AI Selloff: Screening for Quality Tech Stocks After the Reset

Key Points

• The recent AI selloff has heightened the importance of stock selection.
• Investors should focus on companies with corrected prices but intact business quality and valuation support.
• Top-ranked companies include Micron, Nvidia, and Microsoft, each with unique advantages in the AI landscape.

Understanding the Selloff

The selloff in AI-linked stocks has prompted investors to question whether this represents a buying opportunity or a warning sign. A broad "buy the dip" strategy can be risky, especially when valuations are high and many investors are concentrated in the same AI winners. Instead, a more selective approach is recommended.

Screening Criteria

The screening process focuses on US-listed technology stocks with the following criteria:

• Market capitalization above USD 10 billion
• 5-year revenue CAGR above 10%
• 5-year diluted EPS CAGR above 12%
• Next-year sales growth above 15%
• Forward gross margin above 40%
• Net debt/EBITDA below 1x
• Positive trailing 12-month free cash flow
• Share price below 90% of its 52-week high
• Forward P/E below 55x

This approach aims to identify quality-growth stocks that have experienced a price reset while maintaining strong fundamentals.

Top Stocks Identified

The following 12 stocks passed the screening criteria:

• Nvidia (NVDA)
• Microsoft (MSFT)
• Micron (MU)
• KLA Corp (KLAC)
• Marvell Technology (MRVL)
• Arista Networks (ANET)
• ServiceNow (NOW)
• Lumentum (LITE)
• Teradyne (TER)
• Nova (NVMI)
• Onto Innovation (ONTO)
• Guidewire Software (GWRE)

Ranking Methodology

The stocks were ranked based on a scoring model that considers:

• Business quality (30%)
• AI monetisation engine (30%)
• Valuation improvement (20%)
• Correction from high (20%)

This weighted average approach emphasizes the importance of business quality and AI monetisation over mere price corrections.

Insights from the Ranking

Micron, Nvidia, and Microsoft emerged as the top three stocks due to their strong business fundamentals and clear AI monetisation pathways. Micron's role in AI memory bandwidth, Nvidia's leadership in AI compute, and Microsoft's diversified AI exposure through various platforms were highlighted as key strengths.

Risks to Consider

Investors should remain cautious of several risks:

• High earnings expectations may not be sustainable.
• Potential shifts in AI capital expenditure could impact valuations.
• Market correlations may increase, leading to broader selloffs.
• Valuation resets do not guarantee cheap stocks.
• Software companies need to demonstrate tangible AI monetisation.
• Macro and geopolitical factors could affect long-duration growth stocks.