For our Premium Members, we discuss the following:
Microsoft’s nearly 900M user AI catalyst for both enterprises and consumers
The one key metric we are watching to help time when Microsoft’s stock will rally again after being flat for nearly a year
The hidden clue in Microsoft’s earnings report that hints a new AI trend is about to start, and a few key beneficiaries of the explosive trend management is confirming is about to begin.
900M Users on Windows 10 Incentivized to Upgrade to Windows 11
While the Windows 10 end of life support is well-known by now, the reason that we believe it will be a catalyst for Microsoft is that the upgrade cycle will help Microsoft to force many enterprise users to adopt its AI features. Windows 11 devices (Copilot+ PCs) were designed with on-device AI in mind utilizing powerful NPUs, and enterprise use cases for AI require the enhanced security and compliance support no longer provided under Windows 10 after its sundown. The upgrade cycle will place integrated AI features and Copilot directly and instantly to enterprises and consumers, potentially driving higher consumption for 365 services, Copilot Pro, or tokens and API calls.
Microsoft will end Windows 10 support on October 14, 2025, though it is offering extended security update (ESU) licenses to allow for some extension and support past the deadline. Consumers have the ability to purchase a one-year license through October 2026 and enterprises up to 3 years through October 28; however, a lack of support means Windows 10 is likely to be mostly unusable especially for enterprises that require said security.
This is likely to force many upgrades to Windows 11 as license prices for enterprises double from $61 to $122 to $244 per device, quickly adding up each year; Microsoft says organizations have the option to enroll their PCs into a paid ESU subscription after support ends, with the ability to renew each year thereafter for an increasing price. This provides extra time for organizations to plan and commence upgrades, while encouraging them to do so sooner rather than later. Assuming 10 million enterprise devices choose to stay on Windows 10 for the full three year license, that would generate nearly $4.3 billion in license revenue.
Microsoft noted that they are seeing “increased commercial traction as we approach end of support for Windows 10,” and “Windows 11 commercial deployments increased nearly 75% year-over-year.” When it comes to AI-capable PCs, enterprise adoption is expected to drive growth, and this is where Windows 11 makes its mark with Copilot as default on the OS. Canalys says that “Windows AI-capable PC shipments grew 26% sequentially, accounting for 15% of all Windows PCs shipped” in the December quarter, with more enterprises expected to upgrade as the deadline nears.
Microsoft Sees Strong Bookings, RPO Growth
We wanted to point out for Premium members that while bookings are lumpy, Commercial RPO growth above 30% suggests that Microsoft’s stock could (finally) resume strength again.
The last time we saw RPO in the 30%+ growth range was in late 2022-mid 2023 correlating to stronger price action than what we saw in 2024, for example.
Pictured above: Microsoft’s stock rallied up to 68% during quarters when RPO was above 30%.
Microsoft has now reported two quarters with RPO above 30%. Per the most recent earnings call: “Commercial RPO increased to $315 billion, up 34% and 33% in CC. Roughly 40% will be recognized in revenue in the next 12 months, up 17% year-over-year. The remaining portion recognized beyond the next 12 months increased 47%.”
Commercial RPO recorded a second straight quarter with >33% YoY growth in Q3 .
It should also be pointed out that Microsoft’s RPO is monstrous at $315 billion. This is almost double the RPO the company saw in the 2022-2023 period in the mid-$100B range. Growth this high on such a large number should not be overlooked.
Furthermore, when Microsoft’s stock was flat in 2024, the company was reporting RPO growth in the 20% range. Not only is RPO up 15 points in the most recent quarter, but RPO had doubled in the prior quarter from 17.5% to 34% and 36% in constant currency.
Commercial RPO also helps to further separate Microsoft from its Big Tech peers, as its growth is quicker and at a larger scale than both AWS and GCP — Amazon noted that its backlog rose nearly 20% YoY to $189 billion, while Alphabet said GCP’s RPO rose nearly 28% YoY to $92.5 billion. This strong RPO growth at scale helps cement Azure’s leading growth profile through 2026, at an estimated >10 points faster than AWS this year and next and faster than GCP even on a larger revenue base.
What we want to see as investors is not only was the current earnings report strong, but we also want hints that growth can sustain. While bookings are lumpy, RPO is communicating that Microsoft has what it takes to lead the Mag 7 again.
Microsoft CEO Slips They are “Short Power” in Earnings Call
Perhaps one of the more peculiar points of Q3’s report was the fact that Microsoft’s capex declined sequentially despite management noting that they expect to be capacity constrained through at least the June quarter – this begs the question, why slow capex if there are capacity constraints?
Capex declined sequentially for the first time in 2 years, at $21.4 billion versus $22.6 billion in the prior quarter. Q3’s figure was also slightly lower than expected due to variability in timing of data center leases, though capex is expected to increase sequentially in fiscal Q4.
CEO Satya Nadella mentioned that Microsoft would be “short power” in the earnings call and then tried to walk it back later in what was kind of an awkward moment: “And that's what you see reflected, and I feel very, very good about the pace. In fact, Amy just mentioned, we will be short power. And so therefore — but it's not power, but it's not a blanket statement. I need power in specific places so that we can either lease or build at the pace at which we want.”
CFO Amy Hood also tried to clarify that “when Satya talks about being short power, he's really talking about data center space. And so we've continued through the second half to put things in place.”
Our takeaway: The CEO of Microsoft is one of the most knowledgeable and polished speakers on the planet. I do not think he said “short power” to mean data center space — although there is a correlation between higher data center density needing better power solutions and data center density – rather, he clearly stated Microsoft needs power “in specific places.”
We’ve been tracking this closely for over a year, starting with a thematic deep dive on the free side and identifying several stocks positioned to deliver rapid time-to-power—a critical bottleneck for deploying Nvidia’s next-gen, power-hungry AI systems. The key point, especially when paired with Microsoft’s lower capex guidance, is this: AI cannot scale without new power infrastructure. The Next Platform wrote on this topic, which you can read here.
Although Microsoft’s Q3 results showed some unusual quarterly variability due to capacity constraints, the bigger signal came from its forward-looking capex commentary. Management said capex in fiscal 2026 (beginning in the second half of calendar 2025) will grow at a slower pace than FY2025, with a higher mix of short-lived assets. While that suggests more spending on servers, GPUs, and networking gear, it also raises a concern: Microsoft may be pulling back on long-lead infrastructure because they simply can’t get power fast enough.
This doesn’t point to weak demand. Instead, it highlights an industry choke point: without access to sufficient power, Microsoft may be unable to deploy new GPUs or build data center capacity at the pace AI demand requires.
Conclusion
When it comes to Microsoft’s trajectory over the next few years – where do we begin? The media loves to cover the OpenAI partnership for good reason; it shows Nadella had a vision as to the early winner in the space and the fortitude to lock-in Azure’s positioning with early investments. This is not only the usage seen in Chat-GPT but rather from millions of developers who use OpenAI’s APIs and Azure platforms like Foundry.
That is only part of the outlook for Microsoft, there are dozens of AI enterprise integrations that make it hard to compete in the enterprise space. GitHub comes to mind, Teams, Office 365 and the many CoPilot features.
From there, Microsoft will be converting 900 million users from Windows 10 to Windows 11 over the next few years, helping to boost usage across the many AI apps that Microsoft has released over the past decade.
Lastly, we are seeing important key metrics suggest Microsoft could lead the Mag 7 stocks again. Commercial RPO has not only resumed growth rates above 30% but has done so on a revenue base that is hard to fathom at these RPO growth levels. Should Commercial RPO continue, it’s a strong hint that Microsoft’s lead in AI will be hard for AWS and Google Cloud to shake.
The I/O Fund is closely monitoring Microsoft for a potential entry point. Join us Thursdays at 4:30 p.m. in our Advanced Market webinars, where we’ll outline our strategy for initiating a position with maximum upside in mind. Learn more here.Learn more here.
Essentials Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgrade.Essentials Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgradeEmail us to upgrade.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Microsoft stood out amongst its Big Tech peers Amazon and Alphabet this earnings season due to its strength and outperformance in the cloud. Notably, Microsoft Azure was the only cloud provider of the 3 platforms to see growth accelerate this quarter, highlighting Microsoft’s impressive earnings for Q3 2025. Not only did Azure separate itself with this 4-point sequential growth acceleration, but it also grew at more than 2x the rate of AWS and 7 points faster than Google Cloud, reaffirming the company’s momentum in the Azure vs AWS vs Google Cloud battle.
We highlighted Microsoft’s AI strategy and its potential to be dominate AI for our premium members in April 2022 prior to Chat-GPT 3’s release, repeating this thesis in October 2022, labeling Microsoft a “sleeping AI giant” when shares were trading at $247.
Fast forward and Microsoft fiscal Q3 report is cementing the company as the strongest AI player in the hyperscale crowd due to its focus and dominance across enterprise software offerings and deep AI integrations aided by its partnership with OpenAI. Year-to-date, Microsoft is outperforming Alphabet and Amazon by at least 10 points, making it the sole Big 3 stock in positive territory after its strong fiscal Q3 report.
Microsoft stock is up 7% YTD after its strong Q3 report, while Alphabet and Amazon remain negative. Source: YCharts YCharts
Below, we discuss Microsoft earnings for Q3 2025, Azure’s outperformance, Microsoft’s lead in AI with OpenAI, and a major catalyst that nobody is talking about.
Azure Growth Reaccelerates in Microsoft’s Q3 FY25 Earnings
Azure’s growth was expected to be weak this quarter, with numerous analyst notes raising concerns about Azure’s growth heading into Q3’s report, noting that macro headwinds could weigh on growth. Many analysts had forecast growth of 30% to 31% in constant currency, at or below Microsoft’s guidance for 31% to 32% growth.
However, Azure reported quite the opposite as growth accelerated to 35% in constant currency — well ahead of the guide and analyst expectations.
Azure’s growth reaccelerated to 35% in constant currency in Q3, and is expected to remain at that growth rate in Q4.
Azure benefited as Microsoft brought capacity online faster than expected in the quarter, to meet high demand for AI services. AI contributed 16 points of growth in the quarter, compared to 13 points last quarter and 10 points of growth a year ago. Microsoft did not provide an update on AI’s run rate after saying last quarter it had surpassed $13 billion, up 175% YoY.
In the ongoing battle of Azure vs AWS vs Google Cloud, Azure is growing not only growing faster but also seeing higher AI revenue. Neither of the two have reported a specific AI revenue figure like Microsoft, simply saying it was in the multiple-billion dollar range, implying AI revenue to be less than $10 billion and likely in the $3-6 billion range. GCP has also decelerated 7 points in 2 quarters, while AWS decelerated once again in Q1:
Azure growth reaccelerated to 35% last quarter while AWS and GCP growth both decelerated.
Additionally, margins for AI were strong as well. Microsoft said that “margins on the AI side of the business are better than they were at this point by far than when we went through the same transition and the server to cloud transition.” Driving a growth acceleration at this scale while peers decelerate with strong margins is quite an impressive feat.
AI contributed 16 points of growth in fiscal Q3, consistently expanding its share over the past seven quarters.
For Q4, Microsoft guided 34% YoY and 35% constant currency growth for Azure, driven by strong demand, maintaining a very similar growth cadence as the prior year. Management added that demand is growing slightly faster than capacity that can be brought online, and as a result they “expect to have some AI capacity constraints beyond June.”
Over the longer-term, Azure is expected to outperform both AWS and GCP through 2026, according to estimates from UBS. For 2025, Microsoft Azure growth is projected at 28.6% YoY to $83.3 billion, outpacing both AWS at 16.8% and Google Cloud at 25.3%, according to UBS. UBS also forecasts Azure to maintain a 28% growth rate in 2026 to $106.7 billion in revenue, whereas GCP is forecast to decelerate to 22% and AWS to >16% YoY.
Azure’s Non-AI Growth Resilient
Interestingly, Microsoft noted and reiterated that the real driver of outperformance this quarter was not AI, but rather Azure’s non-AI business.
Last quarter, non-AI was a bit of a drag on revenue, as it faced challenges in sales through partners and indirect methods. Microsoft had shifted sales & marketing budgets and resources last summer to balance AI workloads with ongoing migrations and other customer needs, and as a result some lingering impacts on non-AI Azure revenue were expected through 1H 2025.
Management reaffirmed that in Q3, the “majority of our outperformance versus where we had expected to be was on the non-AI piece of the business,” driven by strong execution and accelerations within its enterprise customers.
The upbeat performance in non-AI revenue and confidence from management in continuing this strong growth next quarter is quite encouraging, and a stark contrast to Q2. This newfound strength and resilience in non-AI can complement AI growth on Azure, preserving this growth acceleration.
The I/O Fund is a leading tech portfolio with annualized return of 27.6% — which would rank us as #2 in the United States if we were a hedge fund. Learn more here.Learn more here.
Microsoft’s Enterprise Advantage
Non-AI revenue was hammered home as the real driver of Azure’s Q3 outperformance, and this boils down to one key advantage – Microsoft's dominance in the enterprise. Microsoft benefits from strong enterprise concentration in cloud infrastructure and software, with more than 80% of its Office 365 subscriptions from Commercial customers and more than 95% of the Fortune 500 using Azure for cloud needs. This compares to Google Cloud which has emphasized its startup customer base in the past: “more than 60% of funded gen AI startups and nearly 90% of gen AI unicorns are Google Cloud customers.” HG Insights states AWS has seen only 3% growth in enterprises with 28% in startups and SMBs.
Microsoft is quickly integrating enterprise customers to its AI Copilot offerings, with nearly 520 million 365 subscriptions to target with Copilot and more than 80% of those being Commercial seats – a key pillar of Microsoft’s AI strategy in 2025. Microsoft also said that more than 230,000 organizations and 90% of the Fortune 500 have used Copilot Studio, while 365 Copilot users rose 3x YoY to the hundreds of thousands with larger deal sizes.
