Artificial intelligence (AI) has captured the imagination of businesses and investors alike over the past year. This spring, the hype over ChatGPT's capabilities displayed last November began translating into blockbuster revenue and profits for AI leaders such as Nvidia and others.
The stocks of industry leaders have run very far already. So which one of them is the best AI stock to buy in September?
Booming AI spending has crowded out spending on other types of tech, such as general-purpose servers. Meanwhile, consumer electronics sales of PCs and smartphones have struggled amid high interest rates and the post-pandemic hangover.
While AI sentiment has broadly boosted tech and semiconductor stocks, some AI beneficiaries with broader exposure haven't appreciated as much as AI "pure plays." And many are still well below their 2021 highs.
That includes my pick for the month of September, which trades at a cheap valuation. It not only has underrated prospects in AI, but it should also benefit more than many think from a broader industry recovery.
Is this Micron's moment?
Over the past year, Micron Technology (MU 2.11%) has endured the most brutal memory downturn since 2008.
Memory isn't unlike oil in that it's somewhat (though not completely) commoditized, with pricing that can swing wildly up and down, depending on supply and demand. However, the three major DRAM suppliers have all cut their capital plans and decreased production by 30% or so in recent months. Meanwhile, demand seems to be bottoming, while artificial intelligence brings the potential for a better-than-expected demand next year.
That's a pretty nice setup that should fuel the next memory upturn. While the market has given Micron some credit for a potential recovery, its 41% year-to-date gain is still below the 47% gain of the iShares Semiconductor ETF and far below the 232% gain seen in AI chip leader Nvidia. And Micron still trades 30% below its all-time highs while valued at just 1.7 times book value, making it relatively inexpensive, compared with other tech and chip stocks.
Micron should eventually lead in HBM for artificial intelligence
Another knock against Micron is that it fell behind rivals in high-bandwidth memory, or HBM, a small niche of the market that's currently in high demand for AI applications. Currently, Korean rival SK Hynix is seen as a leader in this DRAM niche because over the past decade, Micron pursued a different technology architecture called hybrid memory cube.
However, the industry eventually standardized on HBM for high-performance computing, and in 2018, Micron shifted its strategy. Yet it appears Micron isn't only rapidly catching up to SK Hynix and Samsung in HBM, but is also likely to surpass both by early 2024.
In July, Micron announced that customers were sampling its new HBM3 product, which boasts 24GB of capacity in just eight layers of vertically stacked DRAM modules, and bandwidth over 1.2 TB/s. Those specs actually beat out SK Hynix's leading HBM chip, which currently has 24GB of capacity in 12 layers, and a speed of 1 TB/s.
Even with SK Hynix recently introducing a souped-up version of that HBM3 product called HBM3E, the speed of that new version will only increase to 1.15 TB/s, still below that of Micron's new HBM3.
Micron's new HBM product won't start shipping until early 2024 and won't ramp up until later next year. Still, that leaves more high-margin growth for investors to look forward to.
DRAM memory is the key bottleneck in fast artificial intelligence. Image source: Getty Images.
Don't forget the rest of the memory market recovery
Micron's fast progress in HBM is another example of its growing technology lead, even in non-AI memory. In 2022, the company surpassed rivals in achieving leading-edge memory nodes for the first time, becoming the first vendor to ramp up 232-layer NAND flash and 1-beta DRAM.
However, Micron's technology success was overshadowed by an extreme cyclical downturn that hit the industry around the same time.
But that technology lead has helped Micron weather the storm and come out stronger on the other side. Last week, industry research site Trendforce issued some encouraging data from the second quarter. It appears DRAM industry revenue bottomed in the first quarter, with all three major DRAM vendors growing quarter over quarter in Q2.
According to Trendforce, SK Hynix saw the greatest quarter-over-quarter growth of 50% on the back of price increases of 7%-9%, thanks to its HBM products. But remember, Micron is poised to capture a significant part of the HBM market next year.
However, Micron far outpaced Samsung, with a 15.7% revenue increase and stable prices, while Samsung grew revenue only 8.6%, as its DRAM selling prices continued to fall. This is because Micron's mix skewed toward higher-end DDR5, which are premium products that benefit from Micron's technology lead.
Even in the beleaguered NAND flash industry, Micron is showing some technological differentiation over its peers. In Trendforce's study of NAND flash-based solid-state drive (SSD) sales, Micron outpaced all competitors in Q2, thanks to its high proportion of advanced 176-layer PCIe SSDs.
In a down market for NAND, Micron's SSD revenue only declined 1.8%, whereas all other competitors saw 20%-35% declines. That allowed Micron to gain market share, going from the fifth-largest SSD vendor to third place in just one quarter.
Micron's recovery could be better than expected
The memory market is extremely cyclical, with booms usually leading to busts and vice versa. But the most recent bust was one of the worst ever, with all major vendors curtailing production and cutting capital expenditures. And with new demand drivers from AI kicking in, the memory industry is sowing the seeds of its next upswing.
However, Micron's recent technological achievements over rivals means it could have an even better recovery than in past cycles. That's why it's my top AI stock to buy this month.
