The AI Boom Isn’t Over Yet—And Google Might Actually Have An Edge

$Alphabet(GOOG)$ $Meta Platforms, Inc.(META)$

Market Under Pressure

Fundstrat's Tom Lee recently appeared on CNBC to share where he sees potential opportunities in today’s volatile market.

Now, it’s important to understand the context in which he made these remarks: the market has been under serious pressure. Year-to-date, the S&P 500 is already down 10% just a few months into the year. And concerns about a potential recession are growing. On March 31st, JPMorgan estimated the odds of a recession at 40%. Just five days later, they raised that estimate to 60%.

A Misleading Bounce? Why Last Week’s Rally Might Not Mean What You Think

But despite all the gloom, the past week has told a different story. The S&P 500 jumped nearly 10% over the last five days, and the heatmap of the index is overwhelmingly green. However, this rally can be misleading. Historically, some of the biggest up days in the market occur during bear markets — think 2008, 2020, and even early 2022. These sharp rebounds often happen in the middle of broader downtrends.

Behind the Curtain: What Earnings Revisions Are Really Saying

Looking deeper, earnings revisions for the S&P 500 have been trending lower since November — down around 2% overall — with certain sectors like materials, real estate, and energy getting hit especially hard.

Let’s take a look at what Tom Lee had to say. Then we’ll break down a few of his picks and evaluate whether or not we agree.

Tariffs as the Tipping

Lee began by acknowledging the increased recession odds, noting that markets are now pricing in a 60% chance of a downturn. However, he believes this pessimism hinges heavily on one factor: tariffs.

If the current round of reciprocal tariffs between the U.S. and China remains in place, then yes, the global economy could be in real trouble. But if these tariffs are more of a negotiating tactic — something Lee believes — then he sees a big rebound ahead.

Not a Recession Yet, But the Market Feels Like One

The markets have become extremely pessimistic, even though we haven’t yet entered a recession. While it may feel like a bear market for most investors — with many stocks getting crushed — he argues that we haven’t met the typical criteria of recession-triggered financial tightening. That said, sentiment has certainly turned negative, and the market is hypersensitive to any positive headlines.

“Sold Out” Stocks: Where Tom Lee Is Buying

He said he’d be a buyer in this market, focusing on what he calls “sold out” stocks — names that are more than just oversold, but have already absorbed a lot of bad news and failed to make new lows during the recent selloff. One group he believes fits that definition? The MAG 7, which includes names like Tesla, Meta, and Google.

Are MAG 7 Stocks Really Washed Out?

Lee’s reasoning makes sense: these stocks have seen significant drawdowns, but may be primed for a rebound if macroeconomic fears fade. Let's focus in on Google and Meta — two names I’ve been watching closely.

Google: Valuation Compression Despite Solid Fundamentals

Google is trading at a forward P/E of 17.29 — not expensive by historical standards. Yet the stock is down over 16% year-to-date. Just recently, Citi lowered their price target from $229 to $195, citing limited visibility in the online advertising space, which could be partially impacted by tariffs.

Why Tariffs Hit Google Where It Hurts

Now, Google isn’t a company that comes to mind when thinking about tariff exposure. But advertising is highly cyclical. Around 76% of Google’s revenue comes from ads. When companies tighten spending — especially in a recession — ad budgets are among the first to be cut.

Meta: A Recovery Already in Motion

Meta is in a similar situation. With nearly 98% of revenue coming from advertising, the company is highly sensitive to global economic slowdowns. We saw this play out in 2022, during a technical recession, when Meta’s EPS dropped from $13.99 in 2021 to just $8.63. But since then, earnings have rebounded sharply — up to $15.19 in 2023 and projected to hit $24.61 in 2024.

Google followed a comparable trajectory, with EPS declining in 2022 but rebounding significantly in the years since.

Bottom Line

Even though companies like Google and Meta aren’t directly impacted by tariffs, they’re exposed to the broader economic consequences tariffs can trigger — namely, recessions and reduced ad spending. But if you believe tariffs are a short-term issue — more bluff than policy — then these “sold out” stocks could be presenting a compelling opportunity.

And honestly, I agree with Tom Lee on this one. Google in particular stands out as a strong short-term rebound candidate. Sentiment is weak, but fundamentals are holding up — and that’s often when the best buying opportunities emerge.

Let’s take a closer look at one of the lesser-known segments of Alphabet’s business: “Other Bets.” This is where Google places its long-term moonshots—ventures that might not generate massive revenue today but could be transformative over the next decade. One of the most promising bets within this category is Waymo.

Waymo has already gained significant early traction, especially in cities like Austin where its autonomous ride-hailing service is off to a strong start. It's not just gaining attention—it’s actively taking market share from traditional players like Lyft. In fact, if this trajectory continues, Waymo has the potential to evolve into a standalone business or even be spun off entirely from Alphabet. That’s not just a growth opportunity—it’s a potential value unlock that the market isn’t fully pricing in yet.

