This summer has seen an abrupt correction in most stocks, including many artificial intelligence (AI) tech winners that outperformed in the first half of the year. Fears over the economy have sent just about all stocks down since mid-July.
However, even if there is an economic downturn, AI investment should continue. And if we see a slower economy, that should lead to lower interest rates, which should keep up valuations of technology growth stocks.
That means stocks poised to benefit from AI could make for excellent buys or adds on the marketwide dip, like these three leaders.
NASDAQ: AVGO
Key Data Points
Broadcom
Broadcom (AVGO 1.69%) CEO Hock Tan has done a masterful job of executing a growth-via-acquisition strategy, targeting dominant franchises in specific niche technologies. And two specific technologies in Broadcom's chip portfolio have taken off with AI.
These include Broadcom's dominant switching and routing Tomahawk and Jericho chipsets, which are seeing hypergrowth due to the high data transport requirements of AI.
The second AI business is custom ASICs (application-specific integrated circuits), which are used by both Alphabet (GOOG +2.21%) (GOOGL +2.25%) and Meta Platforms (META +0.49%) to make their own custom AI accelerators. Recently, Broadcom claimed a third major ASIC customer for AI accelerators, which some analysts suspect is Tik Tok parent Bytedance.
These two AI businesses have absolutely exploded, growing from just over $4.2 billion last year to a projected $11 billion-plus this fiscal year, which ends in October. In addition, Broadcom has other highly profitable franchises, such as supplying Wi-Fi and bluetooth chips for the iPhone.
In addition to chips, Broadcom's recent acquisition of software giant VMware is turning out to be a smashing success. Folding the virtualization software giant into its business, Broadcom has been able to slash costs and accelerate revenue, greatly boosting VMware's profits.
With its business now nearly evenly split between software and hardware -- a rarity among large tech stocks -- Tan can now hunt either hardware or software companies for his next acquisition. In the fast-evolving AI space, that's an advantageous position to be in.
Down about 15% from its highs and trading at just 25 times forward earnings, Broadcom is a solid AI pick to buy on the dip.
ASML Holding
Another AI winner is ASML Holding (ASML 2.13%), which is in the fortunate position of having a monopoly on extreme ultraviolet lithography (EUV) technology. EUV is necessary for making all leading-edge semiconductors today, and is now being used in the production of advanced DRAM memory -- also crucial in AI systems.
Because of its competitive advantage, ASML never really trades "cheaply," but down 23% off its recent highs, this could be a good moment to scoop up shares.
ASML's second-quarter results, while beating expectations, may have disappointed some hoping for more near-term growth. But ASML's sales can be lumpy. Management has always pointed to 2024 as a pause year in growth, before a big year likely coming in 2025.
Last year, the rest of the chip sector was still mired in a post-COVID slump, except for AI. Yet this year, AI is still growing like gangbusters and now makes up a larger part of the industry. Meanwhile, the AI revolution should grow chip content in more devices, such as AI-enabled PCs and smartphones. That should boost industrywide growth into 2025.
There has been recent evidence of a strong pickup in chip demand. Taiwan Semiconductor Manufacturing (TSM +0.11%), the largest foundry for leading-edge chips and ASML's biggest customer, just reported July revenue up a stunning 44.7% compared with last year, and year-to-date revenue up 30.5%.
With such fast growth, TSMC will likely turn on the spending soon, and that should mean more revenue for ASML, making it a strong pickup on this dip.
Image source: Getty Images.
Super Micro Computer
No matter which GPU vendor wins out for advanced AI applications, future AI GPUs will likely need to be liquid-cooled in a server rack. That's a tricky proposition though, as direct liquid cooling (DLC) technology has been an expensive and cumbersome affair to date, which is why 99% of all data centers were air-cooled coming into 2024.
However, the massive electricity requirements of AI are now forcing the hands of data center operators to adopt DLC. And the server maker that has been out in front of this trend is Super Micro Computer (SMCI 3.85%).
Super Micro missed earnings estimates last quarter, and the stock plunged accordingly. It's now down 56% from all-time highs set back in March, even though the stock is also still up 100% since the beginning of 2024.
But looking under the hood, the reasons for the earnings miss weren't so concerning. Super Micro already has a working DLC server product, and AI customers are clamoring for it. The demand was so great that management had to pay for expedited shipping costs for liquid cooling components, which took a bite out of margins. The supply constraints also pushed $800 million in revenue from the June-ended to the September-ended quarter.
Despite the shortage, CEO Charles Liang estimated that Super Micro shipped 1,000 liquid-cooled racks in June and July, accounting for about 15% of all data center deployments, and "at least" 70% to 80% of all DLC servers globally, dominating this nascent market.
Those all seem like valid reasons for the quarter's miss, especially in light of Super Micro's recent track record of trouncing expectations. Meanwhile, management projects a gradual improvement in the company's gross margins back into the 14% to 17% target range by the end of the year.
Super Micro's management also gave blowout guidance of $26 billion to $30 billion in revenue for the year ahead, relative to the near-$15 billion it made in the 12 months ending in June. And Super Micro has a history of giving conservative guidance. For instance, one year ago, Super Micro forecast $9.5 billion to $10.5 billion in revenue for fiscal 2024, which ended in June. The company wound up doing 50% more than that.
This indicates Super Micro could vastly outperform in terms of revenue, which could help 2025 earnings exceed expectations even with some margin compression. Given that the stock only trades around 16 times what could be conservative earnings forecasts for the year ahead, it's a buy on this dip.
