The Nasdaq Composite (^IXIC -0.06%) has had a monster two-year run. After gaining 43% in 2023, the index put up around 30% gains in 2024, marking one of the best-performing periods in its history.
Contrary to what your instincts may tell you, this does not mean the index is ripe for a correction in 2025. In fact, the opposite may occur. Going back to 1972, every year with 30% or higher returns is followed by an average return of 19%, likely due to the momentum factor. While it doesn't guarantee good returns for your portfolio in 2025, it looks more likely than not that the good times will roll, given the historical data.
History indicates that the Nasdaq may soar again in 2025. Here is one artificial intelligence (AI) stock to buy before it does.
A misleading search narrative and AI opportunity
Nasdaq returns over the last two years have been propelled by the AI boom. A lot of stocks associated with AI, such as Nvidia, are now trading at nosebleed earnings multiples. However, one remains undervalued and is hiding in plain sight for investors to buy in 2025: Alphabet (GOOG -0.67%) (GOOGL -0.79%).
The owner of Google, YouTube, and other technology assets has been bogged down by a narrative that it is losing market share to new AI tools such as ChatGPT. It is true that ChatGPT gained a lot of popularity, but it hasn't come at the expense of Google Search's profitability. According to third-party estimates, Google Search still has an approximate 90% market share among search engines worldwide, which hasn't budged much in the last few years.
Google is ingrained in the modern digital operating systems and has billions of daily users. Now, the company has an opportunity to supercharge the business with new AI products, such as its new search result summaries, the Gemini chatbot, and Google Lens (which allows you to search what you see). Google wants to allow you to search about anything in the world around you and get a thoughtful, AI-powered response behind it. This will open up more opportunities for search queries in day-to-day life, which will lead to more advertising revenue for the business.
Last quarter, Google Search revenue grew 12% year over year to $49 billion.
Multiple levers to keep earnings growing
Alphabet has many levers it can pull to keep revenue and earnings growing. There's the aforementioned AI boom that will help grow Google Search. There's YouTube, which keeps gaining market share in video streaming and grew revenue by 12% last quarter. Google Cloud is helping Alphabet sell its AI breakthroughs to third parties and growing revenue by an astounding 35% year over year. At this pace, the segment will hit $100 billion in annual revenue in a few years.
On top of revenue growth, Alphabet is moving its bottom line by expanding its operating margin. Operating margin hit 32% last quarter, compared to 28% in the same period a year ago. With more scale, operating leverage will continue to kick in and help Alphabet grow its earnings power over the next few years.
Lastly, Alphabet is a consistent repurchaser of stock, with shares outstanding down 11% in the last five years. A shrinking share count helps grow earnings per share (EPS).
GOOG PE Ratio data by YCharts
Why Alphabet stock is a buy today
The five factors listed will help Alphabet compound its EPS at a double-digit rate over the next five years, and likely longer. And what do investors have to pay for this double-digit grower? At this writing, the stock trades at a price-to-earnings ratio (P/E) of 26, which is below the S&P 500 (^GSPC 0.16%) and Nasdaq Composite averages of more than 30.
The AI boom will help Alphabet grow its EPS above the market average, while the stock trades at a P/E below the market average. This is a great situation to enter a position in Alphabet stock. Investors should buy this hypergrower and hold through 2025 and beyond.
