Two AI-related stocks that could be worth buying during a price decrease:
These days, the stock market is hitting record highs, particularly in the tech sector. The S&P 500 market index increased by 49% over the past two years, while the tech-focused Nasdaq Composite index soared by an impressive 68%. Both indices were trading about 1% below their all-time highs on November 14.
However, not every tech stock is profiting from this upward trend. Despite playing significant roles in the artificial intelligence (AI) boom, Advanced Micro Devices (AMD) and Micron Technology are trading more than 30% below their peak prices.
I believe that Micron and AMD are excellent opportunities for AI investment due to their recent price drops. Let's dive deeper into these underappreciated AI success stories.
The connection between Micron and AMD and the AI opportunity
These AI hardware specialists operate in the shadows of more famous competitors such as Nvidia. Yet, they are deeply rooted in the AI opportunity. Here's what you need to know about Micron's and AMD's AI products.
AMD specializes in designing high-performance computer processors. Its offerings include the Ryzen line for desktops and laptops, the Epyc series of server-grade chips, and the Instinct collection of AI computing accelerators.
The Instinct chips compete with Nvidia's AI accelerator solutions, and AI supercomputers often use Instinct chips for computations along with Epyc processors. System builders can pair AMD or Nvidia accelerators with AMD and Intel server processors, with most combinations found in the world's leading supercomputers by 2024.
Nvidia and AMD AI accelerators are typically bundled with a large amount of high-speed memory. A single Nvidia H200 card comes with 141 gigabytes (GB) of accelerator memory. AMD's Instinct 205X chip offers 128 GB of fast memory.
Moreover, these massive memory stores do not include the memory of the Intel or AMD processors managing the show or the memory-based solid-state devices (SSD) providing long-term storage for these computing giants.
On top of that, smartphones and other consumer-facing devices with AI features require more memory than older devices without AI. As a leading producer of high-speed memory chips, Micron directly benefits from this growing memory demand.
The impact of AI on their revenue growth
The AI market is not just a future prospect for these companies; it's already driving their revenue growth.
In AMD's third quarter, sales increased by 18% year over year, with a 122% surge in the data center segment, which includes the Epyc and Instinct chips used in AI servers. Micron's fourth-quarter revenue was up 93% year over year, primarily due to "robust AI demand" and skyrocketing data center sales.
High-growth AI on the budget
Both stocks may appear overpriced based on their reported results. AMD trades at 124 times trailing earnings and 145 times free cash flow. Micron's metrics stand at 147 and 909, respectively. Traditional value investors might shy away from these stocks given these figures.
However, the chip industry is recovering from a prolonged downturn in the semiconductor sector, which was affected by a manufacturing capacity shortage and inflation. By looking at these stocks through a forward-looking lens, AMD shares are being traded at 27 times next-year earnings estimates, and Micron's forward price-to-earnings ratio is 7.7.
Therefore, I think it's a mistake to dismiss Micron and AMD as overpriced growth stories. They just needed time to overcome recent challenges and restart delivering strong bottom-line profits. These AI stocks offer an attractive buying opportunity now, and I strongly recommend considering a few shares while they are affordable.
Investing in Micron and AMD can be a profitable venture due to their significant roles in the AI market, despite their current prices being higher than traditional value investors might appreciate. The AI market is already driving their revenue growth, with AMD's data center segment, which includes Epyc and Instinct chips, showing a 122% surge in sales, and Micron's fourth-quarter revenue increasing by 93% due to robust AI demand.
Given the AI market's potential, it's essential to consider these stocks as attractive buying opportunities, even if their current price-to-earnings ratios seem high. The prolonged downturn in the semiconductor sector has affected their stocks' performance, but as the chip industry recovers, these AI stocks may provide substantial returns for investors who capitalize on their affordability now.
