Jefferies Names Nvidia and Alphabet as Top Picks in the "Magnificent Seven" for 2025

Analysts at Jefferies have recently made headlines by ranking the "Magnificent Seven" stocks, identifying which of them are likely to excel in 2025. This group comprises significant mega-cap tech stocks that have played a crucial role in driving market performance over the last few years.

Leading the pack in Jefferies' rankings are Nvidia (NVDA) and Alphabet (GOOGL), followed by other notable companies such as Meta Platforms, Apple, Amazon, Tesla, and Microsoft.

The evaluation by Jefferies considered various quantitative factors like growth potential, market valuation, yield, revisions in earnings forecasts, analyst opinions, return on invested capital (ROIC), stock price trends, and the relationship between research and development (R&D) spending and capital expenditures (capex).

Nvidia emerged as the top choice due to its impressive growth rate, positive earnings outlooks, appealing valuation metrics, and favorable sentiment among analysts.

Nvidia: A Strong Growth Candidate

Nvidia stands out as a company blending robust growth with a reasonable valuation. It is on track to achieve its second consecutive year of substantial revenue increases, marking an impressive accomplishment given its market size.

Analysts anticipate that Nvidia will experience over 50% growth in sales by 2025, bolstered by a forward price-to-earnings ratio (P/E) of less than 33 and a price/earnings-to-growth ratio (PEG) of 1. PEG ratios below 1 typically indicate undervaluation, though high-growth stocks often exceed this benchmark.

Nvidia's growth is propelled by the rapid expansion of artificial intelligence (AI) infrastructure and a significant competitive advantage through its CUDA software platform. Initially designed for enhancing video game graphics, Nvidia's graphics processing units (GPUs) have become fundamental to AI infrastructure due to their exceptional processing capabilities.

Major tech firms and AI startups are increasingly investing in AI model development, resulting in a soaring demand for the computing power provided by GPUs. Nvidia's suite of CUDA X libraries and tools makes its semiconductors versatile for numerous AI applications, enabling the company to capture nearly 90% of the GPU market share.

An illustrative case of this trend is Elon Musk's xAI, which utilized 20,000 GPUs to train its Grok 2 model. The numbers grew from 100,000 GPUs for its Grok 3 model to 200,000 for the next training phase. There are plans for a massive 1 million GPU cluster in its future data center.

Moreover, Nvidia's primary client, Microsoft, has pledged $80 billion this year for AI data centers. In conjunction with this, a coalition of Oracle, SoftBank Group, and OpenAI has explored an investment of up to $500 billion for AI infrastructure development in Texas as part of Project Stargate.

Such investments signal significant growth prospects for Nvidia in the near future.

Alphabet: Strong Growth at Affordable Valuation

Alphabet, while not experiencing growth as explosive as Nvidia's, is still a potent player among the Magnificent Seven, boasting the most attractive valuation with a forward P/E ratio of just 19.4.

In its last quarter, Alphabet achieved a revenue increase of 15%, with profits soaring by 34%, and a remarkable 37% growth in earnings per share. The key driver of this growth was its cloud computing segment, Google Cloud, which saw its revenue rise by 35%.

The cloud computing industry often operates with high fixed costs and significant operating leverage after reaching a certain scale. This was evident in Alphabet’s most recent quarterly results, where Google Cloud's operating profit surged from $266 million last year to an impressive $1.95 billion.

As businesses strive to develop their AI models and applications, Alphabet's cloud services are set to grow robustly alongside the expansion of its data center capacity. The company's partnership with Broadcom to create custom AI chips is expected to enhance performance, reduce processing times, and lower costs in AI inference.

Alphabet's momentum does not stop there; it controls the globally dominant search engine, Google, along with YouTube, which remains the leading streaming platform. Revenues in Google Services climbed 13% last quarter, while operating income surged by 29%, reaching $30.9 billion.

Furthermore, Alphabet is poised to embed its new Gemini AI model across its services this year, aiming to bolster growth through this initiative alongside its Gemini app, which provides competition to ChatGPT.

Alphabet also supports ventures in emerging sectors like quantum computing, having announced a significant breakthrough in this area. The company's investment in Waymo, which currently leads in offering paid robotaxi rides in the U.S., reflects its commitment to exploring future technologies, despite its current unprofitable status.

In summary, Alphabet represents an appealing mix of growth potential and value, partnered with strategic long-term investments in groundbreaking areas like robotaxis and quantum computing.

Investing, Tech, Stocks