It's been a fun couple of years for the technology sector. The arrival of artificial intelligence (AI) has injected growth into various companies and raised long-term expectations, resulting in surging share prices for the top AI stocks and new highs for the tech-heavy NasdaqComposite index.
However, stocks have started 2025 on some shaky footing. Investors are concerned about what the Fed's interest rate policy might look like this year amid fears of inflation returning. Additionally, the 10-year Treasury rate, which dictates the interest consumers and companies pay on debt, has continued to rise.
Could the Nasdaq be headed for a correction? Since December, the index has fallen as low as 5% below its all-time highs. Remember, nobody can predict how far the stock market can rise or fall (or when).
More importantly, stock market declines are normal and represent fantastic opportunities to buy high-quality stocks at better prices.
Consider buying into these three top AI stocks if they continue to drop: Palantir Technologies(NASDAQ: PLTR), Advanced Micro Devices(NASDAQ: AMD), and CrowdStrike Holdings(NASDAQ: CRWD).
Palantir's rapid growth makes it difficult to value
Jake Lerch (Palantir Technologies): I've made no secret of how much I love Palantir stock, thanks to its place in the AI revolution. However, now that its shares have rallied more than 300% in the last 12 months, I can't go without discussing the stock's rich valuation.
There are several ways to measure a stock's valuation, including price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, and PEG ratio.
For fast-growing companies like Palantir, I prefer the P/S ratio and the PEG ratio.
Let's examine Palantir's P/S ratio first, and in this case, I'm using trailing-12-month (TTM) sales.
As of this writing, Palantir's P/S ratio stands at 61 times. That's down from a high of almost 75 times, but it remains astronomically high. By comparison, Nvidia, the king of AI stocks and a stock that has surged by over 2,000% in the last five years, has a P/S ratio of 30 times. Step away from the red-hot field of AI, and most stocks boast P/S ratios in the low single digits.
In other words, Palantir's stock is costly based on just the P/S ratio.
However, the P/S ratio doesn't account for Palantir's rapid growth.
The PEG ratio, which divides the company's price-to-earnings multiple by its estimated growth rate, does.
Here, you can see that Palantir's PEG ratio stands at 1.45 as of this writing. That's down from a high of 1.77, and, what's more, it indicates that Palantir stock isn't as expensive as its P/S ratio seems to indicate. Nevertheless, the stock's valuation remains high, even by the standards of the PEG ratio.
As a general rule, PEG ratios between 0 and 1 represent companies that are undervalued; a PEG around 1 means a reasonably priced stock; and PEG ratios above 1 represent overvalued stocks.
Obviously, if Palantir shares were to fall in value (all else remaining equal), its PEG ratio would contract closer to 1 -- which could represent an excellent opportunity for investors that remain bullish on the company for the long term.
It is time to stop overlooking this Nvidia competitor
Will Healy(Advanced Micro Devices): Fortunately, investors who want to buy a discounted AI stock now may have that chance with AMD. The stock has lost nearly half of its value since last March amid competition with Nvidia in the AI accelerator market and challenges within specific parts of its business.
Aside from the client segment of the business (which makes chips for PCs), AMD's data center segment, which designs AI accelerators, has prospered despite competition from Nvidia.
Revenue in the first three quarters of 2024 surged 107% higher for the data center segment. That allowed AMD's $18 billion in company revenue to grow by 10% yearly during that period.
So, why the sluggish overall performance? Unfortunately, AMD's gaming and embedded segments are to blame for its lackluster revenue growth. Those segments suffered considerable revenue declines in the first nine months of 2024, with gaming revenue dropping 58% and embedded revenue down 38% annually in the first nine months of the year.
In the gaming segment, Microsoft and Sony cut channel inventory while AMD is preparing to release the next generation of Radeon GPUs. Also, the move by clients to normalize their inventories led to struggles in the embedded segment.
However, a turnaround in these segments may happen soon. The new Radeon GPU should reinvigorate its gaming business, and AMD stated that its embedded business bottomed in Q1 2024. These factors should reverse the declines in these segments.
Moreover, the valuations look increasingly favorable. While its trailing P/E ratio is still above 100, AMD trades at just 24 times forward earnings. Additionally, AMD's price-to-book ratio is just above 3, while Nvidia's book value multiple is just above 50. Such a difference could prompt investors to choose AMD's stock despite Nvidia's technical lead.
In the end, AMD is not immune to struggle. Nonetheless, given that its growth prospects have brightened for all its segments, investors may want to consider buying AMD stock while it sells at a discounted valuation.
CrowdStrike's resilient performance since the IT outage underlines its competitive moat
Justin Pope (CrowdStrike Holdings): AI has proven game-changing in cybersecurity. Companies like CrowdStrike have developed technology that uses machine learning and AI to look for potential threats in computer systems. CrowdStrike has established itself as a leader in this new generation of security companies. It has received numerous industry accolades, translating to substantial (and profitable) revenue growth. Today, CrowdStrike's customer base includes 300 companies in the Fortune 500, an impressive feat in such a highly competitive field.
The company specializes in endpoint security, but it has steadily expanded its platform. Approximately two-thirds of CrowdStrike's customers use at least five product modules. The business has generated $3.7 billion in revenue over the past 12 months, including 28% year-over-year growth in its most recent quarter. I think it's reasonable to expect years of double-digit revenue growth ahead. Management believes CrowdStrike's total addressable market will grow to $250 billion by 2029.
Up-and-coming companies like CrowdStrike don't always have clear competitive moats. CrowdStrike was tested in a big way in July 2024 when a faulty update caused an IT outage for millions of devices worldwide. The company received a hefty dose of negative attention, and many feared it would open the door for competitors to steal customers.
Yet, CrowdStrike has held up beautifully thus far, with only a minor downward revision to revenue estimates for next year. It shows how sticky CrowdStrike's product is, which bodes well for the company's ability to continue growing its top and bottom lines over the long term. The company's strong performance is reflected in the stock, which often trades at a higher valuation (price-to-sales ratio) than its peers. If the stock does stumble in a marketwide downturn, investors would be wise to seize the opportunity to get on board.
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Jake Lerch has positions in CrowdStrike and Nvidia. Justin Pope has no position in any of the stocks mentioned. Will Healy has positions in Advanced Micro Devices and CrowdStrike. The Motley Fool has positions in and recommends Advanced Micro Devices, CrowdStrike, Microsoft, Nvidia, and Palantir Technologies. 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.
