The semiconductor industry has been soaring, with chip stocks like Nvidia (NASDAQ:NVDA), Micron Technology (NASDAQ:MU), and Advanced Micro Devices (NASDAQ:AMD) soaring to nosebleed valuations amid the surging hype around artificial intelligence technology.
Some people have seen this story play out before. Remember the dot-com bubble? While I’m as excited as anyone about AI’s transformative potential, I can’t help but wonder if we’re due for a reality check.
Don’t get me wrong. I still believe in these companies’ long-term prospects. But it’s hard not to feel a bit of déjà vu. The chip market has always been cyclical, and predicting its future means betting on the staying power of the AI revolution.
Will the current AI frenzy fizzle out like the early internet did, leaving overeager investors holding the bag? Or will this prove to be a true paradigm shift with room for multiple winners? It’s hard to tell unless we dig deeper. Let’s take a look!
Nvidia (NVDA)
The AI boom has propelled Nvidia to stratospheric heights, with the stock recently hitting an all-time high of $135 (post-split). Wall Street’s enthusiasm is palpable. Analysts are falling over themselves to raise price targets, with some projecting NVDA stock could go as high as $200 per share.
It’s easy to see why. Nvidia’s Q1 results were jaw-dropping, with revenue up 262% year-over-year to $26 billion. The company is riding massive tailwinds in AI, data centers, and gaming. Its GPUs are the gold standard for training large language models. And with the company’s new Blackwell architecture on the horizon, Nvidia seems poised to maintain its technological edge. Its Compute & Networking segment has been booming.
Even then, I can’t help feeling a bit queasy about the stock’s nosebleed valuation. At over 49-times forward earnings, Nvidia is priced for perfection. The semiconductor industry is notoriously cyclical, and we’re likely in the late innings of this economic cycle.
That said, the AI revolution shows no signs of slowing down. Companies are racing to build out AI infrastructure, and Nvidia remains the premier picks-and-shovels play in this sector. To justify its lofty multiple, Nvidia will need to keep delivering massive earnings beats. Anything less than stellar results could trigger a sharp pullback in this name.
Regardless, I’ve been proven wrong whenever I’ve doubted Nvidia. The company continues to deliver massive beats quarter after quarter. If this AI wave is truly as transformative as it seems, today’s lofty valuation may end up looking cheap in hindsight. In the near-term, Nvidia looks risky at these levels. But zooming out over a five to 10 year time horizon, I still see tremendous potential. If the AI boom continues, $500+ per share doesn’t seem unreasonable. Of course, that’s a big if.
Micron Technology (MU)
Micron’s stock price has surged over 65% year-to-date on the back of the strong demand for its memory chips from data center and AI customers. The company recently reported solid Q3 fiscal 2024 results, beating expectations on both the top and bottom lines. Revenue jumped 81% year-over-year to $6.81 billion, while 30 cents of earnings per share handily beat estimates.
Micron is benefiting from some powerful megatrends right now, especially the rapid growth of artificial intelligence applications that require enormous amounts of memory and storage. The company is a key supplier to AI leaders like Nvidia, with its high-bandwidth memory (HBM) chips integrated into Nvidia’s latest AI accelerators. Micron expects record revenue in fiscal 2024 and 2025 driven by these AI tailwinds.
Analysts are largely bullish on the stock, with Morgan Stanley (NYSE:MS) recently upgrading Micron to “equal-weight” and hiking its price target. The firm cited better-than-expected AI chip demand as a key reason for its more positive stance. Of the 27 analysts covering Micron, 25 have buy ratings.
However, I have some reservations about Micron’s longer-term prospects. The memory chip industry is highly cyclical, and Micron’s growth is expected to slow dramatically after fiscal 2025, unless AI demand significantly exceeds expectations.
The stock also doesn’t look particularly cheap at around 14-times forward earnings, given the boom-bust nature of its business.
So while I believe Micron will continue to ride high in the near-term on the AI wave, investors should be aware of the risks further out on the horizon. I believe the stock could trade less than $300 a decade from now. I’d love to be proven wrong, though.
Advanced Micro Devices (AMD)
AMD’s strategy seems to be taking a page out of its playbook against Intel (NASDAQ:INTC) in the CPU market – targeting budget-conscious companies and developers with its lower-cost AI offerings. The company’s MI300 series GPUs are reportedly delivering strong performance for AI workloads at a better value than Nvidia’s pricey H100 chips. This approach could be especially appealing to cash-strapped AI startups looking to keep costs in check.
Financially, AMD is already seeing a big AI boost, with data center revenue up 80% year-over-year in Q1 to $2.3 billion. Management now expects data center GPU sales to top $4 billion this year, up from a prior $3.5 billion forecast. Analysts are taking notice, with Piper Sandler naming AMD its top large-cap pick and New Street Research setting a bullish $345 price target for 2026.
However, AMD still has a steep hill to climb to catch Nvidia, which controls around 70-95% of the AI chip market. And while AMD stock trades at a premium, its growth and margins pale in comparison to Nvidia’s jaw-dropping numbers. Growth in the company’s Data Center segment also hasn’t been as eye-popping.
So, can AMD pull off in AI what it did against Intel in CPUs? Only time will tell. But if AMD can capture even a fraction of Nvidia’s AI market share, the stock could have a long runway ahead, likely sending this stock above the $500 level in a decade.
On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
