Digital Infrastructure Stocks Including Micron Had A Solid Year. What Lies Ahead?

Our theme of Internet Infrastructure Stocks – which includes a diverse set of companies that sell hardware and software that underpin the Internet – has had a solid year, rising by 54% year-to-date, outperforming the Nasdaq-100 which gained about 47% over the same period. This follows a tough 2022, which saw the theme decline by 39% over the year. Although we anticipated limited expenditure on data center technologies over 2023, primarily due to major public cloud providers optimizing their substantial infrastructure investments made during the COVID-19 pandemic, the industry appears to be regaining momentum due to excitement surrounding generative artificial intelligence. Businesses are looking to deploy the technology, which utilizes machine learning models to generate innovative and imaginative content and results, following the success of OpenAI’s ChatGPT bot.  These AI workloads are computationally hefty and are driving demand for accelerated computing chips and GPUs sold by the likes of Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD). For example, over Q3 2023, Nvidia’s sales roughly tripled year-over-year to $18 billion, while net income surged over 10x compared to last year to $9.2 billion. Memory manufacturers such as Micron (NASDAQ:MU) are also expected to see demand rise for faster, higher-density chips, focusing on scaling up DDR5 and high-bandwidth memory (HBM) products. Besides this, the supply chain issues, which proved to be a constraint for much of the technology industry through 2021 and 2022, are also easing, and this could potentially help revenue growth for hardware companies including networking players.

Now, MU stock has seen little change, moving slightly from levels of $75 in early January 2021 to around $75 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. Overall, the performance of MU stock with respect to the index has been quite volatile. Returns for the stock were 24% in 2021, -46% in 2022, and 54% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that MU underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, 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 with high oil prices and elevated interest rates, could MU face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

So what’s the outlook like for the theme? 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 tradeoff a bit less attractive for the near term. Within our theme, Nvidia stock has been the strongest performer, rising by almost 2.5x year-to-date, as the company sees sales of its graphics processing units surge, driven by demand from the AI space. Micron stock has also fared very well, rising by 54% year-to-date, due to interest in AI and the signs that the DRAM market was turning around. On the other side, Juniper Networks (NYSE:JNPR) stock has fared worse than the other stocks in our theme, declining by about 15% year-to-date.

[1] Month-to-date and year-to-date as of 11/26/2023
[2] Cumulative total returns since the end of 2016

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