Nvidia and Alphabet: Top Picks for 2025

Analysts at Jefferies have recently provided their insights on the "Magnificent Seven" stocks, focusing on which of these leading mega-cap tech stocks are likely to outperform in 2025. This group includes several major companies that have significantly contributed to market growth over the past few years.

Among these stocks, Nvidia (NVDA) and Alphabet (GOOGL) emerged as the top contenders. The complete list of the Magnificent Seven, in order of Jefferies' rankings, also includes Meta Platforms, Apple, Amazon, Tesla, and Microsoft.

Jefferies ranked these companies based on a variety of metrics, including growth potential, valuation, yield, earnings revisions, sentiment from sell-side analysts, return on invested capital (ROIC), stock price momentum, and the ratio of research and development (R&D) spending compared to capital expenditures (capex).

Nvidia topped the list due to its impressive growth, positive adjustments in guidance, appealing valuation, and favorable analyst sentiment.

Nvidia's Growth Potential

Nvidia is noteworthy for combining robust growth with an attractive valuation. The company is on track to achieve its second consecutive year of triple-digit revenue increases—an impressive feat for a company of its size.

Analysts forecast over 50% sales growth for Nvidia in 2025. Its forward price-to-earnings (P/E) ratio stands below 33, and its price-to-earnings-to-growth (PEG) ratio is at 1. A PEG ratio below 1 typically indicates undervaluation, although many growth stocks have PEGs that exceed 1.

The source of Nvidia's growth lies in the rapid expansion of artificial intelligence (AI) infrastructure, paired with the significant competitive advantage created through its CUDA software platform. Originally developed to enhance graphics rendering in video games, Nvidia's graphics processing units (GPUs) have become essential for AI infrastructure, facilitating higher processing speeds.

As tech giants and AI startups continue to enhance their AI models, there's a rising demand for significant computing power, primarily sourced from GPUs. Through Nvidia's CUDA X suite of libraries and tools, its semiconductors are highly adaptable for diverse AI applications, capturing nearly 90% of the GPU market.

A concrete example of this trend is Elon Musk's xAI, which utilized 20,000 GPUs to develop its Grok 2 model, scaling up to 200,000 GPUs for the second phase of model training. Notably, Musk has mentioned aspirations for a data center hosting a 1 million GPU cluster in the future.

On the side of spending, Nvidia’s largest client, Microsoft, has disclosed plans to invest $80 billion in AI data centers this year. Additionally, a collaboration between Oracle, SoftBank Group, and OpenAI is considering a $500 billion investment into AI infrastructure in Texas, known as Project Stargate.

Such initiatives are set to massively boost demand for Nvidia’s GPUs, heralding a promising growth trajectory for the company.

Alphabet's Strong Valuation and Growth

While Alphabet may not match Nvidia's extraordinary growth rates, it remains a rapidly growing company and is distinguished as the cheapest option among the Magnificent Seven, with a forward P/E ratio of just 19.4.

In its most recent quarter, Alphabet achieved a 15% increase in revenue, accompanied by a 34% rise in profits and a 37% jump in earnings per share. This success is largely attributed to the performance of its Google Cloud division, which experienced a remarkable 35% growth in revenue.

Cloud computing is characterized by high fixed costs and significant operating leverage once it reaches scale. This was illustrated in the last quarter when Google Cloud's operating income surged from $266 million to $1.95 billion.

As companies rush to develop their AI models and applications, Alphabet’s cloud business is expected to grow robustly as it expands its data center capacity. Furthermore, Alphabet is enhancing its efficiency by creating custom AI chips in collaboration with Broadcom, which are said to reduce AI inference processing times and lower costs when combined with GPUs.

Alphabet is poised to further capitalize on its growth as it stands as the smallest of the big three cloud providers, providing substantial potential for increased margins through its custom chip advantage.

Additionally, Alphabet owns the globally dominant search engine, Google, and YouTube, leading to double-digit revenue growth, with its Google Services segment experiencing a 13% increase last quarter.

Alphabet management is integrating its new Gemini AI model into its operations this year to drive growth and promote its Gemini app, which competes with ChatGPT.

Besides its core offerings, Alphabet is investing in other promising ventures, such as quantum computing, where recent breakthroughs have been announced, and Waymo, which is pioneering paid robotaxi services in the U.S. Although currently unprofitable, these ventures hold significant future potential.

In summary, Alphabet represents an appealing mix of growth and value, with various long-term opportunities stemming from investments in emerging technologies.

Analysis, Stocks, Technology