Today’s world – encompassing the digital world and the information economy – rode out of the 1980s on the back of the silicon semiconductor chip and found a turbo boost in the form of artificial intelligence technology. The combination of AI and semiconductor chips has forever changed the tech landscape. It has also opened up powerful new opportunities for stock investors.
According to the data crunching firm GlobalData, the AI market may reach as high as $909 billion by 2030, just six years from now. An industry awash in that much cash will bring investors running – but they should tread carefully because not all AI chip stocks are created equal, and some are better primed for gains than others.
Against this backdrop, Baird’s 5-star analyst, Tristan Gerra, has taken a closer look at two major players in the semiconductor field: Intel (NASDAQ:INTC) and Micron (NASDAQ:MU), and outlines which is the premier stock to buy today. Let’s dive in.
Intel
We’ll start with Intel, one of the chip industry’s best-known names. Intel has long been a leader in the market for PC processor chips; its Core processor family has become an industry standard. Leadership in this segment, where Intel holds a 63% market share for personal computer CPUs, has kept Intel ranked among the ‘top ten’ chip companies. Intel pulled in $54.22 billion at the top line last year, putting it in 4th place among its peers by revenue.
No company reaches the heights where Intel lives without being able to adapt to changing conditions by shifting its focus when needed. Intel is now making strategic moves into the artificial intelligence sector. It is introducing new chipsets designed to handle the demands of AI applications, building on its existing, highly-regarded semiconductor manufacturing capabilities. Furthermore, Intel is capitalizing on the Federal CHIPS Act, obtaining $8.5 billion in funding, and gaining eligibility for an additional $11 billion in federally subsidized loans for the technology sector.
Intel is using these funds to build and launch a new foundry project in New Mexico. This foundry is part of the Biden Administration’s policy to reshore semiconductor chip manufacturing – particularly for AI-capable products. Intel is preparing the factory to produce its new CPUs based on the 18A fabrication technology and is on schedule to be production-ready later this year, with large-scale production likely to ramp up in 2025. A smooth ramp-up is essential for Intel, as the 18A represents Intel’s most advanced fabrication technology.
All of this provides background for Intel’s recent 1Q24 results. The company reported a total of $12.7 billion in revenue, representing 8.5% year-over-year growth, although it just missed the forecast, coming in $80 million below the estimates. Intel’s bottom line came to 18 cents per share by non-GAAP measures, exceeding estimates by 4 cents per share.
Baird’s Tristan Gerra acknowledges Intel’s strengths, but also sees reason for caution.
“Pendulum could shift as 18A remains slated for launch next year with more tiles insourcing starting late 2025, but a number of challenges remain: Gross margin expansion next year in the face of higher startup costs is dependent on revenue growth, yet we see the x86 market TAM as very low single-digit growth medium term with the shift to accelerated data centers continuing to benefit GPUs, along with the looming threat of ARM gaining traction in the PC ecosystem,” Gerra opined.
To this end, Gerra rates Intel shares a Neutral, although his $40 price target implies ~30% upside potential for the stock over the coming months. (To watch Gerra’s track record, click here)
Gerra’s caution aligns with the Street’s general outlook. Intel has a Hold consensus rating, based on 31 recent analyst reviews that break down to 4 Buys, 23 Holds, and 4 Sells. The stock’s $39.92 average price target suggests a 30% upside potential from the current trading price of $30.68. (See INTC stock forecast)
Micron
Next up is Micron, the Idaho-based chip company that has built its reputation on the quality of its memory chips. The company, which has been in business since 1978, is well-known for its DRAM and NAND chips, as well as its USB flash drives. Micron’s products have found application in the memory-intensive data center business, where they provide the storage capacity needed to back AI computing systems.
In addition to AI and data center applications, Micron’s chipsets can be found in everything from 5G and IoT networks to autonomous vehicles. The company is also a major supplier to the PC market, providing memory and storage chips as well as SSD drives. The company’s broad customer base has served it well, and Micron ranks 11th among the world’s largest semiconductor companies, when counting by market cap or by annual revenue. The company realized $18.3 billion at the top line in 2023.
In recent days, Micron has made some announcements that should interest investors. On April 25, the company announced that it had entered into a non-binding agreement – a Preliminary Memorandum of Term, or PMT – with the Biden Administration, under which Micron stands to receive $6.1 billion in funding from the CHIPS Act. Micron plans to use these funds as part of a large capex plan, with a goal of investing up to $50 billion in capex through the year 2030.
In another update, on May 1, Micron announced that it became the first chip company to validate and ship 128GB DDR5 32Gb server DRAM chips. These are high-capacity chips, capable of meeting the demands and requirements of the memory-intensive generative AI computing applications.
These announcements bode well for Micron’s future. In the meantime, we can look at Micron’s last earnings report, which covered fiscal 2Q24, for a picture of where the company stands now.
In that earnings report, Micron showed a top line of $5.82 billion, up more than 57% year-over-year and beating the forecast by $470 million. At the bottom line, Micron’s non-GAAP income of 42 cents per share was an impressive 66 cents better than had been anticipated. Even better, the company issued revenue guidance for fiscal 3Q24 in the range of $6.4 billion to $6.6 billion, well above the $5.99 billion that had been estimated.
For Baird analyst Tristan Gerra, Micron offers investors plenty of upside to bet on. He writes of the company, “While catching the train a bit late, we see meaningful upside opportunities ahead for Micron notably given the stock’s recent pullback, in discrepancy with incrementally positive trends unfolding in DRAM per our recent channel checks, yielding to a somewhat unprecedented outlook for memory over the next 12-18 months. DRAM pricing is stronger than previously expected with increasing mix of premium-priced DDR5, while HBM3E has the potential to generate 60%+ gross margin for Micron next year.”
Gerra goes on to give MU shares an Outperform (i.e. Buy) rating, with a $150 price target pointing toward a 26% one-year upside potential.
Overall, Micron has picked up a lot of interest from the Wall Street analysts – a total of 25 reviews that include 23 Buys, 1 Hold, and 1 Sell for a Strong Buy consensus rating. The shares are trading for $119.21, and their $132 average price target implies a 12-month upside of ~11%. (See Micron’s stock forecast)
With the analyst’s calls put side-by-side, it’s clear that Baird’s Tristan Gerra sees Micron as the superior chip stock to buy now.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