Additionally, Microsoft is benefiting from increased usage by its strategic partner OpenAI, not only due to its 49% ownership stake and revenue-sharing agreement, but also due to the sharp rise in ChatGPT usage and token generation as OpenAI’s APIs are exclusive to Azure.
OpenAI is a strong driver for Azure as the world’s most popular AI assistant, including not only the Azure usage from Chat-GPT's 400 million weekly active users but also from Azure Open AI, which allows API access for enterprises to integrate OpenAI models into their applications. This combination is resulting in high token usage, coupled with developers who use Open AI’s APIs, and also platforms on Azure such as Azure Foundry, where over 70,000 enterprises have built AI applications using OpenAI and other models.
Microsoft’s 49% Stake in OpenAI, 20% Revenue Share
Microsoft has invested a total of $13.75 billion in the ChatGPT parent, holding a 49% stake in the company along with rights to OpenAI’s IP and exclusivity for OpenAI’s APIs on Azure. This has paid off handsomely as Chat-GPT queries and OpenAI API calls run on Azure servers.
The 49% stake in OpenAI is now worth $147 billion after the company’s March fundraise at a $300 billion valuation, and Microsoft also has revenue and profit-sharing agreements through 2030 (although these may soon be amended).
Diagram of OpenAI’s complex corporate structure and Microsoft’s investment. Source: Financial TimesFinancial Times
Currently, Microsoft and OpenAI’s partnership includes a 20% revenue share for Microsoft through 2030, as well as a 75% profit-share until its investment is returned. Microsoft’s original $1 billion investment in 2019 also gave them 49% profit share in OpenAI’s capped profit subsidiary with a 100x investment cap, or up to $100 billion.
However, OpenAI is now said to be seeking to cut the revenue share down to 10% by the end of the decade as part of a restructuring plan that may set the path for a future IPO. Under the plan, OpenAI will see its “for-profit arm becoming a public benefit corporation (PBC) but continue to be controlled by its nonprofit division.” It is reported that Microsoft would also give up some of its stake in exchange for access to new models developed after the 2030 cutoff.
While the plan is still fluid in nature, OpenAI is projecting substantial revenue growth over the next four years, as it recently boosted its long-term revenue forecasts, representing a large revenue opportunity for Microsoft. OpenAI raised its 2029 revenue estimate by 25% to $125 billion, while also substantially raising its 2027 and 2028 revenue estimates by >20%.
OpenAI boosted its revenue projections from 2025 onwards, raising 2029 projections by 25%.
On a cumulative basis from 2024 to 2029, OpenAI’s updated projections now see revenue of $311 billion, up from $256 billion previously. Under the terms of the current deal at 20%, this would represent $62.2 billion in cumulative revenue to Microsoft, growing almost 10x from an estimated $2.6 billion in 2025 to $25 billion by 2029 based on this projection. This revenue share opportunity would be nearly 5x more than it has invested in the ChatGPT parent. At a 10% share, this could still represent at least $31.1 billion in cumulative revenue assuming these projections materialize.
Despite this growth, OpenAI is not expecting to be cash-flow positive until 2029, providing a drag to earnings via the profit-share. For the nine-months ending Q3, Microsoft reported ($3.2 billion) in other expenses, up more than 3x YoY to 3.3% of operating income, primarily related to losses from equity method investments including OpenAI.
Tokens Processed Up 5X to 100 Trillion Per Quarter
Hundreds of millions of Chat-GPT users, along with millions of developers using OpenAI’s APIs are driving a surge in Azure’s processed tokens.
CEO Satya Nadella said that Microsoft “processed over 100 trillion tokens this quarter, up 5x year-over-year, including a record 50 trillion tokens last month alone.” A rough estimate for 100 trillion tokens in API calls from GPT-4 could drive $4.5 billion per quarter (or $18 billion annualized) at the midrange, though a higher mix of lower priced models could bring this closer to $2 billion per quarter.
The rapid increase in ChatGPT image generator’s popularity in the last month likely aided token growth to the record 50 trillion. Nadella had another very important quote on the call that suggests they can continue to drive token growth moving forward:
“You see this in our supply chain where we have reduced dock to lead times for new GPUs by nearly 20% across our blended fleet where we have increased AI performance by nearly 30% ISO power and our cost per token, which has more than halved.”
What Nadella is saying is that Microsoft increased deployment times for its newest GPUs, bringing new capacity online faster to meet demand. Additionally, Microsoft also boosted efficiency significantly, increasing performance by 30% without using more power, helping drive token costs down by more than half. More efficient capacity and lower token costs supports further token growth ahead, especially considering ChatGPT’s popularity and widespread usage with 5.6 billion monthly visits as of March.
Microsoft is also seeing rapid adoption of its new AI agent platform, Azure AI Agent Service, which was initially unveiled in December 2024. Microsoft said that in just four months, “over 10,000 organizations have used our new agent service to build, deploy and scale their agents.”
Azure AI Agent Service is Microsoft’s new fully-managed platform allowing developers and enterprises to build extensible AI agents directly in Azure, without having to manage underlying compute and storage, and using just a few lines of code. These agents can answer questions, perform actions, or fully automate workflows, with integration to 365 and built-in memory and reasoning supporting longer, multi-step tasks. These longer tasks, frequent tool calling and API integration, and multi-agent collaboration all can drive token usage higher as more enterprises adopt and scale on the platform.
Looking Beyond OpenAI:
Microsoft also provided a handful of stats that show strong AI-driven platform growth and adoption beyond OpenAI.
GitHub Copilot is still seeing rapid growth, with Microsoft stating that users rose 4x YoY to more than 15 million. Copilot had accounted for 40% of GitHub’s growth last year, and is still relatively early in its adoption cycle, at ~10% of the 150 million developers on the platform. In Q3,Microsoft continued to build out Copilot and evolved it “from pair to peer programmer with agent mode in VS Code,” while it also now can “iterate on code, recognize errors and fix them automatically.”
Analytics consumption accelerated in Q3, with Microsoft Fabric paid customers rising 80% YoY and over 10% QoQ to more than 21,000. Since the start of FY25, Fabric has added more than 5,000 customers, as Microsoft continues to deepen integrations with the platform, such as with Power BI or the new Azure AI Agent Service. Microsoft added that real-time intelligence is the “fastest-growing workload in Fabric with 40% of customers already using it in just five months since becoming generally available.”
Power Platform continues to see strong user growth, with MAUs rising 27% YoY to 56 million, with Microsoft saying these customers “increasingly use our AI features to build apps and automate processes.” As of Q1, Power Platform had more than 600,000 active organizations, up 4x YoY.
While strong underlying adoption metrics and deep integrations with OpenAI are driving strong Azure growth, there’s another major upcoming catalyst for Microsoft that will help its ability to cross-sell its AI services into both enterprises and consumers. We share this catalyst and another bullish key metrics that signals Microsoft’s stock could (finally!) lead the Mag 7 again.
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Microsoft’s nearly 900M-user AI catalyst for both enterprises and consumers
The one key metric we’re watching to help time when Microsoft’s stock will rally again after being flat for nearly a year
The hidden clue in Microsoft’s earnings report that suggests a new AI trend is beginning — plus a few key beneficiaries of this explosive shift management just confirmed Sign Up to Continue ReadingSign Up to Continue Reading
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Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
For our Premium Members, we discuss the following:
Microsoft’s nearly 900M user AI catalyst for both enterprises and consumers
The one key metric we are watching to help time when Microsoft’s stock will rally again after being flat for nearly a year
The hidden clue in Microsoft’s earnings report that hints a new AI trend is about to start, and a few key beneficiaries of the explosive trend management is confirming is about to begin.
900M Users on Windows 10 Incentivized to Upgrade to Windows 11
While the Windows 10 end of life support is well-known by now, the reason that we believe it will be a catalyst for Microsoft is that the upgrade cycle will help Microsoft to force many enterprise users to adopt its AI features. Windows 11 devices (Copilot+ PCs) were designed with on-device AI in mind utilizing powerful NPUs, and enterprise use cases for AI require the enhanced security and compliance support no longer provided under Windows 10 after its sundown. The upgrade cycle will place integrated AI features and Copilot directly and instantly to enterprises and consumers, potentially driving higher consumption for 365 services, Copilot Pro, or tokens and API calls.
Microsoft will end Windows 10 support on October 14, 2025, though it is offering extended security update (ESU) licenses to allow for some extension and support past the deadline. Consumers have the ability to purchase a one-year license through October 2026 and enterprises up to 3 years through October 28; however, a lack of support means Windows 10 is likely to be mostly unusable especially for enterprises that require said security.
This is likely to force many upgrades to Windows 11 as license prices for enterprises double from $61 to $122 to $244 per device, quickly adding up each year; Microsoft says organizations have the option to enroll their PCs into a paid ESU subscription after support ends, with the ability to renew each year thereafter for an increasing price. This provides extra time for organizations to plan and commence upgrades, while encouraging them to do so sooner rather than later. Assuming 10 million enterprise devices choose to stay on Windows 10 for the full three year license, that would generate nearly $4.3 billion in license revenue.
Microsoft noted that they are seeing “increased commercial traction as we approach end of support for Windows 10,” and “Windows 11 commercial deployments increased nearly 75% year-over-year.” When it comes to AI-capable PCs, enterprise adoption is expected to drive growth, and this is where Windows 11 makes its mark with Copilot as default on the OS. Canalys says that “Windows AI-capable PC shipments grew 26% sequentially, accounting for 15% of all Windows PCs shipped” in the December quarter, with more enterprises expected to upgrade as the deadline nears.
Microsoft Sees Strong Bookings, RPO Growth
We wanted to point out for Premium members that while bookings are lumpy, Commercial RPO growth above 30% suggests that Microsoft’s stock could (finally) resume strength again.
The last time we saw RPO in the 30%+ growth range was in late 2022-mid 2023 correlating to stronger price action than what we saw in 2024, for example.
Pictured above: Microsoft’s stock rallied up to 68% during quarters when RPO was above 30%.
Microsoft has now reported two quarters with RPO above 30%. Per the most recent earnings call: “Commercial RPO increased to $315 billion, up 34% and 33% in CC. Roughly 40% will be recognized in revenue in the next 12 months, up 17% year-over-year. The remaining portion recognized beyond the next 12 months increased 47%.”
Commercial RPO recorded a second straight quarter with >33% YoY growth in Q3 .
It should also be pointed out that Microsoft’s RPO is monstrous at $315 billion. This is almost double the RPO the company saw in the 2022-2023 period in the mid-$100B range. Growth this high on such a large number should not be overlooked.
Furthermore, when Microsoft’s stock was flat in 2024, the company was reporting RPO growth in the 20% range. Not only is RPO up 15 points in the most recent quarter, but RPO had doubled in the prior quarter from 17.5% to 34% and 36% in constant currency.
Commercial RPO also helps to further separate Microsoft from its Big Tech peers, as its growth is quicker and at a larger scale than both AWS and GCP — Amazon noted that its backlog rose nearly 20% YoY to $189 billion, while Alphabet said GCP’s RPO rose nearly 28% YoY to $92.5 billion. This strong RPO growth at scale helps cement Azure’s leading growth profile through 2026, at an estimated >10 points faster than AWS this year and next and faster than GCP even on a larger revenue base.
What we want to see as investors is not only was the current earnings report strong, but we also want hints that growth can sustain. While bookings are lumpy, RPO is communicating that Microsoft has what it takes to lead the Mag 7 again.
Microsoft CEO Slips They are “Short Power” in Earnings Call
Perhaps one of the more peculiar points of Q3’s report was the fact that Microsoft’s capex declined sequentially despite management noting that they expect to be capacity constrained through at least the June quarter – this begs the question, why slow capex if there are capacity constraints?
Capex declined sequentially for the first time in 2 years, at $21.4 billion versus $22.6 billion in the prior quarter. Q3’s figure was also slightly lower than expected due to variability in timing of data center leases, though capex is expected to increase sequentially in fiscal Q4.
CEO Satya Nadella mentioned that Microsoft would be “short power” in the earnings call and then tried to walk it back later in what was kind of an awkward moment: “And that's what you see reflected, and I feel very, very good about the pace. In fact, Amy just mentioned, we will be short power. And so therefore — but it's not power, but it's not a blanket statement. I need power in specific places so that we can either lease or build at the pace at which we want.”
CFO Amy Hood also tried to clarify that “when Satya talks about being short power, he's really talking about data center space. And so we've continued through the second half to put things in place.”
Our takeaway: The CEO of Microsoft is one of the most knowledgeable and polished speakers on the planet. I do not think he said “short power” to mean data center space — although there is a correlation between higher data center density needing better power solutions and data center density – rather, he clearly stated Microsoft needs power “in specific places.”
We’ve been tracking this closely for over a year, starting with a thematic deep dive on the free side and identifying several stocks positioned to deliver rapid time-to-power—a critical bottleneck for deploying Nvidia’s next-gen, power-hungry AI systems. The key point, especially when paired with Microsoft’s lower capex guidance, is this: AI cannot scale without new power infrastructure. The Next Platform wrote on this topic, which you can read here.
Although Microsoft’s Q3 results showed some unusual quarterly variability due to capacity constraints, the bigger signal came from its forward-looking capex commentary. Management said capex in fiscal 2026 (beginning in the second half of calendar 2025) will grow at a slower pace than FY2025, with a higher mix of short-lived assets. While that suggests more spending on servers, GPUs, and networking gear, it also raises a concern: Microsoft may be pulling back on long-lead infrastructure because they simply can’t get power fast enough.
This doesn’t point to weak demand. Instead, it highlights an industry choke point: without access to sufficient power, Microsoft may be unable to deploy new GPUs or build data center capacity at the pace AI demand requires.
