This Artificial Intelligence (AI) Stock Trades at Just 22 Times Earnings -- and It's Growing Fast

Yahoo

a day ago

Key Points
Micron's earnings are expected to multiply substantially, and yet the stock can be bought at an incredibly attractive valuation right now.
The growth opportunity in the memory chip market, driven by AI applications, should enable this chipmaker to deliver outstanding growth.
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Artificial intelligence (AI) has supercharged the growth of many companies in the past two to three years, thanks to the huge amounts of money that are being spent on both AI hardware and software to train AI models and move them into production to unlock the benefits of this technology.
Not surprisingly, many of the top AI names are now trading at expensive valuations. From chip giants such as Nvidia and Broadcom to software specialists such as Palantir Technologies and SoundHound AI, investors will have to pay huge premiums if they are looking to add a top AI stock to their portfolios right now.
However, there's one company that's not just trading at an extremely attractive valuation, but is growing at an incredible pace as well thanks to AI: Micron Technology (NASDAQ: MU). Let's see why investors would do well to buy this stock now.
Data centers, smartphones, and computers are fueling this chipmaker's terrific growth
Micron Technology manufactures and sells memory and storage chips that are deployed in AI graphics cards, personal computers (PCs), and smartphones. This makes the company one of the best bets on the secular growth of the AI hardware market.
After all, AI chips used in data centers are equipped with large amounts of high-bandwidth memory (HBM), since they can provide substantially higher bandwidth and lower latency. These properties allow HBM chips to quickly transport a lot of data in comparison to legacy memory chips, making them ideal for tackling AI workloads.
Micron management points out that the company has "deep relationships with practically every major customer of HBM." Third-party reports suggest the same, indicating that Micron sells its HBM to the top four AI chipmakers that produce both GPUs and custom AI processors. The company is reportedly looking to corner a fourth of the HBM market by the end of the year, and that could translate into a nice increase in Micron's revenue and earnings.
After all, the HBM market's revenue is expected to almost double in 2025, generating $35 billion in sales, per Micron's estimates. What's more, the HBM market's revenue is expected to hit $100 billion by 2030. Assuming Micron can sustain a 25% share of this space, HBM alone could contribute around $25 billion to its top line after five years (based on the $100 billion revenue estimate mentioned earlier).
That would give Micron's growth a big boost, considering that the company has generated just under $34 billion in revenue in the trailing 12 months. Meanwhile, additional growth is likely to come from the PC and smartphone markets, where the demand for memory is increasing on account of a bump in the average dynamic random-access memory (DRAM) content, thanks to AI.
For instance, the mobile DRAM market's revenue could jump sixfold over the next decade, generating more than $636 billion in revenue, as AI and machine learning (ML) applications will lead to an increase in the amount of compute memory required in smartphones. Importantly, this isn't where Micron's list of catalysts ends.
The company says that it occupied the second spot in the data center solid-state drive (SSD) market in the first quarter. Again, this could turn out to be a huge positive for Micron in the future, as the data center SSD market's size is expected to grow by over 7x through 2033 from last year's levels.
In all, it is easy to see that Micron has solid secular growth opportunities that could help it remain a top growth stock in the long run, and that's why buying the stock right now is a great idea, considering its valuation.
The biggest reason to buy Micron stock hand over fist
Consensus estimates are expecting a 6x jump in Micron's earnings in the current fiscal year, which will end next month. This astronomical growth can be attributed to skyrocketing memory prices caused by tremendous end-market demand -- fueled by AI -- in the multiple areas discussed. What's more, Micron is expected to clock a 54% jump in earnings in the next fiscal year as well.
The good part is that investors can buy Micron stock at just 22 times earnings. That's a steal, considering that the U.S. technology sector has an average earnings multiple of 51. Another thing worth noting here is that Micron is undervalued when we take into account its long-term earnings growth potential.
The stock has a price/earnings-to-growth ratio (PEG ratio) of just 0.15, based on its five-year projected earnings growth, per Yahoo! Finance. The PEG ratio is a forward-looking valuation metric that's calculated by dividing a stock's earnings multiple by its estimated annual earnings growth rate over the next five years. A reading of less than 1 means that a stock is undervalued when its future growth is considered.
Micron's PEG ratio suggests that it is significantly undervalued. So, this AI stock is a no-brainer buy right now, as the remarkable growth that it has been clocking of late seems here to stay for a long time.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
This Artificial Intelligence (AI) Stock Trades at Just 22 Times Earnings -- and It's Growing Fast was originally published by The Motley Fool