Wall Street’s Reminder: Nasdaq Composite Enters Correction Phase
Over the past two weeks, Wall Street has delivered a stark reminder to investors: stocks can fluctuate in both directions. The Nasdaq Composite (NASDAQINDEX: ^IXIC), following a robust rally lasting nearly two-and-a-half years, has officially entered correction territory. As of the market close on March 6, the Nasdaq Composite stood at 10% below its all-time closing high of 20,173.89, reached on December 16, 2024.
Where to invest $1,000 right now? Our analyst team has identified the 10 best stocks to buy immediately. Learn More »
Image source: Getty Images.
AI Stocks Suffer Amid Nasdaq Correction
The stocks most severely impacted over the past two weeks are those that thrived during the current bull market, particularly in the artificial intelligence (AI) sector. This excitement around AI stocks is significant, with PwC estimating the global addressable market for AI to reach $15.7 trillion by the end of the decade. Such a vast market presents opportunities for countless businesses to emerge as leaders.
However, history teaches us that every major investment trend has faced a bubble-bursting event, notably since the internet boom in the 1990s. Emerging technologies, like AI, require time to fully develop. The fact that many companies are still learning how to optimize their AI solutions indicates that the technology has yet to mature. Consequently, I suggest that prominent AI stocks such as Nvidia and Palantir Technologies might not be the best investment choices at this moment.
Four AI Stocks to Consider During the Correction
Despite the correction within the Nasdaq, this situation creates an opportunity for discerning investors to acquire four historically undervalued, well-diversified AI stocks.
Amazon
The first noteworthy AI stock to consider during the Nasdaq’s downturn is Amazon (NASDAQ: AMZN). Although there are concerns regarding retail sales that could hinder Amazon’s stock in the short term, the company primarily generates growth and operating cash flow from its auxiliary ventures.
The future of Amazon hinges significantly on its cloud infrastructure service, Amazon Web Services (AWS). AWS is rapidly integrating generative AI solutions, allowing clients to develop custom AI applications and large language models. As of the end of 2024, AWS’s annual revenue run-rate is approximately $115 billion, with sales growth showing signs of reacceleration. Notably, this profitable segment contributes over half of Amazon’s operating income while comprising only about one-sixth of the company’s total sales.
Moreover, Amazon’s advertising and subscription services are anticipated to provide substantial support. Remarkable content agreements, such as obtaining exclusive streaming rights for Thursday Night Football and select NBA games, enhance Amazon’s ad and subscription pricing power.
At first glance, Amazon’s valuation does not appear cheap based on the traditional price-to-earnings (P/E) ratio. However, it is historically affordable when assessed against future cash flows, providing a clearer picture of value for a company that typically reinvests much of its operating cash flow. Investors can currently acquire Amazon stock at 12 times its forward-year cash flow, which is 43% below the company’s average price-to-cash-flow multiple over the previous five years.
Image source: Getty Images.
Alphabet
Continuing the “Magnificent Seven” theme, another compelling AI stock during this correction is Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG), the parent company of Google, YouTube, and Google Cloud.
Analogous to Amazon, Alphabet’s long-term growth is heavily reliant on its cloud infrastructure platform. According to Canalys estimates, Google Cloud accounted for 11% of cloud-service spending in the fourth quarter, trailing only AWS and Microsoft’s Azure. Providing customers with AI solutions through Google Cloud could significantly augment revenue in Alphabet’s most profitable segment.
However, it is essential to note that Alphabet isn’t overly dependent on the AI sector. In 2024, 75% of its net sales originated from advertising connected to Google search, YouTube, and Google Network. With Google holding an 89% to 93% share of internet search over the last decade, Alphabet is well-positioned to maintain its strong ad-pricing power.
