To The Moon

$Amazon.com(AMZN)$ $Alphabet(GOOG)$ $ASML Holding NV(ASML)$

We've experienced one of the worst market performances in recent days, with significant losses across the board. It's no surprise that investor sentiment has turned extremely bearish, with the market currently in a state of extreme fear. A major factor contributing to this pressure is the ongoing tariff dispute, and the retaliatory actions from countries like China, Canada, and Mexico are adding to concerns. These countries have already announced plans to retaliate against President Trump's tariffs, which is raising alarms for investors about the broader economic impact of the escalating trade war.

This downturn isn't isolated to the U.S.; European stocks and oil prices are also feeling the pressure, reflecting a global trend. The central worry among investors is the scope and potential duration of this trade conflict and whether a resolution is on the horizon. There's also increasing concern within the Republican party about the direction Trump's trade policies are taking, with many questioning whether this is a strategic negotiation tactic or a more prolonged issue.

Additionally, some market analysts believe we're overdue for a correction, especially given that many companies are trading at lofty valuations. However, despite the broader market volatility, we’ll be highlighting six stocks that we believe are solid buys, with Nvidia being one of them, especially considering its attractive forward valuation of around 19.5.

It’s also worth noting that the ongoing tariff battle has led to expectations of negative GDP growth in the U.S., something we haven't seen in a while. Investors are bracing for more interest rate cuts throughout the year, but it's unclear whether that will be viewed as a positive or negative for the market. Historically, interest rate cuts haven't always been a strong signal for market performance. Furthermore, as we discussed in yesterday's episode, there may be a shift in market focus, with capital moving away from high-performing sectors like tech, which had a strong year last year, and into areas that have underperformed.

The markets have opened, and we're seeing a continuation of the downward trend—a pattern that was prevalent throughout February. We want to analyze what’s driving this decline and whether investors should be concerned.

Year-to-date, the S&P 500 hasn't performed well, particularly for large-cap companies like the "Magnificent 7." For instance, Nvidia has dropped around 12% in 2025, while Tesla has lost approximately 26% of its total market cap. Amazon is also down by about 5%. February saw an overall decline in the S&P, driven by economic uncertainties and tariff concerns that have been widely discussed in recent weeks.

However, instead of a broad market sell-off, we may be witnessing a sector rotation. A closer look at different sectors reveals some interesting trends—sectors like healthcare, value stocks, and basic materials appear to be holding up better. Meanwhile, tech stocks, which soared over 35% in 2024, have struggled in early 2025. For example, consumer cyclical stocks, which gained roughly 25% last year, are down about 6% year-to-date.

Historically, February is the second-worst month for the S&P 500 (only September tends to be worse). While March is typically more positive, this year has not started on a strong note. Another sign of sector rotation is the declining dominance of the Magnificent 7 within the index. At the start of the year, these stocks made up about 30-35% of the S&P 500, but that share has now dropped to around 20-25%.

Looking at market sentiment, we are entering a historically bearish phase, with growing investor concerns. Many stocks are trading at significantly higher valuations compared to five years ago, suggesting a potential correction may be overdue. Additionally, this downturn appears to be concentrated in the U.S. While U.S. markets remain relatively flat, the UK market is up nearly 8%, and China has outperformed both, rising about 16%. Some major investors have been shifting capital toward Chinese companies, possibly viewing the U.S. market as overinflated.

Adding to market concerns, weaker-than-expected U.S. manufacturing data has fueled worries about broader economic slowdowns. Analysts are also anticipating negative GDP growth for the first quarter of FY2025, raising fears of a potential slowdown despite earnings reports not yet reflecting it. Analysts tend to focus on forward-looking indicators, which could explain the bearish outlook.

Investor sentiment remains cautious—while fear levels have slightly eased since last Friday’s "extreme fear" reading, we are still in a zone of high bearish sentiment. Depending on which analysts you follow, perspectives on the market's direction vary.

Bank of America has stated that they wouldn’t be surprised if we experience a 40% correction. On the other hand, Tom Lee, a well-known figure in the investment community and often seen on CNBC, predicts a 16% increase for the S&P 500 by summer 2025. However, he also expects the market to decline by year-end, resulting in a 9.4% overall gain for the year.

Meanwhile, Goldman Sachs believes the broader market could be vulnerable in 2025. Their view is that the strong rally of 2024 may have already priced equities for perfection. If earnings and growth slow down, they foresee a sharp correction. While they don’t predict the full 40% decline that Bank of America anticipates, they do believe a correction is likely. Similarly to Tom Lee’s predictions, they forecast a 10% return for the S&P 500 in 2025, including dividends, though price return will likely be lower. They also expect earnings to drop by 11% in 2025 and 7% in 2026.

