A beaten-down stock naturally feels cheap.

If shares once traded at $100 and now trade at $50, it’s tempting to assume you’re getting the same business at half the price.

But a stock’s decline, by itself, tells you very little about whether the shares are actually cheap.

The business has to justify the valuation.

That requires earnings growth, improving margins, stronger revenue, better execution, or another catalyst that can increase future profits.

If profits have fallen as fast as the stock price, the company may be no cheaper than before.

The opposite is also true. A stock can soar several hundred percent and still become “less expensive” if earnings are growing even faster.

Two well-known stocks have recently illustrated the difference. Let’s take a look.

A lower stock price does not automatically mean a cheaper stock

Nike (NKE) shares have fallen sharply from their previous highs. At first glance, that kind of decline might make the stock look like a bargain.

But valuation depends on what you’re paying for the earnings the business can generate. And Nike’s earnings picture has weakened.

Wall Street expects Nike to earn about $0.44 per share for the quarter, down from roughly $0.49 a year earlier. Meanwhile, the stock is still trading around 22 times (22x) forward earnings.

In other words, investors are still being asked to pay an above-market valuation for a company whose earnings are expected to decline year over year.

Now compare that with Micron (MU), which presents almost the reverse situation. Its stock has already multiplied several times over during the AI boom.

That kind of move normally makes investors think they missed their chance.

But despite the huge increase in Micron’s share price, the company is trading around just 7x forward earnings.

Why? Because earnings have grown dramatically.

Hyperscalers continue to spend heavily on AI infrastructure, and memory remains a critical component of AI systems. Customers are also trying to lock in supply for future capacity.

That creates a potential multi-year earnings runway.

In fact, Micron’s stock could actually be cheaper after its massive run than it was when the share price was much lower… because earnings have increased even faster than the stock.

Price and valuation are two different things

Investors tend to make the same mistake in both directions.

After a major selloff, they assume the bad news has been priced in. And after a major rally, they assume all the good news has been priced in.

Sometimes that’s true.

But the stock chart can’t answer that question.

You have to look at how the company’s earnings estimates, revenue growth, margins, cash flow, and future demand have changed along with the price.

The lesson is simple: Do not ask how far a stock has risen or fallen. Ask how much you’re paying for the profits the company is likely to generate from here.

That’s the starting point for determining whether a stock is actually cheap.

In Curzio Alpha, we dig into earnings, valuation, growth, and the catalysts that can drive profits higher… so you can separate genuine opportunities from stocks that only look cheap.

Learn more about Curzio Alpha.