Micron Technology‘s (NASDAQ: MU) stock has been on an epic 160%-plus run since the beginning of 2023. The semiconductor bear market is coming to an end, and in addition to industrywide growth getting ready for the next run higher, demand for accelerated computing and artificial intelligence (AI, thanks Nvidia (NASDAQ: NVDA)) continues to ratchet up, too.
Nevertheless, investors grew slightly cautious following Micron’s third-quarter fiscal year 2024 update (for the three months ended in May 2024). The stock pulled back a bit from all-time highs. The numbers were solid, though, giving a green flag for AI chip stocks to continue rocking and rolling.
Were Micron’s financials really that good?
Micron is one of three primary players (Samsung and SK Hynix in South Korea being the other two) in AI memory chipmaking. These days, the investment community has become hyper-aware of one specific memory product called HBM3e (the upgraded version of the third generation of “high-bandwidth memory”).
HBM3e has garnered attention thanks in large part to Nvidia’s AI chip systems, featuring stacks of these advanced memory chips surrounding an Nvidia GPU (graphics processing unit, or more specifically in this new era of AI, an accelerated computing logic chip). Demand for HBM is doing a lot of heavy lifting for Micron right now as it has worked its way through an overall bear market for semiconductors over the last two years. Revenue rallied 82% year over year to $6.8 billion, and adjusted net income was $702 million compared to a net loss of $1.57 billion a year ago.
Micron still has a long way to go to dig itself out of the bear market hole. However, by fiscal 2025 (which will end in August of next year), management says it expects a “substantial” new all-time revenue record and “improved” profitability.
This is a significant outlook upgrade for Micron given the current state of its financials. New record sales over and above the last peak in 2022 are indicative of significant growth during this AI-fueled cycle.
Micron signals where Wall Street’s money is moving
Micron’s last update on chip sales is relevant to a far wider audience than just Micron shareholders. In its commentary on HBM products for AI, management said its manufacturing capacity is completely booked for all of calendar year 2024 and the entire calendar year 2025.
That means customers like Nvidia are buying lots of HBM from Micron for at least the next year-and-a-half. This is to meet their own customer demands — tech giants like Microsoft, Alphabet, Meta, and Oracle, and a growing list of other companies — in a technology arms race to upgrade existing data centers and build new ones for AI supremacy.
To be clear, Micron is often a couple of steps removed from ultimate end-market system sales. This means that any changes in big tech data center construction can slow, and the ultimate change in demand for memory chips can take a couple of quarters to trickle down and impact Micron’s financial outlook. However, for the time being, commentary about manufacturing capacity being tapped out through the end of next year is a solid indicator that the AI infrastructure spending spree has quite a way to go before it starts cooling off.
A word of caution: While it’s exciting times for investors in stocks like Micron and Nvidia, just how profitable they will be next year remains to be seen. Given that the growth cycle is still pointing up, many chip stocks aren’t as “expensive” as they appear on the surface when viewing them from the standpoint of profit expectations. For next year, Micron stock trades for just 14 times Wall Street analysts’ consensus expectation for generally accepted accounting principles (GAAP) earnings per share (EPS), and Nvidia for 35 times next year’s expected EPS.
But the growth trend can, and eventually will, morph into a downturn. This is the way it works with any business tied to manufacturing and hardware sales. Prudence when buying cyclical growth stocks is always a good idea. But for the foreseeable future, Micron’s latest update continues to give a green flag for the AI chip stock race. All-out growth is all set to continue for some time.
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Micron Just Gave Another Green Flag for the AI Stock Race was originally published by The Motley Fool
