Nasdaq Market Correction: 2 Brilliant Artificial Intelligence (AI) Stocks to Buy on the Decline

The Nasdaq Composite closed in correction territory on Friday, August 2nd as investors reacted to a disappointing jobs report. A correction occurs when an index is down at least 10 percent from a record high, but the Nasdaq is now down 13 percent, and several stocks have fallen more sharply.

Actions of Alphabet (GOOGL 1.94%) (GOOG 1.92%) and Super Micro Computer (SMCI 3.50%) decreased by 17% and 60%, respectively. Still, both stocks trade at reasonable valuations, and history says a Nasdaq correction could quickly reverse course. Since 2010, the Nasdaq has returned an average of 21.9% during the 12 months since its first close in correction territory.

Here’s why Alphabet and Supermicro are worth buying today.

1. The alphabet

Alphabet offers advertising and cloud services. Its subsidiary Google is “the world’s largest digital advertiser, accounting for 27.7% of revenue share,” according to eMarketer. The foundation of that success is Google Search, but the company has six products with more than 2 billion monthly users that support its ability to source data and serve relevant ads across the Internet.

Google is also the third largest provider of cloud infrastructure and platform services (CIPS), although a distant third Amazon and Microsoft. However, the company has gained market share thanks in part to the power of artificial intelligence (AI). For example, Forrester Research recognized its leadership in AI infrastructure and large language models. Google accounted for 12% of CIPS spending in the June quarter, up from 11% a year earlier, and that figure could continue to grow as AI spending increases.

Alphabet reported strong financial results in the second quarter, with only one blemish. YouTube advertising revenue missed estimates, but the company still beat analysts’ expectations on the top and bottom lines. Total revenue rose 14% to $84.7 billion and GAAP net income rose 31% to $1.89 per diluted share. However, the stock sold off after the company announced its results and continued to fall.

Google is gradually losing market share in digital advertising, but the company could reduce or reverse this trend through product innovation. For example, generative AI overviews drive engagement with Google Search, and AI-powered advertising tools drive conversions and streamline workflows for media buyers, according to CEO Sundar Pichai. These innovations create new monetization opportunities.

Wall Street expects Alphabet to grow revenue by 17.4% annually over the next three years. That makes the current valuation of 22.7 times earnings look pretty cheap. Specifically, these numbers give a price-to-earnings-growth (PEG) ratio of 1.3, which is a discount to the company’s five-year average of 1.5. Investors should feel confident buying a short position in this growth stock today.

2. Super Micro Computer

Supermicro manufactures high-performance computing platforms for the cloud and enterprise data centers. These include individual servers and storage systems, as well as full-scale solutions that integrate compute, storage and networking to provide customers with a turnkey solution for workloads such as data analytics and AI.

Supermicro has achieved a leadership position in AI servers due to its in-house manufacturing capabilities and a unique block approach to product design. Specifically, the company does most of its research and development in-house and uses common electronic building blocks from all product lines to rapidly assemble a wide range of servers with the latest chips from vendors such as Nvidia.

Ultimately, that allows Supermicro to bring new technologies to market faster than the competition, typically in two to six months. As a result, the company has become the go-to choice for AI servers and is expected to gain share. Bank of America Analysts expect Supermicro to account for 17% of AI server sales by 2026, up from 10% in 2023. But KeyBanc’s Tom Blakely believes the company could capture 23% market share by 2025.

Supermicro reported mixed results in the June quarter. Revenue rose 143% to $5.3 billion on record demand for AI infrastructure. However, investments in direct liquid cooling (DLC) technology caused the company’s gross profit margin to shrink, so non-GAAP earnings rose just 78% to $6.25 per diluted share. But management says gross profit margin should normalize by the end of the year as DLC shipments come to scale.

looking ahead JPMorgan Chase spending on AI servers is expected to grow sixfold between 2023 and 2028. Supermicro should be a major beneficiary, not only because it can quickly bring AI-optimized servers to market, but also because it has emerged as an early leader in DLC technology. Demand for liquid-cooled servers is expected to grow rapidly over the next few years as they reduce operational costs by reducing data center power consumption.

Wall Street expects Supermicro to grow adjusted earnings 40% annually through fiscal 2026. That makes the current valuation of 23 times adjusted earnings look pretty cheap.

As a caveat, Supermicro’s stock could fall even lower if the company misses estimates for future earnings. Investors who are comfortable with this risk should buy a short position today.