Micron Technology (NASDAQ:MU) and Advanced Micro Devices (NASDAQ:AMD) have been heading in different directions on the stock market so far in 2021. While memory specialist Micron has soared despite the sell-off in tech stocks, AMD's stock price has pulled back by double-digit percentages, despite solid indications that it will continue to grow at a rapid pace this year.
However, when you take a closer look at the prospects of the two chipmakers, it's hard to choose one over the other, despite their divergent fortunes. Read on to find out which one of these two stocks you should be buying right now.
MU data by YCharts.
The case for Micron Technology
Micron Technology has taken advantage of the favorable supply-and-demand conditions in the memory market in the wake of the novel coronavirus pandemic. Supply disruptions and strong demand for memory chips have sent the prices of DRAM (dynamic random access memory) and NAND flash memory soaring, helping Micron turn its fortunes around over the past year.
This tailwind has recently helped Micron deliver terrific results. The company's fiscal second-quarter revenue and earnings increased nicely year over year, and the company also delivered solid guidance. Micron's revenue shot up 30% year over year last quarter, and soaring memory prices sent the company's adjusted earnings to $0.98 per share from $0.45 per share in the year-ago period.
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Non-GAAP gross margin was up to 32.9% last quarter, an increase of 3.8 percentage points over the year-ago quarter. Micron is anticipating $7.1 billion in revenue this quarter, which would translate into 31% year-over-year growth. The company expects earnings of $1.62 per share this quarter, which would be nearly double the year-ago quarter's figure of $0.82 per share.
Micron should be able to sustain this impressive momentum in the coming quarters as well, as the demand for memory chips is anticipated to grow faster than the supply. Micron estimates that the DRAM market will remain severely undersupplied in 2021, as supply growth won't be as strong as the bit demand growth of 20%. This isn't surprising, as DRAM manufacturers reportedly cut capital expenses by 20% in 2020, according to IC Insights.
This bodes well for Micron, as the company gets 71% of its revenue from the DRAM space. However, Micron isn't very upbeat about the NAND market's prospects, pointing out that supply growth is going to exceed demand until there are capital expenditure cuts. But the overall picture appears to be bright, as the DRAM market should remain in strong shape for the remainder of the year and drive the bulk of Micron's growth.
Memory market intelligence provider TrendForce expects PC DRAM contract prices to grow at a faster pace of 13%-18% in the second quarter after an increase of 3% to 8% in the first quarter. Server DRAM prices are also expected to clock 20% growth this quarter. Meanwhile, UBS analysts estimate that even NAND flash prices will continue to improve throughout the year, while the DRAM price growth shouldn't lose steam.
So the stage seems set for Micron to keep delivering solid results as the year progresses.
The case for AMD
AMD is also set for a blockbuster year in 2021. It is sitting on several catalysts, ranging from PCs to servers to gaming consoles to graphics cards. But investors haven't shown much confidence in the stock, and the tech sell-off and positive developments at Intel have hamstrung AMD's stock market performance so far this year. But investors shouldn't write off this fast-growing chipmaker just yet.
That's because AMD is unlikely to lose ground to Intel anytime soon, and could exit the year with a bigger share of the CPU market. For instance, Hans Mosesmann of Rosenblatt Securities projects AMD to corner half of the CPU market by the end of the year, compared to its 22.4% share at the end of the third quarter of 2020. What's more, AMD is enjoying stronger pricing power over Intel, indicating that the company could enjoy a combination of higher volumes and better pricing this year.
Image source: Getty Images.
On the other hand, AMD's data center prospects are looking up since the launch of its latest EPYC 7003 series processors, which are reportedly twice as fast as Intel's offerings, according to third-party tests. AMD could score huge financial gains in the data center market, as it is a much smaller player than Intel. And it seems well on its way to doing that, as several cloud service providers and original equipment manufacturers (OEMs) have already lined up to buy the EPYC 7003 chips, including the likes of Alphabet's Google, Microsoft, Lenovo, Cisco, Dell Technologies, and Amazon, among others.
Finally, the gaming console market is going to be another big growth driver for AMD this year, as sales of the new PlayStation 5 and Xbox Series X consoles are expected to explode in the coming years. The good news for AMD is that Sony and Microsoft are finding it difficult to keep up with demand, indicating that the chipmaker's newly-found momentum in the enterprise, embedded, and semi-custom (EESC) business is here to stay.
Such a broad range of catalysts explains why AMD has called for 37% revenue growth in 2021, and it expects its non-GAAP gross margin to expand by 2 percentage points over last year. However, don't be surprised to see AMD clock a faster growth rate if its market share gains against Intel continue and the console market gains more steam.
The verdict
Both AMD and Micron Technology are on track to record strong financial growth this year and beyond. However, there are a couple of factors that investors may want to look at before choosing one of these high flyers.
Micron, for instance, plies its trade in a cyclical industry. Demand-supply dynamics play a critical role in the company's financial performance, and it is prone to huge crashes in revenue and earnings when memory prices head south. We have already seen that Micron is wary of elevated capital expenditure levels hurting the price of NAND flash memory. A similar scenario in the DRAM market could turn the tide against Micron, though the good news is that the industry's capital outlay is expected to either remain flat or decline over 2020.
So even though Micron is a cheaper bet, with a trailing price-to-earnings (P/E) ratio of 32 compared to AMD's multiple of 38, there is an element of market risk involved that needs to be actively monitored. Also, it is worth noting that AMD is expected to grow at a faster pace than Micron in the ongoing fiscal year, so the former's premium seems justified.
Finally, AMD is not operating in a cyclical industry and is taking away market share from a bigger rival. As such, AMD seems like the more prudent bet over Micron from a long-term perspective, though investors looking for a growth stock with momentum on its side may be enticed by the memory specialist.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
The Link LonkApril 20, 2021 at 07:00PM
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