2 Magnificent Artificial Intelligence (AI) Stocks to Buy in May and 1 to Avoid

Globe and Mail

05-05-2025

For much of the last two-and-a-half years, the bulls have been in firm control on Wall Street. While a confluence of factors is responsible for lifting all three of Wall Street's major stock indexes to new heights in 2024 (and early 2025 for the S&P 500), it's the evolution of artificial intelligence (AI) that stands head-and-shoulders above other catalysts.
The broad-stroke excitement with AI is that it allows enabled software and systems to reason and act on their own. Looking a bit further down the line, machine learning, when coupled with AI capabilities, can lead to software and systems learning new jobs and skillsets, all without human oversight.
The global addressable market for artificial intelligence is vast. In Sizing the Prize, the analysts at PwC pegged it at $15.7 trillion by 2030. This figure includes an estimated $6.6 trillion from productivity improvements, along with $9.1 trillion from various consumption-side effects.
But as previous next-big-thing innovations and technologies have taught investors, not every cutting-edge company is necessarily worth buying. As we move into May, two magnificent AI stocks stand out as no-brainer buys for a multitude of reasons. Meanwhile, one of Wall Street's AI darlings appears priced for perfection and is worth avoiding.
Artificial intelligence stock No. 1 that can be purchased with confidence in May: Alphabet
The stock market entered 2025 with one of its priciest valuations in history. In many instances, AI stocks were leading the charge, with valuations that were well beyond historical norms. But this isn't the case with Google parent Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG), which is one of the cheapest AI stocks on the planet.
Alphabet is best-known for its world-leading internet search platform, Google. Data aggregated by GlobalStats finds that Google has controlled an 89% to 93% monthly share of worldwide internet search when looking back more than a decade. Google's near-monopoly status ensures strong ad pricing power and relatively consistent operating cash flow for its parent company.
But while advertising is Alphabet's foundation, AI-driven cloud infrastructure service platform Google Cloud is its future. Google Cloud became recurringly profitable in 2023 and is currently generating $49 billion in annual run-rate sales. Cloud-service margins are considerably higher than those associated with advertising, meaning a faster growth rate for Google Cloud will disproportionately benefit the company's bottom line.
Alphabet is investing aggressively in AI hardware to give its Google Cloud customers access to generative AI solutions, as well as large language model technology. The ongoing integration of AI solutions into its cloud infrastructure service platform should sustain or accelerate Google Cloud's double-digit growth rate.
Another reason investors can trust in Alphabet is its hearty cash position. It closed out March with $95.3 billion in cash, cash equivalents, and marketable securities, all while generating $36.2 billion in net cash from its operations through the first three months of 2025. This boatload of capital allows the company to invest in faster-growing initiatives, as well as to reward shareholders by repurchasing its own stock.
Shares of Alphabet can be scooped up right now for less than 16 times forecast earnings per share (EPS) in 2026. This equates to a 31% discount to its average forward price-to-earnings (P/E) multiple over the last five years.
Artificial intelligence stock No. 2 that's a screaming buy in May: Baidu
April was a month marked by heightened trade tensions between the U.S. and China, the world's No. 2 economy by gross domestic product. In spite of these ongoing risks, the time to pounce on one of China's most important AI-powered tech stocks, Baidu (NASDAQ: BIDU), has arrived.
Similar to Alphabet, Baidu's core business is ad-driven. With few exceptions, Baidu has sustained a 50% to 85% monthly share of China's internet search market over the trailing decade. Even though Baidu's influence is limited to its home market, it's clearly the top choice by China-based businesses looking to market to consumers. Not to sound like a broken record, but this translates into predictable cash flow and reasonably strong ad-pricing power.
However, it's Baidu's non-online marketing segment that's likely to be its premier growth driver in the latter-half of the decade, if not well beyond.
For instance, even though Baidu's net sales advanced by a low-single-digit percentage during the December-ended quarter, AI Cloud revenue surged 26% and helped lift non-online marketing segment sales up 18% from the prior year. Like Alphabet, Baidu is willingly spending on AI solutions for its cloud infrastructure service platform.
But there's more to Baidu's AI ambitions than just cloud services. Baidu is the parent of Apollo Go, which is the world's (thus far) most-successful autonomous driving company. In January, it surpassed 9 million cumulative rides since its inception. It's also the first autonomous vehicle (AV) company to be granted a permit to conduct testing on public roads in Hong Kong. If the global addressable AV market is even a fraction as large as some analysts have suggested, Baidu can be an absolute juggernaut.
Baidu is also sitting on a mountain of cash. It ended 2024 with the U.S. equivalent of around $19 billion in cash, cash equivalents, restricted cash, and short-term investments. There's plenty of capital to invest in its AI-driven future.
Lastly, Baidu stock can be picked up for less than 8 times forward-year EPS. Even accounting for U.S.-China trade war tensions, this is historically inexpensive.
The AI stock that investors would be wise to avoid in May: Palantir Technologies
As a reminder, not every company associated with a next-big-thing trend is necessarily going to be a winner. Though its shares have risen by more than 1,700% since the end of 2022, AI-fueled software-as-a-service (SaaS) solutions provider Palantir Technologies (NASDAQ: PLTR) is a stock worth avoiding in May.
To be objective, Palantir does deserve some degree of valuation premium. Though it contends with small-scale competitors, there isn't a company that can replace the services Palantir provides through its Gotham and Foundry platforms at scale. Irreplaceability is hard to find among publicly traded companies, and sustainable moats tend to be rewarded.
Palantir has also been growing sales at a lightning-fast pace. Gotham, which provides federal governments with data collection/analytics, as well as tools to conduct military missions, continues to benefit from robust, multiyear contracts won from the U.S. government. Palantir's ability to generate recurring profits has gone a long with the investing community.
But there are three big headwinds Palantir is up against in 2025, and all of them suggest its share price is (eventually) headed lower.
To begin with, it's unclear if the Donald Trump administration plans to increase defense spending. With the Pentagon, in February, proposing $50 billion in annual cuts over the next five years, Palantir's top-tier growth engine (Gotham) could shift down a gear or two.
Secondly, every next-big-thing trend for more than 30 years has navigated its way through a bubble-bursting event. This is to say that investors have always overestimated how quickly a new innovation would gain utility and widespread adoption. Though Palantir's multiyear contracts via Gotham and subscription revenue from Foundry would buoy short-term sales, investor sentiment tied to a bubble-bursting event would almost certainly weigh on its stock.
Third and most important, Palantir's valuation is far beyond historical norms. Prior to the bursting of previous bubbles over the last three decades, industry-leading companies peaked at price-to-sales (P/S) ratios of 30 to 43. Palantir Technologies' stock is tipping the scales at a P/S ratio of 101! No industry-leading company has ever been able to maintain such an outsized premium over an extended timeline.
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