What happened

Shares of computer memory maker Micro Technology (NASDAQ:MU) dropped to close 4.6% lower Thursday. You can probably blame the analysts at Needham & Co. for that -- and here's the strangest thing: Needham actually likes Micron stock.

So what

Early this morning, Needham reiterated its "buy" rating on Micron shares, and its $70 price target, implying there's nearly 44% in the stock. Problem is, while insisting the stock remains a buy, Needham also tweaked its estimates for the company's near-term earnings -- lower.

Data center and end-market sales, warned Needham, are looking likely to revert to the mean after enjoying a COVID-19 boost from stay-at-home workers accessing their workplaces remotely. For the balance of this year, Needham predicts "inventory burn" as customers work through memory that they've accumulated to deal with the surge of demand -- and scale back new purchases from Micron.

Two signs, one for solid state drives and one for hard disk drives.

Image source: Getty Images.

Now what

This, at least, is the near-term story. Longer term, Needham still believes that Micron shares are worth buying, especially if you can scoop some up before next year, which the analyst predicts will be "a recovery year" in which sales pick back up. In particular, Needham believes that "5G handset cycle and 5G base station builds" will drive a "multi-year" trend of growing sales that should lift Micron shares higher.

With Micron shares trading for a pricey 25 times earnings, though, and an even higher ratio of price-to-free cash flow, Needham had better be right about that sales revival. As things stand today, 25 times earnings looks like too much to pay for a stock that most analysts believe will only grow earnings 10% annually over the next five years.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.