Less than three months after the Nasdaq Composite (NASDAQINDEX: ^IXIC) set an all-time high, the tech-heavy index is on the verge of entering a correction, which is typically defined is a pullback of 10% or more from a recent peak.
In fact, on an intraday basis, the index was down more than 10% from peak to trough briefly on March 4, as concerns about new tariffs on Canada and Mexico sent the index down more than 5% over a two-day span on Monday and Tuesday before it recouped some of its losses.
It's natural for investors to be feeling some nervousness about tariffs and the current state of the stock market. In addition to what seems like a rapidly expanding trade war, the stock market is also trading at unusually high valuations, meaning that it doesn't take much for stocks to fall.
However, for long-term investors in artificial intelligence (AI) stocks, the recent sell-off looks like a great buying opportunity. Here are two reasons why.
Image source: Getty Images.
1. The AI build-out will continue
In the recent earnings season, investors got an update on AI spending from big tech companies like Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), and Meta Platforms (NASDAQ: META). Those companies all promised to increase capital expenditures in 2025, meaning they will spend more on data centers and AI infrastructure -- evidence that the AI arms race is only heating up as these companies and others like them race toward artificial general intelligence (AGI).
CEOs like Alphabet's Sundar Pichai and Meta's Mark Zuckerberg have said that the risk of under-investing in AI is much greater than overspending, as these kinds of technological shifts can be all-or-nothing bets for the tech giants.
This has played out before. Take the mobile market, for example, which helped make Apple the most valuable company in the world, but left Microsoft locked out in the cold.
These companies regard the opportunity in AI to be so big that it's worth spending the tens of billions of dollars necessary to build out the infrastructure to run the AI applications that could be as transformative as the internet.
There's another reason to bet on the AI build-out continuing, regardless of what happens in the stock market. All the big tech companies leading the charge in the AI revolution have deep pockets and huge profits. Even a recession would be unlikely to deter them from investing in AI infrastructure, as they don't want to lose out on the next transformative technology.
2. Valuations are getting attractive
The Nasdaq has fallen nearly 10% from its peak in December, but some AI stocks are down even more than that. Take Nvidia (NASDAQ: NVDA), for example. The chip giant widely regarded as the leader of the AI boom is down roughly 25% from its peak after the stock sold off in spite of a solid earnings report, and has continued to slide due to concerns around tariffs and a broader economic slowdown.
That sell-off has come as Nvidia continues to forecast strong growth and just posted 78% revenue growth in the fourth quarter. For the first quarter, it called for revenue of around $43 billion, representing a growth rate of 65%. Nvidia now trades at a forward price-to-earnings ratio of just 26, which is roughly in line with the S&P 500(SNPINDEX: ^GSPC). For a company growing as fast as it has been, that looks like a downright steal. As a chipmaker, Nvidia faces cyclical risks, but even those seem priced in at that kind of valuation.
Similarly, shares of Taiwan Semiconductor Manufacturing (NYSE: TSM), the world's largest semiconductor manufacturer, are down by 18% from their peak earlier this year, making it also look like a bargain after another strong earnings report. TSMC now trades at a trailing price-to-earnings ratio of just 27, which looks like a great price to pay for an industry leader and a company that is a linchpin in the global economy.
TSMC also recently pledged to invest in additional $100 billion in U.S. foundries, which should help the company diversify from its base in Taiwan, expand its capacity, and extend its leadership in chip manufacturing.
If stock prices continue to drop, stocks like Nvidia and TSMC could become even more appealing buys, as the AI revolution should continue to move forward regardless of what happens with tariffs or the global economy over the short term. For long-term investors, the recent sell-off is shaping up to be an excellent buying opportunity.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. 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.
