1 “Magnificent Seven” shares to buy Hand Over Fist in 2025 and 1 to avoid

The second year of Wall Street’s bull market rally did not disappoint. When he crossed the finish line, the Dow Jones Industrial Average, S&P 500i Nasdaq Composite they gained, respectively, 13%, 23% and 29% in 2024.

While a confluence of factors is responsible for this superior performance, such as the increase of artificial intelligence (AI) and Donald Trump’s victory in November, the key catalyst that helped lift Wall Street’s three major stock indexes to multiple record highs last year was the outperformance of the “Magnificent Seven.”

The Magnificent Seven is made up of seven of Wall Street’s most influential firms:

Two traits define these seven businesses. The first, which I have already discussed, is its historical superior performance. These seven companies have run circles around the benchmark S&P 500 over the past decade. While the S&P 500 has gained nearly 189%, excluding dividends, over the past 10 years, Amazon, Tesla, and Nvidia have soared 1,350%, 2,710%, and 28,610% respectively!

The other constant characteristic of the Magnificent Seven is their sustained competitive advantages within their respective industries.

But while these seven companies share similar traits, their outlooks differ significantly for 2025. As the bull market looks set to stretch into a third year, one Magnificent Seven stock stands out as a bargain, while a another is worth avoiding in 2025.

Among this group of more than half a dozen specimens, Alphabet stands out as the best of the new year’s crop.

While we’ll get into Alphabet’s higher-margin growth opportunities in a moment, the first thing to note is its absolute dominance in Internet search. Over the last decade, Google has accounted for between 89% and 93% of Internet search share worldwide. In other words, companies have made Google their go-to place for targeting their messages to users, which is usually 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), along with approximately 2.5 billion monthly active users, should steadily improve YouTube subscriptions. i advertising pricing power.

Based on the above, history is definitely in Alphabet’s corner. Although advertising spending tends to be highly cyclical, periods of economic growth last substantially longer than recessions. That’s one way of saying that advertising-driven companies like Alphabet spend a considerable amount of their time basking in the sun, rather than sinking under the proverbial clouds.

However, Alphabet’s long-term growth prospects depend primarily on its cloud services platform. Google Cloud is expected to generate sustained double-digit revenue growth. Enterprises are still in the relatively early stages of increasing their spending on cloud services. Additionally, Alphabet’s incorporation of generative AI solutions into Google Cloud should be beneficial to its customers and dramatically increase operating cash flow in this segment over the last half of the decade.

Alphabet’s veritable trove of cash on its balance sheet is also a competitive advantage. It ended the third quarter with $93.2 billion in cash, cash equivalents and marketable securities, providing a broad capital return program. Aside from Apple, no other S&P 500 company has bought back more of its stock over the past decade than Alphabet: $286.7 billion as of September 30, 2024.

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

A human face emerging from a sea of pixels and circuits, which is representative or artificial intelligence. — Image source: Getty Images.

However, not every component of the Magnificent Seven is worth buying. As we move towards 2025, the only member I would recommend is none other than Nvidia.

There are certainly tangible catalysts for why Nvidia has gained more than $3 trillion in market value over the past two years. At the top of the list is its absolute mastery of GPU AI. The company’s H100 GPU (commonly known as “Hopper”) and the next-generation Blackwell chip are the “brains” of high-computing data centers.

Nvidia has also undeniably benefited from the AI-GPU shortage. Demand for the company’s AI solutions has easily swamped supply, allowing Nvidia to charge a premium for its products. The end result has been a double-digit 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 example, competition is increasing from all angles. In addition to direct GPU developers (eg Advanced microdevices) ramping up its production, Nvidia could lose valuable data center real estate due to the actions of its major customers.

Microsoft, Meta, Amazon and Alphabet are some of Nvidia’s top customers by net sales, and all are developing GPUs for use in their respective data centers. While these chips won’t match Hopper or Blackwell in terms of computing speed, they will be more readily available and considerably less expensive than Nvidia’s hardware.

President-elect Donald Trump’s November victory also adds big questions 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 difficult trade relations with the world’s second-largest economy. This is in addition to the Joe Biden administration restricting shipments of high-powered AI chips and related equipment to China starting in 2022.

History is not friendly to Nvidia either. Over the past three decades, there has been no major innovation or technology that has prevented an early stage bubble burst event. The cause of these boom and bust cycles is that investors overestimate the early adoption and/or usefulness of new technologies. Since most companies don’t have well-defined plans to generate a positive return on their AI investments, AI seems to be the next in a long line of bubbles.

Finally, Nvidia’s valuation is troubling. While its forward price-to-earnings (P/E) ratio isn’t notably 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 companies moved during previous bubble burst events.

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Alphabet executive Suzanne Frey 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, former director of market development and Facebook spokesperson and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sean Williams has positions on the 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 Microsoft calls and short January 2026 $405 Microsoft calls. The Motley Fool has one disclosure policy.

1 “Magnificent Seven” shares to buy Hand Over Fist in 2025 and 1 to avoid was originally published by The Motley Fool

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