Jefferies Identifies Nvidia and Alphabet as Top 'Magnificent Seven' Stocks for 2025

Analysts at Jefferies recently evaluated a selection of leading tech stocks, famously dubbed the "Magnificent Seven," to determine which ones are expected to excel in 2025. This group includes some of the most significant mega-cap technology companies that have been driving market performance over the last few years.

Among this elite group, the top two picks identified by Jefferies are Nvidia (NVDA) and Alphabet (GOOGL). Other members of the Magnificent Seven, ranked by Jefferies, are Meta Platforms, Apple, Amazon, Tesla, and Microsoft.

The rankings from Jefferies were influenced by a variety of factors including growth potential, valuation metrics, yield, earnings revisions, sentiment from sell-side analysts, return on invested capital (ROIC), stock price momentum, and the financial balance between research and development (R&D) versus capital expenditures (capex).

Nvidia: A Leader in AI and Graphics Processing

Nvidia has claimed the top position due to its remarkable growth, positive revisions in future guidance, appealing valuation, and robust analyst sentiment. Currently, Nvidia is on track to achieve its second consecutive year of triple-digit revenue growth, an impressive feat considering its size.

Looking ahead, analysts predict over 50% sales growth for Nvidia in 2025. Its valuation remains appealing, with a forward price-to-earnings (P/E) ratio under 33 and a price/earnings-to-growth (PEG) ratio of 1. Generally, a PEG under 1 suggests undervaluation, although growth stocks typically present PEGs above this threshold.

Nvidia’s growth trajectory is largely driven by the urgent demand for artificial intelligence (AI) infrastructure and the competitive advantage the company has built with its CUDA software platform. Originally designed to enhance graphics rendering for video games, Nvidia's graphics processing units (GPUs) now serve as critical components for AI systems, given their superior processing abilities.

As major tech firms and AI start-ups strive to refine their AI models, the need for increased computing power—primarily sourced from GPUs—grows. Nvidia's extensive collection of CUDA libraries and tools enables its semiconductors to be easily utilized for various AI applications, resulting in almost a 90% market share in the GPU sector.

A prime example of Nvidia's GPU utilization can be seen in Elon Musk's xAI, which trained its Grok 2 model using 20,000 GPUs, ramping up to 200,000 GPUs for training its more complex Grok 3 model. Plans also suggest that Musk's xAI may aim for a data center with a capacity of 1 million GPUs in the future.

Additionally, Microsoft, Nvidia’s biggest client, has announced an investment of $80 billion in AI data centers this year. Not to be outdone, a coalition including Oracle, SoftBank Group, and OpenAI has considered spending upwards of $500 billion on AI infrastructure in Texas, a venture known as Project Stargate.

A substantial portion of this expenditure will likely funnel directly into GPU purchases, showcasing the potential growth on the horizon for Nvidia.

Alphabet: A Solid Growth Opportunity

While Nvidia's recent explosive growth is a standout, Alphabet presents a solid growth opportunity, distinguished as having the most appealing valuation in the Magnificent Seven with a forward P/E of just 19.4.

In the last quarter, Alphabet reported a revenue increase of 15%, with profits surging by 34% and earnings per share rising by 37%. This strong performance is attributed chiefly to its Google Cloud division, which experienced a 35% revenue boost.

The cloud computing sector, characterized by high fixed costs and substantial operational leverage once a scale is achieved, demonstrated a turning point in profitability. In the last quarter, operating income for Google Cloud soared from $266 million a year ago to almost $2 billion.

As organizations ramp up efforts to create their AI models and applications, Alphabet's cloud services are expected to thrive. The company is investing in expanding its data center capabilities while leveraging custom AI chips, developed in partnership with Broadcom, to enhance performance and efficiency in AI processing.

The combination of scaling up operations and advancements in custom chip technology should bolster margins for Google Cloud, further boosting earnings growth prospects.

Moreover, Alphabet continues to dominate the search engine market with Google and YouTube, the largest streaming platform globally, which consistently sees double-digit revenue growth. Revenue from its overall Google Services segment grew by 13% last quarter, with segment operating income skyrocketing by 29% to $30.9 billion.

This year, Alphabet plans to integrate its new Gemini AI model across its platforms to stimulate further growth and promote the Gemini app as its competitor to ChatGPT.

In addition to these core ventures, Alphabet is exploring various emerging markets, including quantum computing, where recent breakthroughs have occurred, and its Waymo initiative, which is currently leading the market in offering paid robotaxi rides in the U.S. Though these areas are still in their infancy and may not yet be profitable, they hold significant long-term promise.

In summary, Nvidia and Alphabet present a compelling mix of growth potential and attractive valuations, positioning them as worthwhile investments as we look toward 2025.

Stocks, Investment, Growth