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The Nasdaq Composite closed in correction territory on Friday, August 2, as investors reacted to a disappointing jobs report. A correction occurs when an index falls at least 10% from its all-time high, but the Nasdaq is now down 13%, and several stocks have fallen more sharply.
Shares of Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) And Super microcomputer (NASDAQ: SMCI) have fallen by 17% and 60% respectively. Still, both stocks trade at reasonable valuations, and history says the Nasdaq correction could quickly change course. Since 2010, the Nasdaq has achieved an average of 21.9% during the twelve months following the first closure in correction area.
Here’s why Alphabet and Supermicro are worth buying today.
1. Alphabet
Alphabet provides advertising and cloud services. The Google subsidiary is the “world’s largest digital advertiser, 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 two billion monthly users that support its ability to collect data and serve relevant ads across the web.
Google is also the third largest provider of cloud infrastructure and platform services (CIPS), albeit a distant third Amazon And Microsoft. However, the company has gained market share, partly due to its strong position in the market artificial intelligence (AI). For example, Forrester research has recognized its leadership in AI infrastructure and large language models. Google accounted for 12% of CIPS spend in the June quarter, up from 11% in the previous year, and that figure could continue to rise as AI spend increases.
Alphabet reported solid financial results in the second quarter, with only one hiccup. YouTube’s ad revenue fell short of estimates, but the company still exceeded analyst expectations on both revenue and profit. Total revenue rose 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 continued to decline.
Google is gradually losing market share in digital advertising, but the company could curb or reverse that trend through product innovation. Generative AI summaries, for example, drive more engagement in Google Search, and AI-powered advertising tools boost conversions and streamline workflows for media buyers, according to CEO Sundar Pichai. These innovations create new revenue generation opportunities.
Wall Street expects Alphabet to grow earnings 17.4% annually over the next three years. That makes the current valuation of 22.7 times earnings look rather cheap. Specifically, these numbers reflect a price-to-earnings-growth ratio (PEG) of 1.3, which is a discount to the company’s five-year average of 1.5. Investors should buy a small position in this growth stock with confidence today.
2. Super microcomputer
Supermicro produces high-performance computing 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 give customers a turnkey solution for workloads such as data analytics and AI.
Supermicro has achieved a leading position in AI servers thanks to in-house manufacturing capabilities and a unique building block approach to product design. Specifically, the company conducts most of its research and development in-house and uses common electronic building blocks across all product lines to quickly assemble a wide range of servers using the latest chips from suppliers such as Nvidia.
Ultimately, this allows Supermicro to bring new technologies to market faster than the competition, usually within two to six months. As a result, the company has become the go-to option for AI servers and is expected to gain market share. Bank of America Analysts estimate that Supermicro will account for 17% of AI server sales in 2026, up from 10% in 2023. But KeyBanc’s Tom Blakely believes the company could capture a 23% market share by 2025.
Supermicro reported mixed results in the June quarter. Revenue rose 143% to $5.3 billion thanks to record demand for AI infrastructure. However, investments in direct liquid cooling (DLC) technology caused the company’s gross profit margin to decline, so non-GAAP earnings rose only 78% to $6.25 per diluted share. But management says gross profit margin should normalize by the end of the year as DLC deliveries ramp up.
Looking ahead, JPMorgan Chase expects spending on AI servers to increase sixfold between 2023 and 2028. Supermicro should be a big 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 coming years as they reduce operational costs by reducing data center energy consumption.
Wall Street expects Supermicro to grow adjusted earnings 40% annually through fiscal 2026. That makes its current valuation of 23 times adjusted earnings look quite cheap.
As a warning, Supermicro’s shares could fall even further if the company misses future earnings estimates. 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, a director at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions in Amazon. The Motley Fool holds 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 to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has one disclosure policy.
Nasdaq Market Correction: Two Brilliant Artificial Intelligence (AI) Stocks to Buy on the Dip was originally published by The Motley Fool