Significantly Dropped by 44%, This Particular AI Company's Shares Are Strong Purchase Opportunities at Present (And It's Not Nvidia)
Significantly Dropped by 44%, This Particular AI Company's Shares Are Strong Purchase Opportunities at Present (And It's Not Nvidia)
Micron Technology (MU, -1.32%) has managed to grab the attention of investors and the media, surging 2,190% over the past five years and briefly taking the title of the world's most valuable company before settling at number 2.
However, Micron isn't the only game in town when it comes to AI or semiconductors. In fact, a certain chipmaker recently reported a whopping 400%-plus year-over-year data center revenue growth and overall revenue growth of 84% to $8.7 billion in its last earnings report (for the quarter ending Nov. 28).
Despite this impressive growth, Micron's share price has dropped a staggering 44% from its peak. This drop in price, combined with its potential in the AI market, makes Micron a tempting buy right now. Let's delve into the company's recent financials before exploring the buy case.
What is Micron?
Micron is a leader in memory chips, producing DRAM, NAND, and high bandwidth memory (HBM). It also operates as an integrated device manufacturer, much like Intel and Samsung.
The memory chip business is known for its cyclical nature, with prices fluctuating and market gluts common. Owning its own foundries makes Micron more vulnerable to the boom and bust cycle in the semiconductor industry. Running foundries demands a substantial amount of capital, but Micron's integrated business model allows it to maximize its profits during good times.
The graph below, which compares Micron's share price to its previous high, gives some insight into its volatility. Over the past decade, the stock has seen a 40% or more decline on four occasions before hitting a new all-time high.
Volatility and cyclicality are risks associated with investing in Micron, but the semiconductor sector is currently experiencing a boom, driven by the explosive growth of AI. Nvidia's exceptional growth isn't the only evidence of this boom. Industry powerhouse Taiwan Semiconductor Manufacturing recently reported a 36% revenue increase in the third quarter, reaching $23.5 billion, indicating a robust growth in the sector.
Recognizing the strong demand for AI, Micron reported that data center revenue accounted for more than 50% of its total revenue for the first time in the quarter. This shift in revenue sources means a majority of Micron's income now comes from the data center, where AI computing is taking place.
Why Micron's stock price dropped
Following the release of its fiscal first-quarter earnings, Micron's stock fell as much as 19% on Thursday due to weak second-quarter guidance. However, Micron has a history of being conservative with its guidance, and the weakness was primarily due to consumer markets such as smartphones, while the AI business remains strong.
HBM, the portion of the business closely tied to AI, is seeing impressive growth. Micron expects 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" for the fiscal year.
Micron anticipates a sequential decline in revenue and adjusted earnings per share (EPS) in the second quarter, dropping from $8.7 billion to $7.9 billion and slipping from $1.79 to $1.43 for adjusted EPS.
However, Micron's explanation for the weak outlook should reassure investors. CEO Sanjay Mehrotra stated that the company had warned previously about seasonality and customer inventory reductions in consumer-facing segments like smartphones impacting Q2 results. He added, "We are now seeing a more pronounced impact of customer inventory reductions," and continued, "We expect this adjustment period to be relatively brief, and anticipate customer inventories reaching healthier levels by spring, enabling stronger bit shipments in the second half of fiscal and calendar 2025."
Effectively, the issues causing the weak second-quarter guidance appear to be a temporary hurdle rather than a sustained challenge, and management expects to return to sequential growth in the second half of the year. For a stock to fall 17% on a one-time guidance cut feels like a misread by the market and a buying opportunity for investors.
Why Micron is a no-brainer buy
A sell-off driven by short-term news often presents a good buying opportunity, but there's more to Micron's buy case than that. Micron is benefiting from the AI boom by capitalizing on the surge in data center revenue. Its largest customer, believed to be Nvidia, makes up 13% of its revenue. A strong relationship with Nvidia is a significant advantage at this stage of the AI boom, as Nvidia recently reported 94% year-over-year revenue growth in its Q3 report.
Micron's results are known for their volatility and cyclical nature, but the company has the potential to generate massive profits under the right circumstances. 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 by 2030. Even if Micron maintains its market share in this segment, its HBM revenue will be up 4x in four years and 6x in six years.
Micron's stock currently has a relatively low forward price-to-earnings ratio of 10, as per this year's forecasts. This is significantly lower than its competitors in the AI and semiconductor sectors. Even though these forecasts might decrease following Micron's guidance, the stock appears to be a compelling buy at prices close to this figure.
Investors in Micron should keep a keen eye on the trends in the chip and AI industries. A return to Micron's summer peak would represent a 75% gain for the stock. Furthermore, there's a possibility of further price increases in the next year or two, particularly if Micron continues to experience robust growth in the data center sector.
Micron stands out as a unique investment opportunity in the AI sector, offering both rapid growth and reasonable value at the moment.
Given Micron's current financial situation and potential in the AI market, investors might consider diversifying their portfolio by investing some money in this company. The drop in Micron's share price, coupled with its promising growth in the data center sector, particularly in AI, presents an intriguing buying opportunity. Additionally, as Micron's largest customer, Nvidia, also continues to thrive in the AI sector, this strong relationship could further benefit Micron in the future.