Year two of Wall Street's bull market rally did not disappoint. When the iconic Dow Jones Industrial Averagebenchmark S&P 500and growth Nasdaq Composite crossed the finish line for 2024, respectively gaining 13%, 23%, and 29%, and hitting multiple record-setting highs along the way.
Although the stock market did not hurt catalysts last year, there is no doubt that the increase artificial intelligence (AI) played the biggest part in sending stock valuations higher.
Image source: Getty Images.
With Artificial Intelligence, 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 world, and that's what gives AI unlimited potential.
Among the dozens of AI stocks investors can choose from, perhaps the most attractive of all in the new year will be Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG)the parent company of the Google internet search engine, the YouTube streaming service, and the Google Cloud cloud infrastructure service platform, among other ventures.
The Alphabet AI application of AI is best viewed through Google Cloud, which is the third largest cloud infrastructure service platform in the world by market share. Alphabet deploys generative AI solutions and large language model (LLM) capabilities within Cloud for its customers. Sales for Google Cloud increased 35% to $11.4 billion during the quarter ended in September, and this segment is expected to play a key role in generating cash flow throughout the decade.
Alphabet is dipping its toes into the hardware side of the business as well. It is developing tensor processing units and its Trillium chip, which can be used for LLM training, machine learning and inference. Although the Alphabet hardware is unlikely to perform better Nvidia's Hopper or Blackwell chips in terms of computing speed, should be much cheaper and more readily available.
But the great thing about Alphabet is that it's much more than just stock AI. According to data from GlobalStats, Google accounted for just shy of 90% of global internet search in December 2024. Dating back 10 years, it has consistently managed between 89% and 93 % of global internet search share. This makes it a clear path for advertisers and provides a very predictable operating cash flow.
Alphabet is sitting on a real treasure chest of capital, too. It closed 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 boost earnings per share (EPS).
Finally, Alphabet's valuation remains compelling among a sea of expensive AI stocks. The company's forward price-to-earnings (P/E) ratio of 21 remains cheap given Alphabet's continued double-digit EPS growth potential.
Image source: Getty Images.
The second unstoppable Ai stock that can be bought manually first in the new year is based on China Alibaba Group(NYSE: BABA).
Admittedly, Chinese stocks are more risky than US businesses. China's regulatory environment can be unpredictable at times, which is why Chinese stocks typically trade at reduced earnings multiples when they are in the same industry as American companies. In addition, it is not clear whether trade relations between the United States and China will worsen after Donald Trump takes office in two weeks.
Despite these challenges, three catalysts make Alibaba a notable buy in 2025.
The main growth driver for the company in the new year should be Alibaba Cloud, which according to the estimates of the technology analysis company Canalys is the main provider of cloud infrastructure services in the world's No. 2 economy (36% share). Similar to Google Cloud, Alibaba makes productive 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 second half of the decade.
E-commerce should act as another spark for Alibaba in the new year. On top of Alibaba as 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 emerging middle class should lead to a sustainable run of outward growth for e-commerce retailers.
Similar to Alphabet, the third selling point for Alibaba is its new balance sheet. Alibaba ended the third quarter with north of $33 billion in net cash, which gives 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 US stock market.
However, not all AI stocks should be counted on to be winners in 2025. If there's one AI stock worth avoiding, it's a data mining specialist. Palantir Technologies(NASDAQ: PLTR)whose shares have increased by 1,080% over the trailing period of two years, from January 2 onwards.
There are practical reasons that help explain why Palantir stock has gone parabolic in recent months. For one, the company's services cannot be duplicated at scale. Its AI-powered Gotham platform helps federal governments plan and execute missions, as well as collect data.
Meanwhile, Foundry is the AI and machine learning 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 substitute for what Palantir does at scale.
Investors have also been excited about Palantir's move to recurring profitability. Gotham is the core profit driver, with government contracts that typically last four or five years driving consistent double-digit sales growth and predictable cash flow.
Unfortunately, Palantir's otherworldly valuation may make it impossible to sustain its parabolic climb. While most market leading businesses historically added to a price-to-sales (P/S) ratio of around 40 before the bubble burst, Palantir sports a P/S ratio of 68, from closing time on January. 2. With its sales growth slowing in recent years and over a third of its net income coming from interest earned on its cash (ie, an unsustainable/uninnovative source), this level of premium does not any sense.
To build on this point, Palantir's Gotham platform has a limited long-term growth ceiling. Although it has won plenty of contracts from the US government, this is an AI-driven platform that can only be used by the US and its immediate allies. With most countries removed from being future clients, it allows Palantir's bleeding edge valuation to stand out even more.
Palantir is a perfect example of a solid company with a stock valuation that makes no sense.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean Williams he has jobs in the Alphabet. The Motley Fool has positions in Alphabet, Nvidia, and Palantir Technologies and recommends it. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
