One 'Magnificent Seven' Stock to Buy in 2025 and One to Avoid

Among the well-known companies such as Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta Platforms, and Tesla, there exists a remarkable investment option and a stock that may be overpriced.

As Wall Street's bull market continued into its second year, major indices performed impressively. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite recorded gains of 13%, 23%, and 29%, respectively, in 2024.

This success can be attributed to several factors, including advancements in artificial intelligence (AI) and the political landscape shaped by the recent victory of Donald Trump. However, a significant part of this growth was driven by the performance of the so-called "Magnificent Seven" companies.

The Magnificent Seven represents seven critical players in the market:

• Nvidia
• Apple
• Microsoft
• Amazon
• Alphabet
• Meta Platforms
• Tesla

These companies are united by two main characteristics. First, they have consistently outperformed the benchmark S&P 500 over the past decade. While the S&P 500 has seen a rise of almost 189% during this time, companies like Amazon, Tesla, and Nvidia have skyrocketed with increases of 1,350%, 2,710%, and an astonishing 28,610%, respectively.

The second characteristic is their competitive advantages in their industries:

• Nvidia is a leader in the graphics processing market, particularly in AI-optimized data centers.
• Apple dominates the domestic smartphone market and executes one of the most aggressive share repurchase programs among public companies.
• Microsoft's Azure is the second-largest cloud service provider, while Windows remains a widely-used operating system.
• Amazon leads the online marketplace sector and its cloud service, AWS, holds the top position globally.
• Alphabet boasts nearly 90% market share in internet search, with Google Cloud following closely in global rankings.
• Meta Platforms' flagship Facebook caters to a vast user base across its apps.
• Tesla remains a top player in the electric vehicle market with a proven track record of profitability.

While these companies share impressive credentials, their futures diverge significantly. As investors look ahead to 2025, one stock emerges as a compelling buy while another one is advised to be avoided.

Best Buy for 2025: Alphabet

In the new year, Alphabet shines as an excellent investment choice within the Magnificent Seven group. One significant factor is its leadership in internet search. Over the past decade, Google has maintained a commanding 89% to 93% share of the global search market, allowing it to effectively price its advertising.

Moreover, Alphabet owns YouTube, the second-most visited social platform, which continuously enhances its advertising revenue through growing user engagement, including the popular Shorts feature.

Despite the cyclical nature of ad spending, history has shown that growth periods last significantly longer than downturns, suggesting Alphabet will benefit in the long run.

Furthermore, Google Cloud is poised for remarkable growth. As companies shift towards cloud services, Alphabet's integration of AI technologies is set to boost its cash flow even further in the coming years.

With substantial cash reserves, totaling $93.2 billion at the end of Q3 2024, Alphabet can efficiently reward shareholders, having repurchased $286.7 billion in stock over the past decade—making it one of the top firms in this area.

In terms of valuation, Alphabet appears attractive at a price-to-cash-flow ratio of 15.7 for 2025, indicating a 13% discount compared to its average over the last five years.

Stock to Avoid in 2025: Nvidia

Conversely, investors may want to tread carefully around Nvidia. While the company has seen remarkable growth, with its dominant position in the AI GPU market, many of the factors fueling its success are already reflected in its stock price.

The competition in the GPU space is intensifying, with rivals like Advanced Micro Devices (AMD) ramping up production and major customers—including Microsoft, Meta, Amazon, and Alphabet—developing their own chips.

Additionally, the political landscape poses challenges, particularly with the potential tariffs under the incoming Trump administration affecting trade routes with China. This adds an element of uncertainty to Nvidia's future market position.

Investors should remember that groundbreaking technologies often experience boom-and-bust cycles, as seen in past tech bubbles. The current enthusiasm for AI may lead to overvaluation, similar to previous market patterns.

Finally, although Nvidia's forward P/E ratio may not seem excessive, its price-to-sales ratio of 32 is concerning relative to historical trends, indicating potential difficulty ahead for stock price stability.

In summary, while Alphabet is a stock to consider for 2025, Nvidia warrants caution as the market evolves.

stocks, investment, growth