Could Micron Technology Become the Next Nvidia?

By | March 26, 2024

Nvidia (NASDAQ: NVDA) has been one of the hottest chip stocks on the market. The chipmaker was originally known for making gaming GPUs, but the rapid expansion of the artificial intelligence (AI) market in recent years has led to more companies purchasing its high-end data center GPUs to handle complex AI tasks .

Nvidia’s rally of more than 2,000% over the past five years increased its market cap to $2.4 trillion and created many millionaires. But it also has more investors looking for the next big chipmaker that could follow in Nvidia’s footsteps.

Micron's headquarters in Boise, Idaho.Micron's headquarters in Boise, Idaho.

Image source: Micron.

Could that chipmaker be? Micron (NASDAQ:MU), one of the world’s top manufacturers of DRAM and NAND memory chips? Let’s take a look at the key differences between Micron and Nvidia to see if Micron has a chance to replicate Nvidia’s gains.

The main differences between Micron and Nvidia

Micron designs and produces its memory chips in its own foundries. This makes it different from Nvidia, which designs its chips but outsources production to external foundries, for example. Samsung And Taiwanese semiconductor manufacturing company. Micron operates that capital-intensive model at much lower margins than Nvidia.

Chart of NVDA's gross profit marginChart of NVDA's gross profit margin

Chart of NVDA’s gross profit margin

Micron’s memory chips also cost much less than Nvidia’s GPUs, and it doesn’t dominate core markets in the same way that Nvidia does. Micron is the world’s third-largest supplier of DRAM chips and the fifth-largest supplier of NAND chips, but Nvidia is the largest producer of discrete GPUs by a wide margin. According to JPR, Nvidia had 80% of the market by the end of 2023 AMD had only a 19% share.

Compared to Nvidia, Micron operates in a more commoditized market, has less pricing power relative to its competitors, and is more exposed to cyclical downturns as the memory chip market goes through its boom and bust cycles. However, Micron still produces denser and more power efficient DRAM and NAND chips than its two largest competitors, Samsung and SK Hynix. That technological lead helps Micron retain manufacturers of more expensive PCs, mobile devices and servers.

How long will the next growth cycle last?

Micron has suffered a severe slowdown over the past two years as personal computer (PC) shipments fell in a post-pandemic market, the 5G upgrade cycle ended and macro headwinds curbed chip sales to the enterprise and industrial markets. The Chinese government also banned its major infrastructure suppliers from purchasing Micron’s memory chips. All these challenges offset stronger growth in the automotive and AI markets.

Micron’s revenue grew 29% in fiscal 2021 (which ended September 2020), but rose only 11% in fiscal 2022 and fell 49% in fiscal 2023. However, analysts expect revenue to decline in fiscal 2024 will increase by 56% and by 43% in the financial year. Three gusts of wind will occur in 2025. First, the PC and smartphone markets should gradually stabilize. Second, it should sell more chips to the corporate, industrial and automotive markets as the macro environment warms up again.

Finally, the explosive growth of the generative AI market will lead to more data centers upgrading their memory chips alongside Nvidia’s GPUs. During Micron’s latest conference call, CEO Sanjay Mehrotra said the memory chip market was still in “the very early stages of a multi-year growth phase powered by AI” and that these technologies would transform “every aspect of business and society.” For example, Mehrotra predicted that AI-enabled phones could include “50% to 100% more DRAM content compared to today’s non-AI flagship phones.”

But a new economic downturn is inevitable

Those are bright prospects, but Micron’s new growth cycle will still likely end in a few years. That’s because companies drive up memory prices by buying a lot of chips when a particular market – such as smartphones, cloud data centers and AI – becomes popular.

In response, Micron and its peers typically ramp up their production of new chips to meet that demand. But once the hot market cools, the chip shortage quickly turns into a supply glut as companies are left with an excess supply of chips. That’s why Micron’s chip sales fell in 2019 and 2022 – and why they’ll likely fall again once the AI ​​market matures.

This next growth cycle could last much longer than the last, but will ultimately end in a downturn. Nvidia will also face a similar slowdown, but its cyclical declines have been much milder than Micron’s over the past decade. That’s because Nvidia’s dominance of the discrete GPU market gives the company more pricing power during market downturns – while Micron remains heavily exposed to the price cuts among its larger competitors.

Could Micron Become the Next Nvidia?

Micron’s shares will trade at less than four times sales next year, and could move higher as the next growth cycle begins. If valuations remain stable and revenue grows at a CAGR of 30% over the next five years, the stock could nearly quadruple. That would be an impressive gain, but it could end in a cyclical downturn and won’t come close to replicating Nvidia’s gains of the past five years. Simply put, Micron is still a promising semiconductor product, but it’s probably not the next Nvidia.

Should You Invest $1,000 in Micron Technology Now?

Consider the following before purchasing shares in Micron Technology:

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

Could Micron Technology Become the Next Nvidia? was originally published by The Motley Fool

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