3 AI Winners to buy at Dip

This summer saw a sharp correction in most stocks, including many artificial intelligence (AI) technology winners that outperformed in the first half of the year. Fears about the economy have sent nearly all stocks lower since mid-July.

However, even if there is an economic downturn, investment in artificial intelligence should continue. And if we see a slower economy, that should lead to lower interest rates, which should support valuations of tech growth stocks.

That means stocks poised to benefit from AI could make excellent buys or additions on market declines, just like these three leaders.

Broadcom

Broadcom (NASDAQ: AVGO) CEO Hock Tan has done a masterful job of executing an acquisition growth strategy, targeting dominant franchises in specific niche technologies. And two specific technologies in Broadcom’s chip portfolio have taken off with AI.

These include Broadcom’s dominant switching and routing chipsets Tomahawk and Jericho, which are experiencing increased growth due to the high data transport requirements of AI.

The second AI business is custom ASICs (application specific integrated circuits), which are used by both Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Meta platforms (NASDAQ: META) to create their own custom AI accelerators. Broadcom recently claimed a third major ASIC customer for AI accelerators, which some analysts suspect is Tik Tok parent Bytedance.

These two AI businesses have absolutely exploded, growing from just over $4.2 billion last year to an estimated value of over $11 billion this fiscal year, which ends in October. In addition, Broadcom has other very profitable franchises, such as providing Wi-Fi and bluetooth chips for the iPhone.

Chips aside, Broadcom’s recent acquisition of software giant VMware is proving to be a resounding success. By bringing the virtualization software giant into its business, Broadcom was able to cut costs and accelerate revenue, greatly boosting VMware’s profits.

With his business now split almost equally between software and hardware — a rarity among big tech stocks — Tan can now hunt hardware or software companies for his next acquisition. In the rapidly evolving AI space, this is an advantageous position to be in.

Down about 15% from its highs and trading at just 25 times forward earnings, Broadcom is a solid AI pick to buy on the decline.

ASML Holding

Another AI winner is ASML Holding (NASDAQ: ASML)which is in the happy position of holding a monopoly on extreme ultraviolet (EUV) lithography technology. EUV is required for the manufacture of all high-end semiconductors today and is now used in the production of advanced DRAM memory — also crucial in AI systems.

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Because of its competitive edge, ASML never trades “cheap,” but down 23% from its recent highs, this could be a good time to get the stock.

ASML’s second-quarter results, while beating expectations, may have disappointed some hoping for higher near-term growth. But ASML sales can be nebulous. Management has always pointed to 2024 as a gap year in growth, ahead of a big year likely to come in 2025.

Last year, the rest of the chip sector was still mired in a post-Covid crisis, with the exception of AI. However, this year AI continues to grow like gangbusters and is now a bigger part of the industry. Meanwhile, the AI ​​revolution is expected to increase chip content in more devices such as computers and AI-powered smartphones. This should drive industry-wide growth through 2025.

There has been recent evidence of strong growth in chip demand. Taiwan Semiconductor Manufacturing (NYSE: TSM)the largest high-end chip foundry and ASML’s largest customer, just reported a stunning July revenue up 44.7% year-over-year and year-to-date revenue up 30.5%.

With such rapid growth, TSMC will likely turn on spending soon, and that should mean more revenue for ASML, making it a strong pick this fall.

Super Micro Computer

Regardless of which GPU vendor wins for advanced AI applications, future AI GPUs will likely need to be liquid-cooled in a server rack. This is a difficult proposition, however, as direct liquid cooling (DLC) technology has been an expensive and cumbersome business to date, which is why 99% of all data centers will be air-cooled by 2024.

However, AI’s massive electricity requirements are now forcing the hands of data center operators to adopt DLC. And the server manufacturer that has been ahead of this trend is Super Micro Computer (NASDAQ: SMCI).

Super Micro missed earnings estimates last quarter, and the stock fell accordingly. It’s now down 56% from all-time highs set in March, even as the stock is also up 100% since the start of 2024.

But looking under the hood, the reasons for the win rate weren’t so worrisome. Super Micro already has a working DLC ​​server product, and AI customers are asking for it. Demand was so high that management had to pay for expedited shipping costs for liquid-cooled components, which took a bite out of margins. Supply constraints also drove $800 million in revenue from the quarter ended in June to the quarter ended in September.

Despite the shortfall, CEO Charles Liang estimated that Super Micro shipped 1,000 liquid-cooled racks in June and July, representing about 15 percent of all data center deployments and “at least” 70 percent to 80 percent of all DLC servers globally, dominating. this developing market.

All of these seem like valid reasons to miss the quarter, especially in light of Super Micro’s recent track record of beating expectations. Meanwhile, management projects a gradual improvement in the company’s gross margins back to the target range of 14% to 17% by the end of the year.

Super Micro’s management also gave a bumpy estimate of $26 billion to $30 billion in revenue next year, compared with the nearly $15 billion it made in the 12 months ended June. And Super Micro has a history of providing conservative guidance. For example, a year ago Super Micro forecast revenue of $9.5 billion to $10.5 billion for fiscal 2024, which ended in June. The company ended up making 50% more than that.

This indicates that Super Micro could outperform on revenue, which could help 2025 earnings beat expectations even with some margin compression. Given that the stock is only trading at about 16 times conservative earnings forecasts for the next year, it’s a buy on this dip.

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Suzanne Frey, chief executive at Alphabet, is a member of the Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Billy Duberstein and/or his clients have positions in ASML, Alphabet, Broadcom, Meta Platforms, Super Micro Computer and Taiwan Semiconductor Manufacturing and have the following options: short January 2025 $1,840 Super Micro Computer short January 2025 $110 Super Micro Computer, short January 2025 $125 on Super Micro Computer, short January 2025 $130 put on Super Micro Computer, short January 2025 $280 on Super Micro Computer and short January 2025 $85 on Super Micro Computer. The Motley Fool has positions in and recommends ASML, Alphabet, Meta Platforms and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

AI Stock Trading: 3 AI Winners to Buy on the Foot was originally published by The Motley Fool