Top AI stocks Alphabet and IBM remain undervalued amid 2025 tech rally with strong financials and growth potential.
It’s no secret that 2025 has been a rollercoaster for the markets. With the S&P 500 currently priced at nearly 29 times trailing earnings well above its historical average of 17.9 it’s safe to say investors are paying a premium for growth.
But here’s the catch: not all artificial intelligence (AI) stocks have taken part in this rally. Some top-tier names with proven AI muscle, massive scale, and strong financials are still trading at reasonable valuations. If you’re looking for value in a hyped-up market, Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) and IBM (NYSE: IBM) might just be the under-the-radar gems you’re after.
Let’s take a closer look at why these two stocks still look like smart picks in mid-2025.
Alphabet
You might assume Alphabet would be one of the first to get swept up in the AI mania. But interestingly, it’s stayed relatively grounded in terms of valuation. The stock is currently trading at just 18.7x forward earnings, a stark contrast to other AI leaders like Microsoft (32.8x) and Nvidia (36x).
That modest valuation doesn’t quite line up with the company’s performance or potential. The alphabet is firing on all cylinders. In Q2 2025, the company posted $96.4 billion in revenue (up 14% YoY) and $28.2 billion in net income (up 19%). What fueled that growth? A massive boost from its AI and cloud business segments.
Its innovative AI Overviews feature which provides direct answers and summaries at the top of search results now serves over 2 billion users monthly in more than 200 countries and 40 languages. It’s helping reshape the way people use Google Search.
Google Cloud is also gaining steam. The company doubled its number of $250 million+ deals YoY, and has already inked as many billion-dollar contracts in the first half of 2025 as it did in all of 2024. Plus, the OpenAI partnership, where ChatGPT runs on Google Cloud infrastructure, could turn out to be a long-term growth engine.
And let’s not forget YouTube. With 200 billion daily views on YouTube Shorts, it’s now the top platform in terms of streaming time in the U.S.
Alphabet’s cutting-edge AI model, Gemini 2.5 Pro, is outperforming competitors on complex tasks at a lower cost. That advantage helped fuel an 80% jump in usage of its Google AI Studio and Gemini API in April. As of now, nearly 9 million developers have adopted Gemini 2.5.
Sure, some investors raised eyebrows when Alphabet upped its 2025 capital spending guidance from $75B to $85B. But with $95 billion in cash and $66.7 billion in free cash flow, the company is more than equipped to invest in AI infrastructure and it’s likely to pay off.
IBM
IBM doesn’t get the headlines that flashy tech names do, but it’s quietly become a major player in enterprise AI and investors have barely noticed.
Despite delivering strong Q2 results, IBM’s stock dipped due to softer-than-expected software growth. Still, it’s trading at just 26.5x forward earnings, far cheaper than peers like Nvidia or Microsoft.
A lot has changed at IBM since it acquired Red Hat for $34 billion. That move helped transform the company into a hybrid cloud and AI heavyweight. In Q2, Red Hat revenue rose 14% YoY, while OpenShift, its hybrid cloud platform, jumped 20% and hit $1.7 billion in annual recurring revenue.
What sets IBM apart is its focus on enterprise-grade AI. Instead of chasing consumer AI applications, it’s delivering secure, compliant, and scalable solutions for regulated industries like finance and government. Its watsonx AI suite, built on Red Hat, is central to this strategy.
The recent acquisition of Seek AI, a natural language AI startup, further boosts watsonx’s capabilities. IBM’s enterprise AI business is gaining serious momentum valued at $7.5 billion inception-to-date in Q1, up from $6 billion the previous quarter.
Beyond software, IBM’s infrastructure division is thriving too. Q2 infrastructure revenue grew 11% YoY, driven largely by strong demand for IBM Z mainframes, which saw a whopping 67% revenue spike thanks to the launch of z17.
Right now, software accounts for 45% of IBM’s revenue and brings in $22.7 billion in ARR, with strong retention and consistent growth.
The bottom line? IBM’s pivot toward AI and cloud is working. Wall Street may not be paying attention yet, but long-term investors might want to.
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