The PHLX Semiconductor Sector index has kicked off 2024 on a robust note, registering an 11% gain. This performance aligns with the positive trajectory of key components such as Nvidia (NASDAQ: NVDA), AMD, Broadcom, and Taiwan Semiconductor Manufacturing, all of which have seen notable upticks following strong earnings reports. These reports underscore the positive impact of the growing adoption of artificial intelligence (AI) chips.
Amidst this bullish momentum, one notable component of the PHLX Semiconductor Sector, Micron Technology (NASDAQ: MU), has not kept pace, with its shares posting a modest 5% increase in 2024. However, a recent development has injected fresh optimism into Micron’s stock. On February 26, shares of the memory manufacturer surged by 4%.
Exploring the reasons behind this uptick and assessing the potential implications, it becomes evident that Micron Technology might be gearing up for a bullish run following this significant development.
Supplying chips for Nvidia’s next-gen AI GPU
In a press release dated February 26, Micron announced the commencement of volume production for its high bandwidth memory 3E (HBM3E) chip. Notably, this chip will be integrated into NVIDIA’s H200 Tensor Core GPUs, set to ship in the second quarter of 2024. Micron highlights a key advantage, asserting that its HBM3E chip consumes 30% less power than offerings from competitors.
The collaboration with Nvidia on the HBM3E chip was anticipated, as Micron mentioned its advanced qualification stages during the December 2023 earnings conference call. With the confirmation of winning this business from Nvidia, Micron aims to achieve its fiscal 2024 target of generating “several hundred millions of dollars of HBM revenue.”
Encouragingly for Micron, demand for Nvidia’s upcoming H200 processors is robust, with Nvidia management acknowledging that demand is expected to outpace supply. Micron’s potential to sell out its entire HBM3E chip output is plausible, especially considering that fellow memory manufacturer SK Hynix has already depleted its HBM inventory for 2024.
Micron is strategically increasing its HBM production capacity to meet the escalating demand not only from Nvidia but also from other clients. In November 2023, the company inaugurated a new facility dedicated to mass-producing HBM3E. Furthermore, reports suggest that Micron is developing a larger HBM3E memory size slated for release next month.
These initiatives indicate Micron’s proactive stance in capitalizing on the surging demand for HBM, a product highly sought after for its deployment in AI processors. Market research firm Yole Group forecasts that the HBM market could generate nearly $20 billion in annual revenue by 2025, up from $5.5 billion in the previous year and an estimated $14.1 billion in 2024. The global HBM revenue is anticipated to reach $38 billion by 2029.
With Micron securing Nvidia as a significant customer, particularly in the dominant AI chip market, the company is poised for substantial long-term gains. Notably, Micron’s top-line growth is expected to experience significant acceleration in fiscal years 2024, 2025, and 2026.
Big stock upside could be in the cards
As depicted in the chart above, Micron’s revenue is poised to surge to nearly $23 billion in fiscal 2024, marking a substantial leap from the $15.5 billion recorded in fiscal 2023. Looking ahead to fiscal 2026, Micron anticipates approaching the $35 billion milestone, indicating a remarkable doubling of its revenue over a mere three fiscal years.
Presently trading at 6 times sales, Micron’s valuation appears elevated compared to the S&P 500 index’s sales multiple of 2.8. However, considering the potential growth anticipated in this AI-focused stock, it justifies a premium valuation, especially when other chipmakers benefiting from AI adoption command higher sales multiples.
If Micron Technology maintains its price-to-sales ratio of 6 over the next three years and achieves the projected $35 billion in annual revenue by fiscal 2026, its market capitalization could experience a substantial increase to $210 billion. This would signify a notable 112% surge from current levels, providing a compelling reason for investors to consider acquiring shares in this chipmaker before a potential stock market rally gains momentum.
