There's no question that artificial intelligence (AI) stocks have led the charge in the current bull market, but in recent months, that leadership seems to be fading. Some investors even see a potential AI bubble emerging as valuations have arguably gotten ahead of business growth.
Plenty of AI stocks trade down from their recent peaks, and the Nasdaq Composite, the tech-heavy index, hit an intraday peak on July 11. The index is down 5.5% from that peak after a recent recovery. Similarly, the VanEck Semiconductor ETF, which is led by the chip stocks that are key in the AI rally, is down 18% from its peak on the same day.
Investors got rattled by concerns that big tech companies are overspending on AI, fears of a recession, and questions about when AI will truly breakthrough into mainstream technology, in a similar way to the past transformations like the internet and mobile technology. Despite those concerns, sell-offs like these can offer opportunities to investors. On that note, let's take a look at two AI stocks to buy on the dip.
Image source: Getty Images.
1. Nvidia
Nvidia (NASDAQ: NVDA) is an obvious choice at this early stage of the AI boom. And yet Nvidia stock has pulled back 17% from its peak in June, even as the company delivered another round of strong results in its second-quarter earnings report at the end of August. Additionally, there are plenty of other signs that show that demand for Nvidia's products continues to surge.
CEO Jensen Huang said just last week that the company is under tremendous pressure to deliver for its customers, as so many businesses are relying on its technology. Additionally, big tech companies continue to insist that they're prepared to spend whatever it takes to be a leader in generative AI technology, which means continuing to buy from Nvidia.
Oracle founder Larry Ellison recently told investors that he and Tesla CEO Elon Musk spent a dinner begging Nvidia CEO Jensen Huang for more graphics processing units (GPUs), saying, "Please take our money."
Nvidia stock might look expensive at a price-to-earnings ratio of 55, but the business is still growing rapidly, with revenue more than doubling year over year in its most recent quarter. With strong growth expected to continue over the coming quarters, it's worth buying Nvidia at a discount.
2. ASML
One of the strongest economic moats in AI belongs to ASML (NASDAQ: ASML), the leading lithography equipment manufacturer. In other words, ASML makes the machines that chip manufacturers like Taiwan Semiconductor Manufacturing and other foundries use to make chips.
ASML is the only company that currently makes extreme ultraviolet lithography systems (EUV), the most advanced chip manufacturing technology, which is used to make chips with nodes as small as 2 nanometers.
The company's results tend to be volatile from quarter to quarter as it sells a small number of very expensive machines. It expects a cyclical rebound in demand for its machines in the second half of 2024 and into 2025, calling 2024 a transition year with "investment in both capacity ramp and technology." It also expects AI to drive the industry's recovery.
For the third quarter, ASML management sees revenue improving sequentially from 6.2 billion euros to 6.7 billion-7.3 billion euros, which represents a return to year-over-year growth.
While concerns about export controls restricting shipments to China have weighed on the stock in recent weeks, the future of the chip fab industry looks brighter than ever, with new foundries planned in the U.S., Europe, and Japan. The CHIPS Act is also allocating tens of billions of dollars to new chip plants in the U.S. so chip production can be diversified away from areas where China can potentially disrupt production (like Taiwan). ASML is likely to be one of the biggest beneficiaries of the CHIPS Act.
ASML stock trades down 28% from its peak in July. However, with revenue growth on the rebound and a boom in chip manufacturing shaping up, ASML looks like a smart buy, even with new China chip export restrictions in place.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Nvidia, Oracle, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.
