This artificial intelligence (AI) stock is about to make a bull run

By | March 3, 2024

The PHLX semiconductor sector The index is off to a strong start in 2024, with a gain of 11% year to date. That’s not surprising, considering some of its key components, such as Nvidia (NASDAQ: NVDA), AMD, BroadcomAnd Taiwanese semiconductor manufacturing have already made a nice jump thanks to their solid earnings reports – showing that these companies are benefiting from the increasing adoption of artificial intelligence (AI) chips.

However, there is one part of the PHLX Semiconductor Sector that has so far failed to step on the gas: Micron technology (NASDAQ:MU). The memory manufacturer’s shares are up just 5% through 2024. However, a recent development has given Micron shares a nice boost. Shares of the chipmaker rose 4% on February 26.

Let’s take a look at why that happened and consider why this semiconductor stock could make a bull run after this development.

Providing chips for Nvidia’s next-gen AI GPU

In a Feb. 26 press release, Micron indicated that it has begun volume production of its high-bandwidth memory 3E (HBM3E) chip. The company added that this particular chip “will be part of NVIDIA H200 Tensor Core GPUs, which will hit the market in the second quarter of 2024.” Micron claims that HBM3E uses 30% less power than what competitors offer.

It’s not surprising to see Micron land the HBM spot in Nvidia’s upcoming processors. In its December 2023 earnings conference call, Micron pointed out that its HBM3E chip was in the final stages of qualification with Nvidia. Now that the company has acquired this business from Nvidia, it appears to be on track to achieve its goal of generating “several hundred million dollars in HBM revenue in fiscal year 2024.”

The good thing for Micron is that demand for Nvidia’s upcoming H200 processors is already solid. Nvidia management noted on its latest earnings call that demand for its next-generation products will exceed supply. So the possibility that Micron will sell off its entire production of HBM3E chips cannot be ruled out, especially considering that fellow memory manufacturer SK Hynix has already sold out its 2024 HBM inventory.

More importantly, Micron is reportedly increasing its HBM production capacity so it can meet the growing demand for this memory type, not only from Nvidia but also from other customers. In November 2023, the chipmaker reportedly opened a new factory dedicated to large-scale production of HBM3E. It’s also worth noting that Micron is working on a larger HBM3E memory size that could be rolled out next month.

All this suggests that the company is on track to take full advantage of the growing demand for HBM, a product that is in huge demand thanks to its use in AI processors. Market research firm Yole Group estimates that the HBM market could generate annual revenues of nearly $20 billion by 2025, up from $5.5 billion last year and an estimated $14.1 billion in 2024. By 2029, global HBM revenues are expected to will rise to $38 billion.

As such, Micron could gain a lot from this market in the long run, especially considering it has already secured a major customer in the form of Nvidia, which undoubtedly dominates the global AI chip market. Not surprisingly, Micron’s revenue growth will accelerate significantly in fiscal 2024, 2025 and 2026.

MU revenue estimates for the current fiscal yearMU revenue estimates for the current fiscal year

MU revenue estimates for the current fiscal year

Big stock rewards could be in store

As the chart above indicates, Micron’s revenue is expected to rise to nearly $23 billion in fiscal 2024. That would be a big increase from the $15.5 billion in fiscal year 2023. By fiscal year 2026, Micron’s revenue is expected to approach the $35 billion mark, meaning the company is expected to increase its revenue in just will more than double in three fiscal years.

Micron currently trades at 6 times sales. While that is higher than the S&P500 With the index’s sales multiple of 2.8, the potential growth this AI stock could deliver means it looks worth a premium valuation. That’s especially true when you consider that other chip makers benefiting from AI adoption are trading at higher revenue numbers.

So if Micron Technology maintains its price-to-sales ratio of 6 after three years and indeed generates $35 billion in annual sales in fiscal 2026, its market capitalization could rise to $210 billion. That would be a 112% increase from current levels, which is why investors should consider buying this chipmaker before the stock market rally gains momentum.

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

Consider the following before purchasing shares in Micron Technology:

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Harsh Chauhan 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 recommends Broadcom. The Motley Fool has a disclosure policy.

This Artificial Intelligence (AI) Stock Is About to Make a Bull Run was originally published by The Motley Fool

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