Palantir Technologies (PLTR +2.52%) is a great representative of the AI stock boom.
The company saw rapid adoption of its software over the past few years, especially among enterprise customers using its Artificial Intelligence Platform (AIP) to increase its accessibility and use cases. That resulted in strong revenue growth and even stronger profits thanks to its expanding operating margin as it scales. Enthusiastic investors rewarded the stock, sending it up another 143% so far this year as of this writing.
But as big tech companies spend more and more on building out massive data centers and filling them with servers, a pair of essential AI hardware makers have seen their fortunes rise in 2025. As a result, both stocks have outperformed Palantir year to date, each rising more than 185% so far.
Here are the two high-flying AI stocks outperforming the market darling.
Looking beyond the chipmakers in AI hardware
A lot of attention goes toward which GPUs or AI accelerators hyperscale customers are buying for their data centers. While those chips account for the bulk of spending on a new data center, they're not the only components seeing a massive boost from AI spending.
As developers build bigger and bigger large language models based on billions of pieces of data, they need something to store all of that data. While some of that storage needs to be instantly accessible (or as close to it as possible) by each server, much of it can be held in what's called "nearline" storage. Nearline storage can take a few seconds to access, but it's extremely cheap.
Hard drives are the most cost-efficient form of nearline storage. While solid state drives (SSDs) have displaced magnetic hard drives in personal computers, the cost is significantly higher at the data center level. Using SSDs for storage would cost roughly seven to eight times as much for the same amount of storage.
As a result, hard drive makers Seagate Technology (STX +3.93%) and Western Digital (WDC +4.50%) have seen demand for their nearline storage product soar. Seagate reported a 52% year-over-year increase in nearline capacity shipments last quarter. Western Digital reported a 36% increase.
NASDAQ: STX
Key Data Points
That's resulted in some very strong revenue growth and margin expansion. While Seagate and Western Digital's products are interchangeable, there's still a limit on how much they can produce. And with demand climbing for its high-capacity storage solutions, they've been able to exhibit pricing power. Seagate's gross margin expanded 7 percentage points last quarter and Western Digital's expanded 6.1 percentage points.
NASDAQ: WDC
Key Data Points
The combination of growing revenue and expanding margins has been good for earnings growth. Seagate saw earnings per share climb 147% year over year last quarter. Western Digital doesn't have a comparable EPS number from last year, as it spun off its flash memory business to focus more on the hard drive opportunity in February this year. However, its reported operating income for the remaining business increased 147% year over year last quarter.
Can they keep climbing from here?
With the exceptional earnings growth exhibited by both companies, it's no surprise the stocks have moved significantly higher since the start of the year. But it's important to consider that the hard drive industry is very cyclical. As we move deeper into a cycle, it's typical for earnings to climb, but investors should discount those earnings more as the cycle will eventually come to an end. When it does, earnings will plummet as high fixed costs and research expenses eat up leaner revenue.
That said, the increasing long-term spend commitments from some of the biggest names in AI may give investors confidence that this cycle will extend longer than normal. OpenAI, for example, is set to invest $400 billion in data centers over the next three years alone. Other big tech companies have consistently revised their spending plans upward.
Importantly, hard drives aren't set to lose their price advantage anytime soon. In fact, Seagate expects the advantage to improve in 2026 as it scales its heat-assisted magnetic recording (HAMR) process, which will enable it to make higher-capacity hard drives. Western Digital is about six months behind in scaling its next-generation technology.
Seagate and Western's stocks trade at forward P/E ratios of 22 and 18, respectively. That might sound cheap, especially compared to other AI stocks and their current earnings growth, but it's relatively expensive compared to the stocks' historical valuations. Indeed, much of the run-up in price this year has been fueled by multiples expansion. And while the outlook for both companies continues to improve, investors may be wise to wait for a better opportunity to invest in the two AI stocks.
