Five months ago, stock for Advanced Micro Devices (AMD 12.63%) and Micron Technology (MU 3.81%) were following different trajectories when it came to their prices. Micron started the year on a positive note thanks to the terrific demand for memory chips, while AMD was struggling in the wake of the sell-off in tech stocks and market share gains clocked by Intel.
But things have changed remarkably for the performance of the two stocks since then.
AMD has regained its mojo thanks to consistently strong quarterly results and a solid outlook for 2021. Micron, on the other hand, has lost investor confidence due to concerns about the health of the memory market. That's not surprising -- investor sentiment in Micron stock is dictated by the booms and busts in the cyclical memory market, as I pointed out in April, while AMD is sitting on secular tailwinds that could ensure long-term growth.
As a result, AMD looked like the better buy in April, and the stock's performance since then justifies that call. But with Micron now trading at a dirt-cheap valuation and the prospects of the memory market looking up, is it now a better bet over AMD? Let's find out if my investing advice has changed.
The case for Advanced Micro Devices
There are three reasons why AMD remains a stock worth buying even after its impressive rally over the past few months.
First, the chipmaker continues to hurt Intel in the x86 CPU (central processing unit) market. Mercury Research estimates that AMD's CPU market share reached a 14-year high in the second quarter of 2021, hitting 22.5%, an increase of 4.2 percentage points over the year-ago quarter. AMD has doubled its CPU market share at Intel's expense in the past two to three years, and it seems on its way to further improve its positioning thanks to an advanced manufacturing process.
A stronger market share in the CPU space is going to be one of AMD's biggest catalysts, as its computing and graphics business is still quite small compared to Intel's. Similarly, AMD's gains in the server processor market could add billions of dollars to its revenue in the future.
Second, AMD is on track to take advantage of growing graphics card demand. Jon Peddie Research estimates that it holds 17% of the discrete graphics processing unit (GPU) market, with Nvidia controlling the rest. There is no doubt that Nvidia is the dominant graphics card provider, but AMD investors shouldn't forget that discrete GPU sales are expected to jump from $29 billion in 2020 to $44 billion in 2023.
If AMD continues to hold even a 20% share of the discrete GPU market in the future, it could substantially increase its revenue.
Third, AMD's dominant position in video gaming consoles adds yet another potent catalyst to the company's portfolio. AMD's enterprise, embedded, and semi-custom (EESC) business is winning big from the Sony PlayStation 5 and the latest Microsoft Xbox consoles, which use its semi-custom chips.
The EESC business is built for long-term growth as well, as the new console generation is still in its early phases. According to third-party estimates, the PS5 could clock 67 million units in annual sales by 2024, which would be a huge jump over the 4.5 million units sold last year. Throw in the fact that AMD has won the contract to supply chips for an upcoming handheld gaming console that could turn out to be a big success, and it's easy to see why AMD's EESC business will keep firing on all cylinders.
Given all these tailwinds, it is not surprising to see that AMD expects revenue to jump 60% in 2021. Even better, analysts believe that the company's robust growth is here to stay for the long run, as AMD's earnings are expected to grow at an annual pace of over 32% for the next five years. As such, AMD looks all set to sustain its recent rally thanks to multiple growth drivers.
The case for Micron
Micron shares have tumbled over the past few months despite the absence of any visible signs of weakness in the company's business. The company's third-quarter revenue increased 36% year over year to $7.42 billion, while adjusted earnings per share jumped to $1.88 per share from $0.82 per share in the year-ago quarter. The strong memory pricing environment sent Micron's operating income to 31.9% during the quarter from 18% in the year-ago period.
What's more, Micron's guidance suggests that it isn't going to run out of steam. The company expects $8.2 billion in fiscal fourth-quarter revenue and earnings of $2.30 per share, which would translate into 35% year-over-year revenue growth and a sharp jump from the prior-year period's earnings of $1.08 per share. It is surprising to see Micron shares taking a beating despite such outstanding numbers. But investors' trepidation seems justified, as drops in memory prices have historically been bad news for the company.
However, the massive end-market demand for memory chips suggests that memory prices may continue to hold up. For instance, memory industry market research provider TrendForce estimates that robust demand from data center servers could push up server DRAM (dynamic random access memory) prices by 5% to 10% in the current quarter.
More importantly, the server market is set up for long-term growth. Mordor Intelligence estimates a 12% annual increase in enterprise server spending through 2026 on account of the deployment of hyperscale data centers and increased server storage demand. A similar scenario is unfolding in the mobile DRAM market, where the deployment of 5G smartphones has led to a sharp increase in demand.
Counterpoint Research estimates that mobile DRAM revenue increased 30% year over year in the first quarter of 2021 thanks to an increase in the average DRAM capacity per smartphone. As 5G smartphones are being equipped with more DRAM and are still in their early phases of growth, Micron should continue witnessing healthy demand from this market.
With mobile and servers accounting for nearly three-fourths of the overall DRAM market, investors' fear of a drop-off in memory demand could remain unjustified. Finally, the secular catalysts Micron stands to gain from could result in a massive acceleration in its revenue and earnings over the coming years, according to analysts' estimates.
In fact, analysts expect Micron's earnings to clock a compound annual growth rate of 58% for the next five years, which is substantially higher than what's expected from AMD.
By now it should be evident that both Micron and AMD can continue to sustain their impressive growth in the future. As such, investors can't go too far wrong with either stock.
However, those looking for a value play right now have a solid reason to buy Micron stock, as it is trading at just 20 times trailing earnings. The forward earnings multiple of just 7 makes it even more attractive when compared to AMD, which trades at a multiple of 35. So investors with a higher risk appetite can still go for AMD, as its premium seems justified, while those looking to buy a growth stock on the cheap should take a closer look at Micron Technology.