Artificial intelligence stocks have had a tough summer, following a tremendous run in AI-related tech stocks that began in late 2022. One key stock at the very center of the AI boom has actually lost 43% of its value from its June highs.
However, some analysts see this summer's pullback as far too early for a semiconductor bear market. Rather, they think the recent drawdown is a mere mid-cycle correction, and overdone.
In fact, one analyst said Monday he expects this AI winner set to more than double from current levels before the cycle is over.
Oh, and this stock also reports earnings today.
Micron is an AI winner
Micron Technology(NASDAQ: MU) has seen extreme volatility this year, in both directions. Micron nearly doubled between January and early June, before its stock corrected after its June earnings release, then even more so over the summer. Yet even after its 43% swoon, the stock is up almost 10% for the year as of this writing.
Micron can be incredibly volatile because it produces memory chips, including DRAM and NAND flash. Despite a highly concentrated market with just a few players, pricing for these types of chips can move all over the place based on industry supply and demand.
While most DRAM and NAND are like commodities, artificial intelligence training applications require a new type of DRAM called high-bandwidth memory (HBM). This type of stacked DRAM is harder to produce, and thus carries with it more pricing power.
Image source: Getty Images.
That pricing power may be especially high for Micron, which claims its latest HBM3E product has 30% lower power consumption than competitors. Micron's HBM3E just began shipping in the May quarter, is expected to generate "multiple hundreds of million dollars" in revenue for the August quarter, then "multiple billions of dollars" in the coming fiscal year, according to management. Even better, Micron's HBM is set to have higher margins than Micron's other products, lifting the company's overall margin profile.
HBM also requires more capital equipment and manufacturing steps than traditional DRAM. So in the midst of the DRAM downturn, producers shifted equipment to produce HBM, decreasing capacity for other types of DRAM.
The combined effect has been DRAM prices increasing over the last three quarters, with projections for more increases in the quarters ahead.
What went wrong this summer
While the AI market is still projected to see outsized demand this year, Micron still gets a large portion of its revenue from the mature PC and smartphone segments. As phone and PC vendors expected price increases this year, many stockpiled memory inventory earlier in 2024.
But as the summer progressed, we've seen more lackluster demand for PCs than expected, and early orders for the AI-powered iPhone 16 have underwhelmed.
So, for the non-HBM portion of Micron's business, some analysts are anticipating a slowdown relative to prior expectations. Hence, why Micron fell nearly in half after its epic early year run.
But most Wall Street analysts think this a pause on the way to new highs
Memory chips are perhaps the most cyclical or the highly cyclical semiconductor sector, so when there is a downturn, it can be severe.
However, several Wall Street analysts don't think we're on the brink of a memory downturn. Rather, the recent slowdown seems like a mid-cycle "pause" them, before going on to new highs.
This is because memory cycles usually last between six and eight quarters. Given that the memory industry just went through one of its worst downturns ever in 2022 and 2023 and that we are only three quarters into this up-cycle, it seems pretty early on for the memory players to roll over into another downturn.
Last week, three separate analysts from UBS, Susquehanna, and Citigroup each wrote that the current "pause" in DRAM pricing growth was likely temporary. Then on Monday, analysts at JPMorgan Chase noted Micron could go as high as $200 per share, or more than double its current price, if the current up-cycle mirrors the strong 2017-2018 memory boom. Back then, DRAM prices exploded as the cloud computing buildout added a new layer of demand following a 2016 downcycle -- not dissimilar to what HBM and AI are doing today.
Near-term slowdown, 2025 acceleration?
The current AI buildout has crowded out a lot of other enterprise spending, especially on traditional servers and PCs. Meanwhile, high interest rates have caused consumers to pull back on smartphone and new auto purchases.
But with the Federal Reserve now beginning to lower interest rates, it's quite possible consumers and enterprises open the purse strings again. So looking into late 2024 and 2025, the memory industry could very well tighten, with Micron poised to benefit. In particular, Citi analyst Christopher Danley sees a reacceleration in pricing over the next three to six months.
Interested investors should stay tuned for Micron's earnings release and conference call after market close for more color on the state of this important industry.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Billy Duberstein and/or his clients have positions in Micron Technology. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
