Artificial intelligence (AI) has sparked a rally in numerous tech stocks. Thanks to this cutting-edge technology, stocks such as Nvidia and Palantir have experienced exponential increases in their stock prices.
Still, not all AI stocks have responded in equal measure or simultaneously. Nvidia's stock price began accelerating in 2023 amid its support of a much-improved version of ChatGPT, while most of Palantir's gains occurred in 2024 as more investors became aware of the productivity gains from its new generative AI platform.
The question now is which AI stocks will spark a similar rally this year. While it is too early to answer that question, these companies hold considerable potential to finally take off in 2025.
Long-term EUV tailwinds make ASML Holding a buy after a disappointing 2024
Justin Pope (ASML Holding): 2024 wasn't pretty for ASML Holding (ASML -1.80%). Not only did the stock grossly underperform, declining by 8% to the S&P 500's 23% gain, but it has crumbled since the summer and at this writing is 32% off its highs. It's a bit puzzling, considering the AI boom sweeping the market.
ASML designs and sells advanced machinery that produces tiny patterns on silicon wafers. The equipment is crucial to manufacturing chips, including the AI accelerator chips that Nvidia sells hand over fist. The most advanced chips require extreme ultraviolet lithography (EUV), a technology unique to ASML. So, why exactly is the stock struggling?
The waters have become a bit choppy for ASML. The company noted strong AI momentum during its third-quarter earnings but noted that non-AI business is soft and recovering slowly. In addition, China had been over-ordering ahead of potential pressure by the U.S. on ASML to restrict its shipments to the country. It accounted for almost half of ASML's sales through three quarters of 2024, but management expects that to fall back to 20% (its historical norm) in 2025. ASML disappointed the market with its short-term outlook in Q3, fueling the stock's sell-off.
Remember that the semiconductor industry can be cyclical, and ASML has not backed off its projection that global chip sales will surge to more than $1 trillion by 2030. AI remains a tremendous long-term opportunity that should fuel ASML's growth, even if it's a bit lumpy from year to year. Meanwhile, the stock trades at a forward P/E ratio of 31, the lower end of its range since the AI boom began in early 2023.
This company dominates a mission-critical segment of the chip industry, which is the key to powering AI's growth over the next decade and beyond. The stock offers compelling value, with years of potential growth ahead as AI innovation drives demand for its specialty EUV machines. Yeah, it's time to buy ASML in 2025.
Increased data center spending is excellent news for Vertiv
Jake Lerch (Vertiv Holdings): Vertiv Holdings (VRT -1.05%) builds, sells, and maintains digital infrastructure assets. Most notably, the company offers power management, thermal management, and rack solutions for AI data centers.
In other words, Vertiv sits at the heart of the AI boom, helping companies build the infrastructure needed to support the latest and greatest AI-powered applications. And that's big business, because tech companies are spending tens of billions to upgrade their AI infrastructure.
Microsoft, for example, will invest $80 billion over the next 18 months, expanding its data center footprint. Much of that money will be spent on AI chips -- the "brains" that power AI data centers. However, Microsoft (and other hyperscalers) will also have to splurge on additional equipment to power, cool, and store those expensive AI chips. And that's fantastic news for Vertiv, which sells a lot of that equipment.
Indeed, Vertiv is already profiting from the AI boom. In its most recent quarter (ended Oct. 31, 2024), Vertiv reported the following highlights:
- Revenue grew 19% year over year to $2.1 billion.
- Operating profit jumped 48% to $372 million.
- Operating margin increased to a record high of 18.5%.
In addition, the company's CEO, Giordano Albertazzi, provided an upbeat assessment and outlook: "Vertiv's strong performance in the third quarter was driven by ... [our] unique market position in enabling artificial intelligence and other critical applications for the data center. ... There are clear indications of an acceleration in AI development that is truly encouraging, and which is driving demand across our entire AI-enabling portfolio of power, thermal, IT systems, infrastructure solutions and services."
In short, Vertiv is an under-the-radar stock that will continue to benefit as AI spending ratchets up. Investors looking for an AI stock as 2025 gets underway should keep an eye on Vertiv.
This chip stock could finally benefit from industry growth in 2025
Will Healy (Advanced Micro Devices): AMD (AMD -4.31%) stock suffered in 2024. Its gaming and embedded segments fell into a slump. Also, despite triple-digit revenue gains for its data center segment (which designs AI accelerators), it technically lags market leader Nvidia in AI chips. That appeared to sour investors on the stock through most of 2024.
However, signs of improvement are on the horizon. AMD just announced new graphics and gaming products at CES. Since gaming revenue fell 58% yearly in the first nine months of 2024, these products could help turn the sector around.
Moreover, the data center segment was 48% of company revenue in the first three quarters of 2024, up from 25% in the same period of 2023. Despite not holding a technical lead in this market, Grand View Research forecasts a 29% compound annual growth rate for the segment through 2030. That rate of increase alone should solidify AI accelerators as AMD's new primary revenue source.
Even if the data center segment cannot quite sustain the 107% rate of increase from the first nine months of 2024, the elevated demand for AI accelerators should keep this part of the company growing rapidly. Consequently, analysts forecast 26% revenue growth in 2025 for the company overall, well above the 13% predicted in 2024.
Also, amid that improvement, its P/E ratio remains in the triple digits, though its forward P/E ratio has fallen to just 24, indicating the stock sells at a discounted valuation. That lower price, along with its accelerating revenue growth, could spark a recovery in AMD stock this year.
