Six months ago, investors in Micron Technology (MU -3.91%) were on cloud nine. Shares of the memory-chip manufacturer were trading above $60, a sixfold increase from lows carved out in early 2016. Revenue and profits were booming thanks to strong demand and high prices. And the future looked bright, with the company talking up its opportunity in the data center.

But the memory-chip market is cyclical, and trees don't grow to the sky. Periods of tight supply, elevated prices, and fat margins for Micron have never lasted in the past. Instead, they've always given way to lower prices, oversupply, shrinking or disappearing margins, and sometimes significant losses. There's little reason to believe that this time will be any different.

NAND prices have already plunged, and analysts are getting more pessimistic on DRAM. Analyst Tristan Gerra of Baird now expects two full years of gross-margin and earnings-per-share contraction for Micron. That forecast led Gerra to slash his price target by more than half to $32 per share and to reduce his rating on the stock from "outperform" to "underperform."

Worries about a correction in the memory-chip markets have led Micron stock to plunge roughly 45% from its 52-week high. It's been a painful ride for those taking Micron management's optimism at face value. And while it may be hard to believe that the stock could plunge even further from here, it absolutely can.

A Micron facility.

Image source: Micron.

Still room to fall

Valuing a cyclical company like Micron requires some caution. Simply taking the latest earnings number and slapping a multiple on it is not a good idea, because earnings can fluctuate widely from year to year. Micron produced earnings of $11.51 per share over the past 12 months, but it lost $0.27 per share in fiscal 2016. Micron's average earnings are far lower than its current earnings, so the price-to-earnings ratio doesn't tell the whole story.

To get a better sense of how expensive or cheap Micron stock is historically, we can look at the price-to-tangible book ratio. This ratio takes the stock price and divides by tangible assets minus liabilities, ignoring intangible assets -- tangible net worth, in other words. This ratio is not relevant for most asset-light tech companies, but given that Micron is ultimately a capital-intensive manufacturer of commodity products, it's useful in this case.

Here's how Micron's price-to-tangible book ratio has evolved over the past 15 years, through various booms and busts:

MU Price to Tangible Book Value Chart

MU Price to Tangible Book Value data by YCharts.

Micron currently trades for around 1.3 times its tangible book value. This ratio dipped below 1 when the stock last bottomed out in 2016, and it fell well below 1 during the financial crisis. There's no reason it can't fall below 1 again. It would take another 25% decline to make that happen.

A buying opportunity could be on its way

Micron stock isn't necessarily a bad deal at the current price, but increasing negativity, not to mention the ongoing stock market sell-off, could push the stock much lower. Buying around a price-to-tangible book ratio of 1 should work out well in the long run, although investors will likely need to hold the stock until the bottom of this cycle is in the rearview mirror before that bet pays off. That could take many quarters or even a couple of years.

History doesn't repeat, but it often rhymes. The current cycle for Micron is different in a lot of ways than cycles of the past. The PC market is much less important for the company, and the growth of cloud computing and artificial intelligence has created new sources of demand for Micron's memory chips. But that won't protect Micron from the ravages of a downturn. And it won't protect investors who bought the stock at too-high prices.

For those who have watched Micron from the sidelines as investors bid up the stock to unreasonable heights, the time to buy is near.