The year 2024 witnessed a surge in the valuation of Artificial Intelligence (AI) stocks, fueled by a confluence of factors.
Rapid advancements in AI technology, coupled with growing investor enthusiasm and a recognition of the transformative potential of AI across various sectors, propelled many AI-focused companies to significant stock price appreciation
AI continued to dominate corporate discourse in 2024, with over 40% of S&P 500 companies mentioning it on their Q2 earnings calls.
This trend, following a dramatic surge in 2023, underscores the growing significance of AI across various sectors.
The greatest example of this AI-led surge in 2024 was Applovin.
AppLovin started the year with a market cap of around $13 billion, known for its investments in mobile gaming studios behind titles like “Woody Block Puzzle” and “Bingo Story.”
By year-end, its valuation surged to over $110 billion, surpassing companies like Starbucks, Intel, and Airbnb, with shares up 758% this year, leading all tech companies.
Will AI stocks continue to surge in 2025?
Analysts at global research firm UBS say that while there are both negative and positive drivers for AI stocks in the coming year, they should be able to perform well.
In its latest research note on AI, the brokerage argued that contrary to the widespread belief that AI stocks’ valuations are stretched, the rally in AI-related stocks over the last two years has primarily been driven by solid earnings growth, not an expansion in price-to-earnings (P/E) multiples.
For instance, NVIDIA’s forward P/E was around 40x when ChatGPT was launched in late November 2022. Despite the stock’s remarkable rise, its P/E multiple has decreased to the low 30s, the brokerage highlighted.
Looking forward, UBS expects the AI theme to continue its strong earnings growth without needing a P/E rerating. The analysts forecast that their AI portfolio will deliver 25% EPS growth in 2025, following 35% EPS growth in 2024.
Even with a moderate derating of P/E multiples, UBS estimates mid-teen returns in 2025, which would still be impressive after two years of strong performance.
However, UBS highlights factors that could influence the P/E multiple. On the negative side, slower-than-expected AI monetization and macroeconomic or product cycle uncertainties could pressure P/E multiples.
On the positive side, faster monetisation and stronger cash returns could support a rerating.
Volatility in AI stocks in 2025
UBS acknowledges that the easy gains in AI stocks are behind us, and investors should prepare for slightly more volatile returns in 2025.
This expectation stems from the more mature stage of the AI rally, with uncertainties surrounding product cycles and tariff-related issues potentially leading to short-term profit-taking by tactical investors.
This could result in greater volatility, as per the analysts.
Investors can take advantage of heightened volatility through structured strategies, particularly by buying dips in quality AI stocks, as the focus is expected to shift back to strong fundamentals.
UBS also highlights that regulatory debates could add to volatility in AI stocks.
However, based on lessons from the internet and smart device eras, they believe that regulation-driven corrections tend to be short-lived, with long-term performance driven by fundamentals.
AI regulations to take shape in 2025
In 2024, AI regulations started to catch up, and UBS expects more rules to be introduced in 2025.
While regulations have always posed a risk to the tech sector, this is particularly true for AI, given the rapid evolution of the industry.
UBS anticipates that AI regulations will accelerate in the coming years, with increased regulatory attention expected from the new US administration, as well as in China and Europe.
The firm sees early-stage regulations as beneficial, as they can guide more orderly growth for the sector.
However, the introduction of regulations during the later stages of development can cause significant damage, as seen in other industries like education and fintech.
UBS stresses that while AI regulations, including export controls, are an important risk to monitor, any significant correction driven by geopolitics or regulations could present a buying opportunity for long-term investors.
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