The semiconductor industry is a notoriously cyclical industry and profitability generally moves in sync with economic trends. While profits rise during boom times, a recession can often turn those gains into losses. Investors in Micron Technologies †MU 1.13%† have seen the company follow this path in the past, regularly through periods of boom and bust.
Recently, however, some structural trends have emerged that seem to have changed the dynamics of this industry for good. The development of smart vehicles, the rise of 5G and the integration of the Internet of Things in so many parts of the economy combine to provide sustainable tailwinds for semiconductor manufacturers. Another of these trends — artificial intelligence (AI) — is propelling Micron to a whole new level.
AI drives greater demand for Micron’s products
In the past, manufacturers of memory (DRAM) and storage (NAND) semiconductor chips such as Micron depended primarily on the sale of PCs and corporate servers, which are highly cyclical† But as the demand for memory products diversifies with the emergence of data centers, smartphones and more, the demand fluctuation becomes less apparent and growth becomes more sustainable. Likewise, the rise of AI is also increasing the demand for memory and storage products.
Take data centers as an example. The increased complexity of AI algorithms is helping data centers consider more parameters as part of their calculations and processing. As a result, more data is processed and analysed. This increase in workload demands more memory to process the data. In addition to processing needs, data centers must store this ever-increasing amount of data, leading to an increase in demand for NAND storage chips. According to Micron, memory and storage demand per server is expected to double and triple, respectively, between 2021 and 2025. storage products used in every data center.
Take another example in smart cars. As vehicle autonomy improves over time, the demand for memory to process data produced by automotive systems ranging from infotainment to security – and storage to store this exponential growth of data produced – is expected to increase will explode in the coming years. Micron estimates that the target addressable market (TAM) of the automotive market will grow at a compound annual rate of 28% between 2021 and 2025.
In short, as AI permeates almost every aspect of our personal and business lives (phones, factories, homes, etc.), the demand for Micron’s memory and storage will only increase.
Micron uses AI to advance its production
The proliferation of AI is helping Micron grow its business. But there’s more to it. It also promotes the production capabilities and efficiency of the technology company.
For example, Micron analyzes a huge amount of data generated by the more than 500,000 sensors in its production environment. Micron’s AI model processes more than 20 million images per week to predict potential problems in its operations and support real-time decision-making. Without AI, it would be nearly impossible to process this massive amount of data.
Artificial intelligence in semiconductor manufacturing is critical as the industry arguably has one of the most demanding manufacturing processes. There are hundreds (if not thousands) of process steps to make a memory chip, and any defect in one process will bottleneck and cause a cost overrun. AI helps Micron analyze data at multiple points, identify risks early and take preventive action to avoid a production outage.
The result is better productivity, shorter time to deploy and scale new technology and products, and more efficient use of financial resources.
What this means for Micron and its investors?
Micron is set to benefit greatly from the increase in AI penetration. AI will use the . to let grow demand for memory and storage products, which will help support Micron’s revenue growth in the coming years.
In addition, the use of AI within its business operations will help Micron improve planning and use of resources, leading to better capital and cost management. Ultimately, these improvements should lead to a higher and more sustainable margin.
Combined, we saw earnings grow more sustainably over time. And if it does, Micron’s stock price will rise in tandem with growing profitability.