A less frequently discussed point is the significant capital expenditure many of the Magnificent 7 companies are making in artificial intelligence. Their spending has exceeded analysts’ expectations. For instance, Alphabet plans to invest around $75 billion in 2025, whereas analysts had forecasted about $50 billion. Amazon views this as a once-in-a-lifetime opportunity, expecting to spend $100 billion—the highest among these companies. Meta is targeting $60 billion, while Microsoft recently indicated they’ll spend around $80 billion.

The concern among investors is whether these massive investments in AI will lead to strong returns that justify the spending. To complicate matters, Microsoft’s CEO recently stated that artificial intelligence is currently generating little to no value, which has raised additional concerns.

Despite these worries, there are always opportunities in the market. For example, by looking at the stock screener, you can see that many stocks currently present significant upside potential. While some may consider selling or holding, there are also opportunities to buy undervalued stocks across all sectors.

Stock 1: A Strong Buy – Amazon

For us, Amazon is a standout "screaming buy." Both Wall Street and Quant have given it strong buy ratings, with Seeking Alpha also recommending it. In this segment, we'll walk you through why we believe Amazon is a high-quality company that's severely undervalued, and provide our intrinsic price estimate.

Amazon has recently pulled back from its all-time high of $243, currently sitting around the midpoint. However, it’s still up 15% over the past 12 months. Year-to-date, Amazon—a top-tier company—is down 9%. Over the last decade, though, it has massively outperformed the S&P 500, rising more than 1,000%.

Looking ahead, Amazon anticipates growth in every quarter for the next year, continuing its track record of beating earnings estimates. With a strong 100% track record, we’re confident they’ll meet the projected $632 EPS for the full year. Currently, the company trades at a forward P/E ratio of 32.4. In comparison to its sector, where the median is just 15.7, Amazon is trading at a significant premium—about 107% more than its sector’s average. However, when compared to its own 5-year average valuation of 177, this price reflects an 82% discount.

Despite this premium, Amazon’s growth metrics suggest that it deserves this higher valuation. The company has an A+ growth rating, with expected year-on-year revenue growth of 10-11%, significantly outpacing the sector’s low single-digit growth. Over the past five years, Amazon’s revenue growth has averaged around 17-20%, and its anticipated 3-5 year earnings growth of 21% is far ahead of the sector's 10.8%. While this falls short of its own historical 31.2%, it's still impressive.

Amazon’s profitability is another key strength. With an A+ rating, its gross margin of 49% is well above the sector’s 38% and its own 5-year average of 43%. Bottom-line profitability also stands strong, with a nearly 10% margin, compared to the sector’s 4% and Amazon’s 5-year average of around 5%. This demonstrates that not only is Amazon increasing its top-line revenue, but it's also improving operational efficiencies, a key indicator of a high-quality company.

The company also generates a significant amount of cash from operations—$116 billion—far above the sector's $278 million and its own 5-year average of $63 billion, nearly double its previous record. Institutional ownership is high at 72%, and institutions have been very active, with $48 billion in sales over the last year, but $135 billion in buying—three times more buying in the most recent quarter.

In terms of intrinsic value, we estimate Amazon's worth at $230, based on the discounted cash flow (DCF) model. Using a 20% growth rate and a conservative discount rate, we arrive at a present value of future free cash flows and terminal value, leading to an equity value of $230 per share. This indicates a 15% upside from current levels. For those who believe Amazon's growth potential is stronger, using a 25% growth rate gives a target price of $325 (63% upside), and for those more optimistic, a 30% growth rate puts it at $454 (127% upside).

For a conservative approach, we're sticking with the 20% growth rate. After applying a 10% margin of safety, we find that Amazon is a strong buy at around $196. With Wall Street’s consensus price target of $270, Amazon offers a 35% upside, and at its current price, it provides a nearly 15% margin of safety.

As always, we’d love to hear your thoughts—do you agree that Amazon is an obvious buy right now?

Stock 2: A Strong Buy – Alphabet

Alphabet is another stock we’re highlighting as a "screaming buy." The company has gained 26% over the last 12 months, but year-to-date, it’s down 12%. However, over the last decade, Alphabet has significantly outperformed the S&P 500, rising by 56%. It's currently trading in the middle-to-lower end of its 52-week range, presenting a solid buying opportunity. Seeking Alpha and Wall Street both have positive ratings, with Wall Street giving it a 4.4 out of 5—close to the 4.5 threshold for a strong buy. Additionally, Alphabet pays a dividend of around 4.8%.

Looking at the company's earnings for the next four quarters, all are expected to show growth, with two quarters projecting double-digit growth. Alphabet has an impressive historical track record of meeting earnings expectations, with a 100% success rate. Currently, the company is trading at an attractive forward valuation of 18.6, which is relatively low. While this represents a 44% premium compared to the sector median, other metrics indicate that this premium is justified.

