The artificial-intelligence boom has had a profound impact on all stocks, especially technology stocks, and, even more specifically, semiconductor stocks. This is especially true of names like Nvidia (NVDA 1.45%), which is obviously going to be a big beneficiary of near-term AI spending.
But after their huge runs this year, many AI names trade at high valuations — though not all. And if Bill Gates is right that AI is one of two technologies he’s seen in his life that is truly, “revolutionary” — the other being the graphical user interface back in 1980 — then we are still in the very early innings of AI.
That leaves time for other tech stocks to benefit. And both memory giant Micron (MU 1.44%) and processor giant chipmaker Intel (INTC -1.36%), while having lots of AI potential, still trade 28% and 50% below their all-time highs, respectively.
That means these two could “catch up” to this year’s winners if they harness their AI opportunity. But which is the better buy?
The case for Micron
No doubt, both companies are in a vicious downturn right now, as the combination of the post-pandemic hangover in PC and mobile phone sales coincides with high inflation and interest rates, depressing big-ticket item sales. But Micron tends to be even more volatile than Intel. That’s because memory is commodity-like, with market prices that can swing wildly based on supply and demand.
Over the past year-plus, the supply of memory has greatly outpaced demand, and memory prices have cratered. As one can see, Micron’s earnings have followed suit, in their worst free-fall since the Great Financial Crisis.
Fortunately, it appears the worst of this memory downturn is ending. Micron itself reported a slight quarter-over-quarter revenue gain in its fiscal third quarter and projected more improvement in its fiscal fourth quarter, which ended last month and which Micron will report on this Wednesday.
The bottoming out has occurred as inventory corrections have mostly run their course, demand is improving, and all major memory manufacturers have cut back supply. Of note, Micron is one of only three major DRAM makers and five NAND flash producers outside of China, and the oligopoly is now being disciplined in cutting production. In fact, the largest NAND producer, Samsung, just stepped up NAND flash production cuts again last week, cutting back production by about 40%.
Moreover, Micron passed its main competitors in terms of technology transitions within the past year or so, as the first company to produce 1-beta DRAM and 232-layer NAND flash. And while Micron initially fell behind rival SK Hynix in high bandwidth memory (HBM) for AI applications, Micron recently announced a new HBM product with better specs than Hynix this summer. That product is in sampling right now and will start shipping in early 2024.
So, Micron’s improving results aren’t even due to any outsized AI revenues yet, but those should be coming next year. Meanwhile, Its stock trades at less than 1.7 times book value and just six times its peak earnings from back in 2018.
The case for Intel
Like Micron, Intel’s core CPU processor business for laptops and traditional data center servers is also in a downturn. That’s made things especially difficult for Intel, as the company also needs to invest in its ambitious turnaround and transformation outlined by CEO Pat Gelsinger, who took over in 2021.
Still, recent product updates have been positive. Over the summer, Intel management attended numerous industry events, reiterating that its ambitious roadmap of five nodes in four years, with the goal of reaching process parity with industry leaders by 2025, remains on track.
In addition, Intel is transitioning to become a foundry and packaging house that makes chips not only for itself, as it has traditionally, but also for third parties. Recently, Intel’s foundry announced a large pre-payment on the part of a large customer, which will accelerate the foundry buildout while lending confidence that Intel will get its fair share of customers.
Finally, Intel is also pursuing AI products. These include its Gaudi and Max line of accelerators and GPUs, which, while far, far behind Nvidia, have garnered some orders, making it into Amazon (AMZN -0.16%) Web Services’ cloud platform as well as a new supercomputer used by AI start-up Stability.ai. In 2025, Intel plans to combine the two product lines into a new accelerator called Falcon Shores, which it hopes will be competitive with Nvidia GPUs.
Intel’s financials may also be starting to turn a corner, as PC inventories appear to be down to a more stable level, and data center revenue has been “less bad” even though it’s still in a correction. Management also recently said the current quarter was tracking above the midpoint of guidance.
While Intel’s earnings are still depressed and its free cash flow is negative, the stock currently trades at just around 7.4 times its peak earnings from 2019, and at just 1.4 times book value.
Though Intel has struggled mightily in recent years, it still has a lot of innovation and technology chops. Remember, Pat Gelsinger joined Intel as an engineer at the age of 18 back in 1979, and was the youngest VP in the company’s history. So he’s an “engineer’s engineer” who I’d bet will get Intel back on track.
Both companies have major turnaround potential at this point, and that turnaround could be pretty strong if they’re able to capitalize on AI-related products — Micron on HBM, and Intel on leading-edge CPUs, AI accelerators, and chiplet packaging for third-parties.
I’m an owner of Micron and not Intel, but my Micron stake was bought a long time ago. If I had to put new dollars to work, it would be a difficult decision.
But I would still lean toward Micron at this point. This is more because Micron is already demonstrating technology leadership relative to peers, and seems to have increasing momentum on that competitive front. On the other hand, Intel’s investors need to have faith that its management will eventually get there. While I’m a believer, that answer may not come until 2025 or even beyond.
Still, both are good turnaround candidates, and are the rare AI-exposed stocks that still trade at value stock valuations.