Artificial Intelligence (AI) has captured the imagination of businesses and investors over the past year. This spring, the hype around ChatGPT’s capabilities, unveiled last November, began to translate into blockbuster revenue and profits for AI leaders. Nvidia and others.
The stocks of the industry leaders have gone far. So which are the best AI stocks to buy in September?
Booming AI spending has driven down spending on other types of technology, such as general-purpose servers. Meanwhile, consumer electronics sales of PCs and smartphones have struggled amid high interest rates and a post-pandemic hangover.
While AI sentiment has largely boosted technology and semiconductor stocks, some AI beneficiaries have not appreciated AI “pure plays” as much. And many are still below their 2021 highs.
That includes my pick for the month of September, which deals in cheap valuations. Not only does AI have understated prospects, but the broader industry recovery should benefit more than many realize.
Is this Micron’s moment?
Over the past year, Micron Technology (Mr 0.17%) 2008 has endured the most brutal recession in memory.
Memory is no different from oil in that it is somewhat (though not completely) commoditized, with a price that can fluctuate up and down depending on supply and demand. However, three major DRAM suppliers have cut back on their capital plans and cut production by 30% or less in recent months. Meanwhile, demand appears to be bottoming out, while artificial intelligence brings the potential for better-than-expected demand next year.
This is a beautiful setup that will trigger further memory upturns. While the market gave Micron some credit for the potential recovery, its 41% year-to-date gain is still below 47%. iShares Semiconductor ETF And much lower than the 232% seen in AI chip leader Nvidia. And Micron still trades 30% below its all-time high and is just 1.7 times book value, making it relatively cheap compared to other tech and chip stocks.
MU data via YCharts.
Micron should eventually take the lead in HBM for artificial intelligence
Another knock against Micron is that it has fallen behind rivals in high-bandwidth memory, or HBM, a small niche market currently in high demand for AI applications. Currently a Korean competitor SK Hynix It is seen as a leader in the DRAM niche because over the past decade, Micron has pursued a different technology architecture called the Hybrid Memory Cube.
However, the industry eventually standardized on HBM for high-performance computing, and in 2018, Micron changed its policy. Yet it seems that Micron is not only catching up fast to SK Hynix and Samsung in HBM, but both are likely to reverse in early 2024.
In July, Micron announced that customers were sampling its new HBM3 product, which packs 24GB of capacity and more than 1.2 TB/s of bandwidth into just eight layers of vertically stacked DRAM modules. Those specs actually beat SK Hynix’s leading HBM chip, which currently has 24GB of capacity across 12 layers and speeds of 1 TB/s.
While SK Hynix recently introduced a souped-up version of its HBM3 product called the HBM3E, the speed of that new version will only increase to 1.15 TB/s, which is still slower than Micron’s new HBM3.
Micron’s new HBM product won’t start shipping until early 2024 and ramp up until late next year. However, this will give investors more high margin growth.
DRAM memory is a major bottleneck in fast artificial intelligence. Image source: Getty Images.
Don’t forget the rest of the memory market recovery
Micron’s rapid progress in HBM is another example of its growing technology lead, even in non-AI memory. In 2022, the company surpassed competitors in acquiring leading-edge memory nodes for the first time, becoming the first vendor to scale 232-layer NAND flash and 1-beta DRAM.
However, Micron’s technological success was overshadowed by a highly cyclical recession that simultaneously rocked the industry.
But that technology lead has helped Micron weather the storm and come out stronger on the other side. Last week, industry research site TrendForce released some encouraging data for the second quarter. While DRAM industry revenue appears to have bottomed out in the first quarter, all three major DRAM vendors are growing quarter over quarter in Q2.
According to Trendforce, SK Hynix saw the biggest quarter-on-quarter growth of 50% on price increases of 7%-9%, thanks to its HBM products. But remember, Micron is poised to capture a significant portion of the HBM market next year.
However, Micron outpaced Samsung with 15.7% revenue growth and stable prices, while Samsung only grew revenue by 8.6%, as its DRAM selling prices continued to decline. This is because Micron’s mix has shifted towards higher-end DDR5, which are premium products that benefit from Micron’s technology lead.
Even in the troubled NAND flash industry, Micron is showing some technological differentiation from its peers. In Trendforce’s study of NAND flash-based solid-state drive (SSD) sales, Micron outperformed all competitors in Q2 due to its high volume of advanced 176-layer PCIe SSDs.
In a down market for NAND, Micron’s SSD revenue fell just 1.8%, while all other competitors saw declines of 20%-35%. This allowed Micron to gain market share, moving from the fifth largest SSD vendor to third in just one quarter.
Micron’s recovery may be better than expected
The memory market is highly cyclical, with booms usually followed by busts and vice versa. But the most recent bust was the worst ever, as all major vendors cut production and cut capital spending. And with new demand drivers from AI, the memory industry is sowing the seeds for its next growth.
However, Micron’s recent technical performance over rivals means that it can recover even better than in past cycles. That’s why this is my top AI stock to buy this month.