Micron’s Strong Report Bodes Well For AMD And These Tech Stocks

Our theme of Internet Infrastructure Stocks which includes companies that sell hardware and software for server processors, graphics units, memory, and networking equipment, has returned about 31% year-to-date. This compares to the S&P 500 which remains up by about 21% over the same period. The theme had a solid run, driven by excitement surrounding generative artificial intelligence technologies, with accelerated computing chip vendors  Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD) and other players within the computing ecosystem, including memory manufacturers such as Micron (NASDAQ:MU) seeing meaningful gains. The optimism should hold up, as Micron just reported a stronger-than-expected set of Q4 2024 results with revenue rising by 93% year-over-year to $7.75 billion, with adjusted earnings at $1.18 per share as the company witnesses robust demand for its DRAM memory products and high bandwidth memory (HBM) for AI data centers, although, demand from the PC and smartphone markets appear mixed.  Micron is the first of the semiconductor giants to publish this earnings season and is seen as a bellwether of sorts for the tech sector given its exposure to the PC and server markets. The positive earnings report could drive gains for the likes of Nvidia and AMD as well.  See our upside scenarios on how  Nvidia Stock Can Surge To $200

Moreover, the monetary easing by the Federal Reserve could provide an additional boost to the theme. Earlier this month, the Fed implemented its first interest rate cut in nearly four years, lowering rates by 50 basis points. With the benchmark federal funds rate now at 4.75% to 5%, there’s still room for further cuts. Check out our analysis of other ways to profit from the Fed’s next move?   Lower rates are typically beneficial for growth sectors including technology, which have higher earning potential in outer years, as lower discount rates boost the present value of future earnings. The lower rates are particularly beneficial to the internet infrastructure theme. Why?  A softer rate environment would reduce financing costs for builders of large data centers, potentially driving up capital spending in the space, and helping players like Nvidia, Micron, and AMD. The economics of the AI revolution are still challenged by high model training and inference costs and the payback equation could become just a bit more favorable with declining interest rates.

The increase in the Internet Infrastructure theme over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the theme were 45% in 2021, -38% in 2022, and 68% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could the theme face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a jump?

While the structural shift toward greater digitization will drive the theme in the long run, valuations are also a bit high, making the risk-to-reward trade-off a bit less attractive for the near term. Within our theme, Nvidia stock has been the strongest performer of late, rising by more than 190% over the past 12 months, as demand for graphics processing units surged, driven by demand from the AI space.  On the other side, Cisco (NASDAQ:CSCO) stock has fared worse than the other stocks in our theme, remaining roughly flat over the last 12 months.

[1] Returns as of 9/26/2024
[2] Cumulative total returns since the end of 2016

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