Micron’s 30% July Washout Just Sparked a Single-Digit P/E— Is it a Buying Signal?

Micron (NASDAQ:MU | MU Price Prediction) isn’t the only red-hot memory chip stock in town for U.S. investors anymore. Not with SK Hynix (NASDAQ:SKHY) having a chance to flex its muscles with the hopes of shedding more of its “South Korea discount.” Intense volatility has struck the memory chip companies amid the latest semiconductor slump.

Despite the pain inflicted on semi stocks across the board, though, it hasn’t exactly been a slam dunk for the shorts, with intense volatility in both directions. Despite the potential for near-term squeezes, it certainly feels like gravity is finally getting the better of the semiconductor names, especially the memory chip makers that led the charge up until that June peak.

With shares of Micron now down close to 25% from its highs after a partial recovery that saw shares take a 30% dive from peak to trough, it certainly seems like the value case is growing louder.

What’s changed since shares of Micron peaked last month other than the investor sentiment?

Not a whole lot, at least in my opinion. Predicting peaks is not an easy game, especially when there’s a lack of evidence that supports anything like a DRAM drop-off. The latest quarterly result continued to come in hot.

And while some Chinese competitors (think CXMT) could add more supply to the market than expected while algorithmic efficiencies potentially reduce the need for as much memory, there are so many questions that make it hard to know if Micron is a deep-value stock or a trap whose price-to-earnings (P/E) multiple may act as a siren song that draws in investors to sail in and crash against the cold, hard reality that tends to hit cyclical semis.

With Apple (NASDAQ:AAPL) being rewarded for its low-CapEx approach, which might win the AI race, as it reportedly tests CXMT chips for China-bound devices, I do understand some of the reason why investors are crowding the exits when it comes to memory chip stocks before anything has a chance to happen. Any way you look at it, it feels like the thesis that the memory market will have tight supply for many, many years is starting to get weaker.

In a way, the imbalance stands to correct itself, especially as firms at the forefront look to expand capacity in a more aggressive manner. Sure, it’d be nice to think that a memory chip glut would happen at some point in the future, especially if you’re sick of paying the “AI tax” on new devices. In any case, manufacturing expansion isn’t going to flood the market with new supply overnight.

It takes years, and the big question is not whether AI demand will continue to outpace it but whether efficiencies will allow AI demand to soar without requiring a proportional amount of memory.

What’s the real signal to buy Micron?

Jevons’ Paradox suggests that would just pave the way for even more memory demand. And that makes it oh so difficult to know what’s next. Is efficiency the fix to the memory demand issues or something that makes supply even tighter that memory makers just can’t keep up?

In my humble opinion, there are too many uncertainties here to tell if Micron’s single-digit P/E is the real deal or a trap. Indeed, a 6.3 times forward P/E seems too good to be true. But the better signal, at least in my view, doesn’t lie with the multiple; it’s with the smart money buying experienced in recent quarters (most notably in Q1).

There are too many big-name managers who have been initiating or adding to an existing position in Micron. And while it’s impossible to know their holding period, I do think it speaks to the potentially asymmetric risk/reward potential to be had, especially now that Micron is going for a 25% discount to its peak. In short, the risk level is ridiculous, but the rewards profile might have the potential to be even more ridiculous.

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