In 2024, the market noticed particular person know-how shares soar or crash based mostly on the notion of their synthetic intelligence (AI) prospects.
The trick for buyers is to seek out under-the-radar AI winners earlier than the market does, or to pounce on long-term winners after sell-offs when doubts creep into their tales.
With its inventory having almost doubled within the first half in 2024 solely to present virtually all these positive aspects again within the second half, this one AI inventory is at the moment in a trough of despair. But the age of AI will solely want an increasing number of of this firm’s specialised merchandise, making the inventory a discount as we speak.
The early 2024 enthusiasm for Micron Expertise(NASDAQ: MU) had some actual fact to it. That is as a result of AI requires tons of DRAM reminiscence to coach huge datasets shortly and likewise for higher inferencing, or “considering,” which has grown in significance with OpenAI’s new “reasoning” ChatGPT fashions equivalent to o1. General, the DRAM depth of AI is just purported to speed up within the coming years, with specialised AI reminiscence a present bottleneck.
Micron makes each DRAM reminiscence and NAND flash storage, however DRAM makes up the vast majority of its income, at 73%. That is excellent news, as a result of DRAM is each set for greater development than NAND, and there are solely three corporations that may produce superior DRAM nodes: Micron, SK Hynix, and Samsung. There are additionally Chinese language upstarts starting to make some DRAM, however that is for low-end, low-margin purposes making up a mid-single-digit proportion of the market.
With the rise of synthetic intelligence, there’s sudden demand for a brand new kind of superior reminiscence, known as high-bandwidth reminiscence, or HBM. Whereas SK Hynix had an early lead in HBM, Micron is catching up shortly. Final quarter, Micron’s HBM income greater than doubled quarter over quarter, and administration maintains that it has probably the most superior product out there, in know-how phrases, with its HBM3E product having decrease energy consumption and better speeds than these from SK Hynix.
Regardless of the latest quick ramp-up, HBM nonetheless makes up a tiny portion of Micron’s income. In its fiscal 2024, which led to August, HBM accounted for under a number of hundred million {dollars} for Micron, out of a complete $17.6 billion in DRAM income and $25.1 billion in whole income final yr.
That ought to change within the coming years in a giant method. Micron sees the HBM market rising from $16 billion in 2024 to over $30 billion in 2025, with Micron’s HBM market share rising towards its total DRAM market share by the top of 2025. Micron’s present total DRAM share is about 20%, however that is largely as a result of SK Hynix had the early quantity lead in HBM. Earlier than the AI and HBM takeoff, Micron’s share was within the mid-20% vary.
Which means Micron’s HBM income might attain $6 billion to $7 billion in 2025 from almost nothing in 2024. On high of 2024’s numbers, HBM development alone might add over 25% to Micron’s total income.
However the HBM story would not cease there. Micron sees the HBM market rising additional to over $100 billion in 2030, which might be bigger than your complete DRAM trade in 2024. That is completely huge, and it will greater than double Micron’s income even with none development in its different segments.
Not solely that, however there’s additionally a chance for Micron to develop even sooner than the HBM market total. That is largely as a result of struggles of Samsung, which has the most important market share of the general DRAM trade however has struggled to supply HBM at acceptable yields. Samsung’s hit upon HBM has due to this fact opened up the potential for Micron to take much more market share of this all-important section.
Picture supply: Getty Pictures.
With all of those positives, some may marvel why Micron fell by double digits after its latest earnings report and is now 43% beneath its July all-time highs.
The explanation lies within the non-HBM and non-data-center portion of Micron’s portfolio. These embrace chips that go into smartphones, PCs, and the auto and industrial segments. All of those segments are nonetheless sluggish, and finish prospects are nonetheless burning down their stock.
Since HBM continues to be such a small portion of present income, its development will not be sufficient to counter the pullback in different segments. That can really trigger Micron’s income to fall sequentially for the present quarter, ending in February, marking the primary sequential decline in almost two years.
MU Income (Quarterly) knowledge by YCharts
This will have apprehensive buyers, as a result of traditionally, when Micron’s income begins to roll over, it may very well be the sign of a much bigger downturn. The reminiscence section has traditionally been extraordinarily cyclical and unstable, with pricing for reminiscence fluctuating wildly based mostly on provide and demand.
Nevertheless, the dynamics of HBM might change the reminiscence market. Micron is already bought out of its HBM product by way of 2025 at fastened pricing, in order that income and margin is not going away. In Micron’s upcoming HBM4 product, attributable to arrive in 2026, there will likely be an extra logic element of the chip stack. Micron believes that logic die can result in elevated customization, and doubtless extra differentiation and pricing energy.
So HBM might not be fairly as commoditized because the DRAM reminiscence trade has been previously. As HBM makes up a bigger and bigger portion of Micron’s enterprise, that ought to underpin development and earnings going ahead.
Micron’s total knowledge heart enterprise, together with HBM and its different superior DDR5 reminiscences, additionally made up greater than 50% of its income for the primary time final quarter. In order Micron’s enterprise turns into extra centered on the high-growth knowledge heart market, of which HBM will likely be a rising element, the unfavourable impact from the less-dynamic legacy reminiscence purposes will not be as huge of a drag. And naturally, these different segments might additionally flip round after this downturn later subsequent yr.
After all, dangers have not gone away for Micron. It must sustain its technological lead in HBM and hopefully prolong it as Samsung tries to catch up. As well as, new Chinese language upstarts are starting to chip away on the very low finish of the market. Whereas Micron continues to be centered on the upper finish, and on higher-profit merchandise, a brand new supply of low-end provide might trigger an oversupply for a few of Micron’s different companies.
Nonetheless, the HBM development and AI market dynamics seem to outweigh these different dangers for now. AI has put renewed concentrate on reminiscence and DRAM particularly, so if Micron can vogue itself as one in every of solely two leaders within the HBM marketplace for AI, this pullback may very well be a large alternative for longer-term buyers trying previous one quarter into the long run.
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Billy Duberstein and/or his shoppers have positions in Micron Expertise. The Motley Idiot has no place in any of the shares talked about. The Motley Idiot has a disclosure coverage.
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