The S&P 500(SNPINDEX: ^GSPC) has risen by about 22% so far this year, which is more than twice its average annual gain going all the way back to when the index was established in 1957. The technology sector has been the driving force behind that bullish run, thanks to emerging themes like artificial intelligence (AI).
However, going forward, the broader market will likely also benefit from the cycle of interest rate cuts that just started in nations around the world. Those rate cuts are expected to carry into 2025, and should prove to be a tailwind for companies that are sensitive to consumer spending.
Shares of Oracle(NYSE: ORCL) and Sea Limited(NYSE: SE) are up 68% and 158% in 2024, respectively. Here's why these two unstoppable stocks could crush the S&P 500 again in 2025.
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1. Oracle: A leader in AI data center infrastructure
Oracle's rich history in the tech sector dates back to its founding in 1977. Its initial success came from its industry-leading database management software, but it now offers an impressive portfolio of cloud computing services and data center infrastructure. The company's latest Gen2 Cloud data centers have become a leading choice among AI developers for their performance and cost efficiency.
To build AI models, developers need access to thousands of graphics processing units (GPUs), most of which are supplied today by Nvidia. A single high-end GPU can cost over $30,000 to buy, so most developers rent computing capacity from companies like Oracle instead on a per-minute basis. Oracle currently operates 85 data centers and has 77 more under construction, but Larry Ellison, its chairman and founder, believes the company could eventually have more than 2,000.
In its infrastructure, Oracle uses unique RDMA (random direct memory access) networking technology that moves data between GPUs and devices far more quickly than traditional Ethernet networks. Plus, its data centers are entirely automated, which reduces their operating costs. That's why, according to Ellison, developers can train AI models twice as fast and for half the cost by using Gen 2 Cloud infrastructure compared to competing data centers.
During its fiscal 2025 first quarter, which ended Aug. 31, the Oracle Cloud Infrastructure (OCI) business generated $2.2 billion in revenue. That was a 45% increase from the prior-year period. It also signed 42 new deals for GPU capacity worth $3 billion, which contributed to the company's record remaining performance obligations of $99 billion -- a 52% increase from a year earlier. Many top AI customers like OpenAI, Cohere, and xAI are waiting for more Oracle data centers to come online, at which point that backlog will convert into revenue.
Oracle stock is at a record high and it isn't cheap right now. It's trading at a price-to-earnings (P/E) ratio of 45.3, which is about 41% more expensive than the P/E ratio of the Nasdaq-100 technology indexes ratio of 32.1. However, if the company does increase its data center footprint more than tenfold to 2,000 locations over time as Ellison expects, I would say the stock looks cheap on a forward earnings basis. So long as Oracle shows investors it's making consistent progress on that front, I think its stock has a great chance to beat the S&P 500 again next year.
2. Sea Limited: A triple threat in the digital economy
Sea Limited is based in Singapore, and it primarily serves the Southeast Asia region, where consumption is a big driver of economic performance. That's a big tailwind for the company's consumer-centric businesses in e-commerce, digital entertainment (gaming), and digital financial services.
E-commerce is Sea's largest source of revenue, led by its hybrid consumer-to-consumer and business-to-consumer online retail platform, Shopee. It processed 2.5 billion orders during the second quarter of 2024, which was a 40% increase from the same quarter last year.
Over the past year, Sea has focused on making its logistics network more efficient by streamlining fulfillment processes and leaning more on technology, and it achieved an 8% reduction in its cost per order during Q2. It also delivered 70% of its orders across Asia within three days. E-commerce giant Amazon has found that customers order more frequently when they receive products quickly, so rapid order fulfillment is a good sign for Shopee over the long term.
Sea's digital entertainment business is home to the Garena game development studio, which created one of the world's most downloaded mobile games: Free Fire. The segment had 648 million quarterly active users across all titles during Q2, and that metric grew for the second consecutive quarter following a post-pandemic slump. However, tight economic conditions sent its average revenue per user down to $10.20, its lowest level in a year -- but that trend could reverse now that interest rates are falling, which will leave more money in consumers' pockets.
Meanwhile, Sea's digital financial services business continues to deliver incredible growth. It's headlined by SeaMoney which offers digital banking services, consumer loans, and even seller financing for merchants who use Shopee. It registered more than 4 million first-time borrowers in Q2, which was double the number it added in the same quarter last year, and the platform had $3.5 billion in active loans which was up 40%.
Sea generated $3.8 billion in total revenue across all segments in Q2, which was a 23% jump from the prior-year period. It was the fastest growth rate in two years, as the company ramped up spending in areas like sales and marketing to attract more customers across its portfolio of businesses. Sea still generated a net income of $79.9 million, but I wouldn't be surprised if it temporarily chooses to sacrifice some profitability to drive growth that could pay off in the longer term. After all, the company is sitting on a massive cash pile of $9 billion that it can use to expand.
Sea stock has soared by 158% this year, but it's still down 72% from the high it hit during the tech frenzy of 2021. It was unquestionably overvalued back then with a price-to-sales (P/S) ratio surpassing 30. Thanks to the decline in stock price and the company's consistent revenue growth, Sea stock now trades at a P/S ratio of just 4, which is 58% below its long-term average of 9.6 going back to its IPO in 2017.
As a result, I think the stock will still have plenty of room to run next year, especially as interest rates trend lower around the world and potentially boost consumer spending.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Nvidia, Oracle, and Sea Limited. The Motley Fool has a disclosure policy.
