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So you've heard that Micron (MU) has a forward P/E multiple of 4. Four! Sounds crazy undervalued, right? How is no one else seeing this, you might think? Well, it's because forward P/E multiples as they pertain to cyclicals at peak demand-supply imbalance don't really function the same as they do for the average company.
Now before you start racing to type that memory and semiconductors are "no longer cyclical", let's entertain the possibility that they are in fact no longer cyclical. If so, a forward P/E multiple of 4 screams ridiculously undervalued. It should be double that number, even triple that! We keep hearing about how demand is stretched through 2030 or further, supply is non-existent - how could it possibly be so undervalued? Well, maybe the market is wrong, and MU will go to $2500 by next year.
However, if memory is in fact still cyclical, and we are currently now sitting at the peak of this cycle's demand-supply imbalance, a low forward P/E multiple is actually a bad sign, and a bad metric to judge its value. Why? Because forward P/E multiples project earnings 12-24 months out, and the expectation is current short-term extreme highs are unlikely to be sustainable, making it look deceptively cheap.
Case in point: in 2000, MU traded at a seemingly low forward P/E multiple, just as it is now. This low valuation occurred because earnings estimates reached an unsustainable cyclical peak just before DRAM memory chip prices collapsed, leading to a severe evaporation of earnings and a subsequent crash in the stock.
Ironically, MU's forward P/E multiple exploded upwards during this crash because of the dip in earnings, so investors got the higher forward P/E they had been anticipating, but at the cost of the stock crashing 90% in just 3 years.