The semiconductor industry is a notoriously cyclical sector and its profitability generally moves in sync with economic trends. While profits rise during booming periods, a recession can often turn those profits into losses. Investors in Micron Technologies (MU -0.44%) have seen the company follow this path in the past, regularly going through periods of boom and bust.
Lately though, some structural trends have emerged that appear to have changed the dynamics of this industry for good. The development of smart vehicles, the rise of 5G, and the incorporation of the Internet of Things into so many parts of the economy are combining to create sustained tailwinds for semiconductor manufacturers. Another one of these trends -- artificial intelligence (AI) -- is propelling Micron to an entirely new level.
AI drives higher demand for Micron's products
In the past, manufacturers of memory (DRAM) and storage (NAND) semiconductor chips like Micron depended mainly on the sales of PC and enterprise servers, which are highly cyclical. But as the demand for memory products diversifies thanks to the rise of data centers, smartphones, and more, the demand fluctuation becomes less obvious while growth becomes more sustainable. Similarly, the rise of AI is also expanding the demand for memory and storage products.
Take data centers as an example. The increased complexity of AI algorithms helps data centers consider more parameters as part of their calculations and processing. This leads to more data being processed and analyzed. This increase in workload calls for more memory to process the data. On top of the processing needs, data centers have to store this ever-growing amount of data, leading to an increase in demand for NAND storage chips. According to Micron, the memory and storage demand per server is expected to double and triple, respectively, from 2021 to 2025. Effectively, Micron expects to reap benefits from a growing number of data centers as well as the increase in the density of memory and storage products used in each data center.
Consider another example in smart cars. As vehicle autonomy improves over time, the demand for memory to process data produced by car systems ranging from infotainment to safety -- and storage to store this exponential growth in data produced -- is also expected to explode in the coming years. Micron estimates that the automobile market's target addressable market (TAM) will grow at a compound annual rate of 28% between 2021 and 2025.
In short, as AI permeates almost every aspect of our personal and work lives (phones, factories, homes, etc.), the demand for Micron's memory and storage will go nowhere but up.
Micron uses AI to advance its manufacturing
The proliferation of AI helps grow Micron's top line. But there is more to that. It also advances the tech company's manufacturing capabilities and efficiencies.
For example, Micron analyzes a massive amount of data generated from the more than 500,000 sensors across its manufacturing footprint. Micron's AI model runs through more than 20 million images per week to predict potential problems in its operations and aid real-time decision-making. Without AI, processing this sheer amount of data would be nearly impossible.
Artificial intelligence in semiconductor manufacturing is crucial as the industry has arguably one of the most demanding manufacturing processes. There are hundreds (if not thousands) of process steps to make a memory chip, and any defect in one process will cause a bottleneck to build up and a cost overrun to take place. AI helps Micron analyze data from multiple points, identify risks early on, and take preventive measures to avoid a manufacturing breakdown.
The result is better productivity, shorter time to implement and scale new technology and products, and more efficient use of financial resources.
What this means for Micron and its investors
Micron stands to benefit enormously from the increase in AI penetration. AI will grow the demand for memory and storage products, which will help sustain Micron's revenue growth in the coming years.
Besides, using AI within its business operations will help Micron improve resource planning and utilization, leading to better capital and cost management. Ultimately, these improvements should result in a higher and more sustainable margin.
Combined, we could see profits growing more sustainably over time. And if that is the case, Micron's share price will rise in correlation with its growing profitability.