2 Soaring Artificial Intelligence (AI) Stocks Outperforming Palantir So Far in 2025

While AI software firms like Palantir have seen significant gains, hard drive manufacturers Seagate Technology and Western Digital have outperformed, with over 185% YTD stock growth, driven by surging demand for cost-effective 'nearline' storage in AI data centers. Both companies reported triple-digit earnings growth and expanding margins, benefiting from hard drives' substantial cost advantage over SSDs for large-scale data storage. Despite the cyclical nature of the industry and historically elevated valuations, sustained long-term AI infrastructure investments by major tech players suggest an extended demand cycle for these essential hardware components.

Analysis

While AI software firms like Palantir (PLTR) have demonstrated significant stock appreciation, up 143% YTD, a more pronounced rally has occurred in the AI hardware sector, specifically with hard drive manufacturers Seagate (STX) and Western Digital (WDC), which have both risen over 185%. This outperformance is fundamentally driven by the surging demand for cost-effective 'nearline' storage solutions essential for large-scale AI data centers. Hard drives maintain a substantial cost advantage over SSDs, estimated at 7 to 8 times cheaper for equivalent capacity, fueling exceptional operational growth. Last quarter, Seagate reported a 52% year-over-year increase in nearline capacity shipments and a 7-percentage-point expansion in gross margin, leading to a 147% rise in EPS. Similarly, Western Digital saw a 36% increase in shipments, a 6.1-percentage-point margin expansion, and a 147% growth in operating income. However, these strong results are tempered by significant risks. The hard drive industry is historically cyclical, and current forward P/E ratios of 22 for STX and 18 for WDC are elevated relative to their historical valuations, indicating that multiple expansion has fueled much of the recent stock performance. Although massive, long-term AI infrastructure spending may prolong the cycle, the current valuations suggest a cautious stance is warranted.

Key Decisions for Investors

• Investors should recognize that while STX and WDC are direct beneficiaries of the AI infrastructure build-out, their current valuations are historically high and may have already priced in a significant portion of the expected growth, warranting caution despite strong momentum.
• Monitor key forward-looking indicators, such as data center capital expenditure guidance from major tech companies and quarterly capacity shipment growth rates, for any signs of deceleration that could signal the peak of this historically cyclical industry.
• For investors with a long-term bullish view on the theme, consider that Seagate's lead in scaling its next-generation HAMR technology could provide a more durable cost advantage and competitive edge over Western Digital, which is reportedly six months behind.
• Given that much of the share price appreciation has been driven by multiple expansion rather than just earnings growth, it may be prudent to await a market pullback or a period of consolidation before establishing new positions, as suggested by the article's cautious tone.