1 AI stocks down 43% to rise 100% by 2026, according to Wall Street

AI stocks have had a rough summer after a tremendous run in AI-related tech stocks that began in late 2022. One of the key stocks at the heart of the AI ​​boom actually lost 43% of its value compared to June highs.

However, some analysts believe this summer’s pullback is far too early for a semiconductor bear market. Rather, they believe that the recent reduction is simply a mid-cycle correction and overdone.

In fact, one analyst said Monday that he expects this AI winner to more than double from current levels before the cycle ends.

Oh, and this stock is also reporting gains today.

Micron is an AI winner

Micron technology (NASDAQ: MU) has seen extreme volatility this year in both directions. Micron nearly doubled between January and early June, before its stock corrected after the June earnings release, then even more so over the summer. However, even after its 43% swoon, the stock is up nearly 10% for the year as of this writing.

Micron can be incredibly volatile because it makes memory chips, including DRAM and NAND flash. Despite a highly concentrated market with only a few players, prices for these types of tokens can move all over the place based on supply and demand in the industry.

While most DRAM and NAND are commodity-like, AI training applications require a new type of DRAM called high-bandwidth memory (HBM). This type of stacked DRAM is harder to produce and therefore has more pricing power.

That pricing power may be especially great for Micron, which claims its latest HBM3E product has 30 percent lower power consumption than competitors. Micron’s HBM3E just started shipping in the May quarter, is expected to generate “several hundreds of millions of dollars” in revenue for the August quarter, then “several billions of dollars” in the next fiscal year, according to management. Even better, Micron’s HBM is set to have higher margins than Micron’s other products, raising the company’s overall margin profile.

HBM also requires more capital equipment and manufacturing steps than traditional DRAM. So in the midst of the DRAM downturn, manufacturers switched equipment to produce HBM, reducing capacity for other types of DRAM.

The combined effect has been rising DRAM prices over the past three quarters, with forecasts for more increases in the coming quarters.

What went wrong this summer?

While the AI ​​market is still set to see huge demand this year, Micron still derives much of its revenue from the mature PC and smartphone segments. As phone and PC suppliers expected price increases this year, many stockpiled memory in early 2024.

The story continues

But as the summer progressed, we saw weaker-than-expected demand for PCs, and early orders for the AI-powered iPhone 16 were disappointing.

So for the non-HBM side of Micron’s business, some analysts are anticipating a slowdown from earlier expectations. Hence why Micron has nearly halved after its epic start to the year.

But most Wall Street analysts believe this is a pause on the way to new highs

Memory chips are perhaps the most cyclical or cyclical sector of semiconductors, so when there is a downturn, it can be severe.

However, some Wall Street analysts don’t think we’re on the verge of a memory lapse. Rather, the recent slowdown appears to be a mid-cycle “pause” before moving to new highs.

This is because memory cycles typically last between six and eight quarters. Considering the memory industry just went through one of its worst downturns ever in 2022 and 2023, and we’re only three-quarters of the way through this growth cycle, it seems pretty early for memory players to move into another decrease

Last week, three separate analysts from UBSSusquehanna and City Group each wrote that the current “pause” in DRAM price growth was likely temporary. Then, on Monday, analysts from JPMorgan Chase noted that Micron could go as high as $200 per share, or more than double its current price, if the current growth cycle mirrors the strong memory boom of 2017-2018. Back then, DRAM prices exploded as the development of cloud computing added a new level of demand following a 2016 downcycle — not unlike what HBM and AI are doing today.

Short term slowdown, acceleration in 2025?

The current development of AI has eliminated a lot of other enterprise expenses, especially on traditional servers and computers. Meanwhile, high interest rates have caused consumers to hold off on purchases of smartphones and new cars.

But with the Federal Reserve now starting to cut interest rates, it’s quite possible that consumers and businesses will once again open their purse strings. So, looking into late 2024 and 2025, the memory industry could very well tighten up, with Micron poised to benefit. In particular, Citi analyst Christopher Danley sees a re-acceleration in prices over the next three to six months.

Interested investors should stay tuned for Micron’s earnings release and a conference call after the market close for more details on the state of this important industry.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Billy Duberstein and/or his clients have positions in Micron Technology. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.

1 AI stocks down 43% to rise 100% by 2026, according to Wall Street was originally published by The Motley Fool