Semiconductor stocks have mostly been on fire on the market in 2023, which is evident from the impressive 33% surge in the PHLX Semiconductor Sector index so far this year. A key reason why the market is upbeat about this sector is enthusiasm over the potential of artificial intelligence (AI) to boost chip sales.
AI turned out to be an important growth driver for semiconductor companies as this technology requires powerful processors, more storage, and faster memory, among other things. Nvidia, for instance, is a big beneficiary of the booming AI-driven chip demand as the tech giant's recent results tell us. However, Nvidia isn't the only company that stands to gain from AI.
The likes of Micron Technology (MU 2.92%) and Marvell Technology (MRVL 3.17%) also provide critical building blocks for AI infrastructure, and the good part is that they can be bought at attractive valuations right now. Let's look at the reasons why AI could turn out to be a catalyst for these two chip stocks.
1. Micron Technology
Micron Technology stock is up 37% so far in 2023, driven mainly by the belief that AI could give the weak memory market a shot in the arm. It is worth noting that Micron's revenue and earnings have declined steeply in recent quarters as memory demand has dried up on account of weak demand from computers and smartphones. The lack of demand has caused an oversupply and led to a sharp fall in the prices of memory chips.
All this explains why Micron's revenue in the recently concluded fiscal year 2023 is expected to drop in half from the prior-year period to $15.4 billion. The chipmaker is expected to report a loss of $4.55 per share as compared to a profit of $8.35 per share in the previous fiscal year. However, Deutsche Bank analyst Sidney Ho forecasts that the worst could be over for Micron.
Ho says that the inventory correction in the memory market is nearly over thanks to the production cuts instituted by the likes of Micron and other players in the industry. The analyst adds that AI servers are driving stronger memory demand.
Ho believes that the recent uptick in the prices of dynamic random access memory (DRAM) could gain further momentum over the next couple of quarters, allowing Micron to deliver stronger-than-expected revenue and earnings estimates for the first quarter of fiscal 2024. The analyst increased the price target for Micron to $85 from $65, which points toward a 23% jump from current levels.
Market research firm Gartner forecasts that the memory industry could rebound big time in 2024 with an estimated revenue jump of 70%. That would be a big turnaround as compared to this year's estimated decline of 35%. AI is likely to play a central role in this turnaround. According to Micron, "AI servers have six to eight times the DRAM content of a regular server and three times the NAND content."
With the AI server market's revenue expected to jump a whopping fivefold in the next four years -- increasing from $30 billion in 2023 to $150 billion in 2027 -- as per Foxconn, Micron is sitting on a secular-growth opportunity thanks to AI. So, it is not surprising to see analysts forecasting a significant jump in Micron's revenue from fiscal 2024.
MU Revenue Estimates for Current Fiscal Year data by YCharts.
In all, Micron stock can step on the gas in the final quarter of the year and go on a sustainable bull run thanks to the long-term opportunity created by AI servers. That's why investors should consider buying this AI stock while it trades at 4 times sales, which makes it way cheaper than the likes of Nvidia, which sports a price-to-sales ratio of 32.
2. Marvell Technology
Just like Micron, tepid memory demand has been weighing on Marvell Technology's results of late. The company's fiscal 2024 second-quarter revenue (for the three months ended July 29, 2023) was down 12% year over year to $1.34 billion. Its non-GAAP earnings fell at an alarming rate of 42% over the year-ago period to $0.33 per share last quarter.
Marvell management attributed its poor showing to weak storage demand from the data-center segment, which produced 34% of its total revenue and saw a year-over-year decline of 29%. But at the same time, Marvell pointed out that its AI-related revenue is now growing at a faster-than-expected pace.
CEO Matt Murphy said on the company's August earnings-conference call that "we now expect revenue from AI to exit this year at over a $200 million quarterly revenue run rate or $800 million annualized." For comparison, Marvell landed $200 million in AI-related revenue in the previous fiscal year, and management was anticipating the same to double in fiscal 2024 and fiscal 2025. However, management's comments on the earnings call indicate that it is on track to quadruple its AI revenue this year.
What's more, Marvell may reportedly land a big AI customer in the form of Alphabet for powering Google's AI servers. This, however, could be just the beginning of Marvell's AI-driven growth as its data-center interconnect chips, which will play an important role in connecting multiple servers in a data center, could witness healthy demand in the long run. According to a third-party estimate, the data-center interconnect market could generate $17.4 billion in annual revenue in 2028 as compared to $5 billion last year.
All this explains why Marvell's fortunes are expected to turn around in the next fiscal year.
MRVL Revenue Estimates for Current Fiscal Year data by YCharts.
But don't be surprised to see the company clock a faster pace of growth given the growing influence of AI on its business. That could turn out to be a key growth driver for Marvell, which is why investors should consider taking advantage of the 20% decline in the company's stock price since the beginning of August as it could soon regain its mojo and start soaring.
