Better Buy: AMD vs. Micron Technology

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The semiconductor sector has outperformed the broader stock market so far this year, as demand for chips remains strong amid the economic damage done by the coronavirus pandemic. Not surprisingly, chipmakers such as Advanced Micro Devices (NASDAQ:AMD) have stepped on the gas and delivered impressive gains so far in 2020. At the same time, other companies, such as memory and storage company Micron Technology (NASDAQ:MU), have disappointed investors, despite the favorable environment prevailing in the semiconductor industry.

While AMD has benefited from an increase in demand for graphics cards, computer processors, and server chips, Micron has been contending with uncertainty in the memory industry, which was struggling due to oversupply before the pandemic arrived. So does this mean that investors should dump Micron Technology shares to go long on AMD?

My notes:

1. Memory chips should continue to be in good demand thanks to catalysts such as data centers, smartphones, and gaming consoles. 
2. According to data from DRAMeXchange, the price of an 8GB DDR4 DRAM in June stood at $3.31 -- the same as in May. The prices rose consistently from December 2019 until May, indicating that the price gains Micron has been enjoying so far may have come to a halt.

There are two factors that have helped Micron stage this impressive comeback: an uptick in memory demand and improved pricing. In the third quarter, Micron's DRAM (dynamic random access memory) shipments were up 10% sequentially, while average selling prices (ASPs) increased in the mid-single digits. Shipments of NAND flash also increased in the lower single digits quarter over quarter, while ASPs were up in the upper single digits.

Memory chips should continue to be in good demand thanks to catalysts such as data centers, smartphones, and gaming consoles. At the same time, investors need to keep an eye on the supply side as well. An oversupply in the industry sent prices crashing after two solid years in 2017 and 2018, and there are a few ominous signs already that investors need to worry about.

According to data from DRAMeXchange, the price of an 8GB DDR4 DRAM in June stood at $3.31 -- the same as in May. The prices rose consistently from December 2019 until May, indicating that the price gains Micron has been enjoying so far may have come to a halt. The report also points out that spot DRAM prices have dropped 17% over the past three months, and they are expected to drop in the ongoing quarter as well.

Both server and PC DRAM prices are expected to lose momentum as buyers are reportedly holding back purchases in anticipation of a drop in prices. So Micron Technology may have delivered a terrific quarterly report and guidance last month, but the uncertainty around memory prices could play spoilsport.