Without question, semiconductor stocks have been the biggest winners amid the artificial intelligence (AI) revolution. While stars viz nvidia, Taiwan Semiconductor ManufacturingAnd Broadcom Most notably, investing heavily in the chip sector has delivered market-beating returns over the past two years.
As the market closes on December 20, VanEck Semiconductor ETF There was a 39% increase in 2024 – easily topping the returns of the two S&P 500(SNPINDEX: ^GSPC)And Nasdaq Composite(NASDAQINDEX: ^IXIC).
Still, not all semiconductor stocks have fared so well. take Micron Technology(NASDAQ: MU )For example – with shares expected to rise 6% in 2024, investors may think this particular chip stock is a bust.
Smart investors know that looking at a stock’s return is only one variable when evaluating an opportunity. Below, I’m going to explore what has affected Micron’s price action over the year and make the case for why 2025 could be a rebound year for the company.
The chart below shows the movement in Micron shares through 2024. The peaks and valleys shown in the graph make one thing abundantly clear — the micron is quite volatile. In particular, the past six months have been unusually raucous with a decline of around 38% since June.
My thoughts on why Micron shares have experienced so much volatility come down to one thing: expectations. When Nvidia, Taiwan Semiconductor, Broadcom, and many other businesses show strong growth on a consistent basis, investors apply these trends to other companies in the same industry.
While I understand the psychological factors behind these analogies, it is imperative for investors to understand that such an assumption is rooted in flawed 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.
Again, I don’t necessarily see this as a reason to sell the stock. Below, I’ll explore why Micron’s latest plunge is unwarranted.
Since AI emerged as the world’s next megatrend nearly two years ago, one product in particular has become the holy grail of the technology sector: graphic processing units (GPUs).
Companies such as Nvidia and Advanced Micro Devices Develop chipsets known as GPUs capable of running complex algorithms at enormous speeds, and it is this hardware that powers countless generative AI applications. Taking it a step further, Taiwan Semiconductor manufactures GPUs for Nvidia and AMD while Broadcom supplies a host of network infrastructure equipment needed to power. data center where these GPUs are placed.
With all this in mind, doesn’t it seem natural that those particular businesses have experienced unusually high growth over the past two years?
In my eyes, Micron hasn’t had its moment yet, but I think it’s coming. With investments in AI infrastructure expected to be in the trillions of dollars over the next several years, I think it’s safe to say that demand for GPUs and data center services won’t slow down.
At a more granular level, this means that training and inference workloads are going to become more complex and mission critical as competition in the AI arms race intensifies. It’s this dynamic that should result in greater demand for memory and storage protocols — and Micron is well positioned to capture that demand.
It’s not just lofty theory, either. Per micron In the first quarter of fiscal 2025 (ended November 28), the company’s data-center revenue grew 400% year over year and reached a record level. Additionally, 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 continue next year and beyond.
While the company’s near-term outlook may not live 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. With Micron’s trailing 12-month revenue in the ballpark of $29 billion, I think the company has seen significant growth.
Image source: Getty Images
Valuing the micron is a difficult task. Although the company generates positive earnings, it has recently transitioned to a profitable venture and so using the price-to-earnings (P/E) ratio seems a bit out of place, in my opinion.
Instead, I will use the PEG ratio to evaluate 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 can be viewed as undervalued. Currently, Micron’s PEG ratio is only 0.23.
In my opinion, Micron’s low PEG suggests that investors may overlook 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 apparent. To me, buying Micron right now is a bargain for investors with a long-term horizon.
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Adam Spatacco There are 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.
