Memory shortages might continue until 2027, but certain stocks could be poised to counteract this trend.
The increasing demand for chips and other components in data centers is generating significant opportunities for major semiconductor firms. While the need for advanced chips is rising, not all chip stocks are evaluated the same way.
Some leaders in the industry are facing significant pricing discrepancies. Investors are, in fact, paying higher price-to-earnings ratios for stable-performing companies like Nvidia, while the revenue multiples for Micron Technology are lower (MU +0.52%), despite Micron’s faster revenue growth.
Micron’s declining valuation is largely a reflection of the cyclical characteristics of the memory market. However, the scarcity of memory required for artificial intelligence (AI) chips is significantly enhancing Micron’s growth potential. This surge might last longer than initially anticipated, possibly driving further increases in Micron’s stock value.
Relative evaluation with other companies in the same industry
Investors could be hesitant to buy amidst a steep rise in stock prices over recent months. Yet, Micron’s stock presents an appealing valuation, currently trading at merely 11 times forward earnings estimates. This is notably lower than Nvidia’s forward P/E of 24 and Advanced Micro Devices‘ 35.
Moreover, Wall Street analysts project that Micron’s profits will increase at an annual rate of 50% in the coming years, outpacing AMD’s 45% and Nvidia’s 36%. Micron seems to have a better growth outlook at a more favorable price. But, one has to wonder: Is the current demand for advanced memory products really sustainable?
Micron offers a favorable risk-reward trade-off
Expectations on Wall Street indicate that Micron’s earnings could rise by 294% this year to $32.67 per share, and another 27% to $41.54 next year. This recovery is being driven by increasing memory prices due to demand for data center graphics processing units (GPUs), with Micron supplying Nvidia.
These projections stem from existing momentum. Last quarter, sales jumped by 57% year-over-year while profits soared by 175%. Management mentioned in their last earnings call that customers are already expressing interest in all the high-bandwidth memory expected to be available by 2026.
In addition, a recent report from International Data Corp. (IDC) suggests that memory shortages could last until 2027. A key factor here is Nvidia’s upcoming Rubin chip, which will provide enhanced memory bandwidth for complex AI tasks. This implies that each new generation of Nvidia chips can benefit Micron, as it enhances memory bandwidth to manage future AI workloads.
Nevertheless, investors need to be cautious regarding the risk of oversupply. If memory supply fails to meet demand, it could create excess inventory, ultimately lowering memory prices and impacting Micron’s profitability. However, based on customer commitments and management’s insights on the high demand for Nvidia’s data center chips, this risk seems to be manageable for now.
In summary, the stock’s appealing valuation relative to its earnings might offer it substantial upside potential in 2026, and maybe for several years beyond.
