Graphics card giants NVIDIA (NVDA -10.01%) and Advanced Micro Devices (AMD -5.44%) have already launched their latest generation graphics cards, but both chipmakers are finding it difficult to fulfill orders because of unprecedented demand and supply chain constraints.
It is being reported that NVIDIA and AMD's graphics card shortage could last for at least the next three months, and a lack of GDDR6 memory is being blamed for the holdup. GDDR6 is a specialized type of DRAM used in gaming consoles and graphics cards. They are more powerful than the standard DRAM we typically use in our computers.
As gaming hardware demand has remained strong in 2020 and the pandemic has thrown supply chain operations out of gear, it is not surprising to see why AMD and NVIDIA are finding it difficult to gather a critical component that goes into their latest GPUs (graphics processing units). But the problems faced by the two tech giants could turn out to be a tailwind for Micron Technology (MU -4.61%). Let's see why.
Image source: Getty Images.
A memory supply shortage is a great sign for Micron Technology
Micron Technology was on shaky ground a year ago as an oversupply of memory chips wrecked prices and the company's profits. But the pandemic came as a blessing in disguise for Micron as a shutdown of factories around the globe disrupted supply chains and tightened supply. At the same time, demand for memory products rose as more people started working and studying from home.
All these tailwinds have helped drive a recovery in memory prices and recently encouraged Micron Technology to raise its guidance. And now, AMD and NVIDIA's woes indicate that the trend of higher memory prices is likely to continue in the future. Memory industry research firm DRAMeXchange points out that the average price of specialty DRAM showed a slight uptick in November and the price of these chips is expected to keep rising over the next few months on the back of strong demand.
That's not surprising as procurement by cloud service providers to upgrade their data centers to tackle bigger workloads and the launch of new consoles is likely to push up demand for specialty DRAM chips such as GDDR6. This bodes well for Micron as GDDR6 reportedly accounted for a nice chunk (15%) of the company's revenue a couple of years ago.
It is not clear as to how much revenue Micron gets from selling specialty DRAM now, but the prospects of this segment appear to be bright thanks to strong demand from several quarters as mentioned earlier. For instance, both Sony's PlayStation 5 and Microsoft's Xbox Series X are using GDDR6 memory and their sales are expected to take off in the coming months. As a result, Micron is likely to keep enjoying favorable specialty DRAM pricing over the coming months.
Yet another reason to buy
The potential uptick in the demand and prices of specialty DRAM adds to the other tailwinds Micron is sitting on. The memory specialist can count on several catalysts such as the arrival of 5G smartphones that are expected to create more demand for both NAND and DRAM chips. Additionally, the increasing usage of solid-state drives in enterprise data centers and the latest gaming consoles will further boost demand for the company's products.
So, the huge demand for AMD and NVIDIA's graphics cards that has put GDDR6 supply under pressure gives investors another reason to go long on Micron Technology, especially considering its attractive valuation. The chipmaker trades at under 20 times forward earnings, making it an attractive growth stock for investors to buy right now as its bottom-line growth is expected to take off in the next two fiscal years, according to analyst estimates compiled by Yahoo! Finance.
