It’s no secret that there has been a huge demand for semiconductor chips in recent years. As companies continue to figure out how artificial intelligence (AI) can bring a new wave of efficiency to the workplace, chips will remain a critical part of infrastructure.
Within the chip world Nvidia sits atop the throne thanks to best-in-class graphics processing units (GPUs). Nevertheless, I’ve raised some concerns about Nvidia’s position as the de facto leader in chips, as many other companies (some of which are Nvidia’s own customers) are trying to bring their own lines of GPUs to market.
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In my opinion, Micron technology(NASDAQ:MU) has a chance to become the most important chip company in the long term. Below, I’ll outline Micron’s unique position in the semiconductor landscape and explore why I think this is a great opportunity to buy the stock hand over fist.
While you may know Micron as a leading chip company, I wouldn’t be surprised if you don’t know what the company actually does.
Semiconductors have countless applications, and many chip players play unique roles within the broader industrial capabilities. Simply put, Micron specializes in memory and storage solutions.
Memory is a critical part of chip architecture, especially as it relates to generative AI development and data center infrastructure.
Image source: Getty Images.
Memory chips help with storage and data management on hardware devices, such as personal computers or server racks. When it comes to AI development, training models require the ability to process large data sets and complex algorithms in a time-efficient manner. This is where Micron comes into play, as the company’s products help transfer data between memory and processing functionality.
Let’s look at a few examples of how demand for chip memory solutions should increase in the coming years.
For starters, big tech is expected to invest $1 trillion in IT infrastructure in the coming years, according to Wedbush Securities analyst Dan Ives. One area where I suspect will continue to see robust investment activity is the development of large language models (LLMs).
Training these models and building out more features requires a continuous data feed that must be processed and analyzed quickly. Micron’s memory and storage expertise will certainly come in handy here.
Another catalyst for Micron could be the potential of an upcoming computer refresh cycle. Companies that build laptops and computers for large enterprises have been busy integrating new AI-powered solutions into these devices in recent years.
I believe many companies will choose to upgrade their computing equipment as IT budgets allocate more capital focused on AI infrastructure, making the refresh cycle a potential tailwind for Micron.
So far in 2024, Micron stock is up about 25% – narrowly outperforming both Micron stock and Micron stock. S&P500 And Nasdaq Composite as of the time of this article. While this might indicate that Micron stock has some momentum, my Foolish colleague Anders Bylund recently made a very astute observation about Micron’s valuation and future prospects.
A good metric to look at when valuing a stock is the price-to-earnings (P/E) ratio, as it gives a glimpse into what a company’s future earnings potential might look like.
The chart below illustrates Micron’s forward price-to-earnings ratio, compared to a broad range of semiconductor industry cohorts.
MU PE ratio (forward) chart
Do you notice anything? Micron’s price/earnings ratio is by far the lowest of this peer group. Furthermore, the company’s valuation numbers completely plummeted after a less-than-stellar research report published by Morgan Stanley recently, combined with the fact that Micron’s profitability profile remains somewhat inconsistent.
For me, investing in growth stocks requires a certain amount of accommodation when it comes to cash burn. I wouldn’t underestimate the importance that memory solutions should play in the chip industry and in the overall AI story.
In my opinion, the market is underestimating how much of the increasing spending on data centers, IT infrastructure, storage solutions and generative AI could be for Micron. I see Micron as an attractive buying opportunity right now and think the company is in a lucrative position in the long term.
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Adam Spatacco has positions at Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Opinion: This Artificial Intelligence (AI) Semiconductor Stock Could Ultimately Become the Most Important Chip Company (Hint: It’s Not Nvidia) was originally published by The Motley Fool
