AI, although some sub-sectors such as PCs and smartphones are weaker. In addition to Nvidia's blowout growth, industry bellwether Taiwan Semiconductor Manufacturing recently reported revenue growth of 36% in the third quarter to $23.5 billion, showing strong growth in the sector.
Citing strong demand for AI, management said data center revenue topped 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 from the data center, where AI computing happens.
After reporting fiscal first-quarter earnings on Wednesday, Micron's stock plunged as much as 19% Thursday on its weak guidance for the second quarter. 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 AI business remains strong.
HBM, the part of the business closely associated with AI, is seeing impressive growth. The company said it was on track to meet its HBM target for the financial year and hit a “significant record” in HBM revenue, including “significantly improved profitability, and free cash flow” in the financial 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 slide 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 seasonal declines and customer inventory in consumer-facing segments like smartphones would impact Q2 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 that customer inventories will reach healthier levels by spring, enabling stronger bit loads in the second half of fiscal and calendar 2025.”
In other words, the issues causing the weak guidance for the second quarter look like just a speed bump for the company rather than a sustained headwind, and management expects a return to sequential growth in second half of the year. For a stock to fall 17% on a one-time guidance breach feels like a misread by the market and a buying opportunity for investors.
Short-term news-driven sell-offs often present a good buying opportunity, but there's more to the case for buying Micron than that. Micron is clearly capitalizing on the AI boom with the surge in data center revenue, and with its biggest 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 Q3 report.
Micron's results are notoriously lumpy and cyclical, but it has the ability to generate huge profits under the right circumstances — and those seem to be shaping up as the AI boom winds down. For example, Micron expects the addressable market for HBM to jump from $16 billion in 2024 to $64 billion in 2028 and to $100 billion in 2030. Even if only maintaining its market share in that segment, its HBM revenue will be up 4x in four. years and 6x and six years.
Finally, Micron stock is also significantly cheaper than its AI stock and chip peers, trading at a forward P/E from just 10 based on this year's estimates. While those estimates are likely to come down after its guidance, Micron still looks like a bargain at any price close to that.
Micron investors should monitor the chip and AI cycle closely, but there is a lot of upside potential in the stock. A peak this summer would mean a 75% jump for the stock, and shares could continue to rally further over the next year or so, especially if it continues to see strong data center growth.
Micron is the rare AI stock that offers fast growth and good value right now.
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Jeremy Bowman does not have a 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.
