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Artificial intelligence (AI) was the defining theme for markets in 2024, just as it was in the previous year. The “AI bubble” chatter also continued into 2024, which is not without reason. Such questions about emerging technologies are not unwarranted - we have multiple examples of many high-flying industries like electric vehicles (EVs), autonomous driving, space travel, and genomics, which haven’t lived up to the hype. Most companies in these industries are struggling, which is reflected in their stock prices.
Many companies are also struggling to justify their massive AI capital expenditures and the end demand for AI-enabled products and services is still debatable. Then we have the valuation question, as some AI plays indeed trade at eye-popping valuations. However, AI could be among the most disruptive technologies over the next few years with comparisons drawn to the advent of the internet. I believe Amazon (AMZN) and Tesla (TSLA) are two AI plays that look like good buys for 2025 with this in mind. .
AI Stock #1: Amazon
Amazon is among the underappreciated AI plays that still trade at reasonable valuations. The company is using AI across its business segments and the technology is helping it lower costs, increase engagement, improve logistics, and earn additional revenue.
While Amazon is already using technology to improve how customers shop on its website, it can come up with even better recommendations through generative AI features. The company is also using AI to help advertisers make their ads more engaging and, in the process, more effective. Advertising is among the fastest-growing businesses for Amazon and is set to grow further as it ramps up ads on Prime.
AI is also fueling demand for Amazon’s enterprise-focused Amazon Web Services (AWS), which is the company’s cash cow, accounting for the bulk of its profitability. While AWS’s growth was quite tepid in 2022, it has since improved, in part due to the growing AI business.
During its third-quarter earnings call, Amazon CEO Andy Jassy said, “AWS's AI business is a multibillion-dollar revenue run rate business that continues to grow at a triple-digit year-over-year percentage and is growing more than three times faster at this stage of its evolution as AWS itself grew, and we felt like AWS grew pretty quickly.”
AMZN Launched Its Custom AI Chip
Amazon is among the so-called AI hyperscalers that are lining up to buy Nvidia’s (NVDA) top-of-the-line AI chips. However, it also offers its Trainium2 AI chip which is a competitor to Nvidia. Apple (AAPL) is also using these chips to train its AI model, which is a testimony to its capabilities.
Amazon has also backed AI startup Anthropic and has invested $8 billion into the company. I believe Amazon has only scratched the surface when it comes to AI and the stock remains one of the best AI plays for 2025.
AI Stock #2: Tesla
While Tesla is best known for its electric cars – a market that it dominates in the U.S. – the company is positioning itself as an AI play. The positioning makes sense as the company’s EV sales are slowing down while the price war has taken a toll on its margins. Over the long term, Tesla is an AI play and expects to make more money selling non-automotive products. By Musk’s admission, Tesla’s valuation is linked to the progress of its autonomous driving technology. Currently, the company charges $8,000 for its Full Self-Driving (FSD) subscription, and Musk believes that price could rise as high as $100,000.
AI Products Will Drive Tesla’s Growth In the Coming Years
Tesla will use autonomous driving to power its upcoming robotaxi, dubbed the Cybercab. Reports suggest that President-elect Donald Trump might ease crash-reporting requirements, which would be a big positive for Tesla as it preps to begin rolling out its robotaxis. A more “supportive” regulatory environment under a Trump presidency would help Tesla expedite its autonomous driving capabilities and by extension, its Cybercab.
Over the long term, its Optimus humanoid could drive Tesla’s growth and Musk believes it could add $25 trillion to the company’s market cap. Again, Musk’s predictions should always be taken with a grain of salt, but hardware products like humanoids and robotaxis could be the next big thing in AI.
There is little denying that Tesla is among the most consequential companies of our times and is redefining industries like electric cars, autonomous driving, robotaxis, and robotics. However, its valuations have been a sore point for many investors.
To be sure, Tesla hasn’t gotten any cheaper amid the breathtaking rally since Trump’s election and now trades at 175x its expected earnings over the next 12 months. But then, Tesla has never been a near-term earnings story, and AI products like autonomous driving and Optimus, which would drive real growth for the company, are yet to meaningfully contribute to its bottom line.
I believe hardware players like Tesla can benefit from the next round of AI euphoria as round 1 was won squarely by Nvidia with its chips. While concerns over Tesla's valuation are not unfounded, the company could be among the biggest “Trump trades.”
