The growing adoption of artificial intelligence is driving tremendous growth for the semiconductor industry. But demand for chips can be cyclical, which can lead to volatility for many of these stocks.
It's important to understand that wild swings in share prices don't tell you anything about the long-term direction of the business. Volatility can be a long-term investor's friend, providing the opportunity to buy competitively positioned companies at attractive valuations.
Two of the most volatile stocks in the chip industry over the past year have been Micron Technology (MU -0.98%) and Arm Holdings (ARM 4.67%). These high-growth businesses are meeting the growing demand for AI infrastructure in data centers and other products. Here's why they may, or may not be, smart buys right now.
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1. Micron Technology
Investors have a lot of choices to profit off the investment in AI infrastructure. There is tremendous demand for everything from chips, networking, and liquid-cooled servers. But for Micron Technology, the need for more high-bandwidth memory and solid-state storage (SSD) to enable faster data processing and retrieval is a huge opportunity.
The memory market is competitive, which historically led Wall Street to focus on the cyclical swings in selling prices and supply that create volatility in Micron's financials. But if you had just bought and held the stock 10 years ago, your investment would be up 540%.
Micron could easily repeat that performance in the coming years. The opportunity to meet the surging investment in AI infrastructure is driving record revenue for Micron in 2025. Revenue grew 37% year over year last quarter, driven by nearly 50% quarter-over-quarter growth in high-bandwidth memory products.
Overall, Micron's sales to data centers more than doubled over the year-ago quarter. However, the stock is trading at 16 times this year's earnings estimate and just 10 times next year's earnings. These modest earnings multiples indicate that Wall Street is underestimating the sustainability of Micron's growth. It's possible that Micron's revenue over the next several years could be smoother than the lumpy results in recent years.
Micron CEO Sanjay Mehrotra noted that the business is on track for record revenue and solid profitability in fiscal 2025. The company is also gaining momentum with its SSD business, gaining share on competitors to become the No. 2 player in the market.
As more advanced AI workloads kick in, data centers will need memory technology for faster data processing speeds and better energy efficiency to control computing costs. Micron's growth suggests that it is meeting this need.
With Dell'Oro Group forecasting $1 trillion in annual data center spending by 2029, up from the recent $260 billion spent in 2023, Micron could be reporting more record revenue in the years to come. Its relatively modest P/E multiple doesn't reflect this possibility, making the stock a compelling long-term investment. I would consider buying shares.
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2. Arm Holdings
Teaching computer models to think more like humans will continue to require substantial investment in greater processing power. Arm is a leader in designing and licensing central processing units (CPUs) to other chip companies and product manufacturers. In fact, you're probably reading this on a device powered by an Arm-based processor.
Arm's chip designs are everywhere, including 99% of smartphones sold globally, but it also has an increasing share of chips being used in data centers. Its market share in cloud computing, automotive, and other markets has been steadily increasing every year. Its revenue, which comes from licensing and royalties, grew 34% year over year last quarter to over $1.2 billion.
Leading tech companies, including Nvidia, Amazon, Alphabet's Google, and Microsoft, are using Arm-based chips. Nvidia's Grace Blackwell CPU for data centers is an Arm-based design, while Amazon, Google, and Microsoft are using its chip technology to power cloud services for their customers.
Arm's expertise in building chips that offer superior energy efficiency positions it well for strong growth in a market that can't get enough computing power. The U.K.-based company expects up to 50% of new server chips to be Arm-based this year.
This is pointing to excellent growth prospects for Arm Holdings. The reason the stock has been so volatile over the last year can be attributed to its high valuation. Arm's lucrative business of designing chips and collecting royalties on every chip shipped using its technology is well reflected in the stock right now, which is trading at 88 times this year's earnings estimate.
The stock hasn't hit a new high since reaching $188.75 in July 2024, and it may need to settle for a while longer to bring its valuation closer to other leading chip stocks. For example, Nvidia, Advanced Micro Devices, and Taiwan Semiconductor Manufacturing are each growing earnings at about the same rate, or faster, than Arm but trade at much lower earnings multiples.
All of these stocks, including Micron, offer investors a more attractive growth-to-value profile, and therefore offer a better opportunity for market-beating returns. I would pass on Arm stock for now.
