AI Stock Trends: Navigating Market Volatility in 2025
Investor enthusiasm for artificial intelligence (AI) stocks soared in 2024, but signs indicate a slowdown for 2025. Notably, leading chipmaker Nvidia (NASDAQ: NVDA) has seen a nearly 20% drop, while Broadcom has declined by 26% since the beginning of the year. Advanced Micro Devices is also struggling, down 23%.
Market uncertainties, particularly concerns regarding the U.S. economy, have contributed to this downturn. President Donald Trump’s implementation of tariff plans, coupled with anticipated retaliatory tariffs, could hamper global economic growth and raise fears of a recession. As a result, Wall Street highlights that several sectors, including AI, may face challenges.
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Assessing Winners and Losers
Stock market fluctuations are a regular occurrence. However, when your investments decline, it can be disheartening. If you’re considering whether to invest during a correction or bear market, taking a strategic approach is vital.
One effective strategy is identifying promising AI stocks with long-term potential. Instead of fixating on share price, evaluate the underlying business’s performance, such as revenue growth, free cash flow, and key financial ratios like price-to-earnings and price-to-sales ratios.
Strong companies typically exhibit growing sales through sound financial operations, reflected in their gross margins and balance sheet health. This scrutiny is crucial in the competitive AI landscape, where not all companies will succeed as the market develops.
Conversely, companies reporting year-over-year declines may face foundational challenges, such as difficulties in customer acquisition. If you hold shares in such firms, it may be prudent to consider divesting. Even if this results in a loss, you can benefit from tax-loss harvesting.
A prime example is Nvidia. Despite its share price drop this year, Nvidia recently announced impressive fiscal fourth-quarter results, with a 78% increase in sales year-over-year, reaching $39.3 billion.
Furthermore, management anticipates revenue growth to $43 billion in fiscal Q1, a significant 65% rise compared to last year’s $26 billion. Nvidia’s operations remain robust, presenting an opportunity for investors amidst the recent price drop.
Capitalizing on Price Dips
A decline in a quality company’s share price offers a chance to acquire shares at a discount, potentially enhancing your returns.
Regarding Nvidia, Broadcom, and AMD, their price declines have resulted in attractive valuations. Investors can use the forward P/E ratio to gauge how much they’re willing to pay for a dollar’s worth of earnings based on analyst estimates for the next year.
Data by YCharts.
The forward P/E ratios for Nvidia and AMD have seen significant reductions recently. AMD, in particular, appears attractively priced, with a forward P/E ratio nearly halved from the end of 2024.
Nonetheless, it’s natural to hesitate when contemplating stock purchases following a decline—what if prices drop even further? This leads us to a third strategy.
Implementing Dollar-Cost Averaging
Predicting stock price movements can be challenging, especially in the short term. A dollar-cost averaging strategy can help mitigate this uncertainty.
This method involves gradually building your position in a company by purchasing equal dollar amounts of stock at consistent intervals. This approach lessens the impact of short-term price fluctuations on your overall returns.
Identify strong companies affected by the current downturn in AI stocks and consider acquiring some shares now, while planning to buy more over time. If you remain apprehensive, it’s essential to address the emotions linked to investing.
By setting emotions aside and focusing on data, you’ll see that the share prices of quality companies typically appreciate over time. Given that many AI firms are part of the tech-heavy Nasdaq Composite index, let’s review its performance over the past decade.
Data by YCharts.
The Nasdaq index faced declines during the COVID-19 pandemic in 2020 and again amid inflation spikes in 2022. On both occasions, it rebounded to reach new highs.
For those feeling disheartened by the current AI stock downturn, history suggests that a recovery is likely for long-term investors.
Is Nvidia a $1,000 Investment Worth Making Now?
Before acquiring Nvidia stocks, consider the following:
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If you had invested $1,000 in Nvidia back on April 15, 2005, based on advice from our team, you would now have $655,630!
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Robert Izquierdo holds 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
