History Says the Nasdaq Will Surge in 2025: 1 AI Stock to Buy Before It Does (Hint: It's Not Nvidia)
The market has gone into overdrive in 2024. Technology stocks especially so. After posting a 55% total return in 2023, the Nasdaq-100 index followed up with 27.5% total returns so far in 2024 (as of this writing). These are two of the strongest years in the index's history. Counterintuitively, momentum in the Nasdaq index typically begets more momentum. Historically, every time the Nasdaq produces 30% returns in a year, the following year sees gains of at least 19%, indicating that the momentum in technology stocks has a good chance of continuing in 2025.
In 2023 and 2024, the leader of the tech stock party was Nvidia. In 2025, I think Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) will take the lead as the artificial intelligence (AI) leader. Here's why investors should bet on Alphabet stock in 2025 and hold on for long-term gains.
When OpenAI's ChatGPT went viral in late 2022, investors in Alphabet got nervous. The owner of Google, YouTube, and the DeepMind research lab was supposed to be the leader in AI research. In fact, the company had invented the transformer model that led to the ChatGPT breakthrough at OpenAI, and yet, the company could not capitalize on the situation.
In early 2023, Alphabet stock got much cheaper with ChatGPT taking off in popularity. When Microsoft partnered with OpenAI and CEO Satya Nadella said he wanted to "make Google dance," investors got even more nervous. Was the Google Search monopoly about to be broken?
Two years later, it's clear that Alphabet has risen to the challenge. It has copied all of OpenAI's products, innovated in Google Search to embed more AI tools in the product, and retained its market share in search engines. Now, it's starting to extend its lead in AI commercialization. Recent announcements include an AI video generator, quantum computing chips, and the expansion of Waymo's self-driving car unit to new cities -- just to name a few updates. The worry over Alphabet's lagging in AI innovation should be over. This company is at the forefront of the sector yet again.
Extending its AI lead will help Alphabet grow its business. More search queries will lead to more revenue at Google Search, which is around 74% of the company's overall revenue. Most important will be the cloud-infrastructure business named Google Cloud. This segment hit $11.35 billion in revenue last quarter with profit margins inflecting higher.
Alphabet's AI expertise allows it to sell these computing, storage, and software tools to third-party companies. As spending on AI grows, a lot of it will be funneled to Google Cloud's data centers. It is only a small part of the business today, but I think there is a clear path to $100 billion in Google Cloud revenue within a few years. Assuming the company can hit or surpass 25% profit margins -- which competitor Amazon Web Services easily beats -- that is $25 billion in annual earnings from this fast-growing division. I would expect these financial metrics to hit these milestones by the end of the decade, if not sooner.
