Picking Up the Pieces of the Tech Meltdown

Key Points

• Tech stocks are down in July, but investors shouldn’t fear an AI bubble.  
• Long-term investors can buy some quality tech names at attractive prices.
• Here’s why SMCI, NVDA, and MU should be on investors’ radars.  

The earnings reports from Alphabet Inc. NASDAQ: GOOGL and Tesla Inc. NASDAQ: TSLA led technology stocks lower for the week. Some analysts are warning that the price action is due to an artificial intelligence (AI) bubble, but there could be other factors at play.  

First, the second half of July tends to be seasonally weak for stocks. That means the current price action is being driven by relatively lower volume.  

Second, technology stocks have been on a magnificent run (no pun intended) in the last two years. It's natural that some investors may decide it’s a good time to take some profits. 

But there’s also evidence that instead of pulling money out of the market, investors are rotating into other sectors, particularly small-cap stocks.  

But if you’re a long-term investor, sell-offs create opportunities. Many quality tech names are trading at attractive prices, and now may be an attractive time to buy. Both the S&P 500 Index ETF NYSEARCA: SPY and the Invesco QQQ ETF NASDAQ: QQQ displayed a “hammer candle” formation as the market closed on July 25. This happens when a stock finishes lower for the day but significantly higher than a low they set earlier in the day.  

Here are three names to consider if you’re looking to sift through the tech wreck for some attractive deals.  

Super Micro Computer: Benefitting from the Demand for Data Centers

Super Micro Computer Inc. NASDAQ: SMCI is a leader in high-performance, high-efficiency server technology. One of the key applications for the company’s products comes from data centers, which are continuing to grow due to demand for AI applications.  

The total return on SMCI stock has been over 4,000% in the last five years, so investors were naturally looking to take some money off the table. But the sell-off looks overdone. As of July 26, the stock was trading below its 200-day moving average, and the relative strength index (RSI) briefly dipped below 30.  

Plus, at 32x forward earnings, Super Micro Computer has a reasonable valuation, particularly when earnings are expected to increase by 40%. Some may argue the stock is priced for perfection, which may explain why the analyst forecasts on MarketBeat give the stock a consensus Hold. However, the company grew its year-over-year (YoY) revenue and earnings by 200% and 361%, respectively.

NVIDIA: The King Is Just Taking a Break 

The total return on NVIDIA Corp. NASDAQ: NVDA stock in the last three years is over 480%. After a run like that, a pullback is normal. But it still makes investors, particularly those who have been loading up on NVDA stock, uncomfortable. The question investors need to ask is why?

Some investors have been selling after hearing that NVIDIA CEO Jensen Huang and billionaire board member Mark Stevens recently sold shares. Investors get jumpy when they see insider selling, but there are always reasons to sell a stock. Most of the time, it has nothing to do with the stock’s performance. Besides, in the big picture of their total holdings, only a small amount was sold.  

The other issue is less clear: the stock’s valuation, which remains at what some would say is an unsustainable level. In the last quarter, NVIDIA showed YoY revenue growth of 262% and YoY earnings growth of over 500%.  

However, some investors may feel that it’s better to sell a month too early than a month too late. NVIDIA reports earnings on August 28, right about the time that institutional investors will start jumping into the market with both feet.

Micron Technology: Look Past Your Fear and Buy This Stock 

Micron Technology Inc. NASDAQ: MU stock has been down 23% in the last month. This downturn can be attributed to concerns over a potential "Trump trade." Micron relies on the Chinese market for a significant portion of its revenue, and the campaigning Trump administration is pledging to renew the trade tensions that marked its first administration.  

Investors may also be concerned about the company’s higher capex spending forecast for 2025. However, this is an investment that the company needs to make to manufacture the high-powered chips necessary for AI.  

In its most recent quarter, revenue of $6.81 billion was 81% higher YoY, beating forecasts by $140 million. However, if the company’s current capacity for 2025 is maxed out, there could be reason to believe the stock is overvalued. 

That said, the sell-off appears to be overdone, which means that now is a good time for investors to buy this dip on MU stock that is finding support at its April 2024 low.

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