But despite these exciting developments, one of the biggest concerns investors have about Google right now is whether it’s losing its moat in AI. The narrative goes something like this: Microsoft has partnered with OpenAI, ChatGPT took the world by storm, and now Google is scrambling to catch up. But that narrative is oversimplified—and frankly, misleading.

Google’s AI Dominance: By the Numbers

Most people don’t realize just how dominant Google still is in the AI space. If you look at the LLM (Large Language Model) leaderboard, Google’s models are consistently near the top. In fact:

• In reasoning, Google ranks #2 globally.

• In coding, again, it’s #2.

• In high school-level math, also #2.

• And when you look at the best overall performance, Google is right there among the top-tier models—often outperforming OpenAI and Anthropic depending on the metric.

So let me be clear: Google is still an AI leader. The issue isn’t their capability—it’s mostly about perception. They’ve been more cautious in rolling out AI tools to the public, partly because of the risks involved in releasing experimental technology at scale. But under the hood, their models are just as powerful—if not more so—than many competitors.

Now, let’s pivot to something even more critical: how these companies would fare in a potential recession. And this is where balance sheet strength becomes incredibly important.

A lot of companies struggle during downturns because they’re highly leveraged or don’t have enough liquidity. But Alphabet and Meta are not among those companies. Their financial positions are rock solid.

Let’s break it down:

Alphabet (Google)

• Total assets: $450 billion

• Total debt: $25 billion

• Debt-to-assets ratio: 0.06 — extremely low

• Current assets: $163.7 billion

• Current liabilities: $89 billion

• Current ratio: very healthy

• Interest coverage: not a concern at all — Alphabet has no trouble meeting interest obligations.

Meta

• Also in great shape.

• Debt-to-assets ratio: extremely low

• Current ratio: very strong — current assets are nearly 3x the current liabilities.

• Like Alphabet, Meta has such a strong cash position that both companies felt comfortable initiating dividends last year.

And keep in mind, these dividends are just the beginning. Because of their accelerating free cash flow and balance sheet strength, they have the flexibility to grow those dividends over time, making them increasingly attractive to both growth and income investors.

Now let’s talk valuation — starting with a Reverse DCF analysis.

This model helps us estimate how much free cash flow growth the market is currently pricing into the stock. For Google:

• If we assume 0% free cash flow growth, the stock would be worth around $81.21.

• At 5% growth, that value rises to $115.

• At 10%, it surpasses the current share price (~$159).

That tells us the market is pricing in somewhere around 9.7% growth over the next decade. But here’s the thing—according to analyst estimates on platforms like Seeking Alpha, Google’s projected long-term earnings growth is in the range of 12–14%. Even after recent downward revisions, that’s still well above what the market is pricing in. That makes Google look undervalued by historical standards.

Let’s run the same analysis for Meta:

• At 10% free cash flow growth, the intrinsic value exceeds the current share price.

• If we lower it to 9%, we get close to today’s market price.

• Once again, if analyst projections hold true—ranging from 10% to 13% long-term growth—then Meta also looks undervalued.

Now let’s take it a step further with a Sensitivity Analysis.

This allows us to forecast potential returns by combining EPS growth projections with possible changes in the P/E ratio.

Google:

• Average P/E over the last decade: 25.8

• Current trailing P/E: 19

• Even if it only reverts to 21.5, and we assume 12.5% EPS growth through 2030, we’d be looking at:

  120% total return

  14%+ annualized

Meta:

• Average P/E: 30.73

• Current P/E: 22

• Assuming 9% EPS growth and a modest P/E reversion to 25.5, we’d get:

  93.6% total return

  11.6% annualized

And remember, these assumptions are on the conservative side. If these companies outperform or sentiment shifts more positively, the returns could be significantly higher.

But here’s the wildcard: tariffs.

Tom Lee recently pointed this out as a key macro risk. For example, consider the impact of tariffs on Apple. According to Bank of America, if Apple is forced to build iPhones in the U.S. without an exemption, production costs could rise by 90%. That’s massive. Analysts estimate that this scenario could cut Apple’s EPS by 28% in 2025—a staggering decline for a company of its size.

That’s why the next 90 days could be pivotal. Any policy changes around trade or tariffs could ripple across the entire market, particularly for tech giants with global supply chains.

But here’s the bottom line:

If you’re a long-term investor, especially one still in your accumulation phase, don’t let short-term volatility shake your conviction. Yes, the market is facing headwinds—rate uncertainty, inflation, geopolitics, and tariffs. But beneath all of that, some of the strongest companies in the world are trading at what appear to be very reasonable valuations, even under cautious assumptions.

So instead of panicking about the daily headlines, use this environment to your advantage. Focus on quality. Look for margin of safety. And think long-term.

Like always, it’s about finding opportunities—not chasing hype.

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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