Why the Most Popular Nasdaq Stocks Trade at the Lowest P/E Multiples

The past week on Wall Street was particularly difficult for the chip sector in general, and memory chips in particular. The Nasdaq 100 index plunged by more than 5%, the SOXX semiconductor index lost about 10%, and the DRAM exchange-traded fund, which focuses on memory chips, recorded the sharpest drop with a tumble of over 15%. The South Korean KOSPI index also registered a double-digit decline, reaching a six-month low. This turmoil highlights the high sensitivity of memory stocks, even when traded at exceptionally low price-to-earnings multiples.

Understanding P/E Multiples

As is known, the capital market utilizes two main price-to-earnings multiples used, among other things, to evaluate company valuations:

• Trailing P/E ratio: Examines how much investors pay for every shekel the company actually earned in the past 12 months. For example, a multiple of 10 means the stock price is 10 times the annual earnings per share.

• Forward P/E ratio: Based on the earnings analysts estimate the company will generate over the next 12 months, rather than past earnings. It allows investors to examine how a stock is priced relative to expected profits, though forecasts can turn out to be incorrect.

Four of the most prominent companies in the memory chip industry are Samsung, Micron, SK Hynix, and SanDisk. Despite sharp increases in their profits and demand for their products, their stocks trade at exceptionally low forward P/E multiples, significantly below the Nasdaq 100 index average. Forward multiples stand at roughly 4 for Samsung, 7 for Micron, 5 for SK Hynix, and 8 for SanDisk, compared to a multiple of about 21 for the index.

The Memory Stock Paradox

This raises the question: How is it possible that the very stocks that recorded the sharpest surges in profits and demand are trading at the lowest P/E multiples in the market? This is the paradox of memory stocks: the more profits skyrocket, the greater investors' fear that they are at the peak of a business cycle.

"The sharp declines recently demonstrate that even when multiples are low and profits are high, investors remain anxious about the possibility that the current cycle is nearing its peak."

This apprehension stems from the cyclical nature of the memory industry. During periods of shortage, prices spike and manufacturers enjoy abnormal profits. Consequently, they increase investments and build new factories. However, when production capacity expands and demand weakens, supply can outpace demand, causing prices to plummet. Therefore, precisely when profits are at their peak, investors worry they will not remain at that level indefinitely. A low multiple may reflect expectations of future profitability declines rather than undervaluation.

Unprecedented Demand vs. Risks

However, the current cycle also possesses characteristics that could alter this picture. Demand for high-speed memories, particularly HBM chips used in artificial intelligence systems, is growing rapidly. Furthermore, memory giants are promoting long-term agreements with clients designed to provide greater certainty regarding future demand. Micron's management, for instance, estimates that tight supply conditions in the industry could persist beyond 2027. If AI infrastructure demand continues to grow and agreements successfully mitigate volatility, the current cycle may differ from historical patterns.

On the other hand, risks remain significant. Manufacturers continue investing immense sums in expanding production capacity, which could lead to oversupply in the future. Competition from China, particularly memory producers like CXMT, could also exert downward pressure on prices. Additionally, a slowdown in cloud giants' investments in AI infrastructure could hurt demand. SanDisk, which focuses on NAND flash memory for data storage, remains similarly exposed to industry volatility.