5 Undervalued AI Stocks Set for a Second-Half 2025 Rebound

The AI sector has faced a rocky first half of 2025, with many stocks languishing due to high valuations, regulatory headwinds, and macroeconomic uncertainty. However, this underperformance has created a unique opportunity for investors to capitalize on mispriced assets. As strategic catalysts emerge—ranging from groundbreaking partnerships to product launches and earnings growth—these five AI leaders are poised for a strong second-half turnaround.

1. Twilio (TWLO): AI-Driven Communication Infrastructure

Twilio's first-half underperformance masked its transformation into an AI infrastructure powerhouse. The company's Customer AI platform, launched in 2023, now powers over 1,000 AI-generated voices in 40 languages, driving a 12% revenue increase in Q1 2025. Strategic partnerships with Google Cloud and OpenAI are accelerating adoption, with analysts raising their price target to $130 (30% upside from current levels).

Twilio's forward P/E of 23 is a discount to its projected 24% earnings growth in 2025. With a 107% dollar-based net retention rate and a 7% YoY customer count increase, the company's scalable SaaS model positions it to outperform as AI adoption in customer engagement accelerates.

2. Alector (ALEC): Biotech's AI-Powered Neurodegenerative Breakthrough

Alector, a clinical-stage biotech, is leveraging AI to develop treatments for Alzheimer's and Parkinson's. Its pipeline includes AL001 (Phase 3) and AL101 (Phase 1), with partnerships with GSK and AbbVie adding credibility. Despite a 75% stock price drop since 2024, Alector trades at near-cash levels with a $18.2 price target (184% upside).

The FDA's cautious stance on Alzheimer's treatments has delayed approvals, but Alector's robust pipeline and $6.40 valuation make it a compelling long-term play. If AL001 receives regulatory clearance, the stock could surge as demand for AI-driven biotech solutions intensifies.

3. Teladoc Health (TDOC): Telehealth's AI Integration

Teladoc's Q1 2025 revenue declined 3% YoY, but its AI-driven diagnostics and virtual care tools remain undervalued. Analysts maintain a “Hold” rating, with a $9.65 average price target (19.5% upside).

While the company's ROA lags (-2.67%), its strong net margin (-14.78%) and low debt-to-equity ratio (1.11) suggest resilience. Teladoc's July 29 earnings report could signal a rebound, especially if AI-powered mental health tools gain traction.

4. Unity Software (U): Gaming's AI Renaissance

Unity's stock has rebounded nearly 50% in 2025, driven by its Unity Vector AI tools and partnerships with automotive and healthcare firms. The company's rollback of controversial runtime fees and improved EBITDA margins highlight its focus on developer retention.

Analysts project 38% operating income growth, with Unity's scalable platform aligning perfectly with Arm Holdings' Neoverse and AI safety initiatives. As real-time 3D content demand surges, Unity's undervalued growth story is hard to ignore.

5. Arm Holdings (ARM): Semiconductor's AI Infrastructure Leader

Arm's rebranding to Neoverse, Niva, and Zena platforms in 2025 underscores its role in AI chip design. The company's Yellow Teaming methodology for AI safety and partnerships with OpenAI (Project Stargate) position it as a critical infrastructure player.

With a 21% earnings growth expectation in 2025 and a forward P/E of 20, Arm is trading at a discount to its long-term potential. Its collaboration with Meta on CPU designs and SOAFEE's open-source automotive software initiative further solidify its market leadership.

The Case for Now

The first half of 2025 has been a correction for AI stocks, but this volatility has priced in pessimism that's likely to reverse. Twilio's AI infrastructure, Alector's biotech pipeline, Teladoc's telehealth AI, Unity's real-time tools, and Arm's semiconductor innovations all represent undervalued growth models. As these catalysts materialize—driven by earnings growth, strategic partnerships, and sector-specific demand—investors who act now could reap significant second-half gains.

Final Take: The AI sector's second-half rebound isn't just a possibility—it's a probability. By focusing on these five undervalued leaders, investors can position themselves to benefit from the next wave of innovation and market re-rating.