Conclusion
When it comes to Microsoft’s trajectory over the next few years – where do we begin? The media loves to cover the OpenAI partnership for good reason; it shows Nadella had a vision as to the early winner in the space and the fortitude to lock-in Azure’s positioning with early investments. This is not only the usage seen in Chat-GPT but rather from millions of developers who use OpenAI’s APIs and Azure platforms like Foundry.
That is only part of the outlook for Microsoft, there are dozens of AI enterprise integrations that make it hard to compete in the enterprise space. GitHub comes to mind, Teams, Office 365 and the many CoPilot features.
From there, Microsoft will be converting 900 million users from Windows 10 to Windows 11 over the next few years, helping to boost usage across the many AI apps that Microsoft has released over the past decade.
Lastly, we are seeing important key metrics suggest Microsoft could lead the Mag 7 stocks again. Commercial RPO has not only resumed growth rates above 30% but has done so on a revenue base that is hard to fathom at these RPO growth levels. Should Commercial RPO continue, it’s a strong hint that Microsoft’s lead in AI will be hard for AWS and Google Cloud to shake.
The I/O Fund is closely monitoring Microsoft for a potential entry point. Join us Thursdays at 4:30 p.m. in our Advanced Market webinars, where we’ll outline our strategy for initiating a position with maximum upside in mind. Learn more here.Learn more here.
Pro Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgrade.Pro Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgrade.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Jabil has surfaced as an oft-overlooked cloud and data center beneficiary, as the company’s strong growth in AI-related segments is mired behind multiple low-growth segments.
Simply put, Jabil’s 37% guided growth in Cloud & Data Center Infrastructure — to account for nearly 23% of fiscal 2025 revenue — would be impossible to see by looking at just top-line growth as revenue is expected to decline (3.4%) YoY in FY25.
However, it is this exact reason that Jabil likely faces growing headwinds throughout the rest of 2025, as a myriad of weak segments such as Auto and high consumer exposure via Apple present it to tariff-related demand and supply chain risks. These weak segments are more than offsetting AI growth, while thin margins mean tariff costs must be passed on to preserve the bottom line, which is already far below management’s FY23-stated target for this year.
Below, we discuss Jabil’s positioning in the AI supply chain, data center-driven growth and a penchant for M&A, consumer-exposed tariff risks, and lingering weakness in key segments.
Jabil’s Unique Positioning in the AI Supply Chain
Jabil is uniquely positioned in the AI supply chain, as it provides custom-designed, turnkey HPC/AI server platforms, rack enclosures, and optical networking components. Jabil is also increasingly vertically integrated across its AI portfolio with recent acquisitions, now offering complete GPU-agnostic servers featuring custom power and cooling solutions and in-house optical components.
Jabil offers both 1U and 2U (single, double rack unit) servers based on AMD’s latest 5th-gen EPYC processors and Intel’s 5th and 6th-gen Xeon processors. The 2U servers are optimized for low-latency, AI GPU accelerated workloads, while its 1U servers can be optimized for compute-storage or memory density. Jabil’s 2U ‘Eagle Stream’ server is Nvidia-certified for its L4 GPUs, which focus on video processing, deep learning and graphics use cases.
Jabil takes its full-system integration capabilities one step further with its Design-to-Dust lifecycle management support. This spans complete server rack development, tailored to customers’ exact needs, moving to volume manufacturing and then customer delivery, and circling back to decommissioning for end-of-life products. Thus, hyperscaler customers can come to Jabil for fully-designed, custom-manufactured servers from the ground up, minimizing supply chain diversification with Jabil’s vertical integration capabilities, further expanded with recent acquisitions.
However, the main risks with this strategy serving primarily in a ‘contract manufacturing’ model is that Jabil’s margins may remain thinner than other AI server manufacturers (at ~5% versus high single/low double-digits for Super Micro or HPE), hyperscale customers could shift spending, switch to other suppliers that can better meet needs with leading-edge GPUs, such as Blackwell or soon Rubin, or decide to internalize builds.
M&A Aiding Vertical Integration Capabilities
Jabil has taken steps over the past few years to strengthen its AI data center stack and enhance its vertical integration capabilities with two primary acquisitions, first with Intel’s silicon photonics-based pluggable optics transceivers unit in late 2023, and with liquid cooling manufacturer Mikros Technologies in late 2024.
Jabil is also said to be an interested party in acquiring ZT Systems’ US-based AI server manufacturing plants, with AMD reportedly looking to offload the assets in the second quarter to avoid competing with its customers Dell and HPE. Per Bloomberg, AMD is looking for a deal valued between $3 to $4 billion for the plants, with Taiwanese firms Wiwynn and Compal Electronics other interested parties.
Deal for Intel’s Silicon Photonics Unit
Financial terms for the silicon photonics deal with Intel were not disclosed, though Jabil acquired Intel’s silicon photonics IP, current and future product designs, R&D and technical teams. The deal brought Intel’s existing 400G optical transceiver module products, 800G products in development, and future 1.6T designs to Jabil’s data center portfolio. Neither Intel nor Jabil commented on the revenue of the unit, with Jabil’s management simply stating that it had “baked some of the revenues into our guide through 2024 into 2025.”
Interestingly, Jabil’s management said the idea of the deal arose from discussions from cloud customers who wanted to “disaggregate supply chains” and for Jabil to be more vertical in its server offerings. This raises a somewhat concerning point in that Jabil may have undertaken the deal due to pressure from customers who wanted to minimize extensive supply chain exposure, highlighting that these cloud customers likely have low switching costs and were willing (and able) to switch to new rack suppliers easily if such demands were not met.
Jabil’s management stated in late 2024 that within the first 12 months of the deal, the company had landed two new hyperscale accounts, with shipments already commencing. The hyperscale customers were not named, though Jabil has had a long-standing relationship with Amazon as one of its largest customers at 11% of revenue back in 2020, in both Cloud and Connected Devices segments, along with a pre-existing relationship with Meta in Connected Devices (now Connected Living).
As of fiscal Q2, Jabil is currently engaged in the 100G, 200G and 400G PAM4 optical transceiver module lines, while quoting 800G PAM4 modules in the first half of 2025 and moving towards 1.6T PAM4 modules by the end of the year. Jabil recently showcased its 1.6T pluggable transceiver module at the start of April, supporting dual 800G Ethernet or Infiniband connections, or single 1.6T connections while offering “among the lowest power consumption in the market.”
Jabil’s positioning in the 800G and 1.6T transceiver lines opens to door to growth over the next few years as these ultra-high speed products emerge at the forefront of the optical transceiver market. According to leading manufacturer Mitsubishi Electric, the optical transceiver market is expected to nearly triple from $4 billion in 2023 to almost $12 billion by 2029, with 800G and 1.6T solutions accounting for more than 80% of the market by then. This would correspond to ~$10 billion share, up 10x from ~$1 billion in 2023.
However, given that Mitsubishi commands ~50% global market share, the absolute opportunity in terms of revenue for Jabil may be quite low given that the market is quite saturated and competitive. Based on management’s current guidance for FY25, Networking and Communications revenue is expected to remain flat YoY at $2.3 billion when backing out the $0.7 billion associated with the exit of its legacy networking unit in FY24. Thus, it’s likely that related transceiver driven growth will be minimal even as Jabil begins to quote 800G and 1.6T products this year. Even if the new products generate ramp quickly to a few hundred million in revenue, that will only account for 1% of Jabil’s total revenue, which could easily be overshadowed by lingering auto or consumer weakness.
Jabil also expects the photonics deal will position them well for the upcoming push to co-packaged optics, believing their capabilities align better with networking switches, which is where CPO is first expected to be utilized after Nvidia unveiled two CPO networking switches at GTC. However, the growth story for CPO is much more long-term, arising more in 2027 and 2028, and as result CPO is unlikely to be a material driver over the next few years for Jabil.
To enhance its thermal management solutions, Jabil acquired little-known liquid cooling manufacturer Mikros Technologies for $63 million, with the company’s revenue being estimated between $4 million and $7 million in 2023, non-accretive to Jabil’s $28.8 billion last year. The deal had $40 million in intangible assets, including $31 million assigned to contractual agreements and customer relationships.
Mikros specializes in custom microchannel cold plate and liquid cooling designs with ultra-low thermal resistance and high cooling capabilities of 1kW per square centimeter. These solutions are primarily direct-to-chip liquid cooling methods. The primary benefit of this is that these solutions can feature in a wide range of server racks, but are not as efficient as immersion-cooled servers, which are more tailored to >50kW racks, such as those featuring Blackwell GPUs, according to Super Micro.
Mikros has designed multiple different cold plate designs, with its AX-NV1 being designed primarily for Nvidia’s H100 GPU, and its AX-NV2 designed specifically for Blackwell series GPUs. Mikros says the NV2 fits easily in 1U rack designs, a primary rack size that Jabil offers.
The acquisition is helping Jabil begin to ramp its ability to help customers retrofit existing facilities from air cooling to liquid and soon liquid to liquid, through Mikros’ cold plate tech that easily will integrate into Jabil’s rack solutions. This acquisition further expanded Jabil’s full-system capabilities to now span server racks, cooling and optical networking tech.
Financials: AI Growth Overshadowed by Many Weak Segments
Jabil is by no means a hypergrowth stock, with revenue expected to decline this year and rebound to low-single digits in the next two. Despite the slow growth and thinner margins, the company has a strong bottom line, with EPS currently forecast to be nearly $9 this year.
AI-related revenue growth is strong at a guided +40% YoY as Jabil captures rising data center infrastructure demand. However, forward revenue growth rates through 2027 are multiple points lower than pre-pandemic growth and lagging management’s long-term growth targets, signaling risk ahead as multiple segments remain weak.
In Q2, Jabil reported revenue of $6.73 billion, down (0.6%) YoY, with a growth rate rebounding from a (16.6%) decline in Q1.
For Q3, Jabil guided for a return to topline growth at 3.4% YoY at midpoint, offering a wide revenue range of $6.7 billion to $7.3 billion. To note, comps after fiscal Q1 2024 are slightly impacted by the $2.2 billion divestment of its Mobility business in FY24 — Mobility contributed $1.7 billion in revenue in FY24 before divestment, down from $4.2 billion in 2023.
On the back of AI-related strength, Jabil raised its FY25 forecast in Q2, now seeing revenue of $27.9 billion, a $600 million increase from the $27.3 billion guided in fiscal Q1. This has brought its guidance up $900 million from its initial $27 billion guide from Q4 2024. The primary driver for FY25 is Intelligent Infrastructure (discussed below in Segment Breakdown), riding AI tailwinds to a forecast of 17% YoY growth for the full year to $10.8 billion in revenue. This was increased from Q1’s forecast for 9% growth to $10 billion in revenue.
Jabil’s updated outlook would correspond to a YoY decline of (3.4%) for revenue, as it works through weakness outside of Intelligent Infrastructure. This builds on top of a (16.8%) YoY decline in FY24, as swift pullbacks in customer demand and excess inventory buildup in multiple key markets including auto, 5G and renewables dented revenue growth significantly. Jabil had initially guided for a (2%) to (5%) YoY decline including the Mobility divestiture, but ended the year at nearly (17%). This overshadowed strong momentum in AI, with Jabil noting that “AI GPU volume in the first half of 2024 [was] 200 times that of the level of 2023.”
Looking forward through FY27, Jabil’s growth is expected to return to positive territory in the mid to high-4% range, estimated to rise 4.6% YoY in FY26 to $29.3 billion and 4.9% YoY in FY27 to $30.7 billion.
Accelerating AI-driven growth is not appearing in higher revenue growth over the next few years, and more importantly, current estimates show Jabil operating through FY27 below its long-term growth targets – management previously outlined expectations to grow revenue at 5% to 7% YoY in the long-term.
Segment Breakdown
Jabil recently reorganized its reportable segments at the end of fiscal 2024, shifting from two segments, Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS), to three: Intelligent Infrastructure, Regulated Industries, and Connected Living & Digital Commerce. Regulated Industries accounted for 41% of revenue, followed by Intelligent Infrastructure at 39% and Connected Living & Digital Commerce at 20% of revenue in Q2.
Intelligent Infrastructure is arising as a core driver of revenue growth in fiscal 2025, with the segment focused on high-value data center and cloud computing needs for hyperscalers. Regulated Industries segment focuses primarily on auto and transportation, healthcare, renewable energy infrastructure and packaging end markets, while Connected Living & Digital Commerce segment focuses on retail digitization, smart home, warehouse automation and robotics.
Here's how each segment fared in Q2:
Intelligent Infrastructure revenue rose 18% YoY to $2.6 billion, accelerating from 5% YoY growth in Q1. This was driven by strong AI-related demand in cloud, data center and capital equipment. Growth was 37% YoY when backing out the ~$300M in revenue in Q2 ‘24 from the legacy networking business it exited.
Regulated Industries revenue declined (8%) YoY to $2.7 billion in Q2, decelerating slightly from (7%) YoY growth in Q1, on expected EV and renewable energy weakness.
Connected Living & Digital Commerce revenue declined (13%) YoY to $1.3 billion; excluding the Mobility divestiture, growth was 4% YoY. This was driven by strong warehouse automation and digital commerce growth, offset by weakness in consumer-oriented connected devices.
For Q3:
Intelligent Infrastructure revenue was guided to accelerate to 22% YoY to $2.8 billion, driven by “broad-based growth across our capital equipment, advanced networking, cloud, and data center infrastructure markets,” slightly offset by 5G weakness.
Regulated Industries revenue guided to rebound to a (1%) YoY decline to $3.0 billion, on continuing caution in the EV market.
Connected Living & Digital Commerce revenue guided to decline (16%) YoY to $1.2 billion, due to weaker growth in connected living, offset by some growth in digital commerce.
