AI Stocks Beating Palantir in 2025

AI Stock Growth

Palantir's stock value increased substantially as more businesses adopted its AI software. However, a couple of AI hardware manufacturers have experienced even more rapid growth, as they are providers of essential parts for AI data centers. Over the last year, these two businesses have achieved triple-digit earnings growth.

Palantir Technologies exemplifies the AI stock surge. Its software has been quickly adopted, particularly by enterprise clients utilizing its Artificial Intelligence Platform (AIP). This led to substantial revenue growth and even greater profits due to its growing operating margin as it expands. Investors have reacted favorably, driving the stock up 143% so far this year. As big tech companies invest heavily in constructing massive data centers and equipping them with servers, two crucial AI hardware suppliers have seen their prospects improve in 2025. Consequently, both stocks have outperformed Palantir year to date, with gains exceeding 185%.

The Unsung Heroes of AI

Although GPUs and AI accelerators receive considerable attention, they aren't the sole beneficiaries of increased AI spending. As developers create increasingly large language models based on vast amounts of data, the need for data storage solutions becomes critical. While some data requires near-instant access, a significant portion can be stored in nearline storage, which offers cost-effectiveness at the expense of slightly longer access times.

Hard drives remain the most economical option for nearline storage. Although solid-state drives (SSDs) have replaced hard drives in personal computers, their higher cost makes them less viable for data centers. Using SSDs would cost approximately seven to eight times more for equivalent storage capacity. Consequently, hard drive manufacturers Seagate Technology and Western Digital have witnessed a surge in demand for their nearline storage products.

Seagate and Western Digital

Seagate reported a 52% year-over-year increase in nearline capacity shipments last quarter, while Western Digital reported a 36% increase. This surge in demand has resulted in substantial revenue growth and margin expansion. Despite the interchangeability of Seagate and Western Digital's products, production capacity remains limited. The rising demand for high-capacity storage solutions has allowed them to exercise pricing power. Seagate's gross margin increased by 7 percentage points last quarter, while Western Digital's increased by 6.1 percentage points.

The combination of revenue growth and margin expansion has boosted earnings growth. Seagate's earnings per share climbed 147% year over year last quarter. Western Digital's operating income for its remaining business increased 147% year over year last quarter, following the spin-off of its flash memory business in February.

These companies' exceptional earnings growth explains why their stocks have risen significantly this year. However, the hard drive industry is cyclical, and investors should be aware that earnings tend to rise during the cycle but eventually decline as fixed costs and research expenses outpace revenue. The increasing long-term spending commitments from major AI players like OpenAI, which plans to invest $400 billion in data centers over the next three years, may prolong this cycle.

Hard drives are expected to maintain their price advantage, with Seagate anticipating further improvements in 2026 through its heat-assisted magnetic recording (HAMR) process. Western Digital is approximately six months behind in scaling its next-generation technology.

Seagate and Western Digital's stocks have forward P/E ratios of 22 and 18, respectively. While this may seem inexpensive compared to other AI stocks, it's relatively high compared to their historical valuations. Multiples expansion has driven much of this year's price increases. While the outlook for both companies continues to improve, investors may want to consider a better entry point before investing.