The broad market sell-off this year has weighed heavily on technology stocks. While the S&P 500 is down by about 11% from its peak, the tech-heavy Nasdaq Composite index is off by about 15%, and this more pronounced pullback isn't surprising considering that investors have become more risk-averse of late.
This is one reason why artificial intelligence (AI) stocks, which had been in fine form on the market for the past couple of years, have been heading lower even as many have been reporting solid quarterly results. However, AI adoption is set to increase at a robust pace in the long run: Grand View Research projects 36% annualized growth in this space through 2030.
As a result, companies selling AI-focused hardware and software should ideally experience healthy growth over the long run. That's why now would be a good time to take a closer look at some solid AI stocks that have dropped in 2025 to attractive valuations, but that have the potential to fly higher in the long run thanks to the massive opportunities they are sitting on.
1. Advanced Micro Devices
Shares of chip designer Advanced Micro Devices (AMD 3.89%) are down by close to 29% in 2025 as of this writing. As a result, AMD now trades at an attractive 19 times forward earnings. That's well below the tech-laden Nasdaq-100 index's forward earnings multiple of 24. Even better, AMD is undervalued with respect to the growth that it is expected to deliver over the next five years.
NASDAQ: AMD
Key Data Points
This is evident from the stock's price/earnings-to-growth ratio (PEG ratio) of just 0.35 based on its projected five-year earnings growth, according to Yahoo! Finance. The PEG ratio is a forward-looking valuation metric that's calculated by dividing a stock's price-to-earnings ratio by the estimated annual earnings growth it could deliver over various periods. Stocks with positive PEG ratios of less than 1 are generally viewed as being undervalued with respect to their projected growth.
Consensus estimates are projecting a 36% increase in AMD's earnings to $4.51 per share this year. That's expected to be followed by healthy growth over the next couple of years as well, despite recent downward revisions in those estimates due to the economic headwinds created by President Donald Trump's tariffs and trade wars.
AMD EPS Estimates for Current Fiscal Year data by YCharts.
Of course, tariffs on semiconductors, computers, and raw materials could dent AMD's sales and earnings growth, as the company will be forced to increase the prices of its offerings, absorb higher costs, or both. However, Trump has -- at least for now -- exempted semiconductors from his tariffs, and put a 90-day pause on the comprehensive tariffs he imposed on most countries in the world to allow time for negotiations.
It remains to be seen how those various international negotiations will play out, but the administration's apparent willingness to negotiate with trade partners suggests that favorable outcomes may be possible. Additionally, tech companies' heavy investments in AI infrastructure are likely to continue despite the tariff-related turmoil. This explains why AMD is expecting to report next month that its first-quarter revenue increased by 30% year over year at the midpoint of its guidance range.
The company is on track to benefit from the growing demand for AI server CPUs (central processing units) and graphics processing units (GPUs), along with the growth in AI-enabled personal computers. Meanwhile, there are other catalysts, such as an increase in the number of design wins in the embedded chip market. Also, the upcoming gaming console upgrade cycle should be a key growth driver.
In sum, there is more to AMD than just AI, which is why investors looking for growth stocks trading at attractive valuations should consider buying it hand over fist right now.
2. DigitalOcean
DigitalOcean (DOCN 5.95%) provides on-demand cloud computing infrastructure to small businesses, developers, and start-ups, and it has recently started offering AI solutions as well. In October, the company released Droplets, an AI infrastructure platform through which customers can rent its cloud platform to train and deploy large language models (LLMs).
NYSE: DOCN
Key Data Points
Demand for the platform was so strong that DigitalOcean was finding it difficult to provide enough capacity. That wasn't surprising as Droplets allowed its customers to deploy AI applications without buying expensive hardware. Not surprisingly, DigitalOcean is now investing more money to bolster its AI infrastructure.
DigitalOcean customers can also rent a more powerful version of its cloud infrastructure platform through the Bare Metal GPUs solution. The company notes that Bare Metal gives customers "maximum performance and control, ideal for sustained, high-throughput workloads that demand direct access to hardware resources and customization." So customers looking to run heavier AI workloads can also turn to DigitalOcean to fulfill their requirements.
DigitalOcean is doing the right thing by investing in AI hardware so that it can rent capacity on it to customers, as the market for that is on track to grow substantially in the long run. Goldman Sachs estimates that the cloud infrastructure-as-a-service (IaaS) market could be worth a whopping $580 billion by the end of the decade.
The addition of AI tools to its offerings is helping DigitalOcean drive stronger customer spending. In its fourth-quarter earnings release, it pointed out that the "continued traction in AI drove quarterly revenue for our top 500+ customers, representing 22% of total revenue, to grow at 37% year-over-year."
The company's average revenue per customer jumped 14% year over year. DigitalOcean is set to move deeper into AI with the addition of agentic AI solutions, which will allow its clients to build AI agents with the help of powerful LLMs on its GenAI Platform. As a result, it won't be surprising to see its customers spending even more with DigitalOcean, and even more customers signing up with it.
All this helps explain why analysts expect DigitalOcean's bottom-line growth to improve.
DOCN EPS Estimates for Current Fiscal Year data by YCharts.
Finally, with DigitalOcean trading at just 13.5 times forward earnings following its recent pullback, now is a good time for investors to buy this cloud computing stock. It could jump impressively in the long run thanks to the growing demand for AI services in the cloud.
