Spending on artificial intelligence (AI) infrastructure has been solid over the past few years, and that trend is expected to continue into 2025, with market research firm IDC predicting that total AI spending could reach an impressive $227 billion in 2025. year.
The good part is that AI spending is expected to grow 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 few AI shares which look like solid buys at the start of 2025 due to their attractive valuations and ability to deliver strong growth in the new year as well as over the long term.
Microsoft(NASDAQ: MSFT) may have had a forgettable 2024, as the tech giant’s shares have rallied just 14% in the past year, weaker than the 31% gains on record Nasdaq Composite in the same period. However, investors should not overlook the company’s huge AI-driven growth potential.
From cloud computing to personal computers (PCs) to workplace productivity, Microsoft is well positioned to capitalize more AI-focused end markets. This tells us why CEO Satya Nadella noted at the company’s October 2024 earnings conference call that its “artificial intelligence business is on track to exceed $10 billion in annualized revenue next quarter, making it the fastest growing business in our history that this has reached a turning point.”
There’s a good chance this revenue rate could increase significantly over the long term, given the AI-specific markets Microsoft serves. For example, the company’s cloud business is already reaping the benefits of the growing adoption of cloud AI services. Microsoft’s Intelligent Cloud revenue rose 20% year-over-year in the first quarter of fiscal 2025 to $24.1 billion, driven by a 23% increase in Azure cloud service revenue.
AI accounted for 12 percentage points of Azure’s growth during the quarter, proving that this technology is already having a significant impact on Microsoft’s cloud business. That growth could have been stronger if Microsoft had been able to meet all the demand for its AI cloud services.
Another thing worth mentioning 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 cloud infrastructure market share, which is in second place Amazonshould lay the foundation for great long-term growth in Microsoft’s cloud business. That’s because global cloud spending is expected to reach $2 trillion by 2030 Goldman Sachsdriven by 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 whopping $400 billion, a big increase from the $105 billion the company generated from the segment in fiscal 2024.
These huge catalysts explain why analysts expect Microsoft’s growth to accelerate going forward after an estimated 10% increase in earnings in fiscal 2025 to $13.04 per share.
More importantly, investors won’t have to pay a hefty valuation to get their hands on Microsoft stock. This is because it trades at 35 times earnings, which is not that expensive compared to Nasdaq-100 an index earnings multiple of 33 (using the index as a proxy for technology stocks). Buying Microsoft at this valuation looks like a no-brainer, given the potential improvement in bottom-line growth over the next few years.
Lam Research(NASDAQ: LRCX) is another stock that underperformed the market last year, losing 2% over the past year. The stock’s underperformance can be attributed to memory market weakness over the past few years, but things look bright for 2025.
Market research firm TrendForce predicts a 25% increase in capital spending for dynamic direct access memory (DRAM) in 2025, along with a 10% increase in NAND flash memory spending. The company adds that there is room for upward revision in these estimates. This is 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 computing memory and storage needs.
For example, smartphones that support features based on the Large Language Model (LLM) on the device are likely to require 7 gigabytes of additional DRAM. Memory manufacturers such as Micron technology witness a similar trend.
Now you may be wondering how the favorable memory market outlook will 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, which were released in October 2024, indicate a reversal 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 expect Lam’s growth to pick up in the current fiscal year after a poor performance in fiscal 2024, when its revenue fell 14% to $14.9 billion, followed by double-digit growth in the next fiscal year. year also. Meanwhile, Lam’s earnings are expected to jump 17% in the current and next fiscal years.
All of this makes Lam Research a no-brainer AI stock to buy in 2025, as it trades at just 24 times earnings, a nice discount to the Nasdaq-100’s earnings multiple of 33. A potential upside to Lam’s growth could lead the market reward the stock with a higher valuation, leading to greater growth.
Not surprisingly, Lam’s 12-month median price target of $95 points to a 32% jump in the share price from current levels, giving investors another reason to consider adding this stock to their portfolios in the new year.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sharp Chauhan has no position in any of the listed stocks. 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.
