Year two of Wall Street's bull market rally didn't disappoint. When the iconic Dow Jones Industrial Average, benchmark S&P 500, and growth-fueled Nasdaq Composite crossed the finish line for 2024, they'd respectively gained 13%, 23%, and 29%, and hit multiple record-closing highs along the way.
Though the stock market didn't hurt for catalysts last year, there's no question that the rise of artificial intelligence (AI) has played the biggest role in sending stock valuations higher.
Image source: Getty Images.
With AI, software and systems are given the ability to make split-second decisions without the need for human intervention. The utility for this technology spans most industries around the globe, which is what gives AI seemingly limitless potential.
But as we've witnessed from previous next-big-thing technologies, not all stocks are necessarily going to be winners. As we steam ahead into 2025 and the practical application of this game-changing technology comes into full focus, two unstoppable AI stocks stand out as no-brainer buys, while another highflier is worth avoiding.
Artificial intelligence stock No. 1 to buy hand over fist in 2025: Alphabet
Among the dozens of AI stocks investors can choose from, the most attractive of all in the new year just might be Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG), the parent company of internet search engine Google, streaming service YouTube, and cloud infrastructure service platform Google Cloud, among other ventures.
Alphabet's application of AI is best seen through Google Cloud, which is the third-largest cloud infrastructure service platform in the world by market share. Alphabet is deploying generative AI solutions and large language model (LLM) capabilities within Cloud for its customers. Sales for Google Cloud surged 35% to $11.4 billion during the September-ended quarter, with this segment expected to play a key role in cash-flow generation throughout the decade.
Alphabet is dipping its toes into the hardware side of the business, too. It's developing tensor processing units and its Trillium chip, which can be used for LLM training, machine learning, and inference. While Alphabet's hardware isn't likely to outperform Nvidia's Hopper or Blackwell chips in terms of computing speed, it should be significantly cheaper and more readily available.
But the great thing about Alphabet is it's far more than just an AI stock. According to data from GlobalStats, Google accounted for just shy of 90% of global internet search in December 2024. Dating back 10 years, it's consistently controlled 89% to 93% of worldwide internet search share. This makes it a clear go-to for advertisers and provides highly predictable operating cash flow.
Alphabet is sitting on a veritable treasure chest of capital, as well. It closed out September with $93.2 billion in cash, cash equivalents, and marketable securities. This cash allows the company to aggressively repurchase its stock, which has helped to boost earnings per share (EPS).
Lastly, Alphabet's valuation remains compelling among a sea of pricey AI stocks. The company's forward price-to-earnings (P/E) ratio of 21 remains cheap considering Alphabet's sustained double-digit annual EPS growth potential.
Image source: Getty Images.
Artificial intelligence stock No. 2 to buy hand over fist in 2025: Alibaba Group
The second unstoppable Ai stock that can be bought hand over first in the new year is China-based Alibaba Group(NYSE: BABA).
Admittedly, China stocks come with more risk than U.S.-based businesses. China's regulatory environment can be unpredictable at times, which is why China stocks typically trade at discounted earnings multiples when in the same industry as American-based companies. Additionally, it's not clear if trade relations between the U.S and China will worsen after Donald Trump takes office in two weeks.
Despite these challenges, three catalysts make Alibaba a standout buy in 2025.
The primary growth driver for the company in the new year should be Alibaba Cloud, which according to estimates from tech analysis firm Canalys is the leading provider of cloud infrastructure services in the world's No. 2 economy (a 36% share). Similar to Google Cloud, Alibaba is making generative AI solutions available on its platform for its corporate clients. Cloud-service margins are typically juicy, which should pave the way for meaningful growth in operating cash flow and EPS in the latter-half of the decade.
E-commerce should act as another spark for Alibaba in the new year. On top of Alibaba being China's top cloud infrastructure service provider, the company's Taobao and Tmall marketplaces combine to account for just over half of the country's online retail sales market share. China's up-and-coming middle class should lead to a sustainable runway of outsized growth for e-commerce retailers.
Similar to Alphabet, the third selling point for Alibaba is its pristine balance sheet. Alibaba ended the third quarter with north of $33 billion in net cash, which affords it plenty of opportunity to repurchase its stock and invest in higher growth initiatives.
Alibaba's forward P/E of 9 stands out in all the right ways amid a historically expensive U.S. stock market.
The AI stock investors would be smart to avoid in 2025: Palantir Technologies
However, not all artificial intelligence stocks should be counted on to be winners in 2025. If there's one AI highflier that's worth avoiding, it's data-mining specialist Palantir Technologies(NASDAQ: PLTR), whose shares have skyrocketed by 1,080% over the trailing-two-year period, as of Jan. 2.
There are viable reasons that help explain why Palantir stock has gone parabolic in recent months. For one, the company's services can't be duplicated at scale. Its AI-powered Gotham platform helps federal governments plan and execute missions, as well as gather data.
Meanwhile, Foundry is the AI- and machine learning-propelled service that helps businesses make sense of their data. While other companies may offer bits and pieces of the services Palantir provides, there is no one-for-one replacement of what Palantir does at scale.
Investors have also been excited about Palantir's shift to recurring profitability. Gotham is the core profit-driver, with government contracts that typically last four or five years fueling steady double-digit sales growth and predictable cash flow.
Unfortunately, Palantir's otherworldly valuation might make it impossible to maintain its parabolic climb. Whereas most market-leading businesses have historically topped out at a price-to-sales (P/S) ratio of around 40 before the bubble burst, Palantir is sporting a P/S ratio of 68, as of the closing bell on Jan. 2. With its sales growth decelerating in recent years and over a third of its net income coming from interest earned on its cash (i.e., an unsustainable/non-innovative source), this level of premium makes no sense.
To build on this point, Palantir's Gotham platform has a limited long-term growth ceiling. Although it's earned plenty of contracts from the U.S. government, this is an AI-driven platform that only the U.S. and its immediate allies can use. With most countries eliminated from being future clients, it allows Palantir's nosebleed valuation to stand out even more.
Palantir is the perfect example of a solid company with a stock valuation that's simply doesn't make any sense.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean Williams has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Palantir Technologies. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
