Jefferies Names Nvidia and Alphabet as Top Picks for 2025

Analysts at Jefferies have placed their bets on the "Magnificent Seven" stocks, highlighting which of these mega-cap technology companies are expected to shine in 2025. This group has been at the forefront of driving the market upwards over the past years.

Among these stocks, Nvidia (NVDA) and Alphabet (GOOGL) came out as the top two favorites. Other influential stocks in this elite group include Meta Platforms, Apple, Amazon, Tesla, and Microsoft.

Jefferies' rankings were informed by a range of quantitative analyses, including growth metrics, value assessments, earnings revisions, analyst sentiment, return on invested capital (ROIC), stock price momentum, and spending on research and development compared to capital expenditures.

Nvidia earned the top ranking chiefly due to its impressive growth trajectory, positive guidance revisions, appealing valuation metrics, and favorable analyst opinions.

Nvidia: Growth with Value

Nvidia remains a standout example of robust growth coupled with an attractive valuation. The company is poised to record its second consecutive year of triple-digit revenue growth, which is quite remarkable given its size.

Analysts predict the company will experience over 50% sales growth in 2025. Currently, it is valued at a forward price-to-earnings ratio (P/E) of under 33 and has a price/earnings-to-growth ratio (PEG) of 1—considered a valuated metric, especially as growth stocks often exceed a PEG of 1.

Nvidia's remarkable growth is largely fueled by the accelerated development of artificial intelligence (AI) infrastructure. The company has established a strong presence with its CUDA software platform. Initially designed to enhance graphics rendering in video games, Nvidia's graphics processing units (GPUs) have now become vital components powering AI infrastructure due to their superior processing capabilities.

As tech giants and startup companies pursue advancements in AI, they require robust computing power for model training, predominantly supplied by GPUs. Nvidia's CUDA X suite of programming libraries and tools has enabled the company to capture nearly 90% of the GPU market.

A notable example of GPU utilization is seen in Elon Musk's xAI, which utilized 20,000 GPUs for its Grok 2 model training and ramped up to 200,000 GPUs for Grok 3's second phase. Musk also mentioned plans for a data center housing a 1 million GPU cluster.

Furthermore, Microsoft's recent commitment to invest $80 billion in AI data centers emphasizes the growing demand for GPUs. In addition, a consortium involving Oracle, SoftBank Group, and OpenAI is considering spending up to $500 billion on AI infrastructure in Texas as part of the announced Project Stargate.

A significant portion of these investments is expected to be directed toward GPUs, showcasing the immense growth potential ahead for Nvidia.

Alphabet: Growth with a Value Edge

While no other mega-cap stock matches Nvidia's recent growth, Alphabet stands out as a strong performer with the lowest valuation among the Magnificent Seven, sporting a forward P/E of just 19.4.

In the last quarter, Alphabet's revenue grew by an impressive 15%, while its net profits soared by 34% and earnings per share increased by 37%. This growth was primarily driven by its rapidly expanding cloud computing segment, Google Cloud, which experienced revenue growth of 35%.

Cloud computing typically involves high fixed costs but offers substantial operating leverage upon reaching scale. This trend became evident last quarter, as Google Cloud reported a significant profitability shift, with operating income rising from $266 million last year to $1.95 billion.

The eagerness of businesses to develop AI models and applications will likely continue to fuel this segment's growth, especially as Alphabet enhances its data center capacity. Additionally, the company is expected to increase operating efficiency through custom AI chips developed in partnership with Broadcom, further reducing processing times and costs.

As Alphabet positions itself as one of the leading players in the cloud space, profitability in Google Cloud should improve, supporting further earnings growth.

On the other hand, Alphabet is also the owner of Google, the largest search engine globally, and YouTube, the leading video streaming platform. These platforms are seeing significant revenue boosts, with the overall Google Services segment recording a 13% increase last quarter and segment operating income reaching $30.9 billion, an increase of 29%.

This year, Alphabet aims to integrate its new Gemini AI model across its operations to stimulate growth and is also expected to roll out the Gemini app, its competitor to ChatGPT.

Additionally, Alphabet is investing in emerging technologies, such as quantum computing—boasting a recent technological breakthrough—and the autonomous vehicle sector through Waymo, which currently offers paid robotaxi rides in the U.S. Although these initiatives may currently be unprofitable, they hold significant future potential.

In summary, Alphabet presents a favorable mix of growth and value, bolstered by promising long-term options like investments in robotaxis and quantum computing.

Stocks, Investing, Technology