Q3’s guide would point to a 17 point acceleration in growth for Intelligent Infrastructure in just 2 quarters. QoQ growth is also accelerating from 4% QoQ in Q2 to 7.7% QoQ in Q3, assuming Jabil meets it guide at $2.8 billion.
Jabil laid the groundwork for this forthcoming acceleration in Q1, noting that it deepened its relationship with its largest hyperscaler customer (presumed to be Amazon but not named), seeing continued strength in custom AI-driven GPU rack integrations, and winning new programs with a new hyperscaler customer in silicon photonics. The ramp of Jabil’s 800G optical transceivers in the first part of calendar 2025 is also another likely factor behind this acceleration.
Intra-Segment View for FY25
Jabil also provides an intra-segment view into each of three reportable segments, breaking down growth by end market. This provides further clarity into the separate growth drivers for Jabil and what segments are struggling to grow.
Within Intelligent Infrastructure, Jabil is projecting 37% YoY growth in Cloud and Data Center revenue to $6.3 billion, or nearly 23% of total revenue, a significant acceleration from Q1’s outlook for 20% YoY growth to $5.5 billion in revenue (an $800 million sequential increase). This would be primarily driven by server racks and related data center products, as photonics revenue appears in Networking.
Capital Equipment growth is forecast at 38% YoY to $2.2 billion, while Networking and Communications revenue is expected to decline (23%) YoY to $2.3 billion, in part due to the exit of legacy networking which contributed $700 million in revenue last year. Stripping that out, Networking growth would be flat YoY.
For Regulated Industries, FY25 revenue growth was revised down from (2%) in Q1 to (5%) in Q2, on prolonged weakness in Auto & Transportation revenue, with growth expected to slow further to (11%) YoY. Renewables & Energy remain flat, while Healthcare growth was revised from 2% to flat as well.
Connected Living & Digital Commerce was maintained around (27%) YoY, impacted in part by the Mobility divestiture, but also more broadly by weak demand in Connected Living.
Most importantly, this segment breakdown reveals one key risk ahead for Jabil — the fact that Data Center growing at 38% YoY at nearly one-quarter of total revenue is not appearing in top-line growth suggests this strong AI momentum will remain overshadowed by weak growth and demand issues in other consumer-exposed and rate sensitive segments.
AI-Related Revenue Forecast Increased to $7.5 Billion, up 40%+ YoY
Based on its strengths within Intelligent Infrastructure and more specifically within Cloud and Data Center Infrastructure, Jabil boosted its AI-related revenue outlook for FY25 to $7.5 billion.
This represented a $1 billion increase in its AI-related revenue forecast and points to YoY growth of 40%+. Jabil said that last year’s AI-related revenue “was in the region of $5 billion,” and they had then increased it to $6 billion, then $6.5 billion and now to $7.5 billion. Management said the increase comes “as demand for servers, racks, photonics, advanced networking gear, storage, and testing equipment all continued to climb higher during the quarter.”
Barclays’ George Wang questioned Interim CEO Mike Dastoor about what was driving the raised AI guidance and $800 million increase in Cloud & DCI guidance:
Q, Wang: “Just kind of glad to see you guys raised the guidance by $800 million around the server rack. Was it likely driven by your biggest hyperscale customer? Just curious about timing for the ramp. Earlier, you guys talked about it will be more FY '26 in terms of the ramp with the sort of custom rack with your biggest customer in the DCI side. Just curious if there's any pull in into the back half of FY 25 kind of evidenced by the strong growth in the segment and the kind of guidance you raised. Just curious if you have any refreshed thoughts in terms of nuance just on the cadence for the ramp.”
A, Dastoor: “So I think the increase is driven mainly in 2 parts. I think if you look at our market share, we are growing our market share. So there's definitely some level of consolidation going on there, and we're winning more than our fair share of the market. And then the end market growth, again, we're not seeing any slowdown there in the end market. That continues to move upward.”
Dastoor’s answer beat around the bush, as he did not provide any clues or clarity as to whether this growth was driven by its largest hyperscaler. Comments around the custom rack ramp being more towards FY26 implies that Jabil’s AI-related revenue growth next fiscal year could remain strong if there is no pull in into this fiscal year.
Margins
Though Jabil has thin margins, it is seeing some slight margin expansion arise with its Intelligent Infrastructure operating at a higher margin and higher growth rate than its other segments. This can provide longer-term margin tailwinds should AI continue to drive more favorable margins in the segment over the next few years.
Gross margin in Q2 was 8.6%, down from 8.7% in Q1 and 9.3% in the year ago quarter.
GAAP operating margin was 3.6% in Q2, up from 3.8% in Q1 (not comparable to Q2 24’s 16.7% due to divestiture gains). Adjusted operating margin was 5.0%, flat QoQ and YoY. For Q3, adjusted operating margin is implied to be ~5.4% at the midpoint of management’s guidance for $348 million to $408 million in operating income.
GAAP net margin was 1.7%, up from 1.4% in Q1. Adjusted net margin was 3.2%, down slightly from 3.3% in Q1 but up slightly from 3.1% in the year ago quarter.
Breaking down adjusted operating margin by segment in Q2 shows Intelligent Infrastructure becoming the quiet margin and visible growth driver:
Intelligent Infrastructure adjusted operating margin was 5.3% in Q2, expanded half a point from 4.8% in Q1.
Regulated Industries adjusted operating margin was 4.8% in Q2, up slightly from 4.7% in Q1.
Connected Living & Digital Commerce adjusted operating margin was 4.5% in Q2, down 1.3 points from 5.8% in Q1.
EPS
Jabil reported strong 15.5% growth in adjusted EPS to $1.94, while it guided for a wide range of $2.08 to $2.48 for Q3. At midpoint of $2.28, this implies adjusted EPS growth will accelerate to 20.6% YoY. Jabil had noted at the time of its Mobility divestiture that it expects EPS seasonality similar to its old EMS business, with 40% in the first half and the remaining 60% coming in the second half.
The wide revenue and EPS range likely stems in part from uncertainties around tariffs, given that the guidance was given in March before specifics were announced. Yet it’s notable that management is forecasting sequential improvement in margins and accelerating EPS (aided by seasonality), as it suggests that they are quite confident in their ability to navigate tariffs and benefit from accelerating AI demand.
In Q2, Jabil also boosted its FY25 EPS forecast, seeing earnings of $8.95, up 5.4% YoY. This was a $0.20 increase from its original $8.75 forecast. To see EPS growth while revenue is declining, albeit at single digits, suggests Jabil is managing costs well and recognizing some slight operating leverage benefits.
Over the medium-term, EPS growth is expected to accelerate to the mid-teens in FY26 and FY27, with growth currently estimated at 15% and 14% to $10.30 and $11.75, respectively.
However, the broad slowdown in demand across multiple end markets and ensuing revenue weakness in FY24 has put Jabil behind its FY25 EPS target given at the end of FY23. At the time, management forecast EPS of at least $10.65 in FY25, but is now nearly (16%) below that target for this year, and still below it next year.
Cash and Balance Sheet
Cash flows remain solid, with Jabil reporting a sequential improvement in cash flows in Q2.
Operating cash flow was $334 million in Q2, up more than 53% YoY and 7% QoQ. Operating cash flow margin was 5.0%, expanding from 4.5% in Q1 and 3.2% in the year ago quarter.
Adjusted free cash flow was $261 million, up more than 443% YoY and 15% QoQ. Adjusted free cash flow margin was 3.9%, up from 3.2% in Q1 and 0.7% in the year ago quarter. Jabil forecast for adjusted free cash flow generation of more than $1.2 billion for FY25, implying a slight expansion in adjusted FCF margin from 3.7% in FY24 to 4.3% in FY25. While these are thin margins, it’s likely sufficient to cover upcoming debt maturities.
Core EBITDA was $488 million in Q2, down (3.4%) YoY. For the first half of 2025, core EBITDA was $987 million, down (15.9%) YoY due to Q1’s YoY decrease in operating income.
Net inventories rose 2.7% QoQ to $4.44 billion. Net inventory days increased 5 days QoQ to 61, above management’s targeted range of 55 to 60 days, which Jabil attributed to timing in the Intelligent Infrastructure segment.
Cash and equivalents totaled $1.59 billion, while debt remained steady at $2.88 billion. While Jabil is upside-down on debt, having nearly 2x debt as cash and debt-to-equity at 2.12x, available revolver capacity and evenly spaced maturities suggest that Jabil’s indebtedness should not elevate risk.
Jabil has approximately $500 million in senior debt due in 2026, 2027, 2028 and 2030, with $300 million due in 2029 and its largest tranche of $600 million due in 2031. While Jabil is currently focused on maximizing shareholder returns via share buybacks, its cash flow generation annually would be sufficient to cover its upcoming maturities. Jabil also has $4 billion in revolving credit facilities available as a backup to its Commercial Paper program, which also has $3.2 billion in available borrowing capacity.
However, a larger acquisition such as for AMD’s ZT Systems’ manufacturing plants where Jabil is a rumored bidder, would likely place more significant strain on its balance sheet given its expected price tag of $3-4 billion.
Jabil Believes it is Well Insulated from Tariffs, but Supply Chain Risks Remain
We recently discussed The Impact of Tariffs on the Stock Market as Q1 earnings kicks off, highlighting that early commentary from executive teams and analysts point to growing uncertainty on customer behavior and demand, amidst broader supply chain challenges. We explained that analysts are revising estimates under the hood with cautious notes that these issues will not disappear overnight.
For Jabil’s case, management believes it is well insulated from direct tariff impacts due to its global manufacturing footprint and majority of localized sales, though indirect, trickle-down impacts present a larger risk as numerous end markets remain weak.
Tariffs were a central part of Q2’s earnings call at the beginning of March, well in advance of April’s tariff announcements and subsequent market selloff, given uncertainties around scope, duration and impact of tariffs. Jabil’s management fielded several questions from analysts about this and the impacts they expect given their global manufacturing and sales footprint.
CEO Mike Dastoor said the majority of Jabil’s China business is “local to regional” in nature with only a small portion being US-bound, while he thinks the company’s global footprint and ability to manufacture locally to domestic customers worldwide means tariffs would be a “net positive.” However, this could potentially be an incorrect assumption as tariffs could possibly impact industry-wide growth in key markets such as automotive and smartphones.
To note, Jabil’s foreign revenue exposure is elevated at 77% in Q2, down from 82.5% a year ago, with the decrease primarily due to the Mobility divestiture. Jabil does not break down individual geographic exposure beyond that, but this high foreign revenue concentration increases geopolitical risk due to the sweeping implementation of tariffs worldwide, as well as broader macroeconomic risk should tariffs weigh on global growth and numerous foreign economies where Jabil operates in.
Jabil said that tariffs will be a “pass-through cost”, which makes sense to protect its bottom line given that its thin margin profile would be unlikely to safely absorb rising tariff-related expenses without severely impacting EPS. Yet, this does not truly insulate Jabil from tariffs, and neither does its global footprint — as we have seen with multiple other major tech firms from semis to autos, there is the growing uncertainty that tariffs “could lead to some level of demand reduction by the end customer” in the upcoming quarters. Jabil would likely feel tariff-related impacts if core customers such as Apple, Tesla and other auto and renewable customers face demand weakening through the end of 2025.
As we explained in our free newsletter, tariffs could quickly complicate the global supply chain and have trickle-down effects to consumers, as it’s impossible to onshore complex supply chains to the US overnight, or in short order, without facing major increases in costs. Tariffs are also expected to weigh on consumer demand, and for Jabil, analysts are cutting price targets and estimates. JPMorgan is now embedding “broader macro slowdown and associated demand moderation across most customer verticals into its estimates,” while Goldman cut its view on the auto market and sees softening consumer demand.
Consumer Exposure, Apple Concentration
Tariff impacts are already appearing in the consumer electronics industry, where both PC and smartphone industry growth forecasts are being revised lower, with industry tracking groups noting that growth rates in Q1 were driven by vendor stockpiling rather than healthy demand.
For the smartphone market, IDC said vendor stockpiling “effectively inflated Q1 shipment figures beyond levels anticipated based on underlying consumer demand trends alone.” IDC added that heightened US-China tensions and growing tariff uncertainties were a “strong reason for concern” for 2025 growth. TrendForce estimated that the “best case scenario will see the smartphone market flat at best” in 2025, while the “worst case scenario is a production decline by as much as 5% YoY.”
Jabil’s top customer Apple is expected to face quite significant tariff impacts, either culminating in much higher prices for consumers, with analysts forecasting 7% up to 43% price hikes, or higher costs, up to $9 to $10 billion to COGS. Apple also rushed to ship in 600 tons, or ~1.5 million iPhones worth $2 billion, in March in an effort to avoid tariffs.
While Jabil may not be affected by directly supplying Apple, if its sales occur locally in India for example, demand shocks from higher prices theoretically would impact Jabil’s revenue if Apple cuts shipments to manage inventories as a result. Jabil’s management is well aware of the fact that overall volumes are likely to be negatively impacted by tariffs in the future, expecting “some level of pullback towards the holiday season, especially from the consumer's perspective.”
In FY24, Apple’s share of Jabil’s revenue was 11%, or ~$3.2 billion, abating from the 19% to 22% revenue share from FY19 to FY22 (in part due to the Mobility divesture). During those years, Apple had driven revenue of at least $5.4 billion to Jabil. In 2023, Jabil also took steps to limit its Apple-China exposure, shifting its AirPod production to India.
EVs, Renewables Also Present Risks
Jabil has already seen persisting weakness in Automotive weigh on revenue growth, especially in FY24, and tariffs could further exacerbate demand issues in this and other markets such as renewable energy.
