In 2024, the market saw individual technology stocks soar or crash based on the perception of their artificial intelligence (AI) prospects.
The trick for investors is to find under-the-radar AI winners before the market does, or to pounce on long-term winners after sell-offs when doubts creep into their stories.
With its stock having nearly doubled in the first half in 2024 only to give almost all those gains back in the second half, this one AI stock is currently in a trough of despair. Yet the age of AI will only need more and more of this company's specialized products, making the stock a bargain today.
NASDAQ: MU
Key Data Points
Micron Technology is a rare AI commodity
The early 2024 enthusiasm for Micron Technology (MU +0.59%) had some real truth to it. That's because AI requires tons of DRAM memory to train massive datasets quickly and also for better inferencing, or "thinking," which has grown in importance with OpenAI's new "reasoning" ChatGPT models such as o1. Overall, the DRAM intensity of AI is only supposed to accelerate in the coming years, with specialized AI memory a current bottleneck.
Micron makes both DRAM memory and NAND flash storage, but DRAM makes up the majority of its revenue, at 73%. That's good news, because DRAM is both set for higher growth than NAND, and there are only three companies that can produce advanced DRAM nodes: Micron, SK Hynix, and Samsung. There are also Chinese upstarts beginning to make some DRAM, but this is for low-end, low-margin applications making up a mid-single-digit percentage of the market.
With the rise of artificial intelligence, there is sudden demand for a new type of advanced memory, called high-bandwidth memory, or HBM. While SK Hynix had an early lead in HBM, Micron is catching up quickly. Last quarter, Micron's HBM revenue more than doubled quarter over quarter, and management maintains that it has the most advanced product in the market, in technology terms, with its HBM3E product having lower power consumption and higher speeds than those from SK Hynix.
Why HBM is such a massive growth opportunity for Micron
Despite the recent fast ramp-up, HBM still makes up a tiny portion of Micron's revenue. In its fiscal 2024, which ended in August, HBM accounted for only several hundred million dollars for Micron, out of a total $17.6 billion in DRAM revenue and $25.1 billion in total revenue last year.
That should change in the coming years in a big way. Micron sees the HBM market growing from $16 billion in 2024 to over $30 billion in 2025, with Micron's HBM market share increasing toward its overall DRAM market share by the end of 2025. Micron's current overall DRAM share is about 20%, but that's largely because SK Hynix had the early volume lead in HBM. Before the AI and HBM takeoff, Micron's share was in the mid-20% range.
That means Micron's HBM revenue could reach $6 billion to $7 billion in 2025 from nearly nothing in 2024. On top of 2024's numbers, HBM growth alone could add over 25% to Micron's overall revenue.
But the HBM story doesn't stop there. Micron sees the HBM market growing further to over $100 billion in 2030, which would be larger than the entire DRAM industry in 2024. That's absolutely massive, and it would more than double Micron's revenue even without any growth in its other segments.
Not only that, but there's also an opportunity for Micron to grow even faster than the HBM market overall. That's largely due to the struggles of Samsung, which has the largest market share of the overall DRAM industry but has struggled to produce HBM at acceptable yields. Samsung's stumble on HBM has therefore opened up the potential for Micron to take even more market share of this all-important segment.
Image source: Getty Images.
Why Micron stock fell after its recent earnings
With all of these positives, some might wonder why Micron fell by double digits after its recent earnings report and is now 43% below its July all-time highs.
The reason lies in the non-HBM and non-data-center portion of Micron's portfolio. These include chips that go into smartphones, PCs, and the auto and industrial segments. All of these segments are still sluggish, and end customers are still burning down their inventory.
Since HBM is still such a small portion of current revenue, its growth won't be enough to counter the pullback in other segments. That will actually cause Micron's revenue to fall sequentially for the current quarter, ending in February, marking the first sequential decline in nearly two years.
MU Revenue (Quarterly) data by YCharts
This may have worried investors, because historically, when Micron's revenue starts to roll over, it could be the signal of a bigger downturn. The memory segment has historically been extremely cyclical and volatile, with pricing for memory fluctuating wildly based on supply and demand.
But HBM makes this time a bit different
However, the dynamics of HBM could change the memory market. Micron is already sold out of its HBM product through 2025 at fixed pricing, so that revenue and margin isn't going away. In Micron's upcoming HBM4 product, due to arrive in 2026, there will be an additional logic component of the chip stack. Micron believes that logic die can lead to increased customization, and probably more differentiation and pricing power.
So HBM may not be quite as commoditized as the DRAM memory industry has been in the past. As HBM makes up a larger and larger portion of Micron's business, that should underpin growth and profits going forward.
Micron's overall data center business, including HBM and its other advanced DDR5 memories, also made up more than 50% of its revenue for the first time last quarter. So as Micron's business becomes more centered on the high-growth data center market, of which HBM will be a growing component, the negative effect from the less-dynamic legacy memory applications won't be as big of a drag. And of course, those other segments could also turn around after this downturn later next year.
Risks to the bullish thesis
Of course, risks haven't gone away for Micron. It will have to keep up its technological lead in HBM and hopefully extend it as Samsung tries to catch up. In addition, new Chinese upstarts are beginning to chip away at the very low end of the market. While Micron is still focused on the higher end, and on higher-profit products, a new source of low-end supply could cause an oversupply for some of Micron's other businesses.
Still, the HBM growth and AI market dynamics appear to outweigh these other risks for now. AI has put renewed focus on memory and DRAM specifically, so if Micron can fashion itself as one of only two leaders in the HBM market for AI, this pullback could be a massive opportunity for longer-term investors looking past one quarter into the future.
