Is Now the Time to Buy Beaten-Down AI Stocks?

Investors rushed to get in on artificial intelligence (AI) stocks over the past two years as it became clear that AI might be the next big thing. The idea was that this newish technology could join the ranks of electricity or the internet, revolutionizing our daily lives and a whole lot more. As a result, companies such as AI chip giant Nvidia (NASDAQ: NVDA) and AI-driven software company Palantir Technologies saw their stock prices soar -- these two surged 171% and 340%, respectively, last year.

But recently, the excitement has turned to concern about what's ahead. Early last month, President Donald Trump announced a detailed plan for tariffs on imports, and stocks -- particularly tech and AI players -- sank.

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Though the president paused the tariffs for a 90-day negotiation period and even temporarily halted tariffs on electronics products, the issue remains a risk for U.S. companies. The concern is that the tariffs will result in higher prices, hurting both the U.S. consumer and companies, particularly those, such as tech players, that heavily import parts and finished products.

Amid these fears, the Nasdaq Composite crashed into bear territory. Though it's recovered from its low point, many AI stocks remain down for the year. And many are trading at reasonable and even bargain valuations. Does this mean now is the time to buy beaten-down AI stocks? Let's find out.

Image source: Getty Images.

Today's tariff situation

So, first, let's consider the tariff situation. At the moment, tech companies don't face tariffs because Trump has exempted them. This means U.S. tech players don't have to pay the 145% tariff that Trump imposed on China when importing electronics items from that country. (The U.S. excluded China from its pause on tariffs.)

The Trump administration is now studying what level might be appropriate for electronics and will soon announce a tariff that will apply specifically to imported electronics parts and finished products. Meanwhile, companies are making an effort to reorganize their manufacturing processes to minimize potential tariff impact.

For example, Nvidia announced a major move to build AI infrastructure in the U.S., and Apple said it's moving production of its iPhones and other products for the U.S. away from China -- the country most impacted by Trump's tariffs -- to India and Vietnam.

These investments by companies today may result in higher costs in the near term but should insulate them from significant tariff impact over the long run. It's also important to keep in mind that Trump's move to pause general tariffs and negotiate with countries and his decision to temporarily exempt electronics from tariffs offer us reason to be optimistic about the future. This shows a certain degree of flexibility and the will to impose tariffs without damaging the earnings of U.S. companies.

So, when the U.S. announces trade deals with various countries and an eventual tariff level for electronics, it's possible that the impact on U.S. companies will be much less than originally expected. If this happens, stocks could soar from current levels. I wouldn't expect tariffs to be as high as the initial levels announced before the pause, but the risk is that they -- and an eventual electronics tariff -- would still be high enough to disturb earnings and economic growth. In this scenario, stocks may take a lot longer to recover.

The Magnificent Seven's valuations

Let's get back to our question: Considering the uncertainty about tariffs ahead, is now really the time to buy beaten-down AI stocks? A look at the "Magnificent Seven" technology stocks that led market gains last year shows four of them trading for less than 30x forward earnings estimates. And Alphabet looks dirt cheap at only 17x forward earnings.

NVDA PE Ratio (Forward) data by YCharts. PE Ratio = price-to-earnings ratio.

What happens next depends on tariff news. If it's better than expected, these and other AI stocks could climb, lifting valuations. However, as mentioned, if tariffs seem high, these stocks could fall further. Even though I'm more inclined to say good news may still be ahead, if you're betting on the short term, risk remains.

But don't worry. Here's some good news: You don't have to bet on the short term. Instead, bet on stocks over the long term, and the picture changes in a positive manner. Strong AI companies, such as Nvidia or Alphabet, are likely to win over a number of years thanks to their smart investments and innovation today, even if their shares stagnate or fall at certain points in the near term.

It's impossible to time the market and scoop up a stock at its very lowest, but today, prices of many AI players have reached bargain levels considering their long-term prospects. And that means if you buy at these levels, you could score a major win over time, even if stocks slip further in the coming weeks or months. That's why it's a great idea to seize the opportunity and get in on some of the market's top AI stocks right now.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. 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 a member of The Motley Fool's board of directors. Adria Cimino has positions in Amazon and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Nvidia, Palantir Technologies, and Tesla. The Motley Fool has a disclosure policy.