Better AI Stocks: AMD vs. Micron Technology

Many tech stocks have benefited from the mainstream adoption of artificial intelligence (AI). A prime example is the semiconductor chip maker Advanced Micro Devices (NASDAQ:AMD).

AMD shares have soared from a 52-week low of $93.12 last year to a high of $227.30 in March. But that’s not the only beneficiary of AI.

Another company that is particularly well-prepared to take advantage of the artificial intelligence market is Micron Technology (NASDAQ:MU). Its shares have also risen sharply over the past year, rising from a 52-week low of $61.75 in August last year to a high of $157.54 in June.

Both AMD and Micron have compelling reasons to invest in their stocks. But if you could only pick one, which would be a better AI investment? Here’s a look at each to help you figure it out.

AMD Advantages and Disadvantages

AMD builds semiconductor chips that provide the processing power required by an AI system to perform complex calculations. So with the advent of AI, AMD has seen a dramatic increase in demand for its products.

For example, the company’s data center business, which includes AI chips for cloud computing, saw first-quarter revenue grow by an astonishing 80% year over year to $2.3 billion. Sales of AI products for PCs, grouped under the client business, grew by 85% to $1.4 billion. Together, the two business segments accounted for nearly 70% of AMD’s $5.5 billion in first-quarter revenue.

But despite the success of AI chips, AMD’s other business lines delivered dismal results in Q1. Gaming revenue fell 48%, and sales to industrial sectors like automotive chips fell 46%.

According to AMD management, customer demand for its products in these areas has been weak this year. In fact, management expects gaming sales to continue to decline in the second half of 2024.

The decline in these parts of the business is a result of the cyclical nature of the semiconductor industry. AMD’s client business, for example, posted $739 million in revenue in Q1 last year but is expected to nearly double that amount in 2024. And AMD executives believe industrial sales will gradually recover in the second half of this year.

Combining revenue growth in some AMD businesses and declines in others, the company is forecasting second-quarter sales of about $5.7 billion, a modest 6% increase from $5.4 billion a year earlier.

Let’s take a look at Micron

Micron supplies computer memory and storage components that AI systems need to store and retrieve the data they need to perform their tasks.

That means Micron’s business is booming. Customer demand is so strong that the company has already sold out of its AI-tuned, high-bandwidth memory chips for 2024 and raised prices.

The story continues

The price hikes led to an increase in the company’s gross margin, which reached 27% in the fiscal third quarter, ended May 30. That’s up from 19% in the second quarter, and it’s not stopping there. Micron expects its gross margin to rise again in the fourth quarter to about 34%.

AI-driven demand for Micron’s products led to an 82% year-over-year increase in revenue to $6.8 billion in Q3. The company expects its strong sales to continue in the fiscal fourth quarter, reaching about $7.6 billion, up 90% from $4 billion in the prior year.

While Micron is enjoying a huge success in 2024, like AMD, it is also subject to cyclical ups and downs. For example, the company ended fiscal 2023, which ended Aug. 31, with sales of $15.5 billion, down nearly 50% from fiscal 2022, due to the recession in the memory and storage industry.

The industry has been slowly recovering over the past few quarters thanks to AI, which has allowed Micron to rebound from a $1.2 billion net loss in Q1 to $332 million in net income in Q3.

Deciding Between AMD and Micron

Both AMD and Micron are benefiting from the AI ​​boom, making it difficult to judge which AI investment is better. The current consensus among Wall Street analysts is a “buy” rating for AMD and Micron stocks.

One factor to consider is valuation. Micron’s massive Q1 loss means the company has a net loss of $109 million for the nine months, so the price-to-earnings (P/E) ratio commonly used to value stocks doesn’t apply. Instead, let’s compare the price-to-sales (P/S) ratio of each stock.

AMD’s P/S multiple is roughly twice that of Micron’s, suggesting Micron stock offers better value.

Taking this into account, as well as Micron’s strong year-over-year sales growth versus AMD’s mixed demand across all business units, which offsets the growth from AI sales, Micron outperforms AMD and is the better investment of the two AI stocks.

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Robert Izquierdo has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices. The Motley Fool has a disclosure policy.

AI Stocks to Beat: AMD vs. Micron Technology originally published on The Motley Fool