The solar and renewable energy industries have been plagued by high rates affecting solar rollouts throughout 2023 and 2024, and high rates combined with tariffs will likely remain a dark cloud over global demand. Enphase last week stated that while tariff impacts would be felt more on batteries as opposed to solar, it expects the US solar market to remain pressured by high interest rates while Europe remains challenging from regulatory changes and seasonal demand softness.
When it comes to automotive, the current consensus is that the industry will be hit quite hard by tariffs. A CNBC report from early April noted that analysts and executives are “expecting to see a drop in vehicle sales in the millions, higher new and used vehicle prices, and increased costs of more than $100 billion for the industry.”
When it comes to EVs, Tesla is typically seen as the bellwether for the industry given its presence and market share. Now, Tesla sits at the crossroads of consumer demand and China tensions, and is witnessing large cuts to growth expectations on top of weak demand. Q1 deliveries slumped (13%) YoY to the lowest level in two years, while revenue estimates for the full year have been slashed by $20 billion since the start of 2025.
Jabil is definitely not immune to demand headwinds in auto and solar — Auto and Transportation weakness was a core factor in FY24’s revenue decline, while Renewable Energy Infrastructure remains nearly (20%) below 2023’s revenue level, at $2.4 billion guided for FY25 versus $3.1 billion in FY23.
At the end of FY23, Jabil had projected 20% YoY growth in FY24 for Auto and Transportation revenue, forecasting a rise from $4.4 billion to $5.3 billion. Jabil then cut the segment’s guidance each quarter, with actual FY24 revenue for the segment coming in flat at $4.4 billion.
For FY25, Jabil had initially guided for $4.2 billion in revenue, down just (5%) YoY, but now has cut this guide each quarter to project just $3.9 billion in revenue for the segment, down (11%) YoY. This is before the full effect of tariffs has hit the auto industry, and a rather substantial erosion of revenue growth for Jabil, considering that at $5.3 billion, Auto & Transportation would’ve accounted for more than 15% of revenue in FY24 and nearly 19% in FY25.
Due to this weakness in Automotive as well as lingering headwinds in other segments including Renewable Energy and Healthcare, Jabil faces a murky outlook and weak top-line growth until these segments begin to meaningfully recover, which at the moment seems to be much more prolonged as tariffs weigh.
Valuation
Jabil has not been left out of tech’s rout in 2025, with shares at one point falling more than 30% from January’s highs at nearly $175. This has brought valuation multiples down to more reasonable levels, though tariffs could still result in a negative impact to the bottom line over the coming quarters due to thin margins.
Currently, Jabil is trading at 16.2x forward PE, a fair bit below its 18-19.5x peak multiples in January 2025 and early 2024, though well above its April low at 13x. This has brought it back above its 5-year average forward PE multiple of 12.8x, presenting more room to the downside should earnings estimates get revised lower through the rest of the year should tariffs impact customer demand and revenue growth.
On a top-line basis, Jabil is trading at 0.56x FY25’s estimated revenue of $27.9 billion at its current $13.3 billion valuation. This is above its 5-year historical forward PS average of 0.45x, as Jabil is likely seeing a slight re-rating higher due to optimism around its strong data center and AI related revenue growth forecasts.
If you strip it down to look at just the AI-related revenue, Jabil is trading at just above 2x its $7.5 billion AI revenue forecast, which is growing 40%+ YoY. It’s also trading at 2.5x its Cloud and Data Center Infrastructure segment with 37% YoY growth, approaching AI hardware pure-plays such as Super Micro which have been valued at 3-4x revenue at peak.
Conclusion
Jabil is intriguing as its strong growth in Cloud and Data Center Infrastructure is shrouded by a myriad of weaker segments, and it has substantially raised the segment’s forecast by $800M QoQ in Q2. This would represent a substantial acceleration from its prior 20% growth guide to 37% growth.
Despite this strong growth, Jabil’s top-line growth is rather subpar, with revenue forecast to decline YoY in FY25 as Jabil continues to digest end market weakness in a handful of consumer-exposed segments. This exposure to Apple, automotive clients and other industries such as healthcare has the potential to weigh on revenue and earnings growth through the rest of 2025, and risks completely overshadowing AI growth.
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Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Vertiv posted a double-beat in Q1 with organic revenue up 25% YoY. The primary key metric of backlog was up $1.6 billion YoY and up 10% since Q4. Perhaps most importantly, backlog of $7.9 billion up from $7.2 billion last quarter hints toward Vertiv reaching an inflection point as Q4 backlog had declined QoQ. The trailing twelve month (TTM) organic orders growth was up 20% YoY and up 21% sequentially from Q4. This is down from 30% YoY growth last quarter, yet the QoQ growth seems to also hint Vertiv could be ramping from here on supplying thermal management for AI systems. Book-to-bill ratio of 1.4X is another key metric that hints Vertiv is resuming AI orders as it indicates the company’s backlog is growing with more orders coming in.
As a reminder, Vertiv reported a muted earnings report last quarter with nearly all of these key metrics declining QoQ. For example, book-to-bill ratio was 1X whereas it had been 1.4X during the busier AI quarters in early 2024. Therefore, it’s encouraging to see these key metrics come in stronger this past quarter.
Vertiv’s importance as a supplier is expected to increase with each new generation of GPUs and AI accelerators. The company provides thermal management solutions, such as cold plate cooling and immersion cooling to lower the power requirements to AI systems. They also offer high density solutions such as rear door heat exchangers and coolant distribution units (CDUs). Direct liquid cooling systems, including hybrid versions that combine air and DLC, can result in 40% less power management space and 20% lower cooling costs. When you’re spending nearly $100 billion per year on capex like many Big Tech companies, this matters quite a bit. In addition to thermal management, Vertiv's power solutions include uninterruptable power systems and lithium-ion battery cabinets that supply up to 1500KW and 263KW in a single cabinet.
Vertiv is closely watched as a lead supplier to Nvidia with management stating they have a 3-6 month lead time before systems are delivered. The current quarter was encouraging especially as management raised FY25 revenue forecast by $250M at the midpoint. However, it’s also odd that analysts expect Vertiv’s growth to decelerate as we go into the second half of the year. Despite raising full year guidance with next quarter expected to report 20.6%, the company is expected to exit the year with growth of 13.8%. Given what we’ve described in terms of the increasing importance of Vertiv’s solutions, there’s a disconnect in terms of H2 weakness.
As of this report, EPS growth is expected to outpace revenue growth although adjusted operating margins are quite slim at 16.5% this quarter and are expected to be 18.5% at the midpoint next quarter. Vertiv also provided a few alternative operating margin scenarios based on tariff policy changes, with two scenarios pointing to margin headwinds ahead. However, the bright spot is that Vertiv stated they could maintain
Looking for an Inflection in Revenue
Despite a solid revenue beat in Q1, management’s Q2 guide and updated FY25 guide still point to pockets of weakness in the back half of the year on a year-over-year basis due to tough comps.
However, looking beyond Q1, Vertiv will be accelerating QoQ through the rest of the year, which points to an important inflection. Although Q2’s guidance points to a 4 point deceleration in organic growth from 25% in Q1 to 21% at midpoint, revenue will grow QoQ by 15%. Similarly, FY25 is currently guided at 18% at midpoint, well below growth rates for the first half of the year yet Vertiv is expected to grow QoQ through the rest of the year.
The sequential growth is to be watched closely as further acceleration is needed to solidify the 2025 growth story (as opposed to the 2026 growth story).
Q1 revenue rose 24.2% YoY to $2.036 billion, easily beating the guided range of $1.90 to $1.95 billion, or 17.4% YoY at midpoint.
Organic revenue increased 25.3% in Q1, marking a slight deceleration from 27.1% organic growth in Q4. Growth was driven by colocation and hyperscale markets in the Americas and APAC, with “strong contribution from switchgear, power solutions, liquid cooling and services.”
For Q2, Vertiv guided for revenue between $2.325 billion and $2.375 billion, or 19% to 23% organic growth. At midpoint, this points to 21% organic growth to $2.35 billion in revenue.
Vertiv Raises Guidance by $250M with $150M Organic Growth
The company raised its FY25 outlook by $250 million to a wide range of $9.325 billion to $9.575 billion, or $9.45 billion at midpoint. However, of this $150M is organic growth with $100M being from FX tailwinds: “First, we are increasing full year sales guidance by $250 million, including approximately $150 million organically and approximately $100 million from favorable foreign exchange. The $150 million increase in organic sales is driven by both the first quarter and higher expectations in the second quarter versus what was implied in our prior guidance.”
Management expects full-year revenue growth to be sub-20%. The new outlook points to 16.5% to 19.5% organic growth, or 18% at midpoint, up from its prior view for 16% growth at midpoint. Given that revenue growth is expected to decelerate further in the back half of the year, at less than 17% in Q3 and less than 14% in Q4, this suggests there may be less room for upside in the FY guide.
Backlog Increases on Strong Order Growth
Vertiv’s backlog rebounded in Q1, up 10% QoQ and 25% YoY to a new high at $7.9 billion. However, this was the slowest quarterly growth in the past five quarters.
Orders growth was strong, with TTM orders up 20% in Q1, while Q1’s orders increased 13% YoY and 21% QoQ. Vertiv believes that TTM orders is the best key metric to focus on, although typically growth investors prefer indication sales are improving on more of a forward basis – which is why backlog is the better one for our purposes. Regarding TTM orders, management stated the lower growth was due to strong comps: “Yes, I want to underline that Q1 orders were up 21% sequentially and a healthy 13% year-over-year against very challenging comps. The strength of these numbers reflects not just market growth but our ability to expand our market position.” Even with strong comps, one has to wonder why a bigger ramp that requires thermal and power management is not showing up in an acceleration of the key metrics.
As stated in the introduction, perhaps Q1 is the inflection point and we see a stronger beat/raise as we move along given Vertiv’s book-to-bill ratio returned to a healthy 1.4x, up from 1.0x in Q4 and 1.1x in Q3, indicating demand remains healthy despite fears of AI spending slowing down. Inventories also jumped more than 11% QoQ to over $1.38 billion, accelerating from a (1%) QoQ decline last quarter.
Americas and APAC Drive Growth (incl China):
The Americas and APAC drove Q1 growth, with both regions showing strong growth in the quarter. On the other hand, EMEA growth slowed more than expected, missing an already-lowered forecast due to project timing.
Americas has a significantly higher margin at 25.6% compared to APAC with 12.6% margin in the current quarter.
Americas revenue increased to 28.8% organic to $1.185 billion, accelerating from 24.7% organic growth in Q4.
APAC revenue increased to 36.4% organic to $447.2 million, accelerating sharply from 27.1% organic growth in Q4 on colocation and hyperscale growth in China.
EMEA growth slowed sharply, with revenue growing just mid-single digits versus expectations for high-single digits, on lagging AI infrastructure buildouts. EMEA increased 7.2% organic to $403.5 million, slowing from >30% growth in Q4.
For Q2, Vertiv forecast Americas to grow mid-20%, APAC low-20%, and EMEA low single-digit, pointing to sequential decelerations for both Americas and APAC as it stands.
Margins to be Resilient in Face of Tariffs
Vertiv’s margins are guided to be resilient in the face of tariffs, with management guiding very minimal impact despite the earnings call being held at the height of the effective tariff rate.
Adjusted operating margin came in at 16.5% in Q1, down 5 points sequentially and below management’s guidance for 16.7% to 17.1%. However, adjusted operating profit was $336.7 million, slightly above the upper end of the guided $315 to $335 million range.
Management said the below-guide margin print was primarily due to the impact of Q1 tariffs, though the sizable revenue beat was also a factor.
Management is expecting an impact on a YoY basis to their Q2 adjusted operating margin, stating: “If tariff rates in effect today remain in effect for the entire second quarter, we expect adjusted operating margin to be 18.5%, about 110 basis points lower than last year's second quarter. However, excluding the estimated net tariff impact, adjusted operating margin would show good expansion, which implies that tariffs more than explain the year-over-year reduction and underlying margin expansion drivers, including operational leverage, productivity and commercial execution remains strong, and we believe we continue to be on track for our long-term margin targets.”
The guide for next quarter of adjusted operating margin of 18.5% marks a 2-point expansion QoQ. However, management also lowered fiscal year guidance, stating: “We are reducing our full year guidance for adjusted operating margin to 20.5% at the midpoint, approximately 50 basis points lower than prior guidance, of course, primarily driven by the estimated net impact of tariffs offset by favorable operating leverage on higher expected sales. This all translates into maintaining our adjusted diluted EPS at $3.55 at the midpoint, which is consistent with prior guidance and 25% higher than prior year despite the impact of tariffs.” This translates to adjusted operating profit of $1.935 billion at the midpoint.
Vertiv reported at the height of the tariff impacts when the effective tariff rate was 27%, largely due to China’s tariffs of 145%. As it stands today, the effective tariff rate is 17.8% which would imply a better outcome for Vertiv’s bottom line than stated on the earnings call on April 22nd.
Despite the 50 bp reduction, this guidance suggests margins are expected to strengthen through the back half of the year to the low-20% range given Q1 and Q2 are both sub-20%.
Vertiv also provided more color on adjusted operating margin, with upside and downside scenarios based on how the tariff situation evolves over the next quarter. Vertiv’s upside scenario assumes tariff rates on April 22 remain the same, while the company recognizes tailwinds from incremental sales growth, projecting $2.015 billion in adjusted operating income for a ~21.3% margin.
Vertiv also provided two downside scenarios:
The first scenario assumes supply chain hiccups or other risks to customer spending, projecting adjusted operating income at $1.85 billion, or a margin of ~19.6% for the year.
The second scenario assumes that the reciprocal tariff rates announced on April 2, that were subsequently paused for 90 days on April 9, are reinstated in July. Under this scenario, Vertiv expects a larger hit, projecting adjusted operating margin of $1.80 billion, or ~19.0%, effectively eliminating much of the margin upside guided this quarter.
