Micron Technology (MU +11.48%) and Intel (INTC +9.34%) are popular with investors right now because the artificial intelligence (AI) boom represents a significant growth opportunity for both companies. The stocks have added 228% and 192%, respectively, this year. Yet, certain Wall Street analysts think Micron and Intel are wildly overvalued.
Those forecasts suggest investors should sell Micron and Intel. Here's why I agree.
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Micron manufactures memory and data storage solutions built on DRAM and NAND flash technology. Its products are used in data centers, mobile devices, personal computers, and automotive systems. While Micron has benefited from a severe memory chip supply shortage tied to demand for artificial intelligence, it lacks a durable competitive advantage.
"We do not believe Micron has an economic moat," writes Kerwin at Morningstar, mentioning the capital-intensive nature of the memory chip industry and the company's mediocre profit margins. "We view DRAM and NAND as commodity-like products prone to market supply/demand dynamics and steady pricing erosion."
To understand why Micron lacks an economic moat, consider the company's most recent quarterly financial results. Revenue rose 196% to $23.8 billion and non-GAAP (adjusted) net income soared 682% to $12.20 per diluted share. Yet, Micron lost share in DRAM and NAND, while Samsung and SK Hynix gained market share.
While Micron's financial results were impressive, the strong numbers were primarily driven by price increases supported by an unprecedented supply shortage, not something unique to Micron. In fact, Samsung and SK Hynix have key advantages in greater production capacity and higher revenue, which means they have more capital to invest in research and development (R&D).
Wall Street expects the current memory chip cycle to peak in 2028, and for prices to drop sharply in 2029. In turn, the consensus estimate says Micron's adjusted earnings will grow at 13% annually through 2029. That makes the current valuation of 40 times earnings look way too expensive. Indeed, among 50 analysts, Micron has a median target price of $660 per share, implying 26% downside from its current share price of $898.
Intel's vertical integration was once a source of great strength. The company was seen as the pinnacle of semiconductor manufacturing technology because it controlled the entire pipeline, from chip design to fabrication. But Taiwan Semiconductor Manufacturing took the lead in manufacturing technology in 2017, and currently makes 95% of the most advanced chips.
Today, Intel is still the largest supplier of central processing units (CPUs). However, the company has lost substantial market share to AMD and Arm over the past decade, in both the data center server and client (personal devices) market segments, due to execution missteps and manufacturing delays.
Bulls will say Intel is on the precipice of a big turnaround. The company is pursuing a large opportunity in contract chipmaking (i.e., foundry services), and AI inference (which is much more CPU-intensive than AI training) is becoming much more common. Indeed, Intel says inference workloads surpassed training workloads last year.
However, whether Intel is actually turning its business around is debatable. The company has struggled to win major foundry customers, and its recent financial results have been uninspiring. In the first quarter, revenue increased just 7%, and the foundry segment lost $2.3 billion on $4.6 billion in sales.
Harlan Sur at J.P. Morgan Chase highlighted several problems in a recent note: "From a company fundamental perspective, the company is facing tough macro headwinds and a highly competitive compute environment exacerbated by lingering questions about its ability to execute. … From a financial perspective, the stock should continue to be under pressure as the market continues to be concerned about the sustainability of dividend payments."
Wall Street estimates Intel's adjusted earnings will increase at 77% annually through 2027. While impressive, that forecast still makes the current valuation of 200 times earnings look very expensive. I think investors should avoid Intel, and most Wall Street analysts agree. The stock has a median target price of $96 per share, implying a 16% drop from the current share price of $115.
JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, JPMorgan Chase, Micron Technology, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Arm Holdings. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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Shares of Micron and Intel have delivered triple-digit gains this year, but certain analysts expect the stocks to drop sharply.
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