1 "Magnificent Seven" Stock to Buy Hand Over Fist in 2025 and 1 to Avoid

Among this group of more than a half-dozen outperformers, Alphabet stands out as the cream of the crop in the new year.

Though we’ll dive into Alphabet’s higher-margin growth opportunities in a moment, the first thing to note is its absolute dominance in internet search. Over the trailing decade, Google has accounted for 89% to 93% of worldwide internet search share. In other words, businesses have made Google their go-to when targeting their message(s) at users, which is typically great news for Alphabet’s ad-pricing power.

Alphabet is also the parent company of streaming platform YouTube, which is the second most-visited social site behind Meta’s Facebook. The proliferation of Shorts (short-form videos lasting less than 60 seconds), coupled with roughly 2.5 billion monthly active users, should steadily improve YouTube’s subscription and ad-pricing power.

To build on the above, history is most definitely in Alphabet’s corner. Even though ad spending tends to be highly cyclical, periods of economic growth last substantially longer than recessions. This is a way of saying that ad-fueled companies like Alphabet spend a considerable portion of their time basking in the sun, rather than sulking under the proverbial clouds.

However, Alphabet’s longer-term growth prospects primarily hinge on its cloud-service platform. Google Cloud is expected to deliver sustained double-digit revenue growth. Businesses are still in the relatively early stages of increasing their cloud-service spending. Further, Alphabet’s incorporation of generative AI solutions into Google Cloud should be beneficial to its customers and dramatically increase operating cash flow from this segment in the latter-half of the decade.

Alphabet’s veritable treasure chest of cash on its balance sheet is a competitive edge, as well. It closed out the third quarter with $93.2 billion in cash, cash equivalents, and marketable securities, which affords a hearty capital-return program. Aside from Apple, no other S&P 500 company has repurchased more of their stock over the last decade than Alphabet — $286.7 billion, as of Sept. 30, 2024.

Lastly, Alphabet’s valuation makes sense for opportunistic long-term investors. Its shares are currently valued at 15.7 times forecast cash flow for 2025, which represents a 13% discount to the company’s average multiple to cash flow over the trailing-five-year period.

However, not all Magnificent Seven components are necessarily worth buying. As we power forward into 2025, the one member I’d suggest steering clear of is none other than Nvidia.

There are certainly tangible catalysts that explain why Nvidia has gained well over $3 trillion in market value over the last two years. At the top of the list is its utter dominance of AI-GPUs. The company’s H100 GPU (commonly referred to as the “Hopper”) and next-generation Blackwell chip are the “brains” of high-compute data centers.

Nvidia has also undeniably benefited from AI-GPU scarcity. Demand for the company’s AI solutions has handily swamped supply, which has allowed Nvidia to charge a premium price for its products. The end result has been a double-digit point increase in the company’s gross margin.

The concern is that all of Nvidia’s catalysts have been more than fully baked into its share price.

For instance, competition is picking up from all angles. On top of direct GPU developers (e.g., Advanced Micro Devices) increasing their output, Nvidia could lose out on valuable data center real estate because of the actions of its top customers.

Microsoft, Meta, Amazon, and Alphabet are some of Nvidia’s core customers by net sales, and they’re all developing GPUs to use in their respective data centers. Even though these chips won’t match the Hopper or Blackwell in terms of computing speed, they’re going to be more readily available and considerably less costly than Nvidia’s hardware.

President-elect Donald Trump’s November victory also adds big-time question marks to Nvidia’s future. Trump previously announced plans to implement a 35% tariff on imported goods from China on his first day in office, which could lead to testy trade relations with the world’s No. 2 economy. This comes atop Joe Biden’s administration restricting shipments of high-powered AI chips and related equipment to China since 2022.

History is no friend of Nvidia, either. Over the last three decades, there hasn’t been a next-big-thing innovation or technology that’s avoided an early stage bubble-bursting event. The cause of these boom-bust cycles is investors overestimating the early stage adoption and/or utility of new technologies. Given that most businesses lack well-defined plans to generate a positive return on their AI investments, it would appear that artificial intelligence is the next in a long line of bubbles.

Finally, Nvidia’s valuation is worrisome. Although its forward price-to-earnings (P/E) ratio isn’t egregiously high, its price-to-sales (P/S) ratio of 32 (which was north of 40 in June and July) is consistent with a multiple where other market-leading businesses rolled over during previous bubble-bursting events.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

1 “Magnificent Seven” Stock to Buy Hand Over Fist in 2025 and 1 to Avoid was originally published by The Motley Fool