Commentary on China:
According to Vertiv, they have low exposure to China: “In the U.S., we have strong local capacity and we continue expanding it. We have capacity in Mexico. Most of our Mexico capacity and production is already USMCA qualified, and we are driving towards 100% of qualification goal. Single digits portion of our demand is sourced from China, and we are deploying or have already deployed lower tariff or no tariff alternatives.”
Although sourcing may be limited from China, there’s indication that China is a major customer per the geographic breakdown above where we stated: “APAC revenue increased to 36.4% organic to $447.2 million, accelerating sharply from 27.1% organic growth in Q4 on colocation and hyperscale growth in China.”
Quarterly EPS Growth Lumpy Through FY25
Similar to its margin outlook, Vertiv maintained its FY25 EPS outlook but widened its range to account for tariff uncertainties. EPS growth is expected to be quite lumpy through the rest of the year as Q1 saw some one-time benefits from a better interest rate on the nearly $3B in debt Vertiv has on the balance sheet: “The increase in EPS was primarily driven by higher adjusted operating profit, but also positively influenced by lower interest expense, in part due to the term loan repricing last year.” Q2 is expected to grow 20.9% and Q3 is also expected to outpace revenue growth at 26%.
Q1 adjusted EPS of $0.64 beat by $0.02, representing YoY growth of 48.8%. The strong growth was notable although lower than the 76.8% growth seen in the prior quarter.
For Q2, Vertiv guided for adjusted EPS of $0.77 to $0.85, or $0.81 midpoint. This corresponds to YoY growth of 20.9%.
Growth is expected to rebound slightly in Q3 to 26% YoY with 15.6% growth expected toward year end.
Management was quite clear the impact of tariffs would be primarily felt in Q2 before normalizing by Q4: “Tariff costs will certainly accelerate in the second quarter from the first quarter. And with limited time to mitigate with either supply chain or commercial countermeasures, our adjusted operating margin will be negatively influenced.”
For the full year, Vertiv still expects $3.55 in adjusted EPS, up 24.6% YoY, though it has widened its forecast range, now seeing $3.45 to $3.65 versus its prior view for $3.50 to $3.60.
Cash Flow Margins Dip, Net Leverage Improves Sequentially
Cash flows dipped sequentially with operating cash flow of $303.3 million in Q1, for a 14.9% margin. This is down from $425.2 million in Q4 with OCF margin of 15.4% but more than double the $137.5 million a year ago with OCF margin of 8.4%.
Adjusted free cash flow was $264.5 million for a 13% margin, down from $361.8 million in Q4 but up more than 161% YoY. Management said that they “experienced strong collections at the end of the quarter with a good portion of that accelerated a few weeks from Q2, which does create a potential headwind for next quarter.”
Based on comments for 1H ’25 free cash flow to be roughly consistent YoY, Q2 adjusted FCF could be near $170 million. This would correlate to a 7.2% margin. Inventories are increasing from $1.25B last quarter to $1.38B this quarter, and this implies inventories will increase again next quarter.
Vertiv also maintained its outlook for $1.3 billion in adjusted FCF for the full year, though it widened its range by $25 million on each end to $1.25 billion to $1.35 billion.
Cash and equivalents increased more than $200 million to $1.47 billion, while debt remained steady at $2.93 billion. Net leverage improved sequentially to 0.8x, down from 1x in Q4 and 2.2x at the start of FY24.
Earnings Call Q&A:
Modular AI Infrastructure (AI Factories) – Catalyst for Vertiv
By now, the Blackwell delays have been fully discussed. However, investors should look deeply at what caused those delays and what solutions providers and component suppliers are solving the issues. When there is this much demand, a delay like this provides a critical opportunity for suppliers to step up and take market share if their products help to resolve the issue.
Prefabricated infrastructure where the thermal management and power specialists assemble the infrastructure could become a path to faster, more successful deployments. Per Vertiv’s comments: “Now let me share some exciting news about our projects with iGenius. Here, NVIDIA and Vertiv are delivering a fully prefabricated AI factory. This is a very important sovereign AI supercomputer and we provide everything infrastructure from liquid cooling to heat rejection, grid to chip power in a very rapidly deployable modular infrastructure. All leveraging our NVIDIA codeveloped AI reference designs. What makes this truly special is how it brings together all our core Vertiv strengths. Our ability to deliver complex solutions at scale, our deep technical expertise and our commitment to innovation. We're not just providing infrastructure, we are enabling iGenius to deploy advanced AI models in a highly regulated industry.”
Often times, CEOs use earnings calls as a marketing tactic and it can be difficult to sort through dozens of product releases to identify which ones are important catalysts. I believe the iGenius deployment will (in time) prove to be an important deployment for Vertiv – perhaps the largest catalyst ever for the company — as it transitions Vertiv from being a solutions supplier to building end-to-end modular infrastructure with substantial cross-sell opportunities.
These modular AI factories also serve the massive market of sovereign AI by reducing the dependency on cloud providers such as Amazon, Google or Microsoft.
Timing for the Next AI Splash
Vertiv’s report can provide hints as to when the next AI splash may occur. Analysts certainly did not miss the opportunity to try and identify timing from Vertiv. We’ve covered in the past our takeawayswhere Vertiv hinted toward Blackwell delays. What’s being described is the Q2 QoQ inflection should translate in about 3-6 months for Nvidia’s deliveries. Notably, there are many proxies to track and thus isn’t not a perfect signal, yet we are quite clear Q1 is not going to be a blowout quarter for Nvidia and it’s likely not going to be Q2 either if you assume 3-6 months out. We’ve stated this many timesmany times in the past – for Nvidia investors to look for H2 as the bigger splash (and next leg up) in AI.
Here is the current update from Vertiv (as far as they can disclose):
Chris Snyder:
Maybe just a high-level one here. What do you guys think is the best way for all of us to track liquid cooling demand in the market? Is it Blackwell shipments? And if that is what we should be looking at? My understanding is you guys do would lead the chip shipments by some period of time. But just any color on that relationship?
Giordano Albertazzi:
Well, certainly Blackwell is a good — Blackwell shipments is a good proxy. But as you were saying, we proceed that deployment or anyway, the demand for liquid cooling proceeds the deployment, especially when it's liquid cooling that is not in rack with the cool and distribution units that are not in back, in which case pretty much the CDU demand and the Blackwell demand coincide.
But it's not just Blackwell shipments. There are other chips, some prior chip ASIC silicon that is more and more requiring liquid cooling or able to work with liquid cooling. So it's a little bit multifaceted. But certainly, Blackwell is a good place. Blackwell shipments are a good place to start and think in terms of probably 6 to 3 months before that happens is when we see our demand turn into deliveries. Yes, I think we are pretty happy about the trajectory of this technology and this product line. I'm actually very happy the way it's unfolding right now.”
Reiterating 2029 Goals
Five year goals are irrelevant to a growth investor as quite a bit can change in that time period. However, management brought up their 2024 goals a few times to assure analysts on the call that their working toward margin expansion. Specifically, the following was stated in the November 2024 Investor’s Day:
Top line growth of 14.4% from $7.8B in 2024 to $14.4B in 2029
Adjusted operating margin of 25% up from 19% in 2024 — you can see where the company took a step back this last quarter with adjusted operating margin of 16.5%
Conclusion:
Vertiv’s report was not a blowout, yet it hints toward the next AI splash occurring in the coming quarters. While many are focused on the effective tariff rate, what we know is that if you count China as a major customer or major sourcing partner, then sales will be lower and margins will be lower compared to last year. Vertiv echoed this in their commentary. Plus, analyst consensus does not point to Vertiv growing meaningfully in the second half (right now).
Our take is a bit different than analyst consensus. According to what we parsed from Q1, Vertiv saw outsized growth in APAC and this growth from APAC is likely to wane given global tensions. Perhaps Vertiv even saw a pull forward ahead of tariffs in Q1 given APAC sharply accelerated and China was named as the region contributing to APAC’s growth. However, my take is that by the time we exit the year, Vertiv’s AI story will have driven a surprise or two as there is a dislocation between what the management team is describing and analyst consensus (in our favor).
With that said, it’s unlikely we buy Nvidia suppliers ahead of Nvidia’s report given the weakness in Super Micro’s report, the lackluster inflection for Vertiv and more muted commentary we’ve been tracking thus far for Q1 from other suppliers. We think August/November will be the bigger AI splash in terms of Nvidia’s earnings call and will align any Vertiv entries accordingly.
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Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Since December of 2022, when Bitcoin was trading in the $16,000 region, we went against the crowd and called for a new bull cycle. Since that report, we released seven additional articles, confirming Bitcoin as a buy, and even sent out 13 buy alerts to our premium members at key spots between $25,000 and up to $60,000.
What separates our firm is the ability to follow our process regardless of the market’s emotions around extreme lows as well as highs. For example, in our last Bitcoin article in October of 2024, titled “Bitcoin Bull Market Intact as Risk Increases,” we started to shift our tone to a more cautious stance than prior reports.
“While we still believe the original price targets of $106,000 – $190,000 are attainable, we do believe risk has increased. As a result, we will likely reduce some risk on the next rally to all-time highs.”
At the time, Bitcoin was trading in the $70,000 region and had not yet broken out over its March high of $73,835. It was dead money for most of 2024, and not a topic of interest. At the time of our October report, it was down nearly 5% from its March high, while the tech focused NASDAQ-100 was up nearly 12% in the same time frame. Yet, our research was firm that Bitcoin had at least one more swing to the $82,000 – $106,000 region.
In early November, Bitcoin jumped nearly 50% in just over 2 months to a new high of $109,354, which was just over our $106,000 target. As stated, we used that move to reduce our position by 50%, as we maintained a cautious stance due to mounting risk.
This cautious approach stems from technical indicators suggesting the current rally is likely in its final stage. While both on chain and technical analysis support another push higher, if we do get this swing, it will likely be the final push higher before a period of prolonged volatility begins.
This is a contrarian opinion, as the narrative around Bitcoin is quite positive right now.
However, when we look back at the history of Bitcoin, narrative-based optimism has historically marked major tops, not sustainable breakouts. As such, we emphasize disciplined risk management and view sentiment extremes as a cue to protect gains, not chase headlines.
The Hidden Risk of Following Bitcoin News Headlines
Regarding equities, investors can lean into fundamental analysis to identify what to buy and sell, such as the growth rate of a company compared to competitors, do key metrics support sustained growth, is there operational efficiency, and is there a path to profitability? These are all questions that must be answered to justify the quality of a stock.
Regarding Bitcoin, there is no management team or earnings calls to guide investment decisions. For this reason, investors tend to lean into news events and narratives to guide investment decisions. There is an obvious logic around this strategy, which we are witnessing in real-time. The current narrative surrounding Bitcoin is quite bullish. Just in the last few months, we have seen:
The U.S. government announced a Strategic Crypto Reserve. Regarding Bitcoin, they will retain all seized Bitcoin, which is valued at approximately $20 billion.
Several petty SEC Lawsuits have been dismissed.
New leadership at CFTC and SEC that are supportive of digital assets.
Progressive bills being introduced, like FIT21 and the Bitcoin Act.
Thematic investing suggests that these developments are tailwinds for Bitcoin that should support higher prices from here. However, if we look at history, Bitcoin has an uncanny inclination to do the opposite of what the news-based narrative at the time suggests. In other words, it likes to top on bullish news and bottom on bearish news.
Against popular belief, Bitcoin’s history shows that it likes to top bullish narratives and bottom on bearish ones.
December 10th, 2017 – CBOE launches first Bitcoin futures. It was believed that this marked a new era in Bitcoin, opening easy access to Wall Street. One year later, Bitcoin was -83% lower.
November/December of 2018 – Three of the world’s largest Bitcoin miners file for bankruptcy due to Bitcoin’s price going below mining cost. The narrative that followed is that Bitcoin’s network would be altered and never fully return. One year later, Bitcoin was approximately +150% higher.
February 9th, 2021 – Elon Musk announces that Tesla has added $1.5 Billion in Bitcoin to its balance sheet and sets out plans to accept Bitcoin for payments. It was believed that institutions and companies would follow, creating growing demand. One year later, Bitcoin was approximately -40% lower.
September 7th, 2021 – El Salvador is the 1st country to accept Bitcoin as legal tender. It provides free Bitcoin wallets to its citizens and establishes plans to mine Bitcoin using geothermal heat from active volcanoes. It was believed that demand would only grow, as more countries followed along. One year later, Bitcoin was down -61%.
November 11th, 2022 – The world’s 3rd largest crypto exchange, FTX, files for bankruptcy, after allegations of extensive fraud led to insolvency. It was believed that this scandal would keep investors away from Bitcoin for years to come. One year later, Bitcoin was up +510%. Notably, this was around the time our firm stated Bitcoin would start to rally again.
Thematic investing certainly has its benefits, and the I/O Fund uses it as one of many blended techniques. However, when used alone, it instills too much confidence and can be detrimental – especially with crypto.
Instead, we have found technical analysis and on-chain analysis to be the most effective methods for successfully participating in Bitcoin’s meteoric rise, while also mitigating the inevitable volatility.
Decoding Bitcoin’s Price Moves Through Technical Analysis
If an investor cannot lean into fundamental analysis with Bitcoin, and narratives do not affect the price swings of Bitcoin, investors are left with two assumptions: 1) the price swings are random and have no logic to them; 2) there is a logic behind these swings, which can be deciphered and navigated.
When viewed through the lens of technical analysis, it becomes apparent that the latter is true. What tends to drive Bitcoin price actions is sentiment, which technical analysis is designed to address. Sentiment is simply analyzing herd mentality, which manifests in repeatable patterns.
