NVIDIA (NVDA 3.33%) and Micron Technology (MU 3.14%) have done well on the stock market over the past year, delivering solid gains to investors despite the upheaval caused by the novel coronavirus pandemic in 2020. But there has been a big difference in the degree of gains delivered by the two stocks.
Shares of NVIDIA have more than doubled, but Micron's performance hasn't been as astronomic. Will a similar story unfold in 2021, making NVIDIA a better bet for investors than Micron?
Let's find out.
The case for NVIDIA
NVIDIA has entered 2021 with solid catalysts in two of its biggest businesses -- video gaming and data center. These two segments produce 88% of NVIDIA's total revenue.
The video gaming business is showing promising signs in the new year, as demand for NVIDIA's latest graphics cards -- the RTX 30 series -- is through the roof. As reported by IGN, NVIDIA CFO Colette Kress recently pointed out that the demand for its gaming GPUs (graphics processing units) is "off the charts" even after a strong holiday season.
The graphics specialist has now warned that the supply of the RTX 30 series will remain tight through the first quarter of 2021, as the company is struggling to catch up to overwhelming demand from gamers and cryptocurrency miners alike. More importantly, the strong demand for NVIDIA's latest gaming graphics cards isn't going to disappear any time soon.
That's because the latest Ampere cards bring about a huge jump in performance over their predecessors at aggressive price points. This gives NVIDIA's huge installed base of old GPU users a solid reason to upgrade. All of this bodes well for the video gaming business, which recorded 37% year-over-year revenue growth in the third quarter of fiscal 2021, generating $2.27 billion in sales for the chipmaker.
Like gaming, NVIDIA's data center business has also been in fine form in recent quarters. The business has generated $4.8 billion in revenue in the first three quarters of fiscal 2021, a jump of 138% over the prior-year period. In fact, the data center business' growth has outpaced the video gaming business, which has recorded a 31% increase in revenue in the first nine months of the fiscal year and generated $5.3 billion in sales.
NVIDIA attributes this terrific growth to increased adoption of its GPUs in cloud computing. Several big cloud computing providers are using NVIDIA's data center chips for high-performance computing workloads, machine learning, and artificial intelligence (AI). In fact, NVIDIA is finding it difficult to fulfill GPU demand from its cloud customers. That's not surprising, as the shift to the Ampere architecture enabled NVIDIA to deliver big performance gains to cloud service providers, and also reduced the cost of operation.
NVIDIA also recently launched a new data center chip that could unlock a big opportunity for the company. The BlueField-2 data processing unit (DPU) is already finding terrific traction among customers, and it could help NVIDIA become a bigger force in the data center accelerator market, which is expected to hit $21 billion in revenue by 2023.
The case for Micron Technology
Micron Technology has seen several price target upgrades of late thanks to the favorable conditions in the dynamic random access memory (DRAM) market. Management points out that DRAM demand will remain strong in 2021, while disciplined capital spending will help keep a lid on supply.
More specifically, Micron anticipates the DRAM industry's demand to grow in the high-teens-percentage range this year. Industry supply is expected to grow at a slower pace than demand, which points toward a favorable pricing environment.
The demand-supply dynamics are already sending DRAM prices higher. According to a third-party estimate, the price of RAM used in personal computers (PCs) has shot up between 20% and 30% since December 2020 due to supply constraints and solid demand -- in fact, the DRAM used in graphics cards is already in short supply.
All in all, overwhelming demand from several quarters such as data center operators, gaming consoles, PCs, and 5G smartphones is going to positively impact the DRAM space in 2021. DRAM manufacturers, on the other hand, are being conservative as far as expanding supply is concerned. Samsung, for instance, is reportedly repurposing one of its DRAM assembly lines toward making image sensors. The DRAM output from that assembly line is expected to drop by half once the conversion is done.
Micron has decided to keep its DRAM capacity investments below the industry's average, while peer SK Hynix is expected to stay away from fresh capacity investments. All of this indicates that Micron's DRAM business, which is its biggest source of revenue with 70% of sales, is set up for a strong 2021.
Not surprisingly, analysts predict a 17% increase in Micron's revenue in fiscal 2021. That would be a huge improvement over fiscal 2020 when the memory specialist's top line fell 8.5% over the prior year. What's more, Micron's top-line growth is expected to get even better in fiscal 2022, with a potential increase of nearly 26%.
Micron Technology is about to step on the gas, but NVIDIA isn't going to be a slouch either. The graphics specialist's top line is expected to jump 20% in the new fiscal year that has just begun.
However, there's a big difference in the valuation multiples of the two companies. While NVIDIA trades at almost 90 times trailing earnings, Micron is much cheaper, with a price-to-earnings (P/E) ratio of 31. NVIDIA's forward P/E ratio of 48 is also on the higher side compared to Micron's multiple of nearly 20. Additionally, investors would have to pay less for Micron's sales growth given its price-to-sales ratio of 4.2, which is significantly lower than NVIDIA's multiple of 23.2.
So investors looking for a growth stock at a reasonable valuation have a stronger reason to choose Micron Technology over NVIDIA stock in 2021.