Why AI Stock Volatility Creates Strategic Entry Points for Savvy Investors

The artificial intelligence (AI) sector has become a defining feature of the 2025 investment landscape, marked by sharp volatility and market dislocations. While concerns about stretched valuations and a potential "AI bubble" have driven erratic swings, this turbulence is not a barrier but an opportunity for disciplined investors. By leveraging fundamentals-based screening and a long-term perspective, investors can identify undervalued beneficiaries poised to capitalize on AI's transformative potential.

The Anatomy of AI Stock Volatility

The current volatility in AI-related equities reflects a collision of macroeconomic uncertainty, policy shifts, and divergent investor sentiment. As noted by a report from The New York Times, the market has seen a stark divergence between high-quality and lower-quality AI stocks, with the former underperforming the latter-a pattern reminiscent of the dot-com bubble in 1999. This dislocation is exacerbated by macroeconomic headwinds, including inflationary pressures and central bank policy uncertainty, which amplify short-term risks. Yet, beneath the noise, the fundamentals for many AI-exposed companies remain resilient. For instance, NVIDIA's revenue surged 55.6% year-over-year in Q3 2025, driven by demand for its AI infrastructure, while Alphabet and Amazon continue to expand their AI-driven offerings in search and cloud computing.

Fundamentals as a Compass in Turbulent Waters

To navigate this volatility, investors must anchor their strategies in rigorous fundamentals. Key criteria include:
1. Revenue Growth and Market Share: Companies with double-digit year-over-year revenue growth and dominant market positions in AI infrastructure or applications are better positioned to sustain long-term value. For example, Veracyte reported a 17% year-over-year revenue increase to $131.9 million in Q3 2025, driven by its AI-powered diagnostic tools.
2. Innovation Pipeline: Leadership in cutting-edge technologies, such as generative AI or agentic AI, is critical. The Ropes & Gray Q3 2025 report highlights that enterprise AI spending is projected to grow at a 150% CAGR, underscoring the importance of companies with robust innovation pipelines.
3. Valuation Metrics: Undervalued AI stocks often exhibit attractive price-to-earnings (P/E) ratios or enterprise value-to-EBITDA (EV/EBITDA) multiples. Impinj trades at a 16% discount to its estimated fair value of $171.79, despite forecasting 122.3% annual earnings growth.
4. Financial Health: Strong free cash flow yields and manageable leverage ratios are essential. CareTrust REIT boasts a net debt-to-EBITDA ratio of 0.42x, well below its target range of 4.0x to 5.0x, reflecting robust financial discipline.

Strategic Entry Points: Case Studies in Undervaluation

Several AI beneficiaries currently trade at significant discounts to their intrinsic value, offering compelling entry points:
- Veracyte (VCYT): Trading at $40.85, the stock is estimated to be 32.6% below its fair value of $60.65. Its Q3 2025 results included a 14% revenue increase and a raised 2025 guidance to $506–510 million, driven by products like Afirma GRID.
- Impinj (PI): Despite quarterly losses, the company's Gen2X technology and expansion into cloud connectivity position it for 122.3% annual earnings growth. Its current price of $147.94 reflects optimism about future profitability.
- CareTrust REIT (CTRE): At $36.21, the stock trades 37% below its estimated fair value of $57.76. Its strong Q3 performance, including $94.7 million in normalized FFO, highlights its potential for cash flow growth.

The Risks and Rewards of AI Investing

While the sector's volatility presents risks-such as overvaluation concerns and regulatory uncertainties-it also creates asymmetric opportunities. As Vanguard notes, AI's transformative potential could drive productivity gains and economic expansion in 2026. However, investors must avoid speculative bets on speculative "AI hype" and instead focus on companies with durable competitive advantages and strong balance sheets.

For those with a long-term horizon, the current dislocations in AI stocks are not a warning sign but a call to action. By applying fundamentals-based screening and maintaining discipline, savvy investors can position themselves to benefit from the inevitable normalization of valuations and the sector's long-term growth trajectory.