Is Micron Technology's Stock Really That Cheap? Why Its Earnings Multiples Can Be Misleading

It can almost seem too good to be true that a stock that's been flying as high as Micron Technology (NASDAQ: MU) over the past year could still be cheap. In the past 12 months, it's up around 500%, which is a truly staggering return when you consider that the S&P 500 has risen by just 27% over that same time frame. And yet, the stock trades at just seven times its expected future earnings.

What's going on with Micron's stock? Is it really this cheap a buy? While it's true that it is cheap, investors need to also understand why that is the case, and why that could change in the future.

Image source: Getty Images.

Why Micron's price-to-earnings multiple may not be all that helpful in assessing the stock's value

Micron's stock trades at a forward price-to-earnings (P/E) multiple of seven, which might make it a compelling buy right now. Earnings for the memory and storage company have been rising rapidly due to strong demand. And with spending on tech likely to remain high as a result of artificial intelligence (AI), it can appear to be a no-brainer buy.

The problem is that the P/E multiple in Micron's case may not be terribly useful these days. The company is indeed experiencing a boom, and demand is so strong that memory and storage prices are rising. That means that not only is Micron selling more products, but it's also selling them at higher prices. Analysts still see a shortage in the year ahead, which is why even on a forward basis, the stock still looks cheap.

But as the situation changes and supply catches up to demand and prices come down, then this seemingly cheap stock may suddenly start to look expensive. Micron may be a big name in the industry, but there's also plenty of competition. And given the exciting opportunities in AI these days, that may intensify in the future. It could lead to leaner profit growth for Micron, or even a decline, making the stock less compelling to buy.

Micron stock is doing well, but it may be running out of room to rise higher

Shares of Micron are up 45% this year, and analysts remain bullish on the stock, with 33 out of 37 rating it a buy. But the consensus analyst price target is around $465, implying a near-term upside of just 13% from where it trades today. Meanwhile, in the longer term, it may be vulnerable to a correction if its growth rate slows down.

As good an investment as Micron has been over the past year, its valuation is already fairly high, with a market cap north of $460 billion, making it one of the most valuable tech stocks not in the trillion-dollar club. If you're buying the stock, you should be aware of the potential risks and volatility ahead.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.