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Shares of Micron Technology (NASDAQ:MU) have been in a tailspin lately amid general softness in the tech sector. While the business has been growing fast and its recent results have remained stellar, the market has nonetheless turned bearish of late. The stock is now down more than 40% from its 52-week high of $1,255 that it hit back in June.
At less than $740, the stock currently trades at just 10 times its trailing profits. Is it a no-brainer buy while it's around this level?
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A stock can decline for many different reasons, even for factors that are outside of its control. That's what appears to be happening with Micron of late. Although its quarterly results show enormous growth on its top and bottom lines, the concern is what lies ahead for the business; its growth just doesn't look sustainable at all.
The challenge for investors is deciphering what Micron's numbers will look like when the memory shortage inevitably ends, and there's more normalcy in the tech sector. Micron may grow faster than it has in previous years, but many growth investors would rightfully doubt its ability to keep growing as fast as it has of late.
While the business has been growing at a feverish pace, it has historically experienced booms and busts along the way.
Whenever a stock is seemingly trading at a big discount, there's often more to the story. At 10 times earnings and incredibly strong financials, Micron's stock is a prime example of just that. If the market were truly confident about its long-term growth opportunities due to artificial intelligence, the stock likely wouldn't ever get to this low of an earnings multiple in the first place.
Instead, it's trading at a discount because many investors have the nagging concern that its growth rate will slow down, and when it does, it could be significant, just as it has been in past cycles for the business. Thus, there's a need to price in at least some margin of safety, hence the discounted valuation.
However, I believe the stock may still be too expensive given its massive surge of nearly 900% over the past five years; there could still be far more room for Micron's stock to fall as more supply of memory products comes online. Taking a cautious wait-and-see approach with the stock may be the most appropriate one right now.
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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.
Micron Technology: Is the Stock a No-Brainer Buy at Less Than $740? was originally published by The Motley Fool
