The Nasdaq Composite closed in correction territory on Friday, Aug. 2 as investors reacted to a disappointing jobs report. A correction occurs when an index declines at least 10% from its record high, but the Nasdaq has now tumbled 13%, and several stocks have fallen more sharply.
Shares of Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) and Super Micro Computer (NASDAQ: SMCI) have slipped 17% and 60%, respectively. Yet both stocks trade at reasonable valuations, and history says the Nasdaq correction could quickly reverse course. Since 2010, the Nasdaq has returned an average of 21.9% during the 12 months following its first close in correction territory.
Here’s why Alphabet and Supermicro are worth buying today.
1. Alphabet
Alphabet provides advertising and cloud services. Its Google subsidiary is the “biggest digital advertiser in the world, 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 deliver relevant ads across the internet.
Google is also the third largest cloud infrastructure and platform services (CIPS) provider, albeit a distant third to Amazon and Microsoft. However, the company has been gaining market share due, in part, to strength in artificial intelligence (AI). For instance, Forrester Research has recognized its leadership in AI infrastructure and large language models. Google accounted for 12% of CIPS spending in the June quarter, up from 11% in the prior year, and that figure could continue climbing as AI spending ramps up.
Alphabet reported solid financial results in the second quarter with only one blemish. YouTube advertising revenue missed estimates, but the company still exceeded analysts’ expectations on the top and bottom lines. Total revenue increased 14% to $84.7 billion, and GAAP net income rose 31% to $1.89 per diluted share. Nevertheless, the stock sold off after the company announced its results and has continued moving lower.
Google is gradually losing market share in digital advertising, but the company could curb or reverse that trend through product innovation. For instance, generative AI overviews are driving engagement with Google Search, and AI-powered advertising tools are boosting conversions and streamlining workflows for media buyers, according to CEO Sundar Pichai. Those innovations create new monetization opportunities.
Wall Street expects Alphabet to grow earnings at 17.4% annually over the next three years. That makes the current valuation of 22.7 times earnings look rather cheap. Specifically, those numbers give a price/earnings-to-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 small position in this growth stock today.
2. Super Micro Computer
Supermicro manufactures high-performance compute platforms for cloud and enterprise data centers. That includes individual servers and storage systems, as well as full rack scale solutions that integrate compute, storage, and networking to provide clients with a turnkey solution for workloads like data analytics and AI.
Supermicro has achieved a leadership position in AI servers due to internal manufacturing capabilities and a unique building-block approach to product design. Specifically, the company handles most research and development internally and uses common electronic building blocks across product lines to quickly assemble a broad range of servers featuring the latest chips from suppliers like Nvidia.
Ultimately, that lets Supermicro bring new technologies to market more quickly than the competition, usually in two to six months. As a result, the company has become the go-to option for AI servers and is expected to gain share. Bank of America analysts estimate that Supermicro will account for 17% of AI server sales by 2026, up from 10% in 2023. But Tom Blakely at KeyBanc believes the company could capture 23% market share by 2025.
Supermicro reported mixed results in the June quarter. Revenue increased 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 contract, such that non-GAAP earnings increased 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 reach scale.
Looking ahead, JPMorgan Chase expects AI server spending to increase sixfold between 2023 and 2028. Supermicro should be a major beneficiary, not only because it can bring AI-optimized servers to market quickly, but also because it has emerged as an early leader in DLC technology. Demand for liquid-cooled servers is expected to increase rapidly in the next few years because they lower operational costs by reducing data center power consumption.
Wall Street expects Supermicro to grow adjusted earnings by 40% annually through fiscal 2026. That makes the current valuation of 23 times adjusted earnings look quite cheap.
As a caveat, Supermicro shares could sink even lower if the company misses earnings estimates going forward. Investors comfortable with that risk should buy a small position today.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Bank of America, JPMorgan Chase, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Nasdaq Market Correction: 2 Brilliant Artificial Intelligence (AI) Stocks to Buy on the Dip was originally published by The Motley Fool
