Wall Street gave Micron Technology's (MU 2.92%) latest quarterly results a thumbs down, even though the company's top and bottom lines were better than what analysts were looking for. This shouldn't be surprising if you take a closer look at the company's numbers.
Thanks to falling memory prices, Micron's revenue dropped a whopping 57% year over year in the third quarter of fiscal 2023 (for the three months ended June 1, 2023) to $3.75 billion, and the company swung to a loss. Additionally, Micron's guidance for the current quarter points toward a year-over-year revenue contraction of 41%.
However, CEO Sanjay Mehrotra believes that "the memory industry has passed its trough in revenue, and we expect margins to improve as industry supply-demand balance is gradually restored." One catalyst that could help restore this balance is artificial intelligence (AI) -- a term that was mentioned several times on Micron's earnings call.
Let's see how this fast-growing technology is going to impact Micron's fortunes and help the stock sustain its impressive momentum.
Micron Technology sees AI as a big growth driver
According to Mehrotra, the rapid "adoption of generative AI is driving higher-than-expected industry demand for memory and storage for AI servers." He also adds that "AI servers have six to eight times the DRAM content of a regular server and three times the NAND content."
This is not surprising, as training and deploying large AI models using billions or trillions of parameters is creating the need for substantially more memory content. Market research firm TrendForce estimates that shipments of AI servers could grow an impressive 38% this year. Even better, the firm points out that AI server shipments could clock 22% annual growth through 2026.
So the demand for memory chips is likely to see a faster increase given that the amount of dynamic random access memory (DRAM) and NAND flash memory that go into an AI server is substantially higher than that of a regular server. This explains why the demand for high-bandwidth memory (HBM), which is deployed in AI servers, is expected to grow at an annual pace of 31% through 2031.
Micron has already started taking advantage of this lucrative opportunity. The company provided a hint on its latest earnings call that Nvidia is deploying Micron's memory chips in AI servers. Mehrotra said:
In fact, some customers are deploying AI compute capability with substantially higher memory content. A striking example is NVIDIA's DGX GH200 supercluster, which shows just how memory-intensive AI workloads can be -- it provides developers the ability to support giant models with a massive, shared memory space of 144TB.
The Micron CEO further specified that "a significant majority of that memory footprint is enabled by a joint development project between our two companies," suggesting that it may be supplying a significant chunk of memory content to Nvidia. Micron's partnership with Nvidia could be extremely fruitful for the former. That's because Nvidia controls a whopping 60% to 70% of the fast-growing market for graphics processing units (GPUs) used in AI servers, according to TrendForce.
According to other estimates, such as the one from New Street Research, Nvidia's share of the market for AI chips stands at a massive 95%. This explains why there is reportedly a waiting period for Nvidia's AI chips. So Micron could benefit big time from Nvidia's dominant position in the market for AI chips, which is expected to clock annual growth of almost 30% a year over the next decade.
Solid long-term upside could be in the cards
According to a consensus of 30 analysts covering Micron, the stock has a 12-month median price target of $77, which points toward 26% upside from current levels. The Street-high price target of $100 would translate into 63% gains. But don't be surprised to see Micron deliver stronger gains thanks to a potential acceleration in growth.
Micron is expected to register attractive revenue growth over the next couple of fiscal years.
MU Revenue Estimates for Current Fiscal Year data by YCharts
This wouldn't be surprising given catalysts such as AI and an anticipated recovery in the smartphone and PC markets next year. If Micron does generate $28 billion in fiscal 2025, its top line would be close to doubling in just two years. Multiplying Micron's estimated revenue after two years by the company's price-to-sales ratio of 4, which can be considered low for a stock riding the AI wave, its market cap could jump to $112 billion.
That would be a jump of more than 60% from current levels. However, don't be surprised to see Micron deliver even better returns given the elevated multiples at which AI stocks trade. That's why investors who are looking to take advantage of the growing proliferation of AI with a stock that's trading at a more reasonable valuation than Nvidia may want to take a closer look at Micron before it jumps higher.
