Just a few weeks after the Nasdaq Composite reached a new record high, tech investors are suddenly singing a different tune. The tech-heavy index is now down more than 8% from its peak on a combination of concerns that valuations are stretched after the earlier surge, doubts about the near-term monetization of AI, and a rotation to small-cap stocks, which have underperformed, in anticipation of interest rate cuts from the Fed.
Despite the sell-off, many of the AI stocks that have reported quarterly results thus far this earnings season have delivered solid numbers even though market sentiment seems to be shifting against them. On that note, let's take a look at three AI stocks worth buying as prices come down.
1. Taiwan Semiconductor
Taiwan Semiconductor (NYSE: TSM), or TSMC, as it's also known, is a linchpin of the global economy. It is by far the largest contract manufacturer of semiconductors in the world, handling production for companies like Nvidia, Apple, Broadcom, Advanced Micro Devices, and others.
Taiwan Semi stock is now down 20% from its peak a few weeks ago even though the company delivered an impressive second-quarter earnings report in mid-July. Second-quarter revenue jumped 40%, or 33% in dollars, to $20.8 billion, and earnings per share rose 36%.
TSMC is benefiting from both the broader cyclical recovery in the chip sector and increasing demand for AI and advanced chips. Advanced technologies, defined as 7-nanometer chips or smaller, made up 67% of total wafer revenue in the quarter.
Due to its dominant market share in third-party chip manufacturing, advanced technologies, and customer relationships, TSMC has formidable competitive advantages, and it should be a winner no matter what happens with AI chips.
The stock also looks reasonably priced at a price-to-earnings ratio of about 30, which looks like a great price considering its current growth rate.
2. Alphabet
Like TSMC, Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock pulled back after the company's latest earnings report even as the search giant topped estimates on the top and bottom lines. Instead, investors were disappointed with slower-than-expected revenue growth at YouTube and concerned about an increase in capital expenditure to build out the company's AI infrastructure.
However, Alphabet's results were strong. It showed 14% revenue growth to $84.7 billion, and earnings per share rose from $1.44 to $1.89.
Alphabet is executing well across its business. It's controlling headcount growth to drive expanding operating margins. It's now reporting strong profits in Google Cloud, where it was losing money only a little more than a year ago. And it has kept pace in the AI race with OpenAI and others, deploying the new Gemini chatbot and an AI assistant in search.
Meanwhile, its Waymo autonomous vehicle subsidiary is the leader in that emerging technology.
You might think Alphabet would trade at a premium to the S&P 500, given its growth rate and potential in new technologies. But at the time of writing, the stock trades at a price-to-earnings ratio of 24.4, a great price to pay for a proven winner.
3. Super Micro Computer
Super Micro Computer (NASDAQ: SMCI) peaked back in March when the company was selected to join the S&P 500, but its share price has drifted lower since then after surging early in the year and late last year. The stock is down 46% from that peak, and it appears to be oversold pending its upcoming fiscal-fourth-quarter earnings report on August 6.
Supermicro, as the company is also called, might be the fastest-growing AI stock after Nvidia. In its most recent quarter, the company reported revenue growth of 201%, and adjusted earnings per share more than quadrupled year over year.
The company makes high-density servers that work especially well for running AI applications, which has driven its growth over the last year. It also enjoys a close relationship with Nvidia, enabling it to get needed supplies of GPUs and other components.
Despite its skyrocketing growth rate, Supermicro's valuation looks relatively modest at a P/E of around 37, and analysts expect the blistering growth to continue. If the company can deliver strong results in its upcoming earnings report, the stock could bounce up from its current level.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in Broadcom. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
AI Stock Sell-Off: 3 Tech Stocks to Buy Now was originally published by The Motley Fool