The growing adoption of artificial intelligence (AI) has lifted many technology stocks this year, and the good part is that this trend is likely to continue in 2025.
Market researcher IDC forecasts that global AI-related spending could hit $337 billion next year and jump to a whopping $749 billion by 2028. As a result, technology companies selling AI-related hardware and software should ideally witness healthy growth in their businesses next year. That's the reason why investors would do well to buy shares of Micron Technology (NASDAQ: MU) and Twilio (NYSE: TWLO), two AI stocks that are set to benefit from the billions of dollars that are being poured into AI.
Let's look at the reasons why.
1. Micron Technology
Micron Technology may not have set the stock market on fire this year as shares of the chipmaker have gained 18% in 2024, losing momentum in the second half of the year despite posting solid results of late, but that's good news for investors looking to buy an AI stock at a reasonable valuation.
After all, Micron is trading at just 11 times forward earnings, a nice discount to the tech-heavy Nasdaq-100 index's forward earnings multiple of 28. Additionally, Yahoo! Finance puts Micron's price/earnings-to-growth ratio (PEG ratio) at just 0.16 based on the estimated earnings growth that it is forecast to deliver over the next five years. A PEG ratio of less than 1 means that a stock is undervalued with respect to the growth that it is expected to deliver.
Buying Micron at this valuation is a no-brainer. That's because the company is set to benefit from the massive jump in memory spending in 2025. Market research firm TrendForce is forecasting a 51% increase in spending on dynamic random access memory (DRAM) in 2025, along with a 29% increase in NAND flash revenue.
AI is set to play a central role in this healthy growth as the demand for high-bandwidth memory (HBM) that's deployed in AI servers is expected to take off. According to Micron, sales of HBM are expected to hit $25 billion in 2025 from just $4 billion in 2024. Even better, the bump in HBM demand is going to impact the pricing environment positively and help Micron enjoy fatter margins.
It is worth noting that Micron is already benefiting from the favorable dynamics in the memory market. When the company released its fiscal 2024 fourth-quarter results in September, it posted a terrific year-over-year increase of 93% in its top line to $7.75 billion. The company's non-GAAP operating margin came in at 22.5%, as compared to a negative reading of 30% in the prior-year period.
The chipmaker is set to release its fiscal Q1 results on Dec. 18. Micron is expecting $8.7 billion in revenue along with earnings of $1.74 per share. Those numbers would be a massive improvement over the year-ago period's revenue of $4.7 billion and non-GAAP loss of $0.95 per share. Even better, analysts are expecting Micron's revenue in fiscal 2025 to jump by 52% to $38.2 billion, while earnings are expected to shoot up to $8.93 per share from last year's reading of $1.30 per share.
However, don't be surprised to see Micron clocking stronger growth in the new fiscal year, as a potential jump in sales of smartphones and personal computers (PCs) next year, driven by AI, could give it an additional boost. Gartner is forecasting AI PC shipments to jump by 165% in 2025.
Meanwhile, shipments of generative AI-capable smartphones are expected to increase to 405 million units in 2025 from 234 million units this year, according to IDC. These two markets could drive considerable growth in memory shipment volumes next year as AI-capable smartphones and PCs require more memory and storage.
In all, Micron's attractive valuation and its impressive growth make this AI stock a screaming buy this month, as the sunny prospects of the memory market in 2025 could send it on a bull run.
2. Twilio
Shares of Twilio have shot up remarkably since the company released its third-quarter results on Oct. 30, as the company's revenue and earnings turned out to be well ahead of Wall Street's expectations.
Even then, investors can buy Twilio at a reasonable 4.5 times sales (which is lower than the U.S. tech sector's average sales multiple of 8.4) and 27 times forward earnings. Investors would do well to buy Twilio stock hand over fist at these multiples as the company's growth is likely to accelerate thanks to the growing adoption of AI in the contact center and customer service space.
Twilio management said on its recent earnings conference call that it is making a concerted effort to integrate AI throughout its platform. This move seems to be bearing fruit as Twilio's revenue growth in the previous quarter hit 10%, a nice improvement over the 4% growth it clocked in the first two quarters. The company not only saw improvement in its customer base but also witnessed higher spending by existing customers.
Twilio's active customer accounts increased to 320,000 last quarter from 306,000 in the year-ago period. More importantly, its dollar-based net expansion rate increased by four percentage points year over year to 105% in Q3. This suggests Twilio's existing customers increased their spending as this metric compares the spending by its customers in a quarter to the spending by the same set of customers in the year-ago period.
The addition of AI-specific offerings to Twilio's platform means that it has an opportunity to cross-sell new solutions to a huge base of existing customers. Future Market Insights estimates that the growing demand for AI-specific tools in the communications platform-as-a-service (CPaaS) market could increase this industry's annual revenue from $12 billion this year to $121 billion in 2034.
Given that Twilio has been integrating AI-powered tools into its communications platform since last year, it won't be surprising to see the company's growth accelerating in the future as it should be able to win a bigger share of customers' wallets. All this explains why analysts increased revenue expectations from Twilio for the next couple of years.
TWLO Revenue Estimates for Current Fiscal Year data by YCharts
This impressive growth is set to filter down to Twilio's bottom line as well. Analysts are expecting its earnings to increase by 17% in 2025 to $4.29 per share. Assuming Twilio trades at 34 times earnings after a year (in line with the Nasdaq-100's earnings multiple), its stock price could jump to $146 based on its projected 2025 earnings. That would be a 29% increase from current levels.
So, savvy investors should consider buying Twilio stock right away, considering its attractive valuation and the acceleration witnessed in the company's growth since it seems capable of sustaining its impressive momentum in 2025 and beyond.
Should you invest $1,000 in Micron Technology right now?
Before you buy stock in Micron Technology, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Micron Technology wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $850,701!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of December 9, 2024
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Twilio. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
