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2 Top Artificial Intelligence (AI) Stocks Ready for a Bull Run

Updated: 09-11-2024, 08.32 AM

The market for artificial intelligence (AI) is a generational investment opportunity. But you don’t have to chase risky stocks to earn great returns. Leading semiconductor and software companies are benefiting greatly from growing adoption of AI and can help you earn superior returns over the long term.

Here are two reasonably priced AI stocks that can hit new highs in 2025 and for years to come.

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Shares of Advanced Micro Devices (NASDAQ: AMD) quadrupled in value over the last five years. The company is the second leading supplier of graphics processing units (GPUs), which are required for AI training in data centers. The company has gained significant market share against Intel in recent years, but AMD stock is down about 4% this year and underperforming the S&P 500‘s 20% increase. However, its latest earnings report shows accelerating growth that could lift the stock in 2025.

Revenue grew 18% year over year in the third quarter, but the most telling sign of its momentum is the 17% revenue increase over the previous quarter. The company’s data center revenue more than doubled year over year, driven by insatiable demand for AMD’s Instinct GPUs and Epyc central processing units (CPUs) for servers.

AMD supplies chips for several markets, including video game consoles. Gaming revenue fell 69% over the year-ago quarter, but the momentum in data center and its client segment, including sales of Ryzen desktop processors, is enough to lift the stock next year. Management sees substantial growth opportunities in these markets. It recently announced the acquisition of ZT Systems, which will expand its opportunities in meeting the growing demand for AI infrastructure.

Most importantly, the high demand for data center and server chips is benefiting AMD’s margins. Adjusted earnings per share were up 33% year over year last quarter, and analysts expect earnings to be up 52% in 2025.

AMD shares are not cheap at a forward price-to-earnings (P/E) ratio of 42 on 2024 earnings estimates, but this is a reasonable valuation to pay for a fast-growing AI chip supplier.

Microsoft (NASDAQ: MSFT) is going to be the face of AI for millions of people. The software giant has been rolling out AI features across its offerings for both consumers and businesses, including the Copilot assistant for Windows and Microsoft 365 apps. It has seen more people using Microsoft 365 (e.g., Word and Excel), and the Azure cloud business continues to see strong growth, driven by increased demand for AI services. The stock’s 9% year-to-date return trails the S&P 500, but Microsoft’s momentum in the cloud and AI should boost the share price.

There is some uncertainty about the timing of Microsoft’s capital spending to support AI demand, and how those expenditures will convert to profits over the long term. But investors are giving Microsoft the benefit of the doubt. Revenue growth continues to look strong, with Microsoft Cloud revenue reaching $38.9 billion last quarter, up 22% year over year.

However, the expenditures needed to support demand for AI services are pressuring earnings, which grew 10% year over year. This is lower than the 16% increase in revenue, but Microsoft is building scale in its cloud and AI services that will lead to better margins over time.

Microsoft is capitalizing very well on AI adoption. The company expects revenue from AI to surpass a $10 billion annual revenue run rate in the next quarter, which makes it the fastest-growing business in Microsoft’s history.

Investments in AI will continue to weigh on margins, but management is countering this trend by focusing on high-margin opportunities in its consumer products. Overall, analysts expect the company’s earnings to grow 15% in fiscal 2025 ending in June. The stock is fairly valued at a forward P/E of 31, so investors should expect Microsoft shares to climb in step with earnings.

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*Stock Advisor returns as of November 4, 2024

John Ballard has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices and Microsoft. The Motley Fool recommends Intel and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.

2 Top Artificial Intelligence (AI) Stocks Ready for a Bull Run was originally published by The Motley Fool