The semiconductor industry has achieved tremendous growth over the past decades. Demand for chips can experience declines, especially during economic downturns, but history shows that more advanced devices and technologies require more powerful processors, which creates an upward demand curve. In the near term, artificial intelligence (AI) remains a key sales catalyst for leading chip suppliers.
The latest IDC report predicts that the semiconductor market will grow by 15% in 2025, led by AI demand. This could be a great buying opportunity for stocks that have recently fallen in value.
Two highly praised stocks on Wall Street are Advanced Micro Devices(NASDAQ: AMD) a Micron Technology(NASDAQ: MU). These stocks are trading well off their recent highs but have been reporting solid revenue growth from the data center market.
Wall Street average price target is 55% above AMD's share price of around $121 and 53% above Micron's share price hovering near $87. Let's take a deeper look at these companies to see if it's a smart move to bet your money on Wall Street's opinion.
Shares of Advanced Micro Devices have delivered excellent returns in recent years. AMD is making a lot of gains in the server market, which is coming Intel' an expense. Over the past few years, its market share of central processing units (CPUs) used in servers increased from the single digits to 34%.
AMD is also seeing strong demand for its graphics processing units (GPUs) in the data center market, and this is the opportunity that could catapult the stock higher in 2025. Despite soft results in gaming and industrial markets, AMD's growth in data center helped drive double-digit revenue growth in Q3 over the year-ago quarter. Analysts expect AMD to report year-over-year revenue growth of 13% for 2024, according to Yahoo! Finance.
Next year could see growth accelerate if demand in other segments picks up. For example, AMD's internal chip revenue, including sales for industrial markets, was down 25% year-over-year in Q3, but the segment's revenue grew 8% over the previous quarter.
With AMD stock selling 43% off its previous highs and trading at just 23 times next year's consensus earnings estimate, Wall Street's price target could be on the money.
AMD expects the market for AI accelerators, or GPUs, to grow over 60% annually to reach $500 billion by 2028. It has a potentially long growth trajectory ahead of it, and these super processors generate above average profits. This should allow earnings to grow faster than revenue.
Analysts expect AMD to grow earnings at an annual rate of 41%. For 2025, the Street calls for earnings to reach $5.13. If the stock continues to trade at its current price-to-earnings multiple, the share price could climb along with earnings and reach Wall Street's price target of $184.
Of course, a sharp downturn in the chip industry would slow AMD's momentum and limit the stock's gains. But with the share price already trading at a deep discount to previous highs, there's a favorable risk-reward arrangement for AMD investors heading into 2025.
Micron Technology is a leading supplier of memory and storage products for data centers, original equipment manufacturers, and consumer markets. The stock has had a good run since ending 2022, with the share price up 71%. But the shares are trading well off their highs as demand for dynamic random access memory (DRAM) has weakened this year.
The company just reported first quarter fiscal results, where soft forecasts sent the stock down again. Sales to data centers grew 400% year-on-year and 40% over the previous quarter. Data center sales now account for over half of Micron's total revenue.
Micron also said its high-bandwidth memory (HBM) shipments were ahead of expectations, with HBM revenue more than doubling over the previous quarter.
Offsetting these positive demand trends was management's soft outlook for financial Q2. Revenue guidance was lower than Street estimates, but management said this was a temporary bump in the road resulting from inventory adjustment by customers in consumer-related markets. The company expects this modification to be completed soon.
Based on its updated outlook, Micron still expects to achieve record revenue and positive free cash flow in fiscal 2025 (which ends in August).
The stock looks cheap at these lower share prices, but there is a risk that it could be a value trap. The problem is that Micron has an inconsistent operating history. Although revenue has grown steadily over the past decade, the competitive nature of the memory market has caused major changes in Micron's earnings per share (EPS) and free cash flow.
The stock is cheap enough that if the company were to meet management's forecasts for the whole year, the stock could return to its previous highs. At the current share price of $86, the stock trades at 10 times this year's earnings estimates and 6.6 times fiscal 2026 estimates. Those low valuation multiples are tempting.
Still, AMD offers the better risk reward and is the safer bet to hit Wall Street's price target in 2025. Micron's latest quarter is a good reminder that there are many variables that affect the demand for its products is difficult to predict, which makes valuing the company a challenge.
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John Ballard he has jobs in Advanced Micro Devices. The Motley Fool has posts on and recommends Advanced Micro Devices. The Motley Fool has a disclosure policy.
