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Nvidia (NASDAQ: NVDA) has been a bellwether for artificial intelligence (AI) companies this year as its graphics processing units and processors are providing the basic building blocks for building powerful servers capable of handling AI workloads.

The demand for Nvidia’s chips is so strong that customers are reportedly having to wait at least six months to get their hands on them. This massive demand explains why Nvidia delivered outstanding results for the second quarter of its fiscal 2024 (for the three months ended July 30, 2023), with its revenue doubling year over year to $13.5 billion and adjusted earnings soaring 429% to $2.70 per share.

Nvidia’s growth is set to accelerate further in the current quarter as the company forecasts $16 billion in revenue, a 171% increase over the prior-year period. A key reason why Nvidia is putting up such amazing numbers is because of its powerful chips, which play a central role in the training and application of AI models.

It wouldn’t have been possible to manufacture those high-performance chips without powerful memory. And there is a race among the likes of Nvidia, Intel, and AMD to pack larger memory configurations so that their chips are capable of training larger AI models. This is where Micron Technology (NASDAQ: MU) steps in — it is one of the key players in the memory market, which puts it in a solid position to take advantage of the growing hunger for powerful memory chips.

AI-driven demand could supercharge Micron

While Micron Technology stock has jumped an impressive 40% in 2023, that has mostly been driven by the broader surge in semiconductor stocks and not by the chipmaker’s financial performance. Micron has been witnessing steep declines in its revenue and earnings over the past few quarters thanks to weak memory demand triggered by tepid sales of personal computers (PCs) and smartphones.

The memory industry is currently facing an oversupply, and this has led to a sharp decline in the prices of memory chips. According to Yole Intelligence, dynamic random access memory (DRAM) prices have fallen over 50% since the third quarter of 2021. The price of NAND (short for “not and”) flash storage memory has dropped by a similar margin as well. This explains why Micron’s top and bottom lines have plunged in the past year.

MU Revenue (TTM) data by YCharts

However, the booming demand for AI chips packed with high bandwidth memory (HBM) could bring the industry out of the rut it is in. Consultancy Gartner estimates that demand for HBM is set to grow eightfold by 2027 thanks to AI. This could be one of the reasons why the DRAM market is expected to start recovering from the end of 2023 and start soaring from 2024.

More specifically, DRAM revenue is expected to jump from $43.8 billion this year to $86.9 billion in 2024, per Gartner. DRAM prices could hit bottom in the current quarter and jump almost 18% in Q4. All this explains why Micron’s growth is expected to take off from fiscal 2024, which has just begun, with the company’s revenue expected to increase substantially from fiscal 2023’s figure of $15.4 billion.

MU Revenue Estimates for Current Fiscal Year data by YCharts

The stock looks like a steal right now

Assuming Micron stock does hit $28 billion in revenue in fiscal 2025 (as the above table suggests) and the stock maintains its current price-to-sales ratio of 4.2, its market capitalization could jump to $117 billion in a couple of years. That would be a 52% increase from current levels.

However, investors should note that companies benefiting from the adoption of AI tend to trade at higher multiples. Nvidia, for example, sports a sales multiple of 36. So if the market rewards Micron with a higher valuation based on the potential acceleration in growth, the stock could deliver even better gains.

That’s why investors looking to buy an AI stock that’s trading at an attractive valuation right now should consider accumulating Micron Technology.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Gartner and Intel. The Motley Fool has a disclosure policy.

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