The so-called "Magnificent Seven" stocks, consisting of seven of the world's largest technology companies, once again helped lead the market higher in 2024. All seven stocks in the group, which includes Apple, Amazon, Alphabet (GOOG -1.55%) (GOOGL -1.45%), Meta Platforms, Microsoft, Nvidia, and Tesla, are on track to have positive returns this year. Nvidia was the pack leader for the second year in a row, up over 168% year to date as of this writing, following an over 238% return in 2023.
With the strong performance of the group over the past two years, the question on many investors' minds is which of these stocks will lead the group next year. While a case can be made for any of the seven, my prediction is that Alphabet will lead the way in 2025.
Google search worries slow Alphabet
Picking Alphabet as the "Magnificent Seven" stock most likely to outperform in 2025 is undoubtedly a bold choice. After all, a federal judge earlier this year ruled the company was an illegal monopoly that had acted unfairly to keep its search dominance. Meanwhile, investors have been worried about the impact of artificial intelligence (AI) on its search business from competitors. Essentially, these two ideas contradict each other, as a monopoly can't be facing heavy competitive threats, but Alphabet's stock nonetheless was caught in the middle of this debate for much of the year. Essentially, it was heads Alphabet loses, tails Alphabet loses.
But it is this lose-lose narrative that should help Alphabet thread the needle when it comes to the remedy phase of its antitrust case. Meanwhile, the appeal process will likely drag this out for quite some time.
Ultimately, Google became the leader in search because it has the best product, so much so that Apple has said Microsoft couldn't pay it any amount of money to make Bing its exclusive search engine. Today, new AI-powered search solutions have emerged from ChatGPT's SearchGPT and Perplexity AI. These search engines aim to give users direct responses without having to sift through link-based search results.
That's great, but it's something that Google Search is also currently doing through its AI Overviews. And while there were some notable early gaffes, these results have just gotten better and better. Meanwhile, Google has an established ad network and a huge user base. Both of these will be needed to adequately monetize AI search. These upstart competitors will need to gain a meaningful amount of users to draw in enough advertisers for their searches. In the meantime, they will likely continue to burn through a lot of cash as they try to accomplish this.
Thus far, Google has seen little impact on its business, with its search revenue growing a solid 12% year over year last quarter. Furthermore, with the company only serving ads on about 20% of its search results historically, the emergence of new types of ads attached to its AI Overviews should become a revenue driver in the future. At the same time, though, these new competitors should be deemed enough of a threat for the company to avoid any severe penalties with its antitrust case.
Image source: Getty Images.
Alphabet's innovations keep the growth engine running
Meanwhile, Alphabet's innovation has recently started to come to the forefront. The company was one of the first to develop its own custom AI chips with the help of Broadcom. When its cloud computing business saw its revenue soar 35% last quarter to $11.4 billion, the company credited its combined use of graphic processing units (GPUs) with its new custom tensor processing units (TPUs) as a key differentiator that helped reduce inference processing times and lower costs. Meanwhile, this high fixed-cost business has seen an inflection point, leading to its operating income surging to $1.95 billion from $1.2 billion in the second quarter and $266 million a year ago.
Alphabet has also recently been able to upstage OpenAI and its 12 days of OpenAI through a number of its own announcements. This includes the introduction of new cutting-edge updates to its AI image and video generation tools. OpenAI recently introduced an AI video generator, Sora, but the big criticism has been that the movements do not look natural while its max output is 1080p. Google's Veo 2 will be able to be in 4K, while the company has said it features "improved understanding of real-world physics and the nuances of human movement and expression, which helps improve its detail and realism overall." Having seen a demonstration on X with people giving random prompts, I think the product is quite remarkable. It will also help to get rid of the pesky finger artifact problem that AI seems to have.
Alphabet also introduced its new Gemini 2.0 AI model, which it says can act as an autonomous AI agent. Agentic AI is considered the next evolution of AI, where AI bots will start to do things on your behalf. Alphabet plans to incorporate Gemini 2.0 with its AI search overviews and then expand it to other products.
Perhaps one of the company's biggest announcements, though, was that the company made a big breakthrough in quantum computing with its new Willow chip. Quantum computing's biggest issue has been errors as it scales up, but Willow has shown the ability to drive errors down while scaling up. Commercial use of the technology is still far off, but Alphabet has now shown that it is the lead in this emerging field.
Inexpensive valuation
Investors are getting a lot when they invest in Alphabet. First and foremost, they are getting a dominant search engine that has a big potential monetization opportunity with AI ahead of it. They are also getting one of the top video streaming services with YouTube as well as a top ad network. Investors also receive one of the big three cloud computing companies, which has just hit a profitability inflection point. Next, investors get the early leader in autonomous driving with Waymo, which is already operating in multiple cities. They are also getting a company at the cutting edge of quantum computing, as well as a leading AI research company with its DeepMind subsidiary.
This is a great mix of leading and upstart businesses that investors can get at a forward price-to-earnings ratio (P/E) of under 22, making it one of the cheapest mega-cap tech stocks out there.
Data by YCharts.
This combination of value, industry leadership, and valuation makes Alphabet my top Magnificent Seven stock pick for 2025.
