Nvidia Stock Is Expensive, But This AI Stock Could Become a Screaming Bargain in June

The surge in artificial intelligence (AI) applications has had a major impact on Nvidia (NASDAQ: NVDA), pulling the chipmaker out of the rut it was in and helping it deliver terrific guidance for the current quarter that points toward outstanding year-over-year growth in its revenue and earnings.

More specifically, for its fiscal 2024 second quarter (which began on May 1), Nvidia forecasts a 64% year-over-year increase in revenue to $11 billion at the midpoint of its guidance range. Analysts are expecting the company's earnings to jump to $2.05 per share from $0.51 per share in the prior-year period, which isn't surprising given the immense pricing power that Nvidia enjoys in AI chips.

However, investors looking to buy into Nvidia's AI-driven growth at this point will have to pay a massive premium. The stock trades at 201 times earnings right now. Its forward price-to-earnings (P/E) ratio of 52 points toward the terrific bottom-line growth the company expects, and which it could indeed deliver. Even then, though, it is quite expensive considering that the tech-heavy Nasdaq-100 index sports a forward P/E ratio of 27.

That's why investors looking for a cheaper way to capitalize on the growth of the AI market should take a look at Micron Technology (MU -0.42%), a memory specialist that has been in the news for the wrong reasons lately.

China's ban on Micron's chips could be a blessing in disguise

Micron investors were shocked late last month when China's cyberspace regulator announced that Micron's chips have "serious network security risks" and pose significant threats to China's national security. The regulator didn't provide any details about the type of risks posed by the chips, but it still banned the company from supplying its products for key infrastructure projects.

The announcement has negatively impacted Micron's stock, but the stock is still up roughly 35%, so far in 2023. However, it won't be surprising if it heads lower after the company releases its fiscal 2023 third-quarter results on June 28.

Micron has already guided poorly for the recently concluded quarter given the weak demand for memory chips. That segment of the chip market is in an oversupply situation, which has led to a sharp decline in memory prices. This explains why Micron expects just $3.7 billion in fiscal Q3 revenue and a non-GAAP loss of $1.58 per share. The company delivered $8.64 billion in revenue during the same quarter last year, with an adjusted profit of $2.59 per share.

Things could get worse for the company following the ban in China. That's because China accounted for just under 11% of Micron's total revenue last fiscal year. Specifically, it sold $3.3 billion worth of memory chips in the world's second-largest economy last year.

Analysts expect Micron's revenue in the current quarter to drop 39% year over year to $4 billion. The company is expected to report a loss of $1.04 per share compared to a profit of $1.45 per share in the prior-year period. But China's ban means that Micron could struggle to meet Wall Street's low expectations.

The stock could drop substantially if it misses the consensus numbers, especially because it's trading at a pricey multiple following its solid 2023 rally. Micron sports a price-to-earnings ratio of 48, which is quite expensive considering the huge declines it is witnessing in revenue and earnings. However, a pullback would give longer-term investors an opportunity to buy Micron at a cheaper multiple, and they should consider taking advantage since the company could turn out to be a solid AI player in the long run.

AI could supercharge the memory market and Micron

We have already seen that AI is turning out to be a serious growth driver for Nvidia as companies queue up to buy the chipmaker's server offerings to train large language models. These large language models, which power popular generative AI applications such as chatbots, also require faster memory and a lot more storage.

That's because the data that those models train on and process needs to be stored somewhere, and it will have to be moved to central processing units (CPUs) and graphics processing units (GPUs) rapidly. Faster memory will allow servers to quickly access huge amounts of stored data, which explains why Micron sees AI as its next big growth driver. As Micron CEO Sanjay Mehrotra remarked on the company's March earnings conference call: "An AI server today can have as much as eight times the DRAM content of a regular server and up to three times the NAND content."

Not surprisingly, the demand for the high-bandwidth memory that's deployed in servers built to tackle AI applications is expected to increase at a solid annualized pace of 25.6% through 2031, according to Straits Research. The size of that market could jump from just $1.6 billion last year to nearly $13 billion a year at the end of the forecast period.

On the other hand, according to a forecast by Market Research Future, the size of the server storage market will clock nearly 38% annualized growth through 2030, hitting almost $64 billion in value at the end of the decade. AI, along with cloud computing and big data analytics, is going to play an important role in the rapid growth of this market. As such, the memory needs of AI systems could soak up the oversupply that has been weighing on Micron's performance in recent quarters and turn the company's fortunes around.

The good part is that Micron's top and bottom lines are expected to pick up from the next fiscal year.

Source: YCharts. *Micron's fiscal years end in the first week of September of the corresponding calendar year.

AI could play a key role in the company's turnaround. So if Micron dips due to its near-term challenges, it may be a good idea to start accumulating shares since it could become a top AI stock in the long run.