It's been little more than a year since the latest iteration of artificial intelligence (AI) went viral, and we're only just beginning to see the fruits of this breakthrough technology. Early indications suggest one of the biggest benefits will be the time and money savings from increases in productivity, as AI automates mundane and time-consuming chores. Businesses of all kinds are exploring how to best adopt this technology, but it's still early days.
Micron Technology(NASDAQ: MU) CEO Sanjay Mehrotra was clear about the long runway ahead. "We are in the very early innings of a multiyear growth phase driven by AI as this disruptive technology will transform every aspect of business and society," he said.
That's a bold assertion but one that's increasingly being echoed by the brightest minds in technology, though estimates of its value are diverse. Generative AI is expected to be a $1.3 trillion market by 2032, according to Bloomberg Intelligence. Global management consulting firm McKinsey & Company is more bullish, estimating a range of between $2.6 trillion and $4.4 trillion annually. What is pretty clear, however, is that the opportunity is vast.
It's also pretty clear that Micron Technology stands to reap a portion of this growing AI windfall.
Image source: Getty Images.
Multiple ways to profit
Micron Technology may not be a household name, but the company provides a number of components that are vital to AI processing, particularly in the data center. Micron is a leading supplier of memory (DRAM) and storage (NAND) chips -- and each one helps accelerate the performance of Nvidia's GPUs, which are the gold standard in data center processing.
In November, Nvidia announced that it had chosen Micron's HBM3E (High Bandwidth Memory 3E) chip, which would be integrated into its H200 Tensor Core GPUs, providing "advanced memory to handle massive amounts of data for generative AI and high-performance computing workloads," according to the press release. Nvidia went further, saying that the HBM3E helped ramp up the performance of the H200, which delivered "nearly double the capacity and 2.4 times more bandwidth compared with its predecessor, the Nvidia A100."
These data center workhorse processors are scheduled to begin shipping in the second quarter of 2024. Last month, Micron announced it had begun volume production of the HBM3E, which the company said provides superior performance while using about 30% less power than competing offerings.
As the number and size of data center workloads continue to scale, energy consumption is becoming a key consideration, which no doubt was a factor when Nvidia chose Micron's power-miserly chips.
The enormous opportunity of AI
The secular tailwind of AI is only just beginning to show in Micron's results. For the company's fiscal 2024 second quarter, which ended Feb. 29, Micron generated revenue of $5.82 billion, which jumped 58% year over year and 23% sequentially. The company noted that surging demand "drove robust price increases." This helped the cyclical chip company return to profitability sooner than expected, generating adjusted earnings per share (EPS) of $0.42.
Management expects the company's growth to accelerate. For the third quarter, Micron is guiding for revenue of $6.6 billion, which would represent 76% year-over-year growth. At the same time, its adjusted EPS is expected to climb to $0.45.
Micron noted that its HBM supply is completely sold out for calendar 2024, as is the vast majority of supply for 2025. This helps illustrate the surging demand created by the accelerating adoption of generative AI.
Helping drive that demand is the ongoing data center upgrade cycle, as existing servers simply don't have the computational horsepower to handle the demands of generative AI. Bernstein analyst Toni Sacconaghi has crunched the numbers and suggests the AI server market will grow 75% annually over the next three years, calling the resulting upgrade cycle "unprecedented." Furthermore, as AI begins to expand from data centers to other devices, including personal computers and smartphones, demand for Micron's other solutions is also expected to surge.
Excitement about the prospects of AI has driven Micron Technology to new heights, with a commensurate increase in its valuation. That said, the stock is still trading for roughly 4 times next year's sales. While that's a premium compared with the multiple of 3 for the S&P 500, the accelerating demand for AI has resulted in unprecedented demand for Micron's storage and memory solutions.
As a leading supplier of processors used to accelerate AI, Micron could represent a once-in-a-generation investment opportunity.
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