Prediction: 2 AI Stocks Will Outperform Nvidia by End of 2025

Nvidia has seen impressive growth, with its shares rising more than 180% since the start of January 2024. This significant increase has contributed to nearly a quarter of the total gains in the S&P 500 (SNPINDEX: ^GSPC) during this timeframe. Currently valued at $3.4 trillion, Nvidia is poised to continue benefiting from the ongoing artificial intelligence (AI) boom for the foreseeable future. However, there is potential for public cloud companies to take the lead in market momentum by 2025.

Investments made in AI infrastructure over the past couple of years have positioned cloud computing companies well to capitalize on the growing demand as businesses move AI prototypes into actual products this year. This opens the door for Amazon (AMZN) and Alphabet (GOOGL) (GOOG) to potentially exceed Nvidia's current market value by the end of 2025:

• Amazon currently stands at a valuation of $2.3 trillion. Achieving a market cap of $3.5 trillion would require the stock to grow by 52%, resulting in a target share price of $338.
• Alphabet, valued at $2.4 trillion, would need a 46% increase to hit a $3.5 trillion valuation, aiming for a share price of $283.

While these predictions may seem ambitious, Bloomberg Intelligence projects that spending on generative AI will rise by 71% in 2025. Wall Street could be underestimating the scale of benefits that Amazon and Alphabet will reap during this time.

Amazon: 52% Growth Needed for a $3.5 Trillion Valuation

In its third quarter, Amazon reported strong financial results, exceeding analysts' expectations. Revenue reached $159 billion, marking an 11% increase, with notable growth in its cloud and advertising services. Operating margin rose by 5 percentage points to 9.8%, while non-GAAP earnings soared by 52% to $1.43 per diluted share, surpassing analyst forecasts of a 21% growth in earnings.

As spending on artificial intelligence (AI) escalates, Amazon's performance could continue to surprise analysts. Amazon Web Services (AWS) accounted for 31% of public cloud services spending in the third quarter, competing closely with the combined 33% market share of Microsoft and Alphabet. This scale affords AWS a significant advantage, allowing it to better monetize AI services.

Additionally, Amazon is making substantial investments in AI product development. Its custom AI chips—Trainium and Inferentia—offer cost-effective alternatives to Nvidia's graphics processing units (GPUs), while the Bedrock platform enables developers to refine existing large language models and create generative AI applications. Amazon's AI assistant, Amazon Q, aids programmers in coding, testing, and deploying their software.

Wall Street predicts a 26% increase in Amazon's earnings over the next year, making its current valuation of 47 times earnings appear reasonable. However, ongoing demand for cloud AI services may fuel faster earnings growth, which could justify a higher valuation and elevate Amazon's market value to $3.5 trillion.

For example, if Amazon's earnings were to grow by 35% over the next year and shares traded at 54 times earnings, which is still below its peak of 62 times earnings, the share price could rise by 52%, propelling it to a $3.5 trillion market cap. Nonetheless, Amazon represents a solid long-term investment regardless of whether it surpasses Nvidia's valuation by the end of 2025.

Alphabet: 46% Growth Needed for a $3.5 Trillion Valuation

Alphabet also reported positive results in the third quarter, surpassing estimated revenue and earnings. Revenue climbed 15% to $88 billion, driven by impressive growth in Google Cloud alongside steady gains in Google services (advertising). GAAP net income shot up 37% to $2.12 per diluted share, exceeding analyst expectations of a 19% growth in earnings.

As demand for AI cloud services grows, Alphabet may keep outperforming estimates. Google Cloud gained 2 percentage points of market share over the last year while Microsoft lost 3. Moreover, Alphabet's hefty investments in AI product development could sustain this trend. Notably, Google stands alongside Amazon as one of the few companies successfully deploying custom AI chips at scale, according to New Street Research.

Additionally, Google holds a strong foothold across various AI product categories. Forrester Research has acknowledged its leadership in AI infrastructure solutions, machine learning platforms, and foundational large language models. Analyst Mike Gualtieri identified Google as the hyperscaler best positioned for AI, suggesting its unique offerings could attract clients from competing public clouds.

Wall Street anticipates a 14% growth in Alphabet's earnings over the next four quarters, making its current valuation of 26 times earnings appear justified. Nevertheless, generative AI spending might lead to earnings that exceed estimates, which may allow for a higher valuation multiple once there is clarity regarding the outcome of the ongoing antitrust case involving Google Search later this year.

These encouraging signs could position Alphabet to surpass Nvidia's current market value by the end of 2025. For instance, if earnings rise by 25% in the forthcoming year and the stock trades at 30 times earnings, its share price could increase by 46%, reflecting a market cap of $3.5 trillion. Regardless, Alphabet remains a strong long-term investment, even if this prediction does not materialize.

AI, Stocks, Investments