The U.S. stock market has posted an impressive performance in 2024, with the benchmark S&P 500 crossing the 6,000 point mark in November 2024. Technology stocks have been a significant factor propelling the S&P 500. Hence, many tech-powered stocks are now trading at unsustainable valuation levels.
Yet, a few fundamentally strong, high-quality tech stocks like Advanced Micro Devices (AMD 0.10%) and Alphabet (GOOG -1.55%) (GOOGL -1.45%) are two reasonably priced but offer significant growth potential. If you have an extra $500 that is not needed to pay bills or for contingencies, consider investing in either technology giants, which are well poised to grow rapidly in the coming years.
1. Advanced Micro Devices
Advanced Micro Devices (or AMD) reported healthy numbers for the third quarter of fiscal 2024, with revenue surpassing consensus estimates and earnings in line with analyst estimates. However, the stock took a beating as Wall Street remains concerned about the company's slower progress in the AI market compared to Nvidia, and its weakness in the gaming and embedded segments.
Despite this, AMD's data center segment is a major growth catalyst. Data center revenue soared by 122% year over year to $3.5 billion in the third quarter, accounting for almost 52% of AMD's total revenue. The data center segment's operating income also tripled year over year to $1 billion.
Cloud service providers have been increasingly opting for AMD's EPYC processors to power a range of cloud-native services, including Microsoft's Office 365 and Meta Platforms' Facebook. Meta Platforms has deployed more than 1.5 million EPYC processors to power various social media platforms, while Cloudflare has also selected EPYC processors to power their next-generation servers.
Additionally, AMD is also making steady progress in its graphics processing unit (GPU) business. AMD is the only company posing any significant competition to Nvidia in the data center market. While Nvidia accounts for 90% to 95% of the data center GPU market, AMD holds almost all of the remaining 5% to 10%. The AI accelerator market is expected to grow 60% annually to $500 billion by 2028. Even if AMD succeeds in maintaining its market share, the company will see a significant boost in its top line in the coming years.
With the supply of Nvidia's Hopper and Blackwell architecture chips remaining tight in the face of demand, some customers are choosing AMD's lower-priced Instinct accelerators for AI workloads.
Key clients such as Microsoft and Meta Platforms expanded the use of AMD's MI300X accelerators for various AI inferencing use cases. While Microsoft is deploying these chips for multiple Copilot services powered by GPT-4 models, Meta uses them to serve all live traffic on the open-source Llama 405B frontier model. The recently launched MI325X GPUs and upcoming MI350-series GPUs (scheduled for launch in the second half of 2025) can further boost AMD's penetration in the inferencing market.
Finally, although playing second fiddle to Nvidia in the AI market, AMD's financials remain top-notch. The company demonstrated a substantial 31% year-over-year growth in earnings per share in Q3. Yet, the company's growth-adjusted price-to-earnings (P/E) ratio, namely the price/earnings-to-growth (PEG) ratio, is only 0.15 times -- far lower than 1.
Considering the robust AI-powered tailwinds and low valuation, AMD may be a smart buy in 2025.
2. Alphabet
The year 2024 has proved quite challenging for Alphabet, the parent company of Google and YouTube. Despite rising from a 52-week low of $127.90 in December 2023 to an all-time high of $191.75 in July 2024, the stock has plunged on increasing concerns about punitive actions for potentially violating antitrust laws.
In August 2024, a federal judge ruled that Google's practices in the search market were monopolistic. The Department of Justice (DOJ) now wants Alphabet to divest its Chrome browser and Android mobile operating system as a remedy. The DOJ also wants to prevent Alphabet from entering into exclusionary agreements with third-party original equipment manufacturers such as Apple and Samsung.
However, if history is any guide, the probability of an Alphabet breakup seems slim. Although the DOJ won a similar case against Microsoft in 1998, the U.S. Court of Appeals eventually overturned the antitrust ruling. Similarly, with Alphabet planning to appeal these rulings, an outcome can be expected only after a few years. Additionally, the new administration to be led by the President-elect Donald Trump does not seem keen on breaking up Alphabet's business.
The pessimism surrounding Alphabet stock may not be justified in this political environment, especially since the company continues to post healthy top-line and bottom-line numbers. Although Google has lost some market share to AI-powered chatbots and other search engines, such as Microsoft's Bing and Yandex, it is still far ahead of the competition with an 89.9% share in the global search engine market.
Google Search and other advertising revenue grew 12% year over year to $49.4 billion in Q3 and now account for 57% of Alphabet's total revenue.
Additionally, the company has introduced the AI-powered Gemini platform, which is targeting the search market and powering internal workloads for all seven products and platforms.
Furthermore, Google Cloud is the only prominent cloud infrastructure platform to have gained market share in Q3. Revenue was up by 35% year over year to $11.4 billion. Google Cloud is benefiting from the robust adoption of AI infrastructure, generative AI technologies, and other products in Alphabet's ecosystem.
Despite the positives, Alphabet stock is trading at 22.7 times trailing-12-month earnings, lower than its historical five-year average P/E multiple of 25.3 times.
Considering its strength in internet search and cloud-computing markets, reasonable valuation, and low risk of the company breakup, Alphabet can be an attractive pick, especially for investors with a high-risk tolerance.
