Micron Is One Of My Top Stocks To Buy For The AI Boom, PC Upgrade Cycle And Robotics (MU)

We’ve seen stocks like Super Micro Computer (SMCI) and NVIDIA (NVDA) surge in value thanks to investor interest in AI related companies. These two companies have been early and obvious winners in the AI boom that has just started. Part of the reason for that is because these companies are amongst the first to see tangible benefits in the form of impressive revenue growth that has been suddenly boosted by AI related product orders. While many investors may have missed the rally in these high-flying early winners, there appears to be many more stocks that can move next as a new and potentially broader array of companies start to see revenues and profits boosted by AI. Many companies could potentially start to see increased product orders as AI starts the process of going mainstream and begin touching the daily lives of people all over the world.

Aside from what appears to be the start of a boom in AI in 2024, there is also another major potential growth factor coming in 2025. Microsoft (MSFT) has announced the retirement of Windows 10 on October 14, 2025 and the end of support for Windows 11 on November 11, 2025. Between this and the potential for new PCs to have built-in AI related features, it could serve as a powerful force that could cause many consumers and businesses to upgrade computers. I also expect many other consumer electronic devices to be upgraded as they will be more compatible with AI and with the latest Windows operating systems.

AI is starting to happen now, next comes a PC and consumer electronics upgrade cycle, which could be followed up by a boom in robotics. Tesla (TSLA) could be the company to bet on in terms of taking robotics mainstream, especially since Elon Musk was able to make EV’s go mainstream. Elon Musk has said the humanoid robot could be the biggest source of revenue for Tesla over time. One article analyzes the potential for robotics and states:

“Tesla’s Optimus Gen-2 falls within the humanoid robotics market, which Markets and Markets research estimates will grow significantly from a value of $1.8 billion in 2023 to $13.8 billion by 2028.”

A recent Seeking Alpha article details plans for an investment of millions of dollars in a company called Figure AI. This company is a start-up that is planning to build a humanoid robot. This appears to be potential competition for Tesla’s Optimus robot and Jeff Bezos and Nvidia are said to be investing in it. When you see wildly successful tech legends like Jeff Bezos, Elon Musk and Nvidia’s Jensen Huang, all pursuing the development of a humanoid robot, the potential is likely enormous.

While it makes sense to consider buying some of the mainstream and obvious AI and robotics stocks like Nvidia or Tesla, there will likely be many more winners, and valuations are much lower if you consider some “under-the-radar” ways to invest in these trends. I call the stocks I have in mind as being under-the-radar because it seems like Nvidia is currently the main, if not the only, recognized AI play for many investors. With this in mind, here are some stocks that appear to offer significant value and lots of potential to benefit from all of this:

Micron Technology (NASDAQ:MU) could be a big beneficiary of everything that appears to be on the horizon. Unlike Nvidia, the boom in AI has not really shown up in Micron’s financial results yet, but I believe that it will start to show up in the second half of 2024. AI is going to require and consume more memory, plus Micron could benefit from a potentially major PC and smartphone upgrade cycle in 2025. It could also benefit from robotics, as Tesla (TSLA) plans to release the Optimus robot somewhere between 2025 and 2027. All of these events should lead to increased demand for Micron’s memory chips, but it will also likely see huge demand for high bandwidth memory or “HBM” which is required for AI chipset uses. Micron’s HBM chips should provide expanded profit margins when compared to more basic memory chips. With the impact of AI likely to benefit Micron later this year, the upgrade cycle potential for PCs (due to support ending for certain Windows products) is coming in 2025, and then growth from robotics could be another big factor.

What I like about Micron

Multiple analysts have taken note of Micron’s potential to capitalize on the AI boom and have set price targets that are as high as $105 per share.

Unlike some semiconductor company valuations, Micron shares offer an extremely reasonable price to earnings ratio. Analysts expect roughly break-even results for 2024, but a major rebound in 2025 with estimates at $6.41 per share, and 2026 estimates at $7.33 per share.

It seems clear that Micron’s memory and storage products will be needed to power generative AI applications and additional demand will come from robotics. A release from Micron itself summarizes the potential by stating:

“Micron’s industry-leading memory and storage solutions enable the latest generation of faster, more intelligent global infrastructures that make AI, machine learning and generative AI possible. From collaborative robots to personal AI companions, complex AI models are created from data, and data lives in Micron solutions.”

The Chart

As the chart below shows, Micron shares have been in an uptrend for the past few months and it currently trades right around the 50-day moving average which is around $84. I would use dips to add to my position.

Another Semiconductor Company Set To Benefit From AI

Magnachip Semiconductor (MX) is a maker of semiconductors that primarily focuses on display, power and automotive systems. This company was a buyout target in 2021 for $29 per share, however the deal was blocked by the US Government due to national security reasons. That failed buyout offer appears to have been made right around the peak in the semiconductor cycle, and Magnachip has since been in a major downtrend, now trading for just over $6 per share. This share price seems unbelievably low when you consider that Magnachip has an incredibly strong balance sheet with around $166.64 million in cash and just under $5 million in debt. This is equivalent to just over $4 per share in cash.

