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The technology sector has enjoyed notable momentum in recent years, primarily driven by the transformative advancements in artificial intelligence (AI). This embrace of AI has spearheaded growth across multiple companies, leading to soaring share prices among leading AI stocks and propelling the tech-heavy Nasdaq Composite index to new heights.
As 2025 unfolds, however, the landscape appears more turbulent. Investor sentiment is being tested by speculation surrounding the Federal Reserve’s interest rate strategy this year, compounded by rising inflation concerns. Concurrently, the 10-year Treasury yield, which influences borrowing costs for individuals and corporations alike, continues its upward trajectory.
Is a market correction on the horizon for the Nasdaq? The index has descended roughly 5% from its all-time highs since December. As always, precisely forecasting market fluctuations is a challenge.
Despite the market’s ebbs and flows, declines can be advantageous, providing an ideal window for acquiring high-quality stocks at more attractive valuations.
In light of this, investors may want to consider three notable AI stocks that could present buying opportunities if their prices continue to decline: Palantir Technologies (NASDAQ: PLTR), Advanced Micro Devices (NASDAQ: AMD), and CrowdStrike Holdings (NASDAQ: CRWD).
Jake Lerch (Palantir Technologies): My enthusiasm for Palantir’s stock stems from its pivotal role in the ongoing AI boom. That said, its share price has surged more than 300% over the past year, raising considerations about its current valuation.
To assess a stock’s valuation, various metrics can be applied, including the price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, and PEG ratio. For rapidly expanding companies like Palantir, I favor the P/S and PEG ratios.
Currently, Palantir’s P/S ratio is approximately 61 times its trailing-12-month sales, down from an earlier peak of nearly 75 times. Despite the decline, this figure remains exceedingly high. For perspective, Nvidia, a leader in the AI sector, boasts a P/S ratio of about 30 times, despite experiencing over 2,000% growth in the last five years. In contrast, many companies outside the AI sector exhibit P/S ratios in the low single digits.
Therefore, Palantir’s stock price is elevated when evaluated through the P/S lens alone.
Nevertheless, this ratio does not account for Palantir’s rapid growth. The PEG ratio, which assesses a company’s price-to-earnings multiple against its expected growth rate, provides a more nuanced view.
The current PEG ratio for Palantir is 1.45, down from a high of 1.77, which suggests the stock is less expensive than indicated by the P/S ratio. Still, the overall valuation remains high within the context of PEG standards.
Typically, PEG ratios between 0 and 1 imply undervalued stocks; around 1 suggest fair valuation, while ratios above 1 indicate overvaluation. Should Palantir’s stock price decrease, all else being equal, the PEG ratio would likely approach 1, signaling a potential opportunity for long-term investors.
Will Healy (Advanced Micro Devices): Investors seeking a chance to buy into a discounted AI stock might find it with AMD. The company’s stock has plummeted nearly 50% since March, primarily due to intensified competition from Nvidia in the AI accelerator segment and challenges within other business areas.
Despite overall underperformance, AMD’s data center segment—responsible for AI accelerator design—has thrived, reporting a staggering 107% revenue increase in the first three quarters of 2024. This growth has bolstered AMD’s total revenue to $18 billion, reflecting a 10% annual increase.
The sluggish overall performance, however, can be attributed to significant revenue declines in AMD’s gaming and embedded segments, which detracted from its revenue growth. Specifically, gaming revenue dropped by 58%, and embedded revenue fell by 38% during the first nine months of 2024.
In the gaming sector, Microsoft and Sony reduced channel inventories while AMD gears up to introduce its next generation of Radeon GPUs. Simultaneously, client moves to balance inventory levels contributed to struggles in the embedded sector.
A turnaround could be on the horizon as the anticipated launch of the new Radeon GPU may revitalize the gaming segment, and AMD’s management has indicated that its embedded business reached a low point in Q1 2024.
Moreover, the current valuation looks increasingly attractive. While the trailing P/E ratio is above 100, AMD has a forward P/E ratio of merely 24, with a price-to-book ratio slightly above 3 compared to Nvidia’s valuation exceeding 50. This disparity may entice investors to lean towards AMD despite Nvidia’s current technical advantages.
Overall, while AMD faces challenges, the outlook appears brighter for its business segments. Investors may find value in purchasing AMD stock at its current reduced valuation.
Justin Pope (CrowdStrike Holdings): The role of AI in cybersecurity is becoming increasingly pivotal. Companies like CrowdStrike are leveraging machine learning and AI technology for proactive threat detection in IT systems, securing their standing as leaders in this evolving field. Their accolades have translated into impressive revenue growth. CrowdStrike currently protects 300 Fortune 500 companies, underscoring its competitive strength.
Initially focused on endpoint security, CrowdStrike is broadening its service offerings. Approximately two-thirds of its clientele engages with multiple product modules. Over the last year, the company has generated $3.7 billion in revenue, showcasing a 28% year-over-year growth rate in its latest quarter, with management projecting continued double-digit growth. The total addressable market for CrowdStrike is expected to reach $250 billion by 2029.
As CrowdStrike continues to grow, it faces competitive pressures. A significant test arose in July 2024 when a malfunctioning update led to extensive IT disruptions affecting millions globally. The incident raised concerns about customer retention amidst intense competition.
Yet, CrowdStrike has shown resilience, with only a slight downward adjustment to revenue projections for the following year. This suggests customer loyalty to CrowdStrike’s offerings, supporting the company’s long-term profitability. CrowdStrike’s strong performance is reflected in its stock, which typically commands a higher price-to-sales ratio than similar firms. If it experiences a downturn alongside the market, investors may want to consider seizing the moment to invest.
For investors concerned about missing out on leading stocks, there may be unique opportunities available now, as analysts identify potential high-performing stocks on the verge of significant growth. Examples of previous success stories include Nvidia with enormous returns for early investors, reflecting the lucrative potential of timely investment strategies.
*Stock Advisor returns as of January 13, 2025
Jake Lerch, Justin Pope, and Will Healy hold positions in various stocks mentioned. The Motley Fool endorses these companies and maintains a relevant disclosure policy.
Is the Nasdaq Headed for a Correction? 3 High-Flying AI Stocks to Buy if Prices Fall.
Source
finance.yahoo.com