Some stocks just can’t seem to fetch much enthusiasm.
Without question, semiconductor stocks have been some of the biggest winners amid the artificial intelligence (AI) revolution. While stars such as Nvidia, Taiwan Semiconductor Manufacturing, and Broadcom fetch the most attention, investing in the chip sector at large during the past two years has yielded market-beating returns.
As of market close on Dec. 20, the VanEck Semiconductor ETF had gained 39% in 2024 — handily topping the returns of both the S&P 500 (^GSPC 1.10%) and Nasdaq Composite (^IXIC 1.35%).
Nevertheless, not all semiconductor stocks have fared so well. Take Micron Technology (MU -0.49%), for example — with shares up a piddling 6% in 2024, investors might think this particular chip stock is a bust.
Smart investors know that looking at the return of a stock is just one variable when assessing an opportunity. Below, I’m going to dig into what has influenced Micron’s price action throughout the year and make the case for why 2025 could be a rebound year for the company.
Micron stock just got smoked
The chart below illustrates movement in Micron shares throughout 2024. The peaks and valleys depicted in the graph make one thing abundantly clear — Micron is pretty volatile. In particular, the last six months have been abnormally rocky with shares dropping by about 38% since June.
My take on what’s causing Micron shares to experience so much volatility comes down to one thing: expectations. When businesses such as Nvidia, Taiwan Semiconductor, Broadcom, and many others exhibit robust growth on a consistent basis, investors tend to apply these trends to other companies in the same industry.
Although I understand the psychological factors behind these parallels, it’s imperative for investors to understand that such a notion is rooted in faulty logic. Not all chip companies manufacture the same products or serve the same purpose, and for that reason, each business is going to experience its own set of unique headwinds and catalysts.
Micron’s position in the AI realm focuses on memory and storage applications. Although the company has had impressive top-line growth that’s augmented by rising profitability, Micron’s forecast for a big miss in its 2025 fiscal second quarter spooked investors.
Again, I don’t necessarily see this as a reason to sell the stock. Below, I’ll dig into why Micron’s latest plunge is unwarranted.
The shares could rebound in 2025
Since AI emerged as the world’s next megatrend about two years ago, one product in particular has become the technology sector’s holy grail: graphic processing units (GPUs).
Companies such as Nvidia and Advanced Micro Devices develop chipsets known as GPUs that are capable of running complex algorithms at extremely high speeds, and it’s this hardware that powers myriad generative AI applications. Taking this a step further, Taiwan Semiconductor manufactures GPUs for Nvidia and AMD while Broadcom supplies a host of network infrastructure equipment needed to power data centers where these GPUs are housed.
With all of that in mind, doesn’t it seem natural that those specific businesses have experienced abnormally high growth during the past two years?
In my eyes, Micron just hasn’t had its moment yet, but I think it’s coming. Considering investments in AI infrastructure are expected to be in the trillions of dollars during the next several years, I think it’s safe to say that demand for GPUs and data center services isn’t going to slow.
At a more granular level, this means that training and inferencing workloads are going to become more sophisticated and mission critical as competition in the AI arms race intensifies. It’s this dynamic that should result in a greater need for memory and storage protocols — and Micron is extremely well-positioned to capture that demand.
This isn’t just lofty theory, either. Per Micron’s 2025 fiscal first quarter (ended Nov. 28), the company’s data-center revenue increased by a staggering 400% year over year and reached a record level. Furthermore, the company’s data-center segment now accounts for more than 50% of the business. To me, these trends underscore the need for Micron’s memory chips and I expect the tailwinds to carry into next year and beyond.
Although the company’s near-term outlook may not have lived up to expectations, I think the long-term narrative is still very much in focus. According to management, the total addressable market for high bandwidth memory is expected to reach $100 billion by 2030 — more than six times what it is today. Considering Micron’s trailing-12-month revenue is in the ballpark of $29 billion, I think the company has significant upside.
Image source: Getty Images.
Is Micron stock a buy right now?
Valuing Micron is a daunting task. Even though the company generates positive earnings, it has only recently transitioned to a profitable enterprise and so using the price-to-earnings (P/E) ratio seems a little out of place, in my opinion.
Instead, I’ll use the PEG ratio to assess an investment in Micron. The PEG ratio looks at analyst forecasts for earnings growth over several years. If the PEG ratio is less than 1, the stock could be seen as undervalued. Right now, Micron’s PEG ratio is just 0.23.
In my opinion, Micron’s low PEG suggests that investors could be overlooking the need for memory and storage chips as AI workloads become larger and more complex. Over time, however, I think the need for Micron’s services will become increasingly obvious. To me, buying Micron right now is a bargain opportunity for investors with a long-term time horizon.
Adam Spatacco has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Add Comment