Regarding the current sentiment pattern in play, Bitcoin has been tracing a large degree 5-wave pattern off the 2022 low, and we have either completed the final 5th wave or have one more swing higher to complete the 5th wave.
In a 5-wave pattern, the 3rd wave is the most powerful part of the trend. It is the moment when everyone realizes at once the direction of the trend – shorts cover at the same time while longs panic buy. This causes a vertical move in price and tends to coincide with peak volume expansion and momentum.
The 5th wave is for those who missed out and think that the trend is just starting. It is the riskiest part of the trend and should only be bought with an established exit plan – i.e., brief to intermediate trade. Here, we tend to see price make a higher high, but on lower volume and lower momentum.
If you look below, this is exactly what we are seeing in Bitcoin’s current price trend.
The Key to Elliott Wave Analysis is to locate the 3rd wave. This is the most vertical part of the trend, met with max volume and momentum. Then, work backwards from there. By doing this, Bitcoin is clearly in the final 5th wave of the bull cycle that started in 2022.
The period from October 2023 – March of 2024 is when price went vertical. It’s also the period where we saw max volume and max momentum. This is the 3rd wave.
Now, look at the most recent move to new highs. This was made on lower volume and lower momentum, confirming that we are in the final stage of the bull cycle that started in 2022. Once again, this analysis runs contrary to the bullish narratives surrounding Bitcoin currently, suggesting that we are closer to a meaningful top than low.
Bitcoin Price Forecast: Three Potential Outcomes
In our last report, we stated that the 5-wave pattern off the 2022 low was “incomplete until we push to new all-time highs,” meaning that the odds were high that we’d see a push higher. Now that we made this push to new highs, we have the minimal waves in place to constitute the larger uptrend is complete.
This scenario is outlined in Red in the chart below.
Three potential scenarios in Bitcoin as we enter Q2 of 2022. The most likely is that we push to new high; however, for the first time in over 2 years, we now have a fully formed 5-wave pattern off the 2022 low. This increases risk, as a case can now be made for a meaningful top.
Here, the push to $109,354 was the final 5th wave, providing us with the minimum number of waves needed to satisfy a full 5-wave pattern. This scenario would see Bitcoin fail below $102,000 and then turn lower toward the $60,000 region. We would then make a series of lower highs into 2026, until we see the final flush. This scenario would be an accelerated push into our long-term buy-and-hold targets, which we have been discussing in our premium service for several months.
While I do not think this outcome is the most probable given the price action, it still must be respected, which is why it is on my chart. In the years that I have provided free Bitcoin analysis; this report is the first one where I can present a fully formed and completed 5-wave pattern off the 2022 low. For this reason, we are more focused on risk management at this stage of the game, as any long attempts will come with stops and overhead targets where we will take gains.
The two scenarios that I believe are most likely are outlined in Green and Blue.
Green – We are in the final 5th wave. We need to breakout over $102,000 and then break above $109, 354. In this scenario, our targets are at least $120,000. We would use this move to reduce most of our position.
If this scenario is going to play out, any further weakness that we see needs to hold over $79,900. Below here and here and we will shift into the below scenario.
Blue – This count mimics the Red one presented above for the next move lower. Both counts will fail under the $102,000 region, then head toward the $60,000 region. Where this scenario differs from the Red one is that from the $60,000 region Bitcoin will setup for the final 5th wave to the $120,000+ region.
Onchain Analysis
Though Bitcoin does not provide classical fundamental analysis, it does have its own unique brand of internal dynamics called onchain analysis. What this type of analysis does is examine the blockchain data to better understand transaction patterns, asset movements, and network health.
It is a relatively new brand of crypto analysis, which we find helpful in helping us better risk manage our position. When it comes to onchain analysis, we favor the work of WealthUmbrella, who has done some comprehensive and remarkable work in this field. The below comments are from Vincent Duchaine of WealthUmbrella.
Since late December of 2024, our stance has remained that Bitcoin likely will see higher prices before confirming a cyclical top. This lines up best with I/O Fund’s Green and Blue scenarios presented above.
Our analysis suggests that we are in a prolonged correction within the ongoing bull market that began with the November 2022 low. This is reinforced by our three Market Top indicators, each of which analyzes a different aspect of the Bitcoin blockchain ecosystem. These indicators are adjusted to account for Bitcoin’s structural evolution over time, and none have reached levels that typically align with a major cycle peak.
This view is further reinforced by our primary Overbought/Oversold Indicator, which is designed to flag probable highs and lows at any stage of a trend, not just at major tops or bottoms.
During the recent pullback, this indicator bottomed within the zone where corrections have found a low in the past. What is key, is that at no point did this indicator break into the levels that we see during more severe periods of volatility, like 2021 – 2022, suggesting this is only a correction.
Regarding supply and demand dynamics, the flows that we track support the April 7th low holding, for now. However, we’re not currently seeing the kind of supply-demand undercurrents that would point to an imminent breakout to new all-time highs. Considering this, we view the current supply/demand dynamics to be healthy, and typical of what we see prior to a breakout higher.
A few examples of these healthy supply/demand dynamics are listed below:
The number of newly created addresses with a non-zero starting balance. This metric measures new interest in Bitcoin. It dropped considerably once the option to invest in ETFs hit the market; however, it has been steadily moving higher while Bitcoin remains in a correction.
This suggests that investors’ interest in Bitcoin continues to remain stable, regardless of the current volatility in price. Even more encouraging, as shown in the chart above, the current rate of new address creation is on average 25% higher than last summer’s low, with even the weakest reading during the recent “tariff” sell-off still sitting 17% above that baseline.
The percentage of coins that have not moved in over a year. This metric measures the behaviors of long-term holders of Bitcoin. It began moving higher in mid-February, suggesting accumulation. This led to a sharp rise in the percentage of coins that haven’t moved in over a year—from 61.7% to 63.61%—by April 2nd.
ETF flows. The current flows in the existing ETFs are not currently in a favorable posture. Bitcoin ETFs were a major driving force behind the price surge in early 2024, but they also contributed significantly to the choppy conditions that emerged around the start of the year. In fact, the first three months of 2024 saw the worst daily outflows in the short history of these ETFs, as illustrated in the chart below:
However, these outflows peaked on March 10th, coinciding with Bitcoin’s initial attempt to bottom. Since then, outflows have meaningfully subsided, settling into neutral territory around zero net flow, and then shifting into meaningful inflows starting April 21st:
Conclusion:
In conclusion, while the narratives around Bitcoin support higher prices, history has shown that investing in Bitcoin without risk management can be painful. Bitcoin tends to do the opposite of what the narratives suggest at major turning points. To better prepare for the immense volatility in crypto, we lean into our process of analyzing sentiment through technical analysis and shifting our risk profile based on where we are in the uptrend.
Whether we hold the April 7th low, or see one more drop to the $60,000 range, we believe Bitcoin still has another move higher. This is supported by the onchain analysis provided by WealthUmbrella, who lines up with our two bullish scenarios. While odds support this rally, considering it will be the final 5th wave in this multi-year bull cycle, we will use it to reduce risk further, locking in well-deserved gains, and raising cash for lower prices.
📈 If you are sitting on outsized gains in Bitcoin with no risk management plan, or interested in our long-term buy for Bitcoin, then we encourage you to join us this Thursday, May 15h at 4:30 PM EST for a premium webinar. We will discuss where we see the crypto market going, our targets for the last swing higher in the current bull cycle, and where we believe the next bull cycle will begin. 👉 Sign up heregn up here
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Coinbase reported a soft Q1, with revenue missing estimates by 3.1% as trading volumes declined (13%) sequentially. Subscription revenue also came in at the low end of guidance in the quarter, with Coinbase forecasting subscription revenue to fall sequentially in Q2.
Where Coinbase stands apart is its cash of $8.05B, which allows the company to execute on an aggressive M&A strategy. Earlier in the day, Coinbase announced the largest crypto acquisition in history of $2.9 billion for Deribit, a Bitcoin and Ethereum options platform. This move expands Coinbase’s derivatives presence, as Deribit’s 2024 trading volumes nearly doubled YoY to $1.2 trillion. For comparison, Coinbase drove more than $800 billion in derivates trading volume in Q1. The deal was also at a large discount from previous reports in January, where it was expected to command a $4-5 billion price tag.
Adjusted EBITDA margin was 45.7% with $930 million in adjusted EBITDA profits and $527 million in adjusted net profit, which helps to illustrate the rare, quality fundamentals that Coinbase offers in the crypto sector.
Looking forward, April is tracking lower than expected with transaction revenue of $240 million, down 12% month-over-month in April compared to global spot transactions down 13% MoM.
As we’ve pointed out in the past, Coinbase is largely dependent on volatility and asset prices, and is not tied as much to the results of an earnings report.
Revenue
Coinbase reported 24.2% growth in revenue to $2.03 billion in Q1, missing estimates by 3.1%. Despite increased crypto volatility and Bitcoin’s new all-time high in January, crypto market cap declined (19%) QoQ and industry trading volumes dropped (13%) QoQ, weighing on growth. Coinbase outperformed the broader industry as its spot trading volume declined just over (10%) QoQ to $393.1 billion. Derivatives trading volume was $803.6 billion in Q1.
Q1’s revenue growth slowed dramatically from Q4’2 138% rate, though this type of volatility is not unusual for the crypto industry. Q2 is currently expected to see revenue rebound slightly to 29.6% YoY.
Key Metrics
Trading Volume
Trading volume rose 26% YoY but declined (10%) QoQ to $393.1 billion, with institutional trading volume remaining steadier in the quarter.
Institutional trading volume declined just (9%) QoQ but remained 23% higher YoY at $315 billion. Consumer trading volume declined (17%) QoQ but was 37% higher YoY at $78 billion. According to Coin Gecko, spot trading volume on centralized exchanges was down (16.3%) QoQ which is aligned with what CB saw on the consumer side, mainly driven by Ethereum and Solana, which saw steeper losses than Bitcoin in Q1.
Transaction Revenue
Transaction revenues declined more than trading volumes in the quarter, with Coinbase pointing out a few factors impacting growth on the institutional side. Coinbase’s global transaction revenue rose 17% YoY but declined (19%) QoQ to $1.26 billion.
Consumer transaction revenue matched corporate growth rates at 17% YoY and (19%) QoQ, with revenue of $1.10 billion in Q1. Institutional transaction revenue grew slower, at 16% YoY and (30%) QoQ to $99 million.
Coinbase said that trading volumes in the quarter were “more concentrated among market makers and liquidity providers which tend to have lower fee rates,” while derivatives also weighed on growth. Coinbase is prioritizing building its derivatives business via trading rebates and incentives to boost liquidity, thereby offsetting fees from trading.
Regarding the disconnect between institutional volume down (9%) and institutional revenue down (30%) QoQ, the CFO stated: “There are 2 factors which drove the discrepancy between the revenue decline and the volume decline. The first is the growth in our derivatives trading business. As we build this business, we are offering trading rebates and incentives to build liquidity and acquire customers. Our focus on growth is causing a decline in the transaction revenue that we get from derivatives trading as these are contra revenue and recorded in the institutional transaction revenue line item.”
Other transaction revenue was flat QoQ at $68 million in Q1. Transactions on Base rose 16% QoQ, though the average revenue per transaction decreased 21% QoQ.
Subscription and Services Revenue
Subscription and Services revenue came in at the lower end of Coinbase’s guided range in the quarter, with management saying lower blockchain rewards revenue partially offset stablecoin and Coinbase One revenue.
Revenue was $698.1 million, versus its guide for $685-765 million. Growth was 36.6% YoY, decelerating from 70.8% YoY in Q4, yet is forecasting to decelerate to the mid-single digits in Q2.
For Q2, Coinbase projected Subscription and Services revenue between $600 and $680 million, for YoY growth of just 6.8% at midpoint, a 30 point sequential deceleration. Even at the upper end of Coinbase’s guide, revenue growth would be just 13.5% YoY. Coinbase said the forecast anticipates blockchain rewards revenue to more than offset stablecoin revenue growth.
Within Subscription and Services revenue:
Stablecoin revenue rose 50.8% YoY and 32% QoQ to $297.5 million. Coinbase said that average USDC held across Coinbase products increased 49% QoQ to $12.3 billion on better USDC integration on its platform.
Blockchain rewards revenue increased 30.3% YoY but decreased (9%) QoQ to $196.6 million, weighed down by lower average crypto prices in Q1, primarily Ethereum and Solana.
Interest and finance fee income decreased (5.4%) YoY and (4%) QoQ to $63.1 million, as higher balances were partially offset by lower rates. Coinbase added that Prime Financing revenue declined as loan balances declined with customers deleveraging due to volatility, though onboarded clients rose double-digits QoQ.
Other subscription and services revenue rose 5% QoQ to $141 million. Coinbase announced that it has now grouped Custodial Fee revenue in this sub-segment.
Margins
Operating margin shrunk more than 10 points on a YoY and QoQ basis, while net margin fell to the low single-digits as Coinbase recorded nearly $600 million in losses on crypto investments.
Operating margin was 34.7% in Q1, down from 45.5% in Q4 and 46.4% in the year ago quarter, as operating expenses rose more than 51% YoY in the quarter. According to the CFO on the call: “Our total operating expenses were $1.3 billion, up 7%, primarily driven by higher variable expenses resulting from elevated market maker activity earlier in the quarter, as well as losses on our crypto assets for operations.”
Net margin was 3.2%, down from 56.8% in Q4 and 71.9% in the year ago quarter, primarily due to the crypto investment losses, the majority of which were unrealized.
The company is introducing a new metric called adjusted net margin which excludes the tax adjusted impact of crypto investment portfolio gains or losses. The CFO stated the adjusted net income was $527 million this quarter.
