In late 2022, OpenAI launched ChatGPT, kicking off an investment frenzy for all things related to artificial intelligence (AI). Users were mesmerized by the realism of the responses. There are many other applications now as well, such as image generators, that equally impress users.
These are known as generative AI applications. They create things by looking for patterns in large sets of data. Whenever people talk about AI now, they're usually referring to generative AI.
However, the narrative surrounding AI is shifting from generative AI to agentic AI. And this could be significant from an investment perspective.
Image source: Getty Images.
Why agentic AI matters for investors
There's a potential problem for companies building foundational AI models: They may not be able to sustain a competitive advantage. OpenAI is considered the leader and first-mover in the space. But co-founder and CEO Sam Altman reportedly just declared a "code red" because of how fast Alphabet is gaining ground.
The better investment in generative AI has been at the hardware layer. Nvidia's graphics processing units (GPUs) are crucial for processing large data sets. And the high demand for these products has propelled the stock to incredible gains for investors.
The agentic AI trend will likely have hardware winners as well. However, it's worth explaining what agentic AI is first. Generative AI creates content in response to users' inputs. By contrast, agentic AI works more autonomously and proactively to achieve users' goals. It breaks goals down into multiple steps and then works to solve the problem.
Yes, agentic AI will still require the powerful processing capabilities provided by GPUs. But this new trend will also be enabled by memory products. In short, the AI agent needs to remember information about the user as it works on their behalf.
It's not a coincidence that four of the top five stocks year to date in the S&P 500 are memory businesses: Western Digital, Seagate Technology, Micron Technology (MU +2.21%), and newly added Sandisk. These businesses are enjoying unprecedented demand for their products. And agentic AI can keep the tailwinds blowing.
NASDAQ: MU
Key Data Points
I believe that Micron stock is particularly interesting. Management says demand is so high that it's already sold out its supply through the end of next year. Commercial customers are looking to sign multiyear supply contracts -- that's how scarce memory products are becoming. And Micron even just decided to stop selling to consumers so it can focus on commercial customers.
Micron stock currently trades at only 14 times its forward earnings estimates. But this valuation metric is based on exactly what it says it's based on: estimates. It's possible that analysts are underestimating the opportunity. In fact, estimates continue to trend higher as analysts gain a better understanding of the opportunity.
This space is prone to cyclicality, and profits have plunged in the past. But agentic AI could sustain this cycle for longer than expected and at a higher level than the estimates project. Just as there were several hardware winners in the generative AI trend, so too will there be hardware winners in the agentic AI trend, in my opinion. And among the top candidates for this trend is Micron Technology.
