Investor interest in artificial intelligence (AI) stocks surged in 2024, but it looks to be cooling off in 2025. At the time of this writing, powerhouse chipmaker Nvidia(NASDAQ: NVDA) was down nearly 20% and Broadcom fell by 26% since January 1. Advanced Micro Devices is also struggling, down 23%.
Uncertainty about the outlook for the U.S. economy as President Donald Trump implements his tariff plans has contributed to the softness in the AI sector. These tariffs, as well as retaliatory tariffs that Trump has pledged to enact, could cause a decline in global economic activity, and potentially lead to a U.S. recession. Understandably, Wall Street is concerned that many industries will suffer, including AI.
There are, however, three concrete ways for tech sector investors to turn these unsettling circumstances to their advantage.
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Identify the winners and losers
Ups and downs in the stock market are normal. Even so, when stocks you own drop in price, it doesn't feel good, and if you're weighing whether to invest, a correction or bear market may give you pause.
One action you can take under these circumstances is to identify which AI stocks are likely to be winners over the long run. Whether you already own a stock or are thinking about investing in it, start by reviewing how the business itself is doing -- based on its revenue growth, free cash flow, and indicators such as price-to-earnings ratio and price-to-sales ratio -- rather than focusing on the share price.
Good companies for investors have an underlying business model that is showing success through growing sales, and with healthy financials that are reflected in such areas as their gross margin and balance sheet. This is particularly important in the nascent AI sector because a plethora of companies are competing in it, and not all of them will be winners as the market evolves.
On the other hand, companies that are seeing year-over-year sales declines could be suffering because of a fundamental issue, such as a struggle to attract customers. If you own stock in a company such as this, consider selling. If that results in a loss, you can at least get some benefit from tax-loss harvesting.
An example of a good company is Nvidia. Although its stock has plunged this year, Nvidia recently reported strong results for its fiscal fourth quarter, which ended Jan. 26, when its sales grew 78% year over year to $39.3 billion.
Moreover, management expects its revenue to grow to $43 billion in its fiscal Q1, a 65% increase from the prior-year period's $26 billion. The semiconductor giant's business is showing no sign of slowing down, so its share price drop actually creates an opportunity for investors to take action.
Look to buy on the dip
When the share price of a good company drops, it creates an opportunity to grab shares at a discount. This increases your potential for better returns.
Going back to Nvidia, Broadcom, and AMD, the declines in their share prices have left them trading at compelling stock valuations. One way an investor can assess this is by using the forward P/E ratio ratio, which tells you how much investors are willing to pay for a dollar's worth of earnings based on analysts' consensus estimates for the next 12 months.
Nvidia and AMD's forward P/E multiples fell substantially in recent months. AMD, in particular, is looking attractively valued at this point -- its forward P/E ratio is nearly half of what it was toward the end of 2024.
That said, it's understandable to feel unease about buying stocks when they've dropped recently. What if they fall further? This leads to the third strategy you can make use of.
Employ dollar-cost averaging
It's always going to be a challenge to predict which way a stock's price will go, particularly in the near term. That's where a dollar-cost averaging strategy can benefit you.
This strategy involves building your position in a company over time by purchasing equal dollar amounts of its stock at regular intervals. Consistently buying shares through ups and downs reduces the impact of short-term stock price moves on your returns.
Start by finding good companies that have been hit by the current drop in AI stocks and scoop up a few shares now, but have a plan to buy more over time. If you still feel concerned, it's important to reflect on the emotions tied to investing.
When you take emotions out of the equation and examine the data, the share prices of good companies tend to increase over time. Since many AI-related businesses are part of the tech-heavy Nasdaq Composite index, here's a look at its performance over the past decade.
The Nasdaq tumbled when the COVID-19 pandemic hit in 2020, and again when inflation surged in 2022. Both times, the Nasdaq recovered to reach greater heights.
So take heart if you're feeling down about this tumble in AI stocks. History suggests a rebound is likely in the cards for long-term investors.
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Robert Izquierdo has positions in Advanced Micro Devices, Broadcom, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
