Nasdaq Rotation: Recognizing Opportunities in the Correction

The Nasdaq Composite is officially in correction mode after it experienced a significant decline last Friday, August 2, due to disappointing labor market data. A correction is defined as a situation where an index trades at least 10% below its record high. However, the Nasdaq has fallen by an impressive 13%, and several stocks have seen even sharper declines. For instance, shares of Alphabet and Super Micro Computer have dropped by 17% and 60%, respectively. Nonetheless, both stocks are trading at reasonable valuations, and historical data indicates that the Nasdaq tends to recover quickly after corrections. Since 2010, the index has averaged a return of 21.9% in the twelve months following the first close in correction territory. Alphabet provides advertising and cloud services. Its subsidiary Google is the largest digital ad provider globally, with a revenue share of 27.7%, according to eMarketer. Google Search and five other products with more than 2 billion monthly users form the foundation of this success. Google is also the third-largest provider of cloud infrastructure and platform services, behind Amazon and Microsoft. However, the company is gaining market share, partly due to its strengths in artificial intelligence (AI). Forrester Research has recognized Google’s leadership in AI infrastructures and large language models. In the June quarter, Google accounted for 12% of CIPS spending, up from 11% the previous year. Alphabet reported solid financial results for the second quarter, although YouTube ad revenues fell short of expectations. Total revenue increased by 14% to $84.7 billion, and GAAP net income grew by 31% to $1.89 per diluted share. Despite this, share prices continued to decline following the earnings announcement. Google is gradually losing market share in the digital advertising market but could reverse this trend through product innovations. Generative AI overviews and AI-driven ad tools enhance interaction with Google Search and improve efficiency for media buyers. Supermicro’s strategy involves conducting most of its research and development internally and using common electronic components across product lines. This enables the company to bring new technologies to market faster than its competitors. Bank of America estimates that Supermicro will have a 17% market share in AI servers by 2026. In the June quarter, Supermicro’s revenue surged by 143% to $5.3 billion due to record-high demand for AI infrastructure. The company is experiencing gross margin declines due to investments in Direct Liquid Cooling (DLC) technology, but expects margin normalization by year-end. JPMorgan Chase projects that spending on AI servers will increase sixfold by 2028, from which Supermicro is likely to benefit significantly. Demand for liquid-cooled servers, which reduce operating costs through lower power consumption, is expected to grow rapidly. Should the companies fail to meet their earnings estimates, shares of Supermicro could still decline further. Investors willing to take this risk might consider establishing a small position today.