One of the biggest drivers in the market in 2024 was artificial intelligence (AI), and there is good reason to believe that AI stocks can continue to lead the charge in 2025. Despite recent advancements, AI is still in the early innings and the technology will only get better with time.
Let's look at three still attractively valued AI stocks that look like no-brainer buys heading into 2025.
1. Nvidia
While the market has been in a festive move to close out the year, the recent pullback in Nvidia(NASDAQ: NVDA) looks like a gift. The chipmaker has been the biggest beneficiary of the AI infrastructure buildout, as its graphic processing units (GPUs) provide the computing power for both training large language models (LLMs) and AI inference.
While not the only GPU maker, Nvidia has created a wide moat though its CUDA software program. The company originally created the free software program as a way to expand beyond its core video gaming market so that customers could use its chips for other applications and it could sell more chips. This led CUDA to become the standard on which developers learned to program GPUs. This has helped Nvidia grab an approximate 90% market share in the GPU market.
Nvidia's dominance in the GPU market has led to explosive revenue growth, including 94% last quarter. Meanwhile, that strong growth looks poised to continue as a number of large tech hyperscalers (companies that own massive data centers) and well-funded AI start-ups, such as OpenAI and Elon Musk-backed xAI, rush to build their AI infrastructure in pursuit of creating the best AI models. As these models become more advanced, they need exponentially more computing power, and thus GPUs, to be trained.
Despite its huge growth, Nvidia still trades at an attractive valuation with a forward price-to-earnings (P/E) ratio of under 29 based on 2025 analyst estimates and a price/earnings-to-growth (PEG) ratio of approximately 0.9. A PEG ratio below 1 is typically considered undervalued, but growth stocks will quite often have PEG ratios well above 1.
Image source: Getty Images.
2. Taiwan Semiconductor Manufacturing
Another company benefiting from the AI infrastructure buildout is Taiwan Semiconductor Manufacturing(NYSE: TSM), or TSMC. Today many companies outsource the manufacturing of their chips, and TSMC has become the world's leading semiconductor contract manufacturer.
The company is benefiting from the huge and increasing demand for AI chips, and is continuing to work to add capacity to keep up with demand. It is poised to benefit from any smartphone and hardware upgrade cycles needed to help run AI applications. Last quarter, the company saw its revenue increase by 36%.
Manufacturing semiconductors is a capital-intensive business that requires both scale and technological expertise to succeed. While TSMC has flourished, rivals such as Intel and Samsung have struggled. This has led to TSMC becoming the clear leader in manufacturing advanced chips, and it counts the likes of Apple, Nvidia, and Broadcom among its largest customers. The company recently hit a nearly 65% market share, and it's even higher for advanced chips.
TSMC's dominant position in the semiconductor manufacturing space has given it strong pricing power the past few years, which has helped boost its gross margin. Meanwhile, the company is set to raise prices next year once again.
The stock is also attractively valued trading at a forward P/E of just above 22 based on 2025 analyst estimates and a PEG ratio of approximately 1.16.
3. Alphabet
Alphabet's (NASDAQ: GOOGL)(NASDAQ: GOOG) cloud computing unit, Google Cloud, has thus far been a big AI winner. Cloud computing is a high-fixed-cost business that becomes much more profitable once it reaches scale. That is exactly what has been happening with Google Cloud, which last quarter grew its revenue by 35% to $11.4 billion while the segment's operating income surged from $266 million to $1.95 billion.
The company has credited its cloud success to using a combination of GPU along with its customized tensor processing units (TPUs) to lower inference times and reduce costs. It noted customers are using its platform to customize their own AI models, while also embracing its Gemini model.
Meanwhile, this month Alphabet has been showing off its innovation prowess. This included a breakthrough in quantum computing, which puts it in the lead in this intriguing new field, although it will still be a long time before quantum computing will impact revenue. In addition, the company introduced new cutting-edge updates to its AI image and video generation tools, as well as introducing its newest Gemini AI model. It said Gemini 2.0 can act as an autonomous AI agent and will be incorporated into search next year.
Alphabet has long been the dominant player in search and it also has one of the largest video services in the world in YouTube. However, the company has finally started to get some recognition for its innovation. Nonetheless, it is still one of the cheapest megacap tech stocks, trading at at forward P/E of 22.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Nvidia:if you invested $1,000 when we doubled down in 2009,you’d have $338,855!*
Apple: if you invested $1,000 when we doubled down in 2008, you’d have $47,306!*
Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $486,462!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Apple, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.
