Micron Technology was already trading at a cheap valuation before the stock plummeted in the chip selloff. Now its valuation looks ridiculous -- so long as its long-term contracts hold up in a downturn.

Micron shares were up 8.1% at $710.54 in premarket trading on Friday. That's a healthy gain but would only recoup part of its 17% drop on Thursday.

Barron's noted Micron was cheap in early October when it was trading at 6.4 times its projected earnings this fiscal year. At Thursday's closing price, it traded at a fiscal 2027 multiple of just 3.7 times, according to FactSet. That sounds absurd for a company expected to report more than doubled revenue and earnings in its current fiscal year, with continued strong growth forecast the following year.

Of course, the counterargument is that memory-chip companies always look cheap at the peak of their cyclical earnings. With data-center construction potentially set to slow in the wake of Democrat victories in the U.S. midterm elections, the risk is that a downturn in demand for memory for artificial-intelligence servers, which had previously been forecast for 2028 or later, might arrive a lot sooner.

Micron has a safeguard in place. It has agreed long-term take-or-pay contracts covering more than 35% of its forecast revenue through 2030. So long as those hold up, the company's normal cyclicality -- where earnings rise and fall sharply along with memory-chip supply-and-demand cycles -- should be reduced.

The only issue is that skeptics think those long-term agreements won't hold up in an AI bust, even with close to $32 billion paid in cash deposits. Similar take-or-pay deals reached in other parts of the chip industry during the shortage caused by the Covid pandemic were subsequently renegotiated to preserve friendly relations with customers.

Still, Micron has another card to play. It can start major stock buybacks from Dec. 9 -- Barron's previously estimated it could buy back $100 billion of stock in its current fiscal year ending in August 2027, which would be more than 10% of its current equity market value.

UBS analyst Nicolas Gaudois argues that valuations for Micron's peers SK Hynix and Samsung Electronics suggest the market is already assuming a downturn in memory prices in 2028. He puts the risk/reward ratio for the two stocks at a 160% upside over the next 12 months versus just a 30% downside.

Micron trades at only a slightly higher valuation to the South Korean companies, suggesting a fairly similar scenario.