Alphabet’s valuation is also appealing in today’s typically pricey stock market. Its forward P/E ratio stands at 17, about 26% below its five-year average, while the forecast cash flow multiple for 2026 is 13, a 27% discount to its half-decade average. Additionally, the company concluded 2024 with a solid cash position of $95.7 billion in cash, cash equivalents, and marketable securities.
Baidu
The Nasdaq correction also creates a prime opportunity to look beyond U.S. borders for outstanding AI stocks. One such example is the China-based search giant Baidu (NASDAQ: BIDU).
Baidu has operated as China’s equivalent of Google’s search engine for over a decade, consistently commanding a 50% to 85% share of the internet search market in China during the past ten years. This strong market presence makes it the logical choice for businesses seeking to reach Chinese consumers, thus providing a robust sales and profit base that offers some protection from stock market fluctuations.
Like Amazon and Alphabet, Baidu is expanding its presence in the AI landscape…
# Baidu and Meta Platforms: Promising Opportunities in AI and Advertising
In recent months, Baidu has made significant strides in the cloud infrastructure service market within China. During the quarter ended in December, the company’s non-online marketing revenue increased by 18% year-over-year, with AI Cloud credited for most of this impressive growth. By enhancing its cloud platform with AI solutions, such as its Ernie LLM, Baidu is positioning itself to drive increased enterprise cloud spending.
Chinese stocks generally appear undervalued due to uncertainties related to President Donald Trump’s import tariffs and the unpredictable nature of China’s regulatory environment. Despite these challenges, Baidu shares can currently be acquired for approximately eight times forward-year earnings. This valuation is notable, considering the company has over $19 billion in cash, cash equivalents, and short-term investments.
Meta Platforms: A Leader in Advertising and AI
Another strong contender in the market is Meta Platforms, (NASDAQ: META). This social media giant continues to be a recommendable buy during the Nasdaq Composite corrections.
While we will discuss Meta’s AI strategies shortly, it is essential to note that a staggering 98% of its net sales in the previous year—amounting to $160.6 billion out of $164.5 billion—originated from advertising. As the parent company of popular platforms such as Facebook, Instagram, WhatsApp, Facebook Messenger, and Threads, Meta benefits from a vast user base, with 3.35 billion daily active users as of December 2024. This extensive reach supports its pricing power for advertising, even amid economic fluctuations.
Although primarily an ad-driven business tightly linked to global economic cycles, CEO Mark Zuckerberg is keen on establishing Meta as a leader in AI. The company stands out by clearly understanding the advantages of integrating AI into its advertising platforms.
Looking ahead, Meta has plans to leverage AI for its virtual reality headsets and developments within the metaverse. Although Zuckerberg has occasionally been slow to invest in emerging trends, his successful track record of monetizing innovative platforms at the right moment is encouraging.
Moreover, Meta’s forward price-to-earnings (P/E) ratio remains under 22, which is appealing given its consistent double-digit sales and profit growth rates.
A Second Chance for Investment Opportunities
Have you ever felt like you missed out on investing in top-performing stocks? If so, this might be your moment.
Occasionally, our expert analysts deliver a “Double Down” Stock recommendation for companies they believe are poised for growth. If you’re concerned about having missed your investing window, now is the time to act before it’s too late. The figures tell a compelling story:
- Nvidia: if you had invested $1,000 when we doubled down in 2009, you’d have $292,207!*
- Apple: if you had invested $1,000 when we doubled down in 2008, you’d have $45,326!*
- Netflix: if you had invested $1,000 when we doubled down in 2004, you’d have $480,568!*
Currently, we are issuing “Double Down” alerts for three remarkable companies, and such opportunities may not arise again soon.
Continue »
*Stock Advisor returns as of March 3, 2025
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. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is also on the board, as is Suzanne Frey, an executive at Alphabet. Sean Williams owns shares in Alphabet, Amazon, Baidu, and Meta Platforms. The Motley Fool holds positions in and recommends Alphabet, Amazon, Baidu, Meta Platforms, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool also recommends options for Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
