Year two of Wall Street's bull market rally didn't disappoint. When the finish line was crossed, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite respectively gained 13%, 23%, and 29% in 2024.
While a confluence of factors is responsible for this outperformance, such as the rise of artificial intelligence (AI) and Donald Trump's victory in November, the foundational catalyst that helped lift Wall Street's three major stock indexes to multiple record highs last year was the outperformance of the "Magnificent Seven."
Image source: Getty Images.
The Magnificent Seven is comprised of seven of the most-influential companies on Wall Street:
- Nvidia (NVDA -4.10%)
- Apple (AAPL -0.72%)
- Microsoft (MSFT -0.84%)
- Amazon (AMZN -1.75%)
- Alphabet (GOOGL -0.29%) (GOOG -0.18%)
- Meta Platforms (META -1.36%)
- Tesla (TSLA -3.00%)
Two traits define these seven businesses. The first, which I've already touched on, is their historic outperformance. These seven companies have run circles around the benchmark S&P 500 over the trailing decade. Whereas the S&P 500 has gained nearly 189%, not including dividends, over the last 10 years, Amazon, Tesla, and Nvidia have respectively skyrocketed by 1,350%, 2,710%, and 28,610%!
The other consistent characteristic of the Magnificent Seven is their sustained competitive advantages within their respective industries.
- Nvidia accounts for the lion's share of graphics processing units (GPUs) deployed in enterprise AI-accelerated data centers.
- Apple is the clear market share leader in domestic smartphone sales with iPhone, and also has the most robust share repurchase program of any publicly traded company.
- Microsoft's Azure is the world's No. 2 cloud infrastructure service platform, while Windows remains the world's leading operating systems for personal computers.
- Amazon has the world's most-dominant online marketplace, and its cloud infrastructure service platform, Amazon Web Services (AWS), is No. 1 in global market share.
- Alphabet's Google commands almost a 90% share of worldwide internet search, while Google Cloud slots in behind AWS and Azure as the global No. 3 cloud infrastructure service provider.
- Meta Platforms is the parent of the world's top social media site, Facebook, and attracted 3.29 billion daily active users to its family of apps during the September-ended quarter.
- Tesla is North America's leading electric-vehicle (EV) manufacturer and one of the few very EV-focused businesses to have shifted to recurring profitability.
But while these seven companies share similar traits, their outlooks meaningfully differ for 2025. As the bull market looks to extend into a third year, one Magnificent Seven stock stands out as a bargain, while another is worth avoiding in 2025.
The Magnificent Seven Stock to buy hand over fist in 2025: Alphabet
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.
Image source: Getty Images.
The Magnificent Seven stock to avoid in the new year: Nvidia
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.
