The Potential Top AI Share Purchase of 2025, Offering Noteworthy Discounts
In 2024, the tech market witnessed individual tech stocks experiencing significant fluctuations based on assumptions regarding their AI potential.
The key investment strategy for investors is to spot under-valued AI victors ahead of the market or to invest in long-term winners following sell-offs, when doubts begin to surface.
Currently, one AI stock has experienced a significant drop in value after almost doubling in the first half of 2024, only to lose most of those gains in the second half. However, the age of AI is expected to necessitate increasing amounts of this company's specialized products, making this stock an appealing investment opportunity today.
Micron Technology is a scarce AI resource
The initial fervor for Micron Technology (MU -1.04%) in early 2024 was not without basis. This is because AI demands substantial DRAM memory to rapidly train massive datasets and also for better inferencing, which has become increasingly important with OpenAI's new "reasoning" ChatGPT models such as o1. Overall, the DRAM requirement of AI is expected to accelerate significantly in the coming years, with specialized AI memory currently facing supply constraints.
Micron produces both DRAM memory and NAND flash storage, but DRAM makes up the majority of its revenue, accounting for 73%. This is advantageous as DRAM is projected to grow faster than NAND, and there are only three companies capable of producing advanced DRAM nodes: Micron, SK Hynix, and Samsung. There are also emerging Chinese companies producing low-end, low-margin DRAM, but this represents a mid-single-digit percentage of the market.
With the advent of artificial intelligence, there's a sudden need for a new type of advanced memory known as high-bandwidth memory, or HBM. While SK Hynix had an early lead in HBM, Micron is quickly catching up. 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 terms of technology, with its HBM3E product having lower power consumption and higher speeds than those from SK Hynix.
Why HBM is such a substantial growth opportunity for Micron
Despite the rapid growth, HBM still represents a small portion of Micron's revenue. In its 2024 fiscal year, which ended in August, HBM generated only a few hundred million dollars for Micron, out of a total DRAM revenue of $17.6 billion and a total revenue of $25.1 billion.
However, this should change significantly in the near future. Micron forecasts the HBM market to grow from $16 billion in 2024 to over $30 billion in 2025, with Micron's HBM market share moving towards its overall DRAM market share by the end of 2025. Micron's current overall DRAM share is approximately 20%, but this is largely due to SK Hynix's early lead in HBM. Before the AI and HBM boom, Micron's share was in the mid-20% range.
This means Micron's HBM revenue could reach $6 billion to $7 billion in 2025 from nearly nothing in 2024. HBM growth alone could add over 25% to Micron's overall revenue.
In addition, the HBM story does not stop there. Micron projects the HBM market to grow further to over $100 billion by 2030, which would be larger than the entire DRAM industry in 2024. This growth could more than double Micron's revenue even without any growth in its other segments.
Furthermore, Micron sees an opportunity to grow even faster than the overall HBM market. This is mainly due to the challenges faced by Samsung, which has the largest overall DRAM industry market share but has struggled to produce HBM at acceptable yields. Samsung's struggles with HBM have opened up the potential for Micron to capture even more market share in this critical segment.
Why Micron stock fell following its recent earnings report
Given these positives, you might be puzzled by why Micron fell by double digits following its latest earnings report and now stands 43% below its July all-time highs.
The reason lies in the non-HBM and non-data-center segments of Micron's portfolio. These include chips used in smartphones, PCs, and the automotive and industrial sectors. All of these segments continue to exhibit sluggish growth, and end-users are still dealing with excess inventory.
Since HBM still represents a small portion of current revenue, its growth will not be enough to counter the decline in other segments. Micron is expected to experience a sequential revenue decline for the current quarter, which ends in February, marking the first sequential decline in nearly two years.
This revenue decline may have concerned investors, as in the past, when Micron's revenue starts to decline, it could be a harbinger of a bigger downturn. The memory segment has historically been extremely cyclical and volatile, with memory pricing fluctuating wildly based on supply and demand.
However, the dynamics of HBM could alter the memory market
However, the dynamics of HBM could change the memory market. Micron is already sold out of its HBM products through 2025 at fixed pricing, meaning this revenue and margin are not at risk. In Micron's upcoming HBM4 product, which is scheduled for release in 2026, there will be an additional logic component of the chip stack. Micron believes that this logic die could lead to increased customization and potentially more differentiation and pricing power.
HBM might not reach the level of commoditization that the DRAM memory industry has experienced in the past. As HBM becomes a more significant portion of Micron's overall business, it should contribute to continued growth and profits.
During the last quarter, Micron's entire data center sector, which includes HBM and its advanced DDR5 memories, accounted for over half of its total revenue for the first time. As Micron's focus shifts towards the high-growth data center market, where HBM will play a larger role, the impact of less energetic legacy memory applications will be less debilitating. Of course, these other segments might also recover after this current period of decline by the end of next year.
Potential Challenges
Micron still faces challenges, such as maintaining its technological edge in HBM and further expanding it as Samsung attempts to catch up. Besides, emerging Chinese competitors are slowly encroaching on the very low end of the market. Although Micron focuses on the higher-end and higher-profit products, an influx of low-end supply from these new competitors could potentially lead to oversupply in some of Micron's other businesses.
However, for the time being, the promising growth of HBM and the dynamics of the AI market appear to outweigh these challenges. The resurgence of interest in memory and DRAM due to AI has highlighted the importance of these technologies, so if Micron can establish itself as one of the elite two players in the HBM market for AI, this downturn could represent a substantial investment opportunity for long-term investors who can look beyond the immediate quarter and envision the future.
Investing in Micron Technology (MU) could be a strategic move for those interested in the AI and finance sectors. The company's production of DRAM memory, which is in high demand for AI applications, has the potential to significantly grow in the coming years due to the anticipated increase in AI's DRAM requirement.
Given Micron's key role in the AI market, long-term investors may find it beneficial to consider adding Micron Technology stocks to their portfolios, especially considering its advancements in high-bandwidth memory (HBM), a critical resource for AI. With the HBM market projected to grow from $16 billion in 2024 to over $30 billion in 2025, Micron's HBM revenue could see a significant increase, potentially adding over 25% to its overall revenue.
