Nvidia (NVDA 6.18%) has been one of the market's hottest chip stocks. The chipmaker was originally known for making gaming GPUs, but the rapid expansion of the artificial intelligence (AI) market over the past few years drove more companies to purchase its high-end data center GPUs to process complex AI tasks.
Nvidia's rally of more than 2,000% over the past five years boosted its market cap to $2.4 trillion and minted a lot of millionaires. But it's also driving more investors to search for the next big chipmaker that could follow Nvidia's footsteps.
Image source: Micron.
Could that chipmaker be Micron (MU 2.92%), one of the world's top producers of DRAM and NAND memory chips? Let's review the key differences between Micron and Nvidia to see if Micron has a shot at replicating Nvidia's gains.
The key differences between Micron and Nvidia
Micron designs its memory chips and manufactures them at its own foundries. That makes it different from Nvidia, which designs its chips but outsources its production to third-party foundries like Samsung and Taiwan Semiconductor Manufacturing Company. Micron operates that capital-intensive model at much lower margins than Nvidia.
Data source: YCharts
Micron's memory chips also cost a lot less than Nvidia's GPUs, and it doesn't dominate its core markets in the same way as Nvidia. Micron is the world's third-largest supplier of DRAM chips and the fifth-largest supplier of NAND chips, but Nvidia is the leading producer of discrete GPUs by a wide margin. According to JPR, Nvidia controlled 80% of the market at the end of 2023, while AMD only held a 19% share.
Compared to Nvidia, Micron operates in a more commoditized market, has less pricing power against its competitors, and is more exposed to cyclical downturns as the memory chip market goes through its boom-and-bust cycles. However, Micron still produces denser and more power-efficient DRAM and NAND chips than its two largest competitors, Samsung and SK Hynix. That technological edge helps Micron lock in producers of higher-end PCs, mobile devices, and servers.
How long will the next growth cycle last?
Micron endured a rough slowdown over the past two years as personal computer (PC) shipments declined in a post-pandemic market, the 5G upgrade cycle ended, and the macro headwinds curbed its chip sales to the enterprise and industrial markets. The Chinese government also barred its key infrastructure providers from buying Micron's memory chips. All of those challenges offset its stronger growth in the automotive and AI markets.
Micron's revenue grew 29% in fiscal 2021 (which ended in September 2020), but only rose 11% in fiscal 2022 and tumbled 49% in fiscal 2023. However, analysts expect its revenue to rise 56% in fiscal 2024 and 43% in fiscal 2025 as three tailwinds kick in. First, the PC and smartphone markets should gradually stabilize. Second, it should sell more chips to the enterprise, industrial, and automotive markets as the macro environment warms up again.
Lastly, the explosive growth of the generative AI market will drive more data centers to upgrade their memory chips alongside Nvidia's GPUs. During Micron's latest conference call, CEO Sanjay Mehrotra said the memory chip market was still in "the very early innings of a multiyear growth phase driven by AI" and that those technologies would transform "every aspect of business and society." As an example, Mehrotra predicted that AI-enabled phones would "carry 50% to 100% greater DRAM content compared to non-AI flagship phones today."
But another cyclical downturn is inevitable
That's a bright outlook, but Micron's new growth cycle will still likely end in a few years. That's because companies drive up memory prices by buying a lot of chips when a certain market -- like smartphones, cloud data centers, and AI -- runs hot.
In response, Micron and its peers usually ramp up their production of new chips to satisfy that demand. But once the hot market cools, the chip shortage quickly turns into a supply glut as companies are left with an excess inventory of chips. That's why Micron's chip sales fell in 2019 and 2022 -- and why they'll likely drop again once the AI market matures.
This next growth cycle could last a lot longer than previous ones, but it will eventually end in a downturn. Nvidia will also face a similar slowdown, but its cyclical declines have been much milder than Micron's over the past decade. That's because Nvidia's dominance of the discrete GPU market grants it more pricing power during market downturns -- while Micron remains heavily exposed to the price cuts at its larger competitors.
Can Micron become the next Nvidia?
Micron's stock trades at less than 4 times next year's sales, and it could run higher as its next growth cycle begins. If its valuations hold steady and it grows its revenue at a CAGR of 30% over the next five years, its stock could nearly quadruple. That would be an impressive gain, but it could end in a cyclical downturn and won't come close to replicating Nvidia's gains over the past five years. Simply put, Micron is still a promising semiconductor play -- but it's probably not the next Nvidia.
