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As the artificial intelligence (AI) era began, 2023 marked a fantastic year for the semiconductor industry. Designing intricate chips with optimal performance and power efficiency is a complex task, and AI plays a critical role for semiconductor companies. Like many chip makers this year, semiconductor company Micron Technology’s (MU) stock has also soared, rising 72% YTD to outperform the tech-heavy Nasdaq Composite’s ($NASX) gain of 45%.
Founded in 1978, Micron has evolved into a leading manufacturer of memory and storage solutions, contributing significantly to the advancement of computing, data storage, and AI. Let’s find out why this stock could be a smart buy heading into 2024, too.
Micron Picks Up Steam
Micron’s robust first quarter of fiscal 2024 signals a strong financial recovery. Driven by improved pricing, total revenue for the quarter ended Nov. 30 jumped 16% year-over-year to $4.73 billion, beating consensus estimates by $94.7 million. Revenue also increased 18% sequentially. Micron operates through four business segments. Notably, revenue in the Compute and Networking Business Unit increased by 45% sequentially, thanks to the growing data center and client AI-related shipments.
Mobile Business Unit revenue grew 7% sequentially, led by a recovery in the smartphone market. Furthermore, robust growth across the majority of the company's end markets aided Embedded Business Unit revenue growth of 21%, on a sequential basis. However, revenue from the Storage Business Unit fell 12% from the previous quarter.
In the first quarter earnings call, CEO Sanjay Mehrotra stated, "Memory is at the heart of GPU-enabled AI servers, and we are already seeing strong demand driven by early deployment of AI solutions, which will only accelerate over time."
Micron’s commitment to heavily investing in research and development (R&D) has resulted in ground-breaking technologies, enabling higher capacities, faster speeds, and energy-efficient memory solutions. From DDR5 DRAM advancements to 3D NAND innovations, Micron has consistently pushed the limits of what is feasible in semiconductor design. In the first quarter, the company spent $845 million on R&D.
DRAM revenue of $3.4 billion contributed to 73% of total revenue. While DRAM’s revenue increased by 24% sequentially, NAND’s revenue grew 2% from the prior quarter.
Moreover, Micron is pleased with the progress and customer feedback for its HBM3E product. The company plans to ramp up production in the first half of calendar year 2024, with the goal of "generating several hundred million dollars in HBM revenue in fiscal 2024." According to management, the HBM3E production ramp could increase fiscal 2024 capital expenditures by $7.5 billion to $8.0 billion.
Turning to its balance sheet, Micron ended the quarter with $9.8 billion in cash and investments, while holding $13.5 billion in total debt. The company's low debt-to-equity ratio of 0.31 indicates that its balance sheet is stable for the time being.
More Growth Ahead
Management anticipates improved business fundamentals for the remainder of fiscal 2024, with a "record industry total addressable market (TAM) in calendar 2025."
Furthermore, the company is nearing completion of its collaboration with Nvidia's (NVDA) Grace Hopper GH200 and H200 platforms, which could be a significant revenue growth driver. With rising demand for AI-integrated chips, Micron is well-positioned to see green in its bottom line in the near future.
Micron anticipates that DRAM bit demand will grow at a compounded annual growth rate (CAGR) in the mid-teens, while NAND bit demand will grow at a CAGR in the low-20s percentage range over the next few years.
Management predicts second quarter fiscal 2024 revenue of $5.3 billion (plus/minus $200 million), in line with analysts' projections. Plus, its gross margin in the quarter could be around 13% (plus or minus 150 basis points). Losses are expected to be narrower at $0.28 per share (plus or minus $0.07) compared to $1.91 per share in the year-ago quarter.
For the full fiscal year 2024, analysts predict a revenue increase of 48% to $22.9 billion. Revenue could continue to surge by 38% year-over-year to $31.7 billion in FY 2025. Analysts anticipate the company to report a profit by fiscal 2025. Trading at three times forward projected 2025 sales, Micron seems like a reasonable growth stock now, with AI-related growth prospects.
What Does Wall Street Say About Micron Stock?
Following its Q1 results, Evercore ISI analyst C.J. Muse increased the target price for Micron stock to $100 from $90, with a “strong buy” rating. Furthermore, impressed by the company’s encouraging financial and operational outlook, Wells Fargo analyst Aaron Rakers reiterated his “buy” rating. Micron's progress with the HBM3E product and collaboration with Nvidia, according to the analyst, are positive catalysts for the company. Rakers has a price target of $95 for MU stock.
With the company heading for robust growth in the coming years, Micron stock is a “strong buy” in the analyst community. Out of 26 analysts, 20 rate the stock a “strong buy,” two rate it a “moderate buy,” three rate it a “hold,” and one recommends a “moderate sell.” The mean target price for the stock is $93.70, which is 8.4% higher than current levels. However, analysts' high target price of $140 implies a 61.9% upside in the next 12 months.
The Key Takeaway
AI is not just a technological enhancement, but a fundamental driving force revolutionizing the semiconductor industry. Micron’s management believes the company is at the very initial stages of a hyper-growth cycle powered by generative AI, implying that much more growth is on the way.
Given Micron’s advancement with its leading products, I believe the company could turn a profit in the coming years. It is a smart pick now for investors interested in the semiconductor industry's long-term potential as AI advances.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
