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Spending on artificial intelligence (AI) infrastructure has been solid over the past couple of years, and that trend is expected to continue in 2025 as well, with market research firm IDC forecasting that the total outlay on AI could hit an impressive $227 billion in the new year.
The good part is that AI spending is expected to rise impressively through 2028, surpassing $749 billion at the end of the forecast period. As a result, now would be a good time to take a closer look at a couple of AI stocks that look like solid buys as 2025 begins because of their attractive valuations and the ability to deliver robust growth in the new year, as well as in the long run.
1. Microsoft
Microsoft (MSFT 1.14%) may have had a forgettable 2024, as shares of the tech giant have appreciated just 14% in the past year, underperforming the 31% gains clocked by the Nasdaq Composite over the same period. However, investors shouldn’t ignore the massive AI-driven growth potential of the company.
From cloud computing to personal computers (PCs) to workplace productivity, Microsoft is well placed to capitalize on multiple AI-centric end markets. This tells us why CEO Satya Nadella remarked on the company’s October 2024 earnings conference call that its “AI business is on track to surpass an annual revenue run rate of $10 billion next quarter, which will make it the fastest business in our history to reach this milestone.
There is a good chance that this revenue run rate could scale up remarkably in the long run, considering the AI-specific markets that Microsoft serves. For instance, the company’s cloud business is already reaping the benefits of the growing adoption of AI services in the cloud. Microsoft’s Intelligent Cloud revenue increased 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 during the quarter, proving that this technology is already having a significant influence on Microsoft’s cloud business. That growth could have been stronger if Microsoft had been able to meet all the demand for its cloud AI services.
Another thing worth noting is that Microsoft Azure’s share of the cloud infrastructure services market increased to 20% last quarter, as it grew at a slightly faster pace than the 23% growth in cloud infrastructure spending.
This impressive market share in cloud infrastructure, which is second to Amazon, should set the stage for terrific long-term growth in Microsoft’s cloud business. That’s because global cloud spending is expected to hit $2 trillion by 2030, according to Goldman Sachs, driven by the growth in spending on generative AI offerings. A 20% share of the cloud infrastructure market at that time would send Microsoft’s cloud revenue to a massive $400 billion, a big increase over the $105 billion revenue the company generated from this segment in fiscal 2024.
These huge catalysts explain why analysts are expecting 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 Current Fiscal Year data by YCharts
More importantly, investors won’t have to pay a hefty valuation to get their hands on Microsoft stock. That’s because it is trading at 35 times earnings, which isn’t all that expensive when compared to the Nasdaq-100 index’s earnings multiple of 33 (using the index as a proxy for tech stocks). Buying Microsoft at this valuation looks like a no-brainer, considering the potential improvement in its bottom-line growth over the next couple of years.
2. Lam Research
Lam Research (LRCX 3.69%) is another stock that has underperformed the market in the past year, losing 2% over the past year. The stock’s underperformance can be attributed to the weakness in the memory market in the past couple of years, but things are looking bright for 2025.
Market research firm TrendForce is forecasting a 25% increase in capital spending for dynamic random-access memory (DRAM) in 2025, along with a 10% increase in spending on NAND flash storage. The firm adds that there is scope for upward revisions in these estimates. That’s not surprising, as the deployment of AI servers and the launch of generative AI-capable devices such as smartphones and PCs are driving an increase in memory compute and storage needs.
For instance, smartphones that support on-device large language model (LLM) based-features are likely to require 7 gigabytes of additional DRAM. Memory manufacturers such as Micron Technology are witnessing a similar trend.
Now, you may be wondering how the favorable prospects of the memory market are 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 the reason why Lam’s results for the first quarter of fiscal 2025, which were released in October 2024, point toward a turnaround in its fortunes.
Lam’s revenue jumped 20% year over year during the quarter to $4.17 billion, along with a 25% increase in earnings to $0.86 per share. The recovery in the memory market explains why analysts are expecting Lam’s growth to pick up in the current fiscal year following a poor performance in fiscal 2024, when its top line fell 14% to $14.9 billion, followed by double-digit growth in the next fiscal year as well. Meanwhile, Lam’s earnings are expected to jump 17% in both the current and the next fiscal year.
LRCX Revenue Estimates for Current Fiscal Year data by YCharts
All this makes Lam Research a no-brainer AI stock to buy in 2025, as it is trading at just 24 times earnings, a nice discount to the Nasdaq-100 index’s earnings multiple of 33. The potential improvement in Lam’s growth could lead the market to reward the stock with a higher valuation, leading to more upside.
Not surprisingly, Lam’s 12-month median price target of $95 points toward a 32% jump 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 stocks mentioned. The Motley Fool has positions in 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.
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