Magnachip has three main business divisions which include display, power, and automotive. Magnachip products are used in smartphones, cars, computers, consumer electronic devices and industrial equipment. Magnachip products provide critical benefits such as extending battery life, improved performance and image quality, and help to provide slimmer form factors. These are the characteristics that are needed for AI and robotics. The company has around 1,100 registered patents and patents pending. In 2023, Magnachip announced it would separate the power and display divisions. This was said to be completed in Q4 of 2023, so we might get more details when Q1 earnings are released. I believe management could be pursuing this idea in order to potentially sell one of these divisions or to spin it offer to shareholders.

What I Like About Magnachip

I feel like the market has given up on Magnachip and like many chip stocks, it could surprise to the upside as a new upcycle appears to be coming. Buying this stock in the $6 range makes a lot of sense to me, especially when it has roughly $4 in cash on the balance sheet and when it had a $29 buyout offer just a couple of years ago. I am not the only one who sees the potential value in a Magnachip turnaround. Howard Marks is a legendary value investor and the founder of Oaktree Capital. His firm has purchased a stake in Magnachip and owns about 2.8 million shares.

Analysts expect Magnachip to generate revenues of about $279 million for 2024, and post a loss of 61 cents per share. However, revenues are expected to grow significantly going forward with revenue projections of $370 million for 2025, which could result in a return to profitability. When this upcycle kicks in, it would appear likely for this company to be earning well over $1 per share again, which it has done in the past. In 2017, this company earned $1.59 per share, it earned $1.23 per share in 2020, and $1.19 per share in 2021, so this is what profitability could look like in a reversion to the mean scenario.

It appears that Magnachip could benefit from the AI boom, and also from a PC and consumer electronics upgrade cycle. It may also be able to benefit from robotics in the future. It seems that AI and a rebound in consumer electronics might start to boost revenues soon. Analysts are predicting a big improvement for the consumer electronics industry in 2024 and this is likely to benefit Magnachip going forward. An Investors.com article states:

“The consumer electronics industry is seen returning to growth in the U.S. in 2024 after two years of declining sales. Analysts made that rosy forecast ahead of the CES 2024 tech trade show, which officially opens Tuesday. One factor boosting sales is a refresh cycle for personal computers, smartphones and other gadgets bought during the Covid crisis in 2020 and 2021.”

In another confirmation for the improving growth outlook for the semiconductor industry, (which should benefit Magnachip and Micron) The World Semiconductor Trade Statistics or “WSTS” has projected a strong rebound in semiconductor demand for 2024. It sees very strong growth prospects in memory chips, as well as a rebound in just about every other segment of the chip industry. It states:

“The outlook for 2024 points to a vigorous upswing in the worldwide semiconductor market, with projections indicating a 13.1 percent increase, reaching a valuation of US$588 billion. This growth is expected to be largely fueled by the Memory sector, which is on track to soar to around US$130 billion in 2024, representing an upward trend of over 40 percent from the previous year. The majority of other principal segments, including Discrete, Sensors, Analog, Logic, and Micro, are also expected to record single-digit growth rates.”

The Chart

As the chart below shows, Magnachip shares have been in a downtrend but might be putting in a very bullish double bottom around the $6.50 level. It currently trades below the 50-day moving average which is around $6.98 and the 200-day moving average which is just over $8 per share. I think this stock is poised to bounce from a very undervalued level and I plan to add shares at current levels or potentially even at higher levels.

Potential Downside Risks For Micron And Magnachip

In terms of potential risk factors, the semiconductor business is very competitive and it is cyclical. Bans on some Micron products by China is another potential risk factor to consider, as are a number of geopolitical risks. As a smaller company, Magnachip might be able to fly below the radar in terms of company specific product bans. A recession is a potential downside risk that concerns me for all stocks. Magnachip has a very strong balance sheet, but it needs to return to profitability. It is obviously more speculative when compared to Micron but, it also appears to have significant upside reward potential to offset the potential risks.

In Summary

Investors who want to try to capitalize on AI, the PC and consumer electronics upgrade cycle and robotics should consider some of the well-known plays in these categories, but obviously, I also think these two chip stocks make a lot of sense as well. The valuations are remarkably low for Micron and Magnachip right now and both of these companies appear to be entering a major new upcycle, with revenues expected to surge going forward. Micron is the safer bet between these two stocks, but as someone who bought and wrote a bullish article about Advanced Micro Devices (AMD) when it was trading for about $3 per share, I know that buying a chip stock with major turnaround potential can also provide remarkable gains and that is why I believe the risk/reward ratio is extremely compelling for Magnachip.

No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.