Over the last five years, Alphabet has traded at an average valuation of 25, meaning it’s currently priced about 27% lower than its historical average. This suggests that the stock is undervalued. If we look at the valuation model, we see that the expected fair price (represented by the blue tunnel) has been increasing over time, signaling long-term growth potential. Currently, the stock is priced below even the lower end of this fair range, further supporting the argument that it's undervalued.

Alphabet deserves to trade at a premium relative to its sector, given its strong growth profile. With a B-grade growth rating, its year-on-year revenue is expected to grow by 14%, with a forward-looking growth rate of 12%. Both are well above the sector’s low single-digit growth, though slightly below its own 5-year historical growth of 18% and 15%, respectively. Additionally, the company’s earnings per share are projected to grow at an impressive 17.7%, which is significantly higher than the sector’s 12% and close to its own 5-year historical rate of 18%.

In terms of profitability, Alphabet scores an A+. Its gross margin is 58%, which is above the sector’s 52% and its own 5-year average of 56%. Similarly, the company’s bottom-line margin is 29%, well above the sector’s 19% and its 5-year average of 27%. This demonstrates Alphabet’s strong operational efficiency and margin expansion, much like Amazon.

The company also generates a substantial amount of cash from operations, totaling $125 billion, significantly higher than the sector’s $334 million. Over the last five years, Alphabet has consistently increased its cash generation, reinforcing its financial strength.

Institutional ownership stands at 40%, with $50 billion in sales over the last year, but more importantly, institutions have been buying heavily, with twice as much buying activity in the most recent quarter, indicating strong institutional confidence in the stock.

Our intrinsic value estimate for Alphabet is $226, based on a 12% growth rate for future free cash flows. This suggests a 36% upside from the current price. If you believe a lower growth rate of 10% is more realistic, the upside would be more modest, but still positive. With a margin of safety of about 25% at the current price of around $170, Alphabet remains an attractive buy. Wall Street’s consensus target price is $220, translating to a 33% upside, further confirming its appeal.

Whether you believe in the 12% growth rate or a more conservative estimate, Alphabet presents an opportunity for significant upside, much like Amazon.

Stock 3: A Strong Buy – ASML

Next on our list is ASML, which has dropped 30% over the past year and is relatively flat year-to-date. However, over the last decade, similar to the previous two stocks, it has significantly outperformed the S&P 500, rising by 554%. Currently, it's trading near the lower end of its 52-week range, making it an appealing buy opportunity. Both Seeking Alpha and Wall Street have rated it as a "strong buy," and like Alphabet, ASML offers a dividend yield of about 0.74%.

Looking at their earnings for the next four quarters, ASML expects three of them to show growth, which is impressive given that it's not a cyclical industry. The company has a solid 100% track record for meeting its earnings expectations. Right now, ASML is trading at a forward valuation of 28, which, while higher than the sector, reflects its status as a high-quality company. You're paying a 27% premium compared to the sector, but when compared to ASML's historical valuation of 34 over the last five years, it's currently trading 30% lower, suggesting it may be undervalued.

We also see a disparity between ASML’s current valuation and the lower end of its expected fair value range (indicated by the blue tunnel), reinforcing the idea that the stock could be significantly undervalued. This suggests that there’s potential for substantial upside.

Growth, however, appears slightly less impressive at 3% over the past year, with 8% growth expected in the next 12 months. The sector performed better last year but is expected to underperform in the coming year. Nevertheless, ASML has shown strong double-digit growth over the past five years, and over the next 3-5 years, earnings per share are expected to grow at 20%, significantly higher than the sector's 5% and their own historical growth rate of 23%.

Profitability is strong, with a gross margin of 51%, well above the sector's 38% and ASML’s own 5-year average of 46%. Similarly, the company’s bottom line margin stands at 27%, above both the sector’s 19% and its own 5-year average of 27.2%. ASML also generates a massive amount of cash from operations, totaling $12 billion, compared to the sector's $106 million. Over the past five years, ASML has consistently increased its cash generation, further supporting its financial strength.

Institutional ownership stands at 26%, with the buying and selling activity by institutions being fairly balanced during the period. However, in the most recent quarter, semiconductor companies like ASML saw more selling activity from institutions.

Our intrinsic value estimate for ASML is $920, based on a 12% growth rate. This suggests a 31% upside from the current price. If we assume a slightly higher growth rate of 14%, the upside increases to 51%, and with a 16% growth rate, it could be as high as 73%. With an intrinsic value of $920, the stock offers a margin of safety of around 10%, which increases to 20-25% if we use a more conservative 12% growth rate.

For those with a longer-term perspective, we believe ASML’s intrinsic value is closer to $1,055, which would provide a higher margin of safety. Based on these estimates, ASML is a strong buy with significant upside potential.

Wall Street remains very bullish, with a price target of $940, indicating a 34% upside. ASML’s future looks promising, and it stands as an attractive investment opportunity.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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