AI Stocks Surpassing Palantir in 2025

AI Stocks Rise Above Palantir

Palantir's stock value increased due to the growing use of its AI software by businesses. However, a couple of AI stocks have seen even more rapid growth. These stocks are from companies that supply essential parts for AI data centers. Over the last year, both of these companies have seen triple-digit earnings growth.

Palantir Technologies is a prime example of the AI stock boom. Its Artificial Intelligence Platform (AIP) has been quickly adopted, especially by enterprise clients, leading to increased accessibility and a wider range of applications. This has resulted in significant revenue growth and even stronger profits due to its expanding operating margin as it scales. Investors have responded positively, driving the stock up by 143% so far this year.

However, as major tech companies invest heavily in building massive data centers and equipping them with servers, two critical AI hardware manufacturers have experienced a surge in their fortunes in 2025. Consequently, both stocks have outperformed Palantir year to date, with each rising by more than 185%.

Essential AI Hardware Makers

Much attention is focused on the GPUs or AI accelerators that hyperscale customers are purchasing for their data centers. While these chips represent a large portion of the spending on new data centers, other components are also benefiting significantly from AI investments. Developers are creating increasingly large language models that rely on vast amounts of data, necessitating extensive storage solutions.

While some of this data requires near-instant access by servers, a significant portion can be stored in nearline storage. Nearline storage offers cost-effective data retention, although it may take a few seconds to access. Hard drives are the most economical form of nearline storage. Although solid-state drives (SSDs) have replaced hard drives in personal computers, they are significantly more expensive at the data center level. Utilizing SSDs for storage could cost approximately seven to eight times more for the same capacity.

Consequently, hard drive manufacturers Seagate Technology and Western Digital have seen a surge in demand for their nearline storage products. Seagate reported a 52% year-over-year increase in nearline capacity shipments last quarter, while Western Digital reported a 36% increase. This has resulted in substantial revenue growth and margin expansion.

Although Seagate and Western Digital's products are interchangeable to some extent, there are still production limits. Due to increasing demand for their high-capacity storage solutions, they have been able to demonstrate pricing power. Seagate's gross margin increased 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 positively impacted earnings growth. Seagate's earnings per share increased by 147% year over year last quarter. Western Digital doesn't have a directly comparable EPS number due to the spin-off of its flash memory business in February, which allowed it to focus more on hard drive opportunities. However, its reported operating income for the remaining business increased by 147% year over year last quarter.

Investment Considerations

The substantial earnings growth of both companies explains why their stocks have risen considerably since the beginning of the year. However, the hard drive industry is known to be cyclical. Typically, earnings increase during the cycle's peak, but investors should be cautious, as the cycle will eventually end, leading to a decline in earnings due to high fixed costs and research expenses. However, the growing long-term spending commitments from major AI companies may reassure investors that this cycle will last longer than usual. For instance, OpenAI is planning to invest $400 billion in data centers over the next three years. Other major tech companies have consistently increased their spending plans.

Importantly, hard drives are expected to maintain their price advantage. Seagate anticipates further improvements in 2026 as it scales its heat-assisted magnetic recording (HAMR) process, which will enable the production of higher-capacity hard drives. Western Digital is approximately six months behind in scaling its next-generation technology.

Seagate and Western Digital's stocks are trading at forward P/E ratios of 22 and 18, respectively. While this may seem inexpensive, particularly compared to other AI stocks and their current earnings growth, it is relatively high compared to the stocks' historical valuations. This year's price increase has largely been driven by multiples expansion. Although the outlook for both companies continues to improve, it may be wise for investors to wait for a more favorable opportunity to invest in these AI stocks.