Advances in artificial intelligence (AI) and the excitement around their potential drove the stock prices of some of the biggest companies in the world higher in 2024. But not every AI innovator was a big winner.
Stock prices go up when financial results exceed forecasts, or at least when management's expectations are even better than investors' sentiment. One disappointing quarter or an underwhelming outlook from a company can send a stock down. But that could be a great buying opportunity for patient investors with a long-term outlook.
Two companies made significant strides in their AI development in 2024, but investors have sent shares of both down as they await the true payoff from their efforts. Shares of Advanced Micro Devices (AMD 1.92%) are down about 43% from the high they reached in early 2024. Meanwhile, shares of Adobe (ADBE +0.88%) have declined about 31% from their 2024 high. But a 2025 turnaround could be in store for both AI stocks.
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1. Advanced Micro Devices
AMD has largely played second fiddle to Nvidia when it comes to building the GPUs big tech companies are using to train and develop generative AI applications. But investors shouldn't discount the importance of AMD's position when it comes to AI data center chips and how it can take share of the booming market over time.
AMD struck several deals with big tech companies in 2024, including Oracle, Microsoft, and Meta Platforms. That shows that these hyperscalers are looking to keep Nvidia's dominance in check by sourcing a secondary provider for the essential infrastructure behind AI.
AMD's AI accelerators have also proven more cost-effective than Nvidia's when it comes to inference performance. In other words, a company like Meta might train its large language model using Nvidia chips, but use AMDs chips to run applications like Meta AI.
NASDAQ: AMD
Key Data Points
The efforts have shown up in AMD's results. Third-quarter data center revenue rose 122% year-over-year. That's even better than Nvidia's 112% growth in the same segment in the comparable period. That suggests AMD's market share is growing. And that growth may continue in 2025.
AMD has accelerated its AI chip development as it looks to catch up with Nvidia's capabilities. The successor of its Instinct MI325X accelerator is due to come out in less than a year. And the MI400 line is due in early 2026. Both promise significant performance improvements.
AMD's growing relationships with big tech companies should help its revenue accelerate in 2025. That also should translate into very strong earnings growth, but it's worth noting that analysts already expect its earning per share (EPS) to climb 54% next year. But AMD stock trades for a relative bargain compared to those growth expectations, with a forward price-to-earnings (P/E) ratio of about 24. At that price, there's a considerable margin of safety for AMD shares for long-term investors.
2. Adobe
Adobe took steps to improve its AI-powered features and expand their use across its suite of design and marketing software in 2024. Perhaps the biggest advancement came in the form of GenStudio, which combines Adobe's creative and marketing software to help companies develop marketing campaigns. It harnesses its Firefly generative AI models and machine learning to help marketers create and optimize their advertising across various media and platforms.
Adobe's focus on commercial-safe generative AI gives it an advantage in the market. Creatives using the company's advanced software are likely doing so professionally. As such, it's important that their work doesn't infringe on any copyrighted or trademarked materials. The same is true for marketers working with GenStudio.
Adobe's also used generative AI tools in its free Adobe Express software to increase the top of its sales funnel. Express is attracting more users than ever, and Adobe's seeing strong conversion rates as it sells customers on the ability to use more AI features with one of its paid options. On top of that, Adobe is using its new AI features as the reason for price increases and generating incremental revenue through its credit-based system, which allows users to use generative AI features more frequently for an additional charge.
NASDAQ: ADBE
Key Data Points
Still, investors were disappointed with Adobe's financial results in 2024. Adobe's Digital Media annual recurring revenue (ARR), a closely watched metric for the business, increased $2 billion over the course of the year. Total revenue increased a relatively modest 11% for the year, while its cost of revenue remained relatively stable.
Adobe's outlook for 2025 was also a bit disappointing for investors, as management expects just 11% growth in ARR. Its EPS estimate of $20.20 to $20.50 also fell short of analysts' expectations.
But Adobe should be able to consistently increase adoption and use of its tools during the next few years, as more creatives and marketers look to use AI to support their businesses. Adobe is well positioned to win that business, and it can charge a premium price to do so. That should lead to steady revenue growth and margin expansion, especially considering management's recent focus on improving profitability. With the shares currently trading at less than 22 times the midpoint of management's 2025 EPS outlook, the stock looks like a great buy at this price.
