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

Analysts at Jefferies have recently made headlines by ranking the "Magnificent Seven" stocks, projecting which ones are likely to outperform in 2025. This group consists of major tech companies that have been instrumental in driving market growth over the past few years.

The top recommendations from Jefferies include Nvidia (NVDA) and Alphabet (GOOGL). Other companies in the Magnificent Seven list are Meta Platforms, Apple, Amazon, Tesla, and Microsoft.

The rankings provided by Jefferies were determined using a variety of quantitative metrics such as growth potential, valuation, yield, changes in earnings projections, analyst sentiment, return on invested capital (ROIC), stock momentum, and research and development (R&D) spending compared to capital expenditures (capex).

Nvidia secured the top spot primarily due to its remarkable growth, improved guidance, appealing valuation, and positive analyst sentiment.

Nvidia's Strong Growth Potential

Nvidia continues to showcase robust growth prospects while maintaining an attractive valuation profile. The company is expected to achieve its second consecutive year of triple-digit revenue growth, which is quite impressive given its scale.

Analysts predict that Nvidia will see more than 50% growth in sales in 2025. It has a forward price-to-earnings ratio (P/E) of less than 33, and its price-to-earnings-to-growth ratio (PEG) is about 1. In general, a PEG below 1 indicates a stock might be undervalued; however, growth stocks often feature PEGs above 1.

The company's growth is driven by two main factors: the surge in demand for artificial intelligence (AI) infrastructure and its strong competitive positioning due to the CUDA software platform it has developed. Nvidia's graphics processing units (GPUs), initially designed for enhancing graphics in video games, have now become essential for AI infrastructure due to their high processing capabilities.

As both large technology firms and AI startups rush to refine their AI models, they require extensive computing power primarily supplied by GPUs. Through its CUDA X suite of libraries and tools, Nvidia's semiconductors are designed for various AI applications, granting the company a dominant nearly 90% market share in the GPU market.

A recent example of the increasing reliance on GPUs in AI development can be seen with Elon Musk's xAI. The company utilized 20,000 GPUs to enhance its Grok 2 model, escalating to 200,000 GPUs during the training of Grok 3. Musk envisions a future where xAI's infrastructure integrates a cluster of 1 million GPUs.

Moreover, Nvidia's largest client, Microsoft, has committed to spending $80 billion on AI data centers this year. Additionally, a partnership involving Oracle, SoftBank Group, and OpenAI has proposed investing up to $500 billion in AI infrastructure as part of the new Project Stargate in Texas.

A significant portion of this funding will be funneled into GPU acquisitions, further highlighting the sustained growth outlook for Nvidia.

Alphabet's Value Proposition

Although no other major tech company can quite match the pace of Nvidia's growth, Alphabet presents a compelling growth story with the lowest valuation among the Magnificent Seven, marked by a forward P/E of just 19.4.

In the last quarter, Alphabet's revenue increased by 15%, with profits jumping 34% and earnings per share rising by 37%. This growth was largely driven by its cloud computing division, Google Cloud, which saw revenue increase by 35%.

Cloud computing operations typically involve significant fixed costs and can yield high operating leverage once scale is achieved. This dynamic was evident in the previous quarter when Google Cloud's operating income drastically surged from $266 million a year ago to $1.95 billion.

As businesses scramble to develop their AI capabilities, Alphabet is poised for further growth in its cloud segment, especially as it expands its data center capacity. Additionally, the company is currently integrating custom AI chips developed in collaboration with Broadcom, resulting in enhanced efficiency and reduced AI inference processing expenses.

Alphabet's growth trajectory in cloud services should continue to strengthen, as did the margins associated with this business. At the same time, Alphabet benefits from its dominance in search through Google and the popular video platform YouTube, both of which continue to enjoy double-digit revenue growth, with the total sales for its Google Services segment up by 13% last quarter.

Additionally, the operating income from this segment increased by 29% to $30.9 billion, reinforcing Alphabet's solid performance.

Looking ahead, Alphabet aims to incorporate its new Gemini AI model throughout its operations to drive growth. The company is also focused on promoting its Gemini app, which serves as a competitor to ChatGPT.

Moreover, Alphabet is investing in high-potential ventures like quantum computing, where it has made significant technological advancements recently. The company also operates Waymo, which is currently the only entity providing paid robotaxi services in the U.S. These initiatives, while not yet profitable, present vast possibilities for future growth.

In summary, Alphabet combines value and growth effectively, alongside long-term potential through strategic investments in emerging sectors like robotaxis and quantum computing.

The synergy between Nvidia's unrivaled growth and Alphabet's solid valuation renders both companies compelling investment prospects for 2025.

Nvidia, Alphabet, Stocks