For a software (SaaS) or consumer goods company, a PEG (Price-to-Earnings) ratio of 0.04 might mean the company is practically free. However, the rules are completely different in the memory (DRAM and NAND) market, a sub-sector of the semiconductor industry.
Looking at companies like Micron (MU) and SK Hynix (SKHY) in cyclical sectors and calling them "incredibly cheap" based on their PEG or P/E ratios is equivalent to thinking you've bought a ticking time bomb at a discount. Let's summarize the reasons with basic dynamics:
1. The "Reverse" Multiplier Logic of Cyclical Companies
Wall Street has an unwritten rule for cyclical stocks: "Cyclical companies are bought when their P/E ratio is record high (or when the company is losing money), and sold when their P/E ratio drops to single digits and they look very cheap."
The memory sector is essentially a kind of technological commodity market. At the peak of a cycle, memory prices skyrocket due to increased demand (the current AI craze) and limited supply. Companies' profit margins explode. Forward EPS (Expected Forward Earnings) is so high that the P/E ratio (like 5.40 or 6.29 in the image) drops to single digits. An inexperienced observer might see these multiples and think the stock is dirt cheap. However, that single-digit P/E ratio is the clearest indicator that the peak of the cycle is approaching and profitability has reached an unsustainable saturation point. That's why we no longer see the rapid increases of the past; the market is much more cautious.
2. The Mathematical Illusion in the PEG Ratio
The PEG ratio is found by dividing the P/E ratio by the expected profit growth. The reason why Micron or SK Hynix's PEG ratio comes out at an absurd level like 0.04 is that the "growth" rate in the denominator of the formula appears enormous.
Why does it appear enormous? Because just 1-1.5 years ago, these companies were at the bottom of the memory cycle, writing off billions of dollars in losses. The sector was going through a severe inventory liquidation period. Now, with the shortage in HBM (High Bandwidth Memory) production and the sharp rise in DDR5 spot prices on the server side, they have gone from massive losses to massive profits.
This profit explosion from negative profitability or zero creates abnormal growth rates of 500%, 1000%, etc., mathematically. If you divide the P/E ratio by this massive growth rate, the PEG naturally approaches zero. This shows that the company is not growing sustainably, but simply at the sharpest break in the cycle.
3. Capacity Increase and the Risk of Price Drop
The market prices for the future. Today, margins may be at historical highs due to HBM shortages or DDR5 demand. However, excessive profitability always attracts new supply (production) to the market.
Manufacturers who see high profit margins open new factories, increase capital expenditures (Capex), and expand production lines. The moment supply catches up with demand, spot memory prices begin to fall. When prices enter a downward trend, the forward-looking profit expectations used to calculate that "0.04 PEG" suddenly evaporate. A stock that seemed cheap yesterday turns into an expensive nightmare within months as earnings erode.
In short:
If you look at a memory manufacturer's chart and see P/E and PEG ratios at their lowest levels in history, there is no "free market"; rather, there is a cyclical peak pricing. When analyzing these companies, one should look not at past P/E ratios or simple PEG ratios, but at industry inventory levels, Capex (capital expenditure) plans, the supply/demand balance of critical products like HBM, and DRAM/NAND spot price trends. Multiples are always the biggest illusion in this sector.
