Many artificial intelligence (AI) stocks have zoomed higher over the last three years, following the introduction of OpenAI's ChatGPT. One of the biggest winners, by far, has been Palantir Technologies (PLTR +1.32%). The enterprise software company integrated generative AI into its software in 2023, and it's seen sales and profits soar ever since. The stock is up a cumulative 2,500% since the start of 2023, including a 120.7% rise in 2025 alone, as of this writing.
Up until last week, that was good enough to make it the best performer in the S&P 500 at the moment. But another stock overtook the market darling's year-to-date performance at the start of September, boosted by the voracious demand for artificial intelligence. Say hello to the new best-performing stock in the S&P 500.
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Essential infrastructure for AI data centers
Big tech companies are spending hundreds of billions of dollars on building out data centers and outfitting them with servers. Chipmakers like Nvidia have benefited greatly as demand for graphics processing units (GPUs) and custom AI accelerators continues to climb. But there's another important component to building out data centers: Storage.
AI training is extremely data-intensive. While some of that data needs to be readily accessible quickly, a lot of it can be held in what's called "nearline" storage. Nearline storage might take a few seconds to access, but it's a cheap and effective way to maintain the huge amounts of data needed for large language models.
Hard drive maker Seagate Technology (STX +3.24%) has seen demand for nearline storage explode, helping push its stock to a 121.4% gain so far this year, as of this writing. That's better than every other stock in the S&P 500, including Palantir.
NASDAQ: STX
Key Data Points
The company shipped 137 exabytes of capacity to data center customers last quarter, up 14% sequentially and 52% year over year. The financial results are just as impressive. Revenue grew 39% in fiscal 2025. Gross profit margin expanded to 35.2% from 23.4% last year. Fourth-quarter gross margin was even more impressive at 37.4%, as the market remains supply-constrained.
Seagate is one of two major suppliers of hard drives. Western Digital (WDC +2.57%) remains its biggest rival, maintaining a nearly equal share of the market. Unsurprisingly, Western Digital is also a top-performing stock this year, as it benefits from the exact same mega trend as Seagate. While both have made strides in increasing storage capacity per unit, there's still a limit to how much each can produce. Thus, they've both seen strong gross margin expansion.
Tech companies are planning to keep spending on new data centers and the necessary increased storage capacity that comes along with them. Seagate's management expects data center storage demand to climb from $13 billion in 2024 to $23 billion by 2028. Western Digital shared a similar outlook at its investor day in February. As a result, the current cycle of growth could extend for years to come.
NASDAQ: WDC
Key Data Points
Is it worth the price?
Hard drives are kind of a commodity for data centers. A buyer could use any supplier, and the hard drives will fit into the same exact spot in their data center as any other hard drive would. The only major difference is how much storage capacity each drive has, which makes price per terabyte (TB) the biggest deciding factor for a buyer.
As a result, competition between Seagate and Western Digital has typically kept pricing low and pushed new technology forward relatively quickly. Margin expansion only really happens when there's a huge demand cycle like we're currently seeing. When the cycle ends, and it will, both companies will see deterioration in their margins until the next uptick in demand.
Seagate seems to have developed a slight technology lead. Its heat-assisted magnetic recording (HAMR) process is on track to be able to scale production of 40TB hard drives by the second half of fiscal 2026 (early calendar 2026). Western Digital isn't on track to start mass production of 40TB hard drives -- it's about six months behind. That could open the door for Seagate to take some market share over the next few years and grow slightly faster than its chief rival.
At a forward price-to-earnings (P/E) ratio of 18.5, investors may think Seagate is an absolute bargain compared to most AI stocks. When you compare it with Palantir's eye-popping 245 times earnings multiple, it seems extremely cheap. But it's important to put that in context.
While Seagate is growing earnings extremely quickly right now, it's still in a cyclical industry. Cyclical stocks tend to trade at much more attractive earnings multiples amid upcycles in demand. That's because they could see a massive drop in earnings power if demand dries up, or even if supply growth starts to outpace demand.
For a point of reference, Western Digital trades for a forward P/E ratio close to 14. While Seagate may deserve a slight premium to Western Digital, both are trading at a premium to their historic pricing over the past year after their recent run to put them at the top of the S&P 500's best-performers list. At this point, it might be worth waiting for a better price on both stocks before buying into the latest big winner from artificial intelligence spending.
