2 Artificial Intelligence (AI) Stocks to Buy on the Dip

The stock market is soaring to all-time highs these days, especially in the tech sector. The S&P 500 (^GSPC -1.32%) market index gained 49% over the last two years while the tech-heavy Nasdaq Composite (^IXIC -2.24%) index soared 68% higher. Both market trackers traded about 1% below their record prices on Thursday, Nov. 14.

But every tech stock didn’t get the memo about this sustained surge. Despite playing active and lucrative parts in the artificial intelligence (AI) boom, Advanced Micro Devices (AMD -2.84%) and Micron Technology (MU -2.86%) are trading more than 30% below their peak prices.

I think both Micron and AMD are excellent AI investments thanks to their recent discounts. Let’s take a closer look at these underappreciated AI winners.

How Micron and AMD relate to the AI opportunity

These AI hardware specialists work in the shadow of more popular rivals, led by Nvidia. They stand with both feet inside the AI opportunity, though. Here’s what you need to know about Micron’s and AMD’s AI products.

AMD designs high-performance computer processors. Its product portfolio includes the Ryzen line for desktops and notebooks, the Epyc range of server-grade chips, and the Instinct collection of AI computing accelerators.

The Instinct chips go head-to-head with Nvidia’s AI accelerator solutions, and you often find AI supercomputers managing the AI accelerator computations with Epyc processors. System builders can pair AMD or Nvidia accelerators with AMD and Intel server processors, and almost every combination is found among the world’s largest supercomputers in 2024.

Nvidia and AMD AI accelerators are bundled with a ton of high-speed memory. One Nvidia H200 card comes with 141 gigabytes (GB) of accelerator memory. AMD’s rival Instinct 205X has 128 GB of fast memory.

And there’s more: These massive memory stores don’t include the memory tied to the Intel or AMD processors running the show. Nor do they account for the memory-based solid-state devices (SSD) that provide long-term storage for these computing beasts.

And that’s just the back end of the AI business. Smartphones and other consumer-facing devices with AI features also require more memory than older devices without AI. As a leading maker of high-speed memory chips, Micron benefits directly from this surging memory demand.

How AI is driving their revenue growth today

The AI market is more than a future opportunity for these companies.

AMD’s third-quarter sales jumped 18% year over year, driven by a 122% surge in the data center segment. That’s the division accounting for AMD’s Epyc and Instinct chips, which are used in AI servers.

In Micron’s recent fourth-quarter report, revenue rose 93% year over year. Again, the fuel for this fire was “robust AI demand” and soaring data center sales, the report said.

High-octane AI growth on the cheap

Both stocks look expensive if you focus on their reported results. AMD trades at 124 times trailing earnings and 145 times free cash flow. These metrics stand at 147 and 909, respectively, for Micron. So I get it if traditional value investors are staying away from these stocks.

But the chip experts are coming back from an extended downturn in the semiconductor sector, held back by a stubborn shortage of manufacturing capacity and the recent inflation crisis. Switching to a forward-looking perspective, AMD shares are changing hands at 27 times next-year earnings estimates, and Micron’s forward price-to-earnings ratio stops at 7.7.

So I think it’s a big mistake to write off Micron and AMD as overpriced growth stories. It just took some time to overcome recent back-end challenges and deliver robust bottom-line profits again. These AI stocks look tempting right now, and I highly recommend picking up a few shares while they’re cheap.

Anders Bylund has positions in Intel, Micron Technology, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, and Nvidia. The Motley Fool recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.