While the market pullback in early August may have been short-lived, it created opportunities to buy excellent companies at much lower valuations. The Nasdaq Composite entered correction territory (defined as 10% below its recent high) and fell nearly 14%, while the S&P 500 flirted with a correction. However, both indexes have recovered most of their losses in more recent trading sessions.
While some see sharp market declines and run for the exit, smart investors see them as fantastic opportunities. Corrections are normal and necessary market events. They occur about once a year on average and are actually healthy. Without periodic corrections, bull markets can overheat and lead to bubbles, which are often followed by deeper crashes that can not only seriously damage the economy, but also seriously degrade the wealth accumulation process of long-term investors.
Therefore, during correction periods, it is best for long-term investors to keep their emotions in check, stay calm and take advantage of the volatility by buying shares of interesting companies at a discount.
I did this with Dell (NYSE: DELL) And Micron (NASDAQ: MU)two companies benefiting from the rise of artificial intelligence (AI) and data centers.
Data centers are crucial for AI
The shift to cloud computing over the past few decades has required the construction of a large number of massive data centers (buildings full of infrastructure, servers, networking and storage equipment, etc.) to process and store data. Without these data centers, enterprise software, online banking, streaming television, gaming, and many other applications would not function. The boom driven by AI programs creates another technical challenge.
Generative AI software requires much more processing power than other applications, so more capacity is needed now. Some data centers are small, less than 10,000 square feet, while others are huge, with over 1 million square feet. So-called hyperscalers like Amazon, Meta, and Alphabet are building these massive centers. Here are a few fun facts:
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More than half of the world’s approximately 10,000 data centers are located in the US.
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Over the next 10 years, 120 new hyperscale data centers could become operational each year.
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Elon Musk’s xAI plans to build a massive data center in Tennessee that could house 100,000 Nvidia (NASDAQ: NVDA) liquid cooled GPUs.
Dell and Micron stand to benefit significantly from rising data center demand. Both have industry expertise, critical products and long-standing partnerships with AI chip leader Nvidia. But the recent correction has sent their shares plummeting, at one point down 51% and 43% respectively, before recovering slightly, as shown below.
Despite their strength over the past year and a half or so, the stocks are still down significantly from their recent highs, which is why I have taken significant positions in both.
Is Dell an Overlooked AI Stock?
Dell divides its business into two segments: the client solutions group (CSG) and the infrastructure solutions group (ISG). The client side includes PCs, laptops, and gaming products. CSG revenue was relatively flat in the first quarter of fiscal 2025 (ended May 3, 2024) due to a weak consumer market. However, I’ll focus on the infrastructure solutions segment. This segment provides data center infrastructure, including AI-ready servers, data storage, and liquid cooling technology.
The ISG segment posted 22% growth in fiscal Q1, reaching $9.2 billion in revenue, while server and networking sales grew 42% year over year to $5.5 billion, illustrating increasing demand from data centers. The company also reported $1.7 billion worth of AI-optimized servers shipped in fiscal Q1, double the amount shipped in the previous quarter.
Dell shares are trading at a price-to-earnings (P/E) ratio of 22, higher than the 3-year average. However, the forward P/E is only 14 based on analysts’ forecasts. Given current demand, Dell has a good chance of beating these estimates.
Management believes the AI ​​runway is long and announced a renewed focus on AI in the last earnings call. The recent pullback in the stock price should be attractive to long-term investors.
Is Micron Stock a Bargain Right Now?
Data centers and AI programs require boatloads of memory in addition to the infrastructure discussed above. Micron is one of the world’s leading memory vendors. The company operates in three major end markets: data center, PC, and mobile and intelligent edge (including automotive and industrial). While sales in the PC and mobile markets are expected to grow modestly, there is excitement around the data center business.
Micron makes a product called high-bandwidth memory (HBM), which is designed for AI and high-performance computing (HPC). In its latest earnings report, Micron points out that:
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HBM revenue reached $100 million in the quarter. Management expects several hundred million dollars in HBM revenue this fiscal year and “several billion” next fiscal year;
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It is already sold out at HBM until the end of 2025;
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The customer base is growing.
Total revenue for the third quarter of fiscal 2024 (ended May 30) was $6.8 billion, up 82% year-over-year. AI-related sales grew 50% from the previous quarter. Strong demand has allowed Micron to significantly expand margins, operating profits and cash flow.
Micron stock is difficult to value using a simple price-to-earnings ratio because the company has significant non-cash expenses, primarily depreciation and amortization, which distort net income. Analysts, however, have more sophisticated methods of valuing companies. Currently, an overwhelming majority of analysts covering the stock have given it a buy or strong buy rating, and their average price target is $157. Micron stock would need to rise 45% to reach that level.
Dell and Micron stand to benefit from the AI/datacenter upcycle, which could last years. Long-term investors should consider them after the recent pullback.
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Randi Zuckerberg, former chief marketer and spokeswoman for Facebook and sister of 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 a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Bradley Guichard has held positions at Amazon, Dell Technologies and Micron Technology. The Motley Fool has positions at and recommends Alphabet, Amazon, Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.
2 Stocks Down 51% and 43% That I Just Made Huge Investments In was originally published by The Motley Fool
