Micron Technology (MU +3.54%) stock has set the market on fire in the past five years, recording impressive gains of 258% and outpacing the Nasdaq-100 Technology Sector index's returns of 136% by a big margin.
A nice chunk of the stock's gains have arrived since the beginning of 2023 when the artificial intelligence (AI) hype started building up. And now, AI is more than just hype for chipmakers such as Micron, whose products are helping build the required infrastructure needed for the proliferation of this technology. The good part is that AI is likely to remain a top growth driver for Micron over the long run, driving robust growth in the company's top and bottom lines.
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Let's see why that may be the case and try to find out if Micron can continue to deliver big gains over the next five years.
Micron Technology is going to spend more money to meet the demand for AI chips
When Micron Technology released its fiscal 2024 second-quarter results in March, the company posted a 58% year-over-year jump in revenue to $5.8 billion. However, it could have clocked even stronger growth had it been able to meet the entire demand for memory chips, known as high-bandwidth memory (HBM), deployed in AI servers.
On its March earnings conference call, Micron management remarked that it is "on track to generate several hundred million dollars of revenue from HBM in fiscal 2024." The company also said that its entire HBM capacity for 2024 is sold out and an "overwhelming majority" of its 2025 supply has been allocated already.
So, it wasn't surprising to see Micron management recently raising its 2024 capital expenditure budget to $8 billion from the earlier estimate of $7.5 billion. The company is likely to allocate the increased budget toward producing more HBM, especially considering that it expects this type of memory chip to become a multibillion-dollar business in the next fiscal year, which will begin in September.
Micron, therefore, is anticipating a big acceleration in its revenue from sales of HBM chips from fiscal 2024 to fiscal 2025. More importantly, its HBM business seems built for healthy long-term growth. That's because AI-oriented chips are expected to account for 61% of the overall memory market in 2028 as compared to just 5% this year, according to Micron's peer SK Hynix.
Market research provider Yole Group estimates that the HBM market could generate annual revenue of $14 billion in 2024. Even better, the firm predicts that HBM shipments could increase at a compound annual growth rate (CAGR) of 45% through 2029. So, Micron is doing the right thing by boosting its capex as this move should allow it to capitalize on the lucrative HBM opportunity in the long run.
However, it is worth noting that Micron is set to capitalize on the proliferation of AI in more ways than one. While the server opportunity is really strong, investors should not forget that AI-enabled smartphones and personal computers (PCs) will add to the chipmaker's addressable market.
The market for generative AI-enabled smartphones and PCs is expected to clock a CAGR of almost 35% through 2029, according to Global Market Estimates. What's more, each AI-enabled smartphone and PC is expected to carry more memory content. According to Micron, AI PCs reportedly carry 40% to 80% more dynamic random access memory (DRAM) than traditional PCs. On the other hand, the company is expecting "AI phones to carry 50% to 100% greater DRAM content compared to non-AI flagship phones today."
All this indicates why the memory market is expected to generate annual revenue of $321 billion in 2030 as compared to $194 billion last year, according to Fairfield Market Research. It could pave the way for Micron to keep growing at a healthy pace over the next five years.
Stronger growth could lead to more stock price upside
We have already seen that Micron delivered outstanding revenue growth in the previous quarter. The impressive top-line growth is expected to translate into a significant jump in the company's bottom line.
MU EPS Estimates for Current Fiscal Year data by YCharts
For comparison, Micron finished the previous fiscal year with a loss of $4.45 per share on account of the weakness in the memory market that was triggered by weak sales of smartphones and PCs. Its annual earnings growth rate in the past five years stands at just over 10%, but as the chart above indicates, its bottom-line growth is set to accelerate remarkably.
So, there is a good chance that Micron's earnings could increase at a faster pace in the next five years as compared to the past five. The market could reward this acceleration with more stock price upside, so it would be a smart move to buy Micron right away as it is trading at an attractive 18 times forward earnings.
