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 becoming the most valuable company in the world for a brief period (it's currently No. 2).
However, Nvidia is far from the only opportunity in the AI or semiconductor space. In fact, one chipmaker just reported 400%-plus year-over-year data center revenue growth and overall revenue growth of 84% to $8.7 billion in its latest earnings report (for the quarter ending Nov. 28).
I'm talking about Micron Technology (MU -1.26%), the memory-chip specialist that 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.
What is Micron?
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 both designs and manufactures its own chips like Intel and Samsung do.
Memory chips are a highly cyclical business, prone to price fluctuations and industry gluts, 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 allows the company to better capture margins when the business is performing well.
The chart below, which shows Micron's price compared to its previous high, gives a sense of how volatile the stock has been. As you can see, over the last decade, the stock has fallen by 40% or more on four occasions before hitting a new all-time high.
Data by YCharts.
Cyclicality and volatility are part of the risk in investing in Micron, but there's no question the semiconductor sector is in a boom right now, driven by the explosive growth of AI, though some subsectors like 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.
Noting strong AI demand, management said that data center revenue topped 50% of total revenue for the first time in the quarter, following a trail 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 is taking place.
Why Micron stock tumbled on the report
After reporting fiscal first-quarter earnings on Wednesday, Micron stock plunged as much as 19% on Thursday on 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 like smartphones, whereas the AI business remains strong.
HBM, the part of the business closely tied to AI, is seeing impressive growth. The company said it's on track to achieve its HBM target for the fiscal year and reach 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 slip from $1.79 to $1.43.
However, management's explanation for the weak outlook should reassure investors. CEO Sanjay Mehrotra said the company had warned previously that seasonality and customer inventory reductions in consumer-facing segments like smartphones would affect 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."
In other words, the issues causing the weak second-quarter guidance look like just a speed bump for the company rather than a sustained headwind, 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 clearly capitalizing on the AI boom with the surge in data center revenue, and with its largest customer, which is believed to be Nvidia, now making up 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% growth in year-over-year revenue 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 plays out. 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 it just maintains 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 much cheaper than its AI and chip stock peers, trading at a forward P/E of 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 near that.
Micron investors should monitor the chip and AI cycle closely, but there's a lot of upside potential in the stock. Getting back to its peak this summer would mean a 75% jump for the stock, and shares could continue to rally further 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 rapid growth and a good value right now.
