Semiconductor stocks have soared recently, and it's not just the artificial intelligence (AI) boom.
While the advent of generative AI is a key driver in the industry, the semiconductor sector is also bouncing back from a cyclical downturn that came after the pandemic as demand for electronics like PCs and smartphones slowed in the economic reopening.
The cyclical recovery and demand surge for all things AI is creating opportunity in the sector beyond Nvidia. Keep reading to see two chip stocks that look like great buys right now.
1. Micron
Few semiconductor stocks are as cyclical as Micron (NASDAQ: MU), the integrated memory chipmaker. Just a few quarters ago, Micron was seeing revenue plunge and reporting wide losses.
Now, driven in part by AI-related demand, Micron is moving in the opposite direction, seeing revenue surge and margins rapidly expand. In the fiscal third quarter, which ended on May 30, revenue jumped 82% year over year to $6.81 billion, and it flipped a $1.6 billion adjusted net loss in the quarter a year ago to a profit of $702 million.
Gross margin jumped 810 basis points sequentially to 28.1%, showing the company is benefiting from rapidly rising prices.
Like many of its peers, Micron is seeing strong demand for data center chips due to the AI boom. Management said that AI demand drove data center revenue up more than 50% sequentially, showing the company could be just starting to capitalize on the trend. Additionally, the company is looking forward to 2025, anticipating continued data center growth due to demand for AI PCs and AI smartphones, which will drive more revenue from the data center. Management also forecast record revenue in fiscal 2025.
Based on its business model and the rebound in demand, the company looks well positioned to ride the AI boom.
Like Intel, Micron also manufactures its own chips, and the company is set to receive $6.1 billion from the CHIPS Act for manufacturing. JPMorgan Chase recently predicted that prices for NAND chips would increase through next year, while DRAM prices are expected to rise through 2026.
The stock now trades at a forward P/E of 10 based on the analyst consensus for 2025. With tailwinds from AI demand, the cyclical recovery, and the CHIPS Act, Micron looks like a smart buy at the current price.
2. Arm Holdings
Another chip stock that is riding similar trends to Micron is Arm Holdings (NASDAQ: ARM).
Arm is unique in the semiconductor industry as it makes most of its money from licensing its CPU architecture and collecting royalties on it, rather than designing complete chips like most of its peers.
The model, along with the company's power-efficient technology, has made it a success, and like Micron, Arm looks poised for another step up thanks to cyclical tailwinds and the surge in AI demand.
Because of its battery-saving architecture, Arm is a mainstay in the smartphone industry as its designs are in more than 99% of smartphones. Roughly half of Arm's revenue comes from Apple, and the new generation of AI-based iPhones could be a boon for Arm. Investors recently bid the stock up on reports that Apple is using Arm's latest CPU architecture, v9, for the new smartphones; that should lead to a windfall for Arm, as the v9's royalty rate is double that of the previous generation, the v8.
Arm doesn't have as strong a presence in data centers, but it is seeing increased demand from cloud infrastructure customers. The same battery-efficient technology gives it an advantage there, and AI applications demand a lot of power.
Arm is seeing a boom in new licenses; licensing revenue was up 72% in its most recent quarter, which will flow through to royalty revenue over the next two or three years.
With AI demand continuing to surge, Arm looks to be in an excellent position to capitalize on the boom thanks to its power-efficient technology.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, JPMorgan Chase, and Nvidia. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
2 Chip Stocks That Are Screaming Buys in September was originally published by The Motley Fool