Two Exceptional Artificial Intelligence (AI) Shares Poised to Outperform the S&P 500 by 2025

Two Exceptional Artificial Intelligence (AI) Shares Poised to Outperform the S&P 500 by 2025

The S&P 500 (^GSPC 1.26% increase) has surged by 28% this year, which is nearly three times its typical annual growth rate since 1957. This significant jump follows the index's impressive 26% growth in 2023.

This remarkable performance has resulted in the S&P 500 having a price-to-earnings (P/E) ratio of 27.8, significantly higher than its historical average of 18.1. This high valuation makes it challenging to identify value-laden opportunities in this market.

Currently, technology stocks are driving the S&P 500's growth. However, it's the companies within the artificial intelligence (AI) sector that are producing the most impressive gains. This trend is expected to continue in 2025 as prominent tech giants invest record sums to establish their AI infrastructure.

Despite the high prices of AI stocks, there are still a few choices with the potential to outperform the S&P 500 in 2025.

In 2023, a financial analyst referred to a group of six significant technology stocks as the "Magnificent Seven." These companies are: Nvidia, Microsoft, Apple, Amazon, Tesla, Alphabet (GOOG 1.31% and GOOGL 1.25%), and Meta Platforms (META 0.90%). Each has a stake in the AI race, but there are two that stand out due to their comparatively low P/E ratios: Alphabet and Meta Platforms.

The reasons Alphabet and Meta Platforms have the potential to overtake the S&P 500 in 2025 are as follows:

The rationale behind Alphabet

Alphabet, Google's parent company, oversees numerous ventures including Google Search, self-driving car company Waymo, and other subsidiaries. They have developed their own family of interconnected large language models (LLMs) known as Gemini, which form the core of Gemini, an AI chatbot. These models also improve various AI capabilities within Google Search.

Alphabet's primary income source comes from the advertising revenue generated by Google Search, which is the world's leading internet search engine with a 90% market share. However, Google's dominance is under threat from AI chatbots like OpenAI's ChatGPT, which are altering the way people acquire information online.

The Gemini chatbot is one strategy Alphabet is using to counter these challenges. Alphabet realizes that improving the Google Search experience is essential. This year, it launched AI Overviews, AI-generated responses appearing at the top of conventional Google Search results, including text, images, and links to external sites for quicker user access to information. This feature is currently being rolled out across 100 countries, serving over 1 billion users each month.

Advertisement clicks within Overviews are more frequent than equally positioned ads in standard search results, making the feature a potential significant revenue source for Alphabet. Diversifying revenue will be a major focus in 2025 as investors eagerly await returns for the substantial investments companies like Alphabet have made in AI so far.

Alphabet faces a significant setback, its primary reason for trading at lower prices than the Magnificent Seven. In 2023, the U.S. Department of Justice (DOJ) won a landmark case, finding that the company practices monopolistic tactics to safeguard its influence in the internet search industry.

The DOJ will not announce Alphabet's punishment until mid-2025, and the desired consequences include selling Chrome and possibly Android to decrease distribution channels used to preserve Google Search's market share. Although these actions would harm Alphabet, a less stringent penalty, such as a fine, is possible.

Many tech industry analysts foresee this case dragging on in the courts for years as Alphabet navigates the appeals process. In the interim, business as usual is the expectation, resulting in investors potentially focusing more on Alphabet's developments in the AI sector.

Analyst forecasts from Wall Street (via Yahoo) suggest Alphabet will achieve record-high revenue and earnings in 2025. While Alphabet's stock may not reach the average P/E ratio of the Magnificent Seven's 50.4, if it aligns with the 34.9 P/E ratio of the Nasdaq-100 technology index, this implies a potential 38% increase from current levels, which would surely enable it to surpass the S&P 500 in 2025.

The argument for Meta Platforms

Meta Platforms' shares have climbed by nearly 80% this year, but they still trade at lower prices than most Magnificent Seven stocks. I think this momentum will persist into 2025 due to several reasons, primarily related to Meta's activities in the AI sector.

Meta's social media platforms, Facebook and Instagram, now feature AI-influenced content feeds. Users spend more time on these platforms when shown content they prefer, which translates to more viewings and increased revenue for the company. During the third quarter of 2024 (ending Sept. 30), CEO Mark Zuckerberg reported that AI-based recommendations have resulted in an 8% increase in user time spent on Facebook in 2023 and a 6% increase for Instagram.

Meta introduced Meta AI, their new assistant, across all its applications last year. It's capable of tackling intricate questions, producing images, suggesting enjoyable get-togethers with buddies, and even mediate disputes in group chats. Currently, it boasts over 500 million monthly active users, and although it's currently free, there's potential for monetization down the line. Imagine businesses shelling out money to include a product link in Meta AI's answer to a suitable query.

Meta AI operates on Llama, a series of LLMs created in-house by Meta. Since Llama is open source, developers frequently delve into its code, allowing Meta to swiftly pinpoint issues and deploy enhancements. Llama has been downloaded over 600 million times, making it the most renowned family of open-source LLMs globally.

Meta is set to introduce Llama 4 next year, with Zuckerberg anticipating it to be the most robust in the industry. Meta is determined to invest up to $40 billion in AI data center infrastructure this year to generate sufficient computing capacity for Llama 4. In simple terms, larger LLMs produce more intelligent AI software, and Meta believes its investments will yield long-term benefits, creating new income streams through features like Meta AI.

Despite Meta's stock surge this year, it needs a 19.5% increase to match the 34.9 P/E ratio of the Nasdaq-100. Analysts also predict an 12% increase in Meta's earnings per share in 2025, potentially leading to further stock growth. Considering all these factors, I think Meta has a fantastic chance to outperform the S&P 500 next year.

Investors who are interested in diversifying their portfolio might consider allocating funds towards Alphabet and Meta Platforms, as these tech giants have the potential to outperform the S&P 500 in 2025 due to their significant investments in artificial intelligence and promising developments in their AI sectors.

With its launch of AI Overviews and successful integration of large language models, Alphabet is aiming to diversify its revenue sources, which could mitigate the impact of potential legal penalties and attract investors seeking returns from AI-focused companies.

If Meta Platforms manages to maintain its growth momentum and effectively monetize its AI features, such as Meta AI, it could achieve a higher P/E ratio and outperform the S&P 500 in 2025, providing a potentially strong financial return for investors.

Read also: