AI Stocks Surpassing Palantir in 2025

AI Stock Growth

Palantir's stock value increased due to broader adoption of its AI software by enterprises. However, a couple of AI hardware manufacturers have experienced even quicker growth, as they supply vital parts for AI data centers. Over the last year, these two businesses have achieved triple-digit earnings growth. Palantir Technologies is a prime example of the boom in AI stocks. The company has seen its software adopted at a rapid pace in recent years, especially among business clients utilizing its Artificial Intelligence Platform to broaden accessibility and applications. This has led to considerable revenue increases and even stronger profits because of its growing operating margin as it expands. Investors have reacted positively, driving the stock up by 143% so far this year.

Hardware Demand Soars

As major tech companies invest more in building large data centers and equipping them with servers, two important AI hardware companies have prospered in 2025. As a result, these stocks have outperformed Palantir so far this year, with gains exceeding 185%.

Much attention is paid to the specific GPUs or AI accelerators that hyperscale customers are acquiring for their data centers. While these chips make up most of the cost of a new data center, they aren't the only parts benefiting greatly from AI spending. Developers are creating increasingly large language models that rely on billions of data points, requiring extensive storage capabilities. While some of this storage requires near-instant access for each server, a large amount can be kept in what is referred to as "nearline" storage.

Nearline Storage Demand

Although nearline storage may take a few seconds to access, it is very affordable. Hard drives represent the most economical option for nearline storage. While solid state drives have taken the place of magnetic hard drives in personal computers, they're significantly more expensive at the data center level. Using SSDs for storage would cost approximately seven to eight times as much for the same storage capacity. As a result, hard drive manufacturers Seagate Technology and Western Digital have seen a surge in demand for their nearline storage products. Last quarter, Seagate reported a 52% year-over-year rise in nearline capacity shipments, while Western Digital reported a 36% increase.

Financial Performance

This has resulted in considerable revenue growth and margin expansion. Even though Seagate and Western Digital's products are interchangeable, there are production limits. Due to rising demand for high-capacity storage options, they've been able to demonstrate pricing power. Seagate's gross margin grew by 7 percentage points last quarter, and Western Digital's increased by 6.1 percentage points. The combination of rising revenue and expanding margins has boosted earnings growth. Seagate's earnings per share increased 147% year over year last quarter. Western Digital does not have a comparable EPS number from the previous year because it spun off its flash memory business in February to focus more on hard drive opportunities. However, its operating income for the remaining business grew 147% year over year last quarter.

Industry Cyclicality

The exceptional earnings growth exhibited by both companies explains why the stocks have risen significantly since the beginning of the year. However, it is important to keep in mind that the hard drive sector is highly cyclical. Earnings typically rise as a cycle progresses, but investors should discount those earnings more because the cycle will eventually end. When this occurs, earnings will fall sharply as high fixed costs and research expenses consume lower revenue. However, growing long-term spending commitments from major AI players may reassure investors that this cycle will last longer than usual. OpenAI, for instance, plans to invest $400 billion in data centers over the next three years. Other major tech firms have consistently raised their spending forecasts. Hard drives are unlikely to lose their cost advantage anytime soon. Seagate, in fact, anticipates that the advantage will grow in 2026 as it expands its heat-assisted magnetic recording (HAMR) technology, which will allow it to create hard drives with greater capacity. Western Digital is approximately six months behind in implementing its next-generation technology.

Investment Considerations

Seagate and Western Digital's stocks have forward P/E ratios of 22 and 18, respectively. Although this may seem inexpensive, especially when compared to other AI stocks and their current earnings growth, it is relatively expensive when compared to the stocks' historical values. Indeed, much of the price increase this year has been fueled by multiples expansion. While the outlook for both companies remains positive, investors may want to wait for a better opportunity to invest.