MU revenue estimates for the current fiscal year graph

Wall Street gave Micron technology‘S (MU -0.76%) latest quarterly results a thumbs down, although the company’s top and bottom lines were better than what analysts were looking for. This shouldn’t come as a surprise if you take a closer look at the company’s numbers.

Thanks to falling memory prices, Micron’s revenue fell a whopping 57% year over year in the third quarter of fiscal 2023 (for the three months ended June 1, 2023) to $3.75 billion. dollars, and the company went into a loss. Additionally, Micron’s guidance for the current quarter indicates a 41% year-over-year revenue contraction.

However, Chief Executive Officer Sanjay Mehrotra believes that “the memory industry has passed its revenue trough and we expect margins to improve as the industry’s supply-demand balance is gradually restored.” One catalyst that could help restore this balance is artificial intelligence (AI), a term that has been mentioned several times in Micron’s earnings call.

Let’s see how this fast-growing technology will affect Micron’s fortunes and help the stock sustain its impressive momentum.

Micron Technology sees AI as a major growth driver

According to Mehrotra, the rapid “adoption of generative AI is driving industry demand for memory and storage for AI servers to exceed expectations.” He further adds that “AI servers have six to eight times the DRAM content of a regular server and three times the NAND content.”

This is not surprising, as training and deploying large AI models using billions or trillions of parameters is creating the need for substantially more memory content. Market research firm TrendForce estimates that AI server shipments could grow an impressive 38% this year. Even better, the company points out that AI server shipments could see 22% annual growth through 2026.

So the demand for memory chips is likely to increase faster as the amount of dynamic random access memory (DRAM) and NAND flash going into an AI server is substantially higher than that of a regular server. This explains why the demand for high-bandwidth memory (HBM), which is implemented in AI servers, is expected to grow at an annual rate of 31% through 2031.

Micron has already begun to capitalize on this lucrative opportunity. The company provided a tip about its latest earnings by giving it a call Nvidiais implementing Micron’s memory chips in AI servers. mehrotra said:

In fact, some customers are implementing AI computing capabilities with substantially higher memory content. A prime example is NVIDIA’s DGX GH200 supercluster, which shows how memory-intensive AI workloads can be: It gives developers the ability to support giant models with a whopping 144TB of shared memory space.

Micron’s CEO further specified that “a significant majority of that memory footprint is enabled by a joint development project between our two companies,” suggesting that it could supply a significant portion of the memory content to Nvidia. Micron’s partnership with Nvidia could be extremely fruitful for the former. That’s because Nvidia controls 60% to 70% of the rapidly growing market for graphics processing units (GPUs) used in AI servers, according to TrendForce.

According to other estimates, such as that of New Street Research, Nvidia’s market share for AI chips is as high as 95%. This explains why there is reportedly a waiting period for Nvidia’s AI chips. So Micron could greatly benefit from Nvidia’s dominance in the AI ​​chip market, which is expected to grow nearly 30% annually over the next decade.

A solid long-term upside could be in the cards

According to a consensus of 30 analysts covering Micron, the stock has a 12-month average price target of $77, which indicates a 26% upside from current levels. The maximum price target of $100 would translate into gains of 63%. But don’t be surprised to see Micron post stronger earnings thanks to potential growth acceleration.

Micron is expected to post attractive revenue growth over the next two fiscal years.

MU revenue estimates for the current fiscal year graph

MU revenue estimates for YCharts current fiscal year data

That wouldn’t be surprising given catalysts like artificial intelligence and an expected recovery in the smartphone and PC markets next year. If Micron generates $28 billion in fiscal 2025, its top line would be close to doubling in just two years. Multiplying Micron’s estimated revenue after two years by the company’s price-to-sales ratio of 4, which can be considered low for a stock riding the AI ​​wave, its market capitalization could soar to $112 billion. dollars.

That would be a jump of more than 60% from current levels. However, don’t be surprised to see Micron offer even better returns given the high multiples at which AI shares trade. That’s why investors who are looking to capitalize on the growing proliferation of AI with a stock trading at a more reasonable valuation than Nvidia might want to take a closer look at Micron before it jumps any higher.

Harsh Chauhan does not hold any positions in any of the stocks mentioned. The Motley Fool has locations and recommends Nvidia. The Motley Fool has a disclosure policy.

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