Down 44%, This AI Stock Is a Screaming Buy Right Now (Hint: It’s Not Nvidia)

Nvidia has dominated the AI narrative within the inventory market, charming traders and the media after hovering 2,190% over the previous 5 years and turning into essentially the most invaluable firm on this planet for a short interval (it is at the moment No. 2).

Nevertheless, Nvidia is way from the one alternative within the AI or semiconductor area. In truth, one chipmaker simply reported 400%-plus year-over-year knowledge middle income development and total income development of 84% to $8.7 billion in its newest earnings report (for the quarter ending Nov. 28).

I am speaking about Micron Expertise (MU 3.48%), the memory-chip specialist that’s surprisingly down 44% from its latest peak, regardless of that blowout development. That low cost and its potential in AI make the inventory an interesting purchase proper now. Let’s evaluate the corporate’s latest outcomes first after which get into the purchase case.

Picture supply: Getty Photographs.

What’s Micron?

Micron is a frontrunner in reminiscence chips, together with DRAM, NAND, and excessive bandwidth reminiscence (HBM). The corporate can also be an built-in system producer, that means it each designs and manufactures its personal chips like Intel and Samsung do.

Reminiscence chips are a extremely cyclical enterprise, susceptible to cost fluctuations and trade gluts, and proudly owning its personal foundries makes Micron extra uncovered to the increase and bust cycle in semiconductors. Working foundries requires a excessive degree of capital, however the built-in enterprise mannequin permits the corporate to raised seize margins when the enterprise is performing properly.

The chart beneath, which reveals Micron’s worth in comparison with its earlier excessive, offers a way of how risky the inventory has been. As you possibly can see, during the last decade, the inventory has fallen by 40% or extra on 4 events earlier than hitting a brand new all-time excessive.

Information by YCharts.

Cyclicality and volatility are a part of the danger in investing in Micron, however there is not any query the semiconductor sector is in a increase proper now, pushed by the explosive development of AI, although some subsectors like PCs and smartphones are weaker. Along with Nvidia’s blowout development, trade bellwether Taiwan Semiconductor Manufacturing not too long ago reported income development of 36% within the third quarter to $23.5 billion, displaying sturdy development within the sector.

Noting sturdy AI demand, administration stated that knowledge middle income topped 50% of complete income for the primary time within the quarter, following a path first blazed by Nvidia within the chip sector. That now makes the overwhelming majority of Micron’s income from the information middle, the place AI computing is happening.

Why Micron inventory tumbled on the report

After reporting fiscal first-quarter earnings on Wednesday, Micron inventory plunged as a lot as 19% on Thursday on its weak second-quarter steerage. Nevertheless, the corporate has a historical past of being conservative with its steerage, and the weak spot was as a consequence of shopper markets like smartphones, whereas the AI enterprise stays sturdy.

HBM, the a part of the enterprise carefully tied to AI, is seeing spectacular development. The corporate stated it is on monitor to attain its HBM goal for the fiscal yr and attain a “substantial report” in HBM income, together with “considerably improved profitability, and free money movement” within the fiscal yr.

Micron expects a sequential decline in income and adjusted earnings per share (EPS) within the second quarter, falling from $8.7 billion to $7.9 billion and for adjusted EPS to slide from $1.79 to $1.43.

Nevertheless, administration’s clarification for the weak outlook ought to reassure traders. CEO Sanjay Mehrotra stated the corporate had warned beforehand that seasonality and buyer stock reductions in consumer-facing segments like smartphones would have an effect on Q2 outcomes. He added, “We at the moment are seeing a extra pronounced influence of buyer stock reductions,” and continued, “We count on this adjustment interval to be comparatively temporary and anticipate buyer inventories reaching more healthy ranges by spring, enabling stronger bit shipments within the second half of fiscal and calendar 2025.”

In different phrases, the problems inflicting the weak second-quarter steerage seem like only a velocity bump for the corporate relatively than a sustained headwind, and administration expects to return to sequential development within the second half of the yr. For a inventory to fall 17% on a one-time steerage lower appears like a misinterpret by the market and a shopping for alternative for traders.

Why Micron is a no brainer purchase

A sell-off pushed by short-term information typically presents a superb shopping for alternative, however there’s extra to Micron’s purchase case than that. Micron is clearly capitalizing on the AI increase with the surge in knowledge middle income, and with its largest buyer, which is believed to be Nvidia, now making up 13% of its income. An in depth relationship with Nvidia is clearly a tailwind at this stage of the AI increase as Nvidia simply reported 94% development in year-over-year income in its Q3 report.

Micron’s outcomes are notoriously lumpy and cyclical, nevertheless it has the power to generate large earnings below the best circumstances — and people appear to be shaping up because the AI increase performs out. For instance, Micron expects the addressable marketplace for HBM to leap from $16 billion in 2024 to $64 billion in 2028 and to $100 billion in 2030. Even when it simply maintains its market share in that section, its HBM income will likely be up 4x in 4 years and 6x and 6 years.

Lastly, Micron inventory can also be less expensive than its AI and chip inventory friends, buying and selling at a forward P/E of simply 10 primarily based on this yr’s estimates. Whereas these estimates are more likely to come down after its steerage, Micron nonetheless seems like a cut price at any worth close to that.

Micron traders ought to monitor the chip and AI cycle carefully, however there’s plenty of upside potential within the inventory. Getting again to its peak this summer time would imply a 75% leap for the inventory, and shares may proceed to rally additional over the subsequent yr or two, particularly if it continues to see sturdy development within the knowledge middle.

Micron is the uncommon AI inventory that provides fast development and a superb worth proper now.