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The semiconductor industry has been a mixed bag in 2023. Companies producing chips for personal computers and gaming experienced a slowdown because consumer spending is under pressure from high inflation and rising interest rates. However, demand remains strong for data center chips, especially those capable of processing artificial intelligence (AI) workloads.

Nvidia, for example, is heavily focused on that segment of the semiconductor market, and the 215% gain in its stock price this year reflects that. But Micron Technology (MU -0.60%) is also building a presence in AI data center hardware, and it just reported strong demand for those products in its fiscal 2023 fourth quarter (ended Aug. 31).

Here's why it might be a great chip stock to buy for the long term as AI demand continues to scale up.

Nvidia is famous for its graphics processors, but those aren't the only chips required when dealing with powerful computing workloads. Data centers -- much like most computers and devices -- also need memory (DRAM) chips and storage (NAND) chips to function, and Micron leads the semiconductor industry in those segments.

Micron said it experienced soft demand for traditional server products in the recent quarter, but it also said demand for AI-related server hardware was strong. That will be key for the company because AI training servers have much higher DRAM and NAND requirements, which means those chips sell for a higher price and are more profitable.

Micron said it continues to build out its portfolio of products specifically for AI workloads to position itself for the long-term opportunity in that space. Its new advanced D5 DRAM chips for data centers can provide twice the bandwidth of its D4 predecessor, which allows CPU chips to process large data sets far more quickly. Sales volume for the D5 is expected to exceed the D4 from early next year, which could lift the company's revenue and earnings.

Micron also supplies chips to the automotive industry, and the company said its revenue in that segment hit a record high in fiscal 2023. In the past, Micron described electric vehicles as data centers on wheels because they require substantially more DRAM and NAND capacity than traditional vehicles, which is driving a demand surge.

Plus, consumers' increasing reliance on driver assistance systems and other in-car applications will continue to buoy the automotive segment for chipmakers, particularly as AI-powered self-driving capabilities become more prevalent.

Micron has grappled with an inventory glut over the last 12 months due to softening demand in consumer segments like personal computing. Like most semiconductor producers in that business, the company saw surging demand during the height of the pandemic as work-from-home trends drove a major upgrade cycle. But when life started returning to normal, the industry was left with an oversupply of chips.

That affected Micron's pricing power, and it drove a whopping 49% year-over-year decline in fiscal 2023 revenue to $15.5 billion.

Unfortunately, no company can adjust its cost structure fast enough to compensate for such a steep plunge in sales, and despite Micron's best efforts to cut its workforce and manage production, its fiscal 2023 bottom line swung into negative territory. The company suffered a sizable net loss of $5.8 billion, compared to net income of $8.6 billion in fiscal 2022.

But here's the good news: In prepared remarks to investors for the fourth quarter, CEO Sanjay Mehrotra said pricing and inventory had bottomed out, which will pave the way for increased revenue and profitability in fiscal 2024.

Image source: Getty Images.

The stock price is up 37% so far in 2023 as investors look ahead to what the new year could bring, but it's still trading 29% below its all-time high on the back of the company's struggles over the last 12 months.

That might be a buying opportunity for investors. Guidance for the current fiscal 2024 first quarter supports the view that the worst of its inventory and pricing issues are over because it predicts revenue of $4.4 billion, which would mark sequential growth of 10%, and the company also expects its net loss to narrow.

And it says data center operators have clearly shifted their budgets away from traditional servers and toward AI servers, which carry much greater financial benefits. Micron also sees accelerating AI opportunities for DRAM and NAND chips throughout 2024, including in data centers and edge applications (computers and other devices).

This might be a great chance for investors to buy Micron stock ahead of an upswing in its business and in anticipation of the AI revolution over the long term.

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