Artificial intelligence, or AI, empowers software and systems to make rapid decisions independently, eliminating the need for human involvement. This transformative technology holds vast potential across various industries worldwide. However, not all AI stocks are guaranteed winners, as past tech trends have shown. Looking ahead to 2025, two standout AI stocks are poised for growth, with one to avoid.
First, Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG), the parent company of Google, YouTube, and Google Cloud, emerges as a top AI investment. Google Cloud, one of the largest cloud service platforms globally, showcases Alphabet’s AI initiatives. Sales for Google Cloud soared by 35%, reaching $11.4 billion in the last quarter. Alphabet also ventures into hardware with tensor processing units and Trillium chips for AI applications. Beyond AI, Google dominates global internet search, securing nearly 90% of the market share. With ample cash reserves, Alphabet engages in stock buybacks, bolstering earnings per share. Despite its AI focus, Alphabet’s low forward price-to-earnings ratio of 21 offers a compelling valuation amidst pricier AI stocks.
Another promising AI stock for 2025 is Alibaba Group (NYSE: BABA), a China-based e-commerce giant. The company faces unique risks due to China’s regulatory landscape and uncertain U.S.-China relations. However, three key drivers position Alibaba for growth in the AI space.
Alibaba is set to be a top buy in 2025, driven by Alibaba Cloud as the leading cloud infrastructure provider in China and Generative AI solutions for corporate clients. With promising margins, the company is expected to see significant growth in cash flow and EPS in the near future.
Additionally, Alibaba’s e-commerce sector, including Taobao and Tmall, holds a significant share of China’s online retail market, promising sustained growth due to the expanding middle class in China.
The company’s strong balance sheet, boasting over $33 billion in net cash, positions it well for stock repurchases and investment in growth opportunities.
Alibaba’s forward P/E ratio of 9 stands out favorably in the current market environment. On the other hand, Palantir Technologies is an AI stock investors should consider avoiding in 2025. Despite its unique services and shift to recurring profitability, Palantir’s skyrocketing valuation, based on a high P/S ratio of 68, may not be sustainable.
Moreover, Palantir’s growth potential is limited by its focus on government contracts, which restricts its market reach. Overall, while Palantir is a solid company, its current valuation may not align with its long-term growth prospects.
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It is worth mentioning that Suzanne Frey, an executive at Alphabet, serves as a member of The Motley Fool’s board of directors. Additionally, Sean Williams holds positions in Alphabet. The Motley Fool itself has both positions in and recommends Alphabet, Nvidia, and Palantir Technologies. Furthermore, The Motley Fool endorses Alibaba Group. Lastly, it is important to highlight that The Motley Fool upholds a strict disclosure policy to maintain transparency with its audience.
