Advanced Micro Devices (AMD 2.60%) and Micron Technologies (MU 5.51%) are both underdogs in their respective markets. AMD is the world's second-largest maker of x86 CPUs and discrete GPUs after Intel (INTC 3.88%) and Nvidia (NVDA 2.21%), respectively. Micron is the world's third-largest producer of DRAM chips and its fourth-largest supplier of NAND chips. Samsung and SK Hynix lead both the DRAM and NAND markets.
Yet AMD and Micron both have unique competitive advantages.
AMD, by outsourcing its production to Taiwan Semiconductor Manufacturing, sells denser, cheaper, and more power-efficient CPUs than Intel. It also sells cheaper GPUs than Nvidia. Micron, which operates its own foundries, produces denser memory chips than its South Korean competitors.
Image source: Getty Images.
Those strengths enabled both chipmakers to weather tough macro, cyclical, and competitive headwinds. Over the past 10 years, AMD's stock price soared 3,770% as it gained ground against Intel in x86 CPUs, kept pace with Nvidia in discrete GPUs, and carved out a defensible niche with its custom APUs for gaming consoles.
Micron's stock rallied more than 300% as the expansion of the mobile, data center, PC, and connected vehicle markets generated cyclical but steady demand for its DRAM and NAND chips. AMD has clearly been the more exciting play for growth-oriented investors, but is it still the better buy right now? Let's take a fresh look at both companies to decide.
Both companies face cyclical headwinds
In 2023, AMD generated 29% of its revenue from its sales of Epyc CPUs and Instinct GPUs for data centers. It generated another 27% of its sales from gaming GPUs for PCs and custom APUs for consoles, 23% from its sales of embedded chips (including Xilinx's programmable chips), and the remaining 21% from x86 CPUs for PCs.
AMD's revenue fell 4% for the year as its declining sales of PC and gaming chips offset its stronger sales of data center and embedded chips for the growing AI market. Its sales of PC CPUs and GPUs declined as fewer people upgraded their PCs following the industry's temporary growth spurt during the pandemic, and its sales of custom APUs slipped as Sony and Microsoft sold fewer consoles. Inflationary headwinds for consumer spending exacerbated that slowdown.
As a result, AMD's adjusted gross margin shrank two percentage points to 50% in 2023 as its adjusted earnings plunged 24%. But for 2024, analysts expect its revenue and adjusted earnings to grow 5% and 23%, respectively, as it ships more data center chips for the booming AI market and the PC and gaming markets stabilize. For 2025, analysts expect its revenue and adjusted earnings to increase 28% and 60%, respectively.
NASDAQ: AMD
Key Data Points
In fiscal 2023 (which ended last August), Micron's revenue plummeted 49%, its adjusted gross margin turned negative, and it posted an adjusted net loss. Its sales of DRAM chips (71% of its top line) and NAND chips (27%) shriveled as PC shipments fizzled out and the 5G upgrade cycle for smartphones ended. The macro headwinds also drove its data customers to prioritize AI-oriented purchases of GPUs over new memory chips.
But in the first nine months of fiscal 2024, Micron's revenue surged 51% year over year as the PC and smartphone markets stabilized, and data centers upgraded their solid-state drives (SSDs) and high-bandwidth memory (HBM) chips to process more AI tasks. Its adjusted gross margin and adjusted earnings also turned positive again.
For the full year, analysts expect Micron's revenue to grow 50% with an adjusted profit. For fiscal 2025, they expect its revenue and adjusted earnings to increase by 54% and 676%, respectively, as a new growth cycle begins.
NASDAQ: MU
Key Data Points
But one stock seems to be the better value
AMD and Micron should both experience accelerating growth over the next two years as their core markets warm up again. However, AMD looks a bit pricey at 48 times forward earnings -- especially when Nvidia, which is growing faster with more exposure to the AI market -- has a forward multiple of 49. Micron trades at just 16 times forward earnings.
AMD's valuations seem to be inflated by the market's high expectations for its Instinct GPUs -- which cost much less than Nvidia's H100 GPUs -- for the AI-driven data center market. But AMD only generates a sliver of its revenue from those chips and is highly exposed to the wobblier PC and gaming console markets.
Investors also seem bullish on Micron's growth potential in the AI market -- but its cyclical recovery is clearer and it looks more reasonably valued. That's why I believe the memory chipmaker is a better buy than AMD right now.
