We recently compiled a list of the 35 Most Important AI Stocks for 2025 According to JPMorgan. In this article, we are going to take a look at where NRG Energy, Inc. (NYSE:NRG) stands against the other AI stocks.
Investors have become increasingly concerned about the rising capital expenditures on artificial intelligence, with many wondering whether the expectations embedded in financial markets today project a realistic path ahead. According to a recent report on the topic by investment bank JPMorgan, investors should focus on opportunities that will prevail right along the AI value chain. Analysts at the bank have advised investors to weigh future potential earnings against what is already embedded in the price. Per JPMorgan, cheaper valuations and less demanding earnings expectations outside of mega-cap tech stocks suggest that even AI bulls should be positioned for further broadening across sectors in 2025.
The Investment Outlook 2025 report by JPMorgan takes a look at the soaring valuations of the Magnificent Seven group of stocks and their importance to the AI revolution. The bank highlights that while each of the companies in the Magnificent Seven are geared differently to the AI theme, this group of stocks now makes up nearly 35% of the S&P 500 market cap and has driven over 70% of returns since the beginning of 2023. This performance, compared against the rest of the market, has allowed for the expansion of valuations. JPMorgan underlines that while the rest of the S&P 500 trades on a 12-month forward earnings multiple of 19x, the largest 10 stocks in the index now trade on 29x.
Read more about these developments by accessing 10 Best AI Data Center Stocks and 10 Buzzing AI Stocks According to Goldman Sachs.
Analysts led by Karen Ward, the Chief Market Strategist for EMEA at JPMorgan, contend that the valuation discrepancy between tech and the rest is unsustainable. The report stresses that if the broad AI ecosystem generates sufficient revenues to justify the earnings expectations already assumed for a handful of companies, the rest should catch up over time. It also cautions that if instead, the broader corporate universe does not see the clear use case of these technologies and is unwilling to pay for them, then a catch down scenario is more likely. However, when the strong fundamentals of these mega caps are compared to other parts of the S&P 500 today, as well as to the 2000s tech bubble, a catch down seems unlikely, it notes.
JPMorgan broke down the AI revolution into five key areas. These were identified as AI hardware, AI hyperscalers, AI developers, AI integrators, and AI essentials. Hardware firms were defined as the companies that drive the design and manufacture of the semiconductors that are key to generating computing power. Hyperscalers were picked out as the companies that provide physical AI infrastructure such as cloud services and data centers, create custom silicon chips, and build large language models that can be used by other companies. AI developers were recognized as software companies that leverage hyperscaler technologies to provide solutions for end users.
Read more about these developments by accessing 30 Most Important AI Stocks According to BlackRock and Beyond the Tech Giants: 35 Non-Tech AI Opportunities.
AI integrators were pinned down as the larger organizations that have sufficient technology functionality to build their own AI solutions, as well as the IT services companies that support them. AI essentials were singled out as companies that are less directly impacted by the technology itself, but provide the resources that enable the whole AI value chain to work, whether that is energy, air conditioning, raw materials or even the data to train models. JPMorgan has warned that there is a substantial gap between the revenue expectations of hardware companies and the revenue growth that can be generated by the AI ecosystem. The bank has cautioned that this weakness can spread throughout the AI value chain.
The report notes that the attention of investors has so far focused on AI hardware and AI hyperscalers, two areas of the AI industry more exposed to the technology and communication services sectors. Per JPMorgan, high levels of valuation dispersion in these categories suggest that opportunities for skilled stock pickers persist, but investors must recognize that any earnings disappointment could lead to substantial volatility. The report further highlights that these categories are also likely to be the most exposed to escalating trade tensions between the US and China. The bank predicts ample opportunities for investors in the AI essentials and AI developers bucket over time.
Our Methodology
For this article, we selected AI stocks by combing through a note on the AI industry by investment bank JPMorgan. These stocks are also popular among hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Close up image of an engineer inspecting the control panel of a modern power plant.
NRG Energy, Inc. (NYSE:NRG)
Number of Hedge Fund Holders: 49
NRG Energy, Inc. (NYSE:NRG) operates as an energy and home services company in the United States and Canada. In November 2024, NRG announced a partnership with Renew Home and Google Cloud to develop a 1-gigawatt AI-powered virtual power plant (VPP) in Texas. This initiative aims to distribute hundreds of thousands of smart thermostats by 2035, enhancing grid resilience through AI-driven solutions. These AI initiatives have positively impacted the financial outlook of the firm. In the third quarter of 2024, the company reported an adjusted EBITDA of $1.06 billion, surpassing market expectations. Consequently, NRG raised the 2024 adjusted profit forecast to a range of $5.95 to $6.75 per share, up from the previous $5.00 to $6.30, and projected 2025 profits between $6.75 and $7.75 per share, exceeding analyst predictions.
Overall NRG ranks 29th on our list of the important AI stocks for 2025 according to JP Morgan. While we acknowledge the potential of NRG as an investment, our conviction lies in the belief that some stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a stock that is more promising than NRG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.