In 2024, the market will see individual technology stocks rise or fall based on the perception of artificial intelligence (AI) prospects.
The trick for investors is to find under-the-radar AI winners before the market hits, or to pounce on long-term winners after a sell-off when doubts creep into their stories.
With its shares nearly doubling in the first half of 2024, then regaining almost all of those gains in the second half, this AI stock is currently in a state of despair. However, the era of artificial intelligence will only require more and more specialized products for this company, making the stock a bargain today.
Early 2024 enthusiasm for Micron technology(NASDAQ: MU) It had some real truth to it. That’s because AI requires a lot of dynamic random access memory (DRAM) to train large data sets quickly and also for better inference or “reasoning,” which has become increasingly important with OpenAI’s new “heuristics.” ChatGPT Models such as o1. Overall, DRAM density for AI should accelerate in the coming years, with specialized AI memory the current bottleneck.
Micron makes both DRAM and NAND flash storage, but DRAM makes up the majority of its revenue at 73%. This is good news, because DRAM is poised for higher growth than NAND, and there are only three companies that can produce advanced DRAM nodes: Micron, SK Hynix, and Samsung. There are also Chinese startups that have started producing some DRAM, but this is for low-margin, low-end applications that make up a mid-single-digit percentage of the market.
With the advent of artificial intelligence, there is a sudden demand for a new type of advanced memory, called high-bandwidth memory, or HBM. While SK Hynix had an early lead in HBM, Micron is quickly catching up. In the latest quarter, Micron’s HBM revenues doubled quarter-on-quarter, and management maintains that it has the most advanced product on the market, in terms of technology, with the HBM3E product featuring lower power consumption and higher speeds than those of SK Hynix.
Despite the recent rapid increase, HBM still makes up a small portion of Micron’s revenue. In fiscal 2024, which ended in August, HBM accounted for several hundred million dollars alone for Micron, out of $17.6 billion in DRAM revenue and $25.1 billion in total revenue last year.
This should change dramatically in the coming years. Micron sees the HBM market growing from $16 billion in 2024 to more than $30 billion in 2025, with Micron’s HBM market share growing toward its total DRAM market share by the end of 2025. Micron’s current total DRAM market share is about 20 %, but this is largely because SK Hynix had an early volume lead at HBM. Before AI and HBM took off, Micron’s share was in the mid-20% range.
This means Micron HBM revenues could reach $6 billion to $7 billion in 2025 from almost nothing in 2024. On top of the 2024 numbers, HBM growth alone could add more than 25% to Micron’s total revenues.
But the HBM story doesn’t stop there. Micron sees the HBM market growing further to over $100 billion in 2030, which will be larger than the entire DRAM industry in 2024. This is so huge, it will double Micron’s revenues even without any growth in its other segments.
Not only that, there is also an opportunity for Micron to grow faster than the overall HBM market. This is largely due to the difficulties faced by Samsung, which has the largest market share in the overall DRAM industry but struggles to produce HBM at acceptable returns. Thus, Samsung’s default on HBM has opened the way for Micron to gain a greater share of the market in this critical sector.
Image source: Getty Images.
With all these positives, some may wonder why Micron fell by double digits after its latest earnings report, and is now 43% below its all-time highs in July.
The reason lies in the non-HBM, non-data center portion of Micron’s portfolio. These include chips that go into smartphones, computers, automotive and industrial sectors. All of these sectors are still slow, and end customers are still burning through their inventory.
Since HBM still represents a small portion of current revenues, its growth will not be enough to counter the decline in other sectors. This would actually cause Micron’s revenue to decline sequentially for the current quarter, ending in February, representing the first sequential decline in nearly two years.
This may have worried investors, because historically, when Micron’s revenues start to decline, it can be a signal of a bigger decline. The memory sector has been historically Very cyclical And volatile, as memory prices fluctuate widely based on supply and demand.
However, the dynamics of HBM could change the memory market. Micron is already selling its HBM product through 2025 at fixed prices, so revenue and margin don’t disappear. In Micron’s upcoming HBM4 product, scheduled to arrive in 2026, there will be an additional logic component to the chipset. Micron believes that a logical template could lead to increased customization, and perhaps more differentiation and pricing power.
So HBM may not be as commoditized as the DRAM industry was in the past. As HBM makes up a larger and larger portion of Micron’s business, this should support future growth and profits.
Micron’s overall data center business, including HBM and other advanced DDR5 memories, also accounted for more than 50% of its revenue for the first time in the fourth quarter. So, as Micron’s business becomes more focused on the high-growth data center market, of which HBM will be a growing component, the negative impact from legacy, less dynamic memory applications will not be as significant a drag. Of course, these other sectors could also change after this downturn later next year.
Of course, the risks have not disappeared for Micron. It will have to maintain its technological lead at HBM and hopefully expand it as Samsung tries to catch up. In addition, new Chinese startups are starting to reach the very low end of the market. While Micron remains focused on higher-profit, higher-profit products, a new source of low-end supplies could cause oversupply for some of Micron’s other businesses.
However, HBM’s growth and AI market dynamics appear to outweigh these other risks for now. AI has put a renewed focus on memory and DRAM specifically, so if Micron can position itself as one of only two leaders in the AI HBM market, this decline could be a tremendous opportunity for long-term investors who… They look beyond the first quarter into the future.
Before you buy shares in Micron Technology, consider the following:
the Motley Fool stock advisor The analyst team has just defined what they think it is Top 10 stocks Investors are buying it now… and Micron Technology wasn’t one of them. The 10 stocks that were discounted could deliver huge returns in the coming years.
Think when Nvidia I prepared this list on April 15, 2005… If you invested $1,000 at the time of our recommendation, You will have $839,670!*
Stock advisor It provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. theStock advisorThe service has More than four times The return of the S&P 500 since 2002*.
Billy Duberstein and/or its clients have positions in Micron Technology. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has Disclosure policy.
