Spending on artificial intelligence (AI) infrastructure has been strong over the past two years, and this trend is expected to continue in 2025 as well, with market research firm IDC forecasting that total spending on AI could reach an impressive figure of $227 billion by 2025. new year.
The silver lining is that AI spending is expected to grow impressively through 2028, surpassing $749 billion by the end of the forecast period. As a result, now would be a good time to take a closer look at a few AI stocks that appear to be solid buys in early 2025 due to their attractive valuations and ability to deliver robust growth in the new year , as well as in the long term.
1.Microsoft
Microsoft (MSFT 1.14%) The year 2024 may have been forgettable, as shares of the tech giant have only appreciated 14% over the past year, underperforming the 31% gains posted by the Nasdaq Composite over the same period. However, investors should not ignore the company’s enormous growth potential through AI.
From cloud computing to personal computers (PCs) to workplace productivity, Microsoft is well-positioned to capitalize on several AI-centric end markets. This explains to us why CEO Satya Nadella noted during the company’s October 2024 earnings conference call that “its AI business is on track to surpass a $10 billion annual revenue run rate in 2024.” next quarter, making it the fastest company in our history to achieve this goal.” milestone.”
There is a good chance that this revenue rate will increase significantly in the long term, given the AI-specific markets that Microsoft serves. For example, the company’s cloud business is already reaping the benefits of growing adoption of cloud AI services. Microsoft’s intelligent cloud revenue grew 20% year over year in the first quarter of fiscal 2025 to $24.1 billion, driven by a 23% increase in revenue from the Azure cloud service .
AI accounted for 12 percentage points of Azure’s growth in the quarter, proving that this technology already has a significant influence on Microsoft’s cloud business. This growth could have been stronger if Microsoft had been able to meet all the demand for its cloud AI services.
Another thing to note is that Microsoft Azure’s share of the cloud infrastructure services market increased to 20% last quarter, as it grew at a slightly faster rate than the 23% growth in infrastructure spending cloud.
This impressive market share in cloud infrastructure, second behind Amazonshould pave the way for tremendous long-term growth in Microsoft’s cloud business. Indeed, global cloud spending is expected to reach $2 trillion by 2030, according to Goldman Sachsdriven by growth in spending on generative AI offerings. A 20% share of the cloud infrastructure market at that time would bring Microsoft’s cloud revenue to $400 billion, a big increase from the $105 billion in revenue the company generated in this segment in the past. during the 2024 financial year.
These huge catalysts are why analysts expect Microsoft’s growth to accelerate going forward, following an estimated 10% increase in earnings in fiscal 2025, to $13.04 per share.
MSFT EPS estimates for the current fiscal year data by Y Charts
More importantly, investors won’t have to pay a high valuation to get their hands on Microsoft stock. That’s because it trades at 35 times earnings, which isn’t that expensive compared to Nasdaq-100 multiple of 33 of index earnings (using the index as a proxy for technology stocks). Buying Microsoft at this valuation seems like a no-brainer, given its potential improvement in net growth over the next couple of years.
2. Lam Research
Search Lam (LRCX 3.69%) is another stock that has underperformed the market over the past year, losing 2% over the past year. The stock’s underperformance can be attributed to the memory market’s weakness over the past couple of years, but things are looking bright for 2025.
Market research firm TrendForce predicts a 25% increase in capital spending on dynamic random access memory (DRAM) in 2025, as well as a 10% increase in spending on NAND flash storage. The firm adds that it is possible to revise these estimates upwards. This is not surprising, as the deployment of AI servers and the launch of AI-enabled generative devices, such as smartphones and PCs, are leading to increased computing and memory storage requirements. .
For example, smartphones that support Large Language Model (LLM)-based features on the device will likely require an additional 7 GB of DRAM. Memory manufacturers such as Micron technology are witnessing a similar trend.
Now, you may be wondering how the favorable memory market outlook is going to positively impact Lam Research. After all, the company gets 35% of its revenue from selling its semiconductor manufacturing equipment to memory makers. This potential turnaround in the memory market is why Lam’s results for the first quarter of fiscal 2025, released in October 2024, suggest a turnaround.
Lam’s revenue jumped 20% year-over-year in the quarter to $4.17 billion, along with a 25% increase in profit to $0.86 per share . The recovery in the memory market explains why analysts expect Lam’s growth to resume in the current fiscal year after a poor performance in fiscal 2024, when its revenue fell by 14% to $14.9 billion, followed by double-digit growth in the next fiscal year. year also. Meanwhile, Lam’s profits are expected to rise 17% in the current and next fiscal years.
LRCX Revenue Estimates for the Current Fiscal Year data by Y Charts
All of this makes Lam Research an obvious AI stock to buy in 2025, as it trades at just 24 times earnings, a nice discount to the Nasdaq-100 Index’s 33 times earnings multiple. Lam’s potential growth improvement could drive the market. to reward the stock with a higher valuation, leading to more upside.
Unsurprisingly, Lam’s 12-month median price target of $95 indicates a 32% upside in its stock price from current levels, giving investors another reason to consider adding this stock to their portfolios in the new year.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the securities mentioned. The Motley Fool holds positions and recommends Amazon, Goldman Sachs Group, Lam Research and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
