It's no secret that the "Magnificent Seven" stocks have been the primary drivers of the S&P 500's stellar performance in recent years. In 2025, the Mag 7 delivered a 23% total return, following an incredible 64% gain in 2024 and a 37% rise in 2023.
I'll spare you the math. This means that a $10,000 investment in the Magnificent Seven at the start of 2023 would be worth about $27,700 in January 2026. And it's fair to say that the boom in artificial intelligence (AI) investment has been the driving force behind this exceptional performance.
Image source: Getty Images.
However, as we head into the next phase of the AI revolution, it may be better to look for stocks that are a little more under the radar, rather than the trillion-dollar giants. Here are two that could be worth a closer look right now.
AI-powered defense
Kratos Defense & Security (KTOS 7.46%) is a leading developer of uncrewed aerial vehicles (UAVs), hypersonic missile systems, and other defense products used by the U.S. Department of Defense, allies, and private-sector government contractors. The company is the largest provider of jet target drone systems to the United States military, and one key point to know is that its main business focuses are areas that are getting major attention when it comes to defense spending right now.
Recent growth is promising, with 36% year-over-year growth in uncrewed systems (drone) revenue leading the way. But this could be just the starting point. The UAV market is expected to roughly quadruple in size by 2032, and the Department of Defense is allocating 47% more to hypersonic systems than it did just two years ago.
NASDAQ: KTOS
Key Data Points
Simply put, evolving AI technology allows Kratos to make its products better and more valuable to customers, and there is massive potential for this business to grow.
A turnaround that's making great progress
Unity Software (U +0.68%) provides an AI-powered software platform that allows video game developers to create and monetize their games. Over 70% of the top 1,000 mobile games were created using Unity's platform, so it is truly the leader in its space.
A couple of years ago, Unity made pricing changes that were not well received by customers, and the platform's future growth potential was questionable. But new CEO Matt Bromberg, who was instrumental in Zynga's turnaround a few years ago, has made excellent progress, leaning in to the creation of AI tools for game creation, more effective marketing tools for creators, and forming a partnership with Epic Games.
Recent results are very encouraging. The company has returned to revenue growth, and in the most recent quarter, free cash flow grew by an impressive 31% year over year. With an excellent balance sheet and tons of potential to expand beyond the core gaming business (Unity is already seeing impressive traction in the automotive industry, for example), this could be a turnaround story worth investing in.