Stock-based compensation was $191 million, or just over 9% of revenue in Q1. For Q2, Coinbase guided for SBC of ~$195 million.
EPS and Adjusted EBITDA
Coinbase places an emphasis on adjusted EBITDA due to fluctuations that can arise from its crypto asset holdings, such as what it witnessed in Q1. Adjusted EBITDA was $930 million for a 45.7% margin, down from a 56.8% margin in Q4 and a 61.9% margin a year ago.
Due to impact from its crypto holdings, Coinbase’s GAAP EPS was $0.24, well below the $1.91 estimate for the quarter. Adjusted EPS was $1.94, slightly below estimates for $1.98.
Cash and Balance Sheet
Operating cash flow was weak in Q2, though Coinbase’s liquidity profile remained strong.
Operating cash flow was ($187.3) million for a (9%) margin, its first cash outflow in five quarters. This is also a stark contrast to the 21.5% OCF margin from a year ago and a 42.5% margin in Q4.
Cash and equivalents totaled $8.05 billion, with Coinbase noting it had a total liquidity profile of $9.9 billion when including its net USDC balance of $1.86 billion. Debt remained steady at $4.24 billion.
Q2 Outlook
Coinbase said that April transaction revenue was ~$240 million, while spot transaction volume was down (12%) MoM, slightly outperforming the broader industry at (13%) MoM. According to the CFO this is aligned with global spot trading trends: “Our spot transaction volume declined approximately 12% month-over-month in April, and this was similar to global spot volume, which was down approximately 13% over that same time period.” Our checks show that Binance declined 18.8% MoM yet popular/rising platform Gate.io increased about 14% MoM.
Subscription and Services revenue was guided at $600-680 million, with Coinbase expecting QoQ growth in stablecoin revenue “to be more than offset by a decline in blockchain revenue due to lower crypto asset prices.” Coinbase added that to-date in Q2, Solana and Ethereum have already declined (25%) and (36%) compared to their Q1 averages.
Earnings Q&A:
Deribit Acquisition:
The Deribit acquisition for $2.9 billion will be a mix of $700M in cash and 11 million shares. According to the CFO, the acquisition will be adjusted EBITDA accretive.
Deribit saw over $30 billion in open interest last year and $1 trillion in trading volume outside the of the United States, representing 75% market share. This aligns with Coinbase’s global strategy as the company also shared (separately) they are growing rapidly in Argentina and India. According to the opening remarks: “This makes Coinbase the #1 crypto derivative platform globally by open interest. And it's our biggest move yet to accelerate our international road map and build out this comprehensive trading platform.”
It’s also a strategy to pull together spot, future and options trading onto one global platform. According to the CEO, there is strong cross-selling opportunity:
“Brian Armstrong CEO:
Yes. And Ken, I'll just add real quick on your cross-selling point. I think this is really important. So a trader can actually go in and hedge futures position with options without having to switch platforms. So that's why we think that there is a cross-selling opportunity. And this is — improves the efficiency but also improves trading volume if they can do that all in 1 platform.”
However, as of now, the United States is a restricted jurisdiction for options trading unless on a CFTC-regulated platform or a SEC-regulated platform, but the CEO foresees approval coming soon for Coinbase: “We've been working very closely with the CFTC to turn and get perpetual futures live in the U.S. That's going to take a little bit longer, but we are — we have 1 step in the right direction.”
USDC Sees Market Cap of $60B
Circle is a fintech company known for creating USDC with Coinbase sharing revenue of USDC as a backer of Circle. In the most recent quarter, the stablecoin USDC hit a market cap all-time high of $60 billion with USDC held on the Coinbase platform increasing 49% QoQ to $12 billion. It was also stated that the number of monthly users holding USDC has doubled and the average USDC balance has tripled.
Although stablecoins contribute low revenue right now of $297.5 million, it helps to diversify Coinbase’s revenue during periods of volatility since USDC remains at $1 and is used across payment platforms.
According to the opening remarks: “In Q2, we'll be onboarding the first businesses to our pilot, enabling them to make stablecoin pay-ins and payouts. Given Coinbase's long history building crypto infrastructure, custody trading and our network of bank partners around the world, we think we're well positioned to power stablecoin payments for many businesses.”
Binance recently joined the partnership with the CFO stating adding a large distribution partner will result in more liquidity and global adoption: “The rationale for adding distribution partners is we believe that we mean it drives liquidity, it drives global adoption. There are more and more places for customers to onboard and offboard USDC and to engage in products and services. These network effects, larger market cap, deeper liquidity, more places for customers to exchange, we think, is going to drive overall growth and opportunity for USDC.”
Conclusion:
Coinbase did not offer the most exciting earnings report this quarter, but it also does not matter much given Coinbase’s stock moves intraquarter as its tied closely to crypto trading volumes and asset prices.
It does not take a stretch of the imagination to see the crypto empire this company is building. Coinbase acts as a leveraged bet on Bitcoin yet is also diversifying beyond spot trading to include subscription services, stablecoins, derivatives and now options trading. As digital assets gain broader adoption, Coinbase is positioned to participate across every major touchpoint: from trading and custody to staking, payments, and Layer 2 scaling with Base. We've covered Coinbase’s more durable business model in the past here.
Notably, it’s rare to see an opportunity in the crypto sector offer quality fundamentals. Not only does this help the stock to withstand volatility when other crypto assets are being slammed, but its large cash reserves can be leveraged to grow the empire. This piece – the cash – should not be overlooked when evaluating the strength of the stock and the company’s long-term prospects.
What’s Next on our New Discovery Tier …
Next week on our new Discovery tier, we’ll spotlight some of the strongest Q1 earnings reports from companies not currently in our portfolio. If you’ve seen a stock surge after hours and are wondering how it stacks up — or whether it has real long-term potential — our Discovery tier is built just for that: surfacing compelling new opportunities.
To upgrade or join the Discovery tier, email us at Premium@io-fund.com or click here to get started. Current Pro and Advanced Members can subscribe with 40% off by mentioning code DISCOVERY40 when you email us or by clicking here to email directly.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Coherent reported a double beat in Q3 with revenue growth of 24% and EPS growth of 141% YoY. The top line beat was driven by Data Center and Communications revenue growing 46% YoY. While this growth moderated slightly from the prior quarter, Nvidia suppliers should see a meaningful acceleration in the second half of the year.
Analysts have yet to fully factor in this acceleration, but as NVIDIA ramps Blackwell-based systems and scales out its Spectrum-X Ethernet and Quantum-X Infiniband platforms, suppliers of high-speed optical interconnects are likely to see an increase in demand. Coherent, as a key ecosystem partner to NVIDIA in silicon photonics and co-packaged optics (CPO), is well positioned to benefit as hyperscalers upgrade to 800G, 1.6T, and eventually 3.2T.
To refresh your memory, Coherent has many products that participate in the AI-driven datacom transceiver and optical interconnects market. Primarily, the growth story centers around supplying Nvidia with pluggable optical transceivers (400G, 800G, 1.6T) including EML lasers, VSCEL lasers and CW lasers, and emerging CPO technologies for next-generation switches and interconnects.
Coherent is certainly not without competitors, and this is the main risk the company faces. Management is tasked with executing flawlessly in an environment where components may see supply disruptions and must also move quickly to make sure they are first to market to support higher bandwidths. Optical transceivers are at risk of being commoditized as reflected in Coherent’s low margins.
Revenue
Coherent delivered another quarter of record revenue driven by strong AI data center demand, with revenue rising 4.4% QoQ and 23.9% YoY to $1.50 billion. This beat the consensus estimate for $1.44 billion by more than 4%, and marks a third straight quarter of >20% revenue growth.
For Q4, management guided a wide range for revenue, forecasting $1.425 to $1.575 billion. At the $1.5 billion midpoint, this represents flat QoQ and 14.5% YoY growth, slightly ahead of estimates for 12.1% growth. Revenue growth estimates for the next two quarters have moved higher since our last Q2 report, from the mid-9% range to double-digit growth through FQ1 2026.
Industrial is weighing on the growth while Datacom is expected to grow: “Yes, if you look at the midpoint of the guidance that Sherri provided on revenue, roughly flat at the midpoint sequentially. But within that, what I would say is we're expecting data center and communications to be sequentially up in the current quarter and then our industrial-related end markets to be sequentially down.”
Key Segments & End Markets
Networking remains the primary driver of Coherent’s growth as the company continues to release new optical networking solutions, including the industry’s first 400G electro-modulated laser (EML) to pave the way for 3.2T optical transceivers, as well as VCSEL-based CPO solutions.
Networking revenue increased 46% YoY and 10% QoQ to $897 million, or ~60% of revenue. Though growth continues to decelerate from Q1’s 61% print, the segment’s growth is much stronger this year compared to last. For the first nine months, networking revenue was $2.48 billion, up 53% YoY.
Lasers revenue softened, rising 4% YoY but dipping (3%) QoQ to $363.9M. This compares to 6% YoY and 8% QoQ growth last quarter to $375.3 million. Lasers accounted for 24% of revenue, down from 26% in the prior quarter as networking gained share.
Materials revenue remained soft, recording a YoY decline for the third consecutive quarter in Q3, though it lessened to just (1%) to $236.7 million. Of Coherent’s three revenue segments, Materials is the only to see a YoY decline for the first nine months of the year. Materials accounted for 16% of revenue.
By end markets, data center and communications continues to expand its revenue share, now accounting for 60% of revenue in Q3, up from 57% in Q2, helping offset softer growth in Industrial, Implementation and Electronics.
Data Center and Communications revenue increased 46% YoY and 9% QoQ to $897 million, slowing from 58% growth last quarter.
Within Communications, Telecom grew 2% QoQ and 21% YoY driven by data center interconnects. We’ve covered the DCI opportunity previously here, which could evolve to become a significant opportunity.
Industrial revenue increased 5% YoY and 1% QoQ to $440 million, accounting for just over 29% of revenue.
Implementation revenue was down (2%) YoY but flat QoQ to $96 million, accounting for over 6% of revenue. Electronics revenue declined (11%) YoY and (15%) QoQ to $66 million, accounting for less than 5% of revenue.
Margins
Coherent’s gross margin was at the higher end of management’s forecasted range and operating margin was more than 1 point ahead of its guide. Margins are expected to expand in Q4, although overall, margins are lower than a stock like Astera for example – which affects valuation.
The company recently restructured the business to divest the silicon carbide portion, which is also contributing to better margins for next quarter: “So I think you're referring to some of the restructuring that we've taken and the portfolio actions associated with it. And so what I would say is that the actions that were taken in terms of an underutilized assets or underutilized businesses, that benefit is — certainly will contribute to our financials from a gross margin and OpEx perspective, depending on the nature of the actual divestiture.”
Q3 GAAP gross margin was 35.2%, expanding nearly 5 points YoY. Adjusted gross margin was 38.5%, at the higher end of the 37-39% guided range, expanding nearly 5 points YoY and slightly sequentially.
GAAP operating margin was 4.8%, up 3 points YoY. Adjusted operating margin was 18.6%, up 6 points YoY and well ahead of the 17.4% guided figure. This highlighted some improvement in operating leverage for Coherent, expanding faster than adjusted gross margins.
For Q4, management is holding adjusted gross margin guidance steady at 37-39%, while guiding for an 18% adjusted operating margin. Coherent is beginning to close in on its long-term gross margin targets of 40% over the last two quarters, though it still needs to make some considerable progress or drive faster growth in higher-margin products to reach this threshold in fiscal 2026.
EPS
Coherent reported a 5.8% EPS beat in Q3 as it benefited from strong margins down the line, reporting $0.91 in EPS. This represented growth of 141% YoY, decelerating from 256% YoY growth in Q1.
For Q4, management offered a wide range for $0.81 to $1.01 in adjusted EPS, with the $0.91 midpoint in-line with estimates. For FY25, Coherent is currently expected to record more than 107% YoY growth to $3.46, though growth is expected to slow to 26.2% YoY to $4.37 in FY26. While the dollar figure for FY26’s EPS has not changed over the past three months, the growth figure is technically 17 points slower due to the higher base it’s growing from in FY25, at $3.46 estimated versus $3.02 three months ago.
Cash Flows and Balance Sheet
Cash flow margins expanded slightly YoY, with operating cash flow margin remaining in the double-digits, though just barely. Inventories ticked slightly higher, and accounts receivable rose rather quickly sequentially in Q3, with Coherent likely preparing for AI data center products such as Nvidia’s Blackwell to ramp in the back half of the year.
Operating cash flow was $162.9 million for a 10.9% margin, expanding from a 9.7% margin a year ago. This was the fourth consecutive quarter of a double-digit OCF margin.
Free cash flow was $51.1 million for a 3.4% margin, expanding from a 2% margin a year ago.
Inventories ticked nearly 4% higher QoQ to $1.39 billion, though accounts receivable showed a much larger jump at more than 13% QoQ to $1.01 billion.
Cash and equivalents totaled $890.3 million, while debt decreased slightly to $3.73 billion as Coherent paid down $136 million of debt in the quarter.
According to the CFO, the company has paid down $386M total for 2.1X debt leverage: “We paid down $136 million in debt during the quarter using cash from operations. This brings our fiscal year-to-date total debt payments to $386 million, reducing our debt leverage to 2.1x as defined in the credit agreement.”
When asked about inventory building, management stated they would not guide beyond one quarter yet see Datacom segment growing: “Yes. We don't guide beyond the current quarter, but what I would say is in datacom, we continue to see strong demand signals from our customers, both kind of shorter-term demand signals, which would be purchase orders and backlog, but also longer-term demand signals like the forecast that they'll give us a 12- or 18-month forecast. And so we continue to see strong demand from the data center customers. So we're expecting that business to continue to grow.”
Earnings Call Q&A
Upcoming 1.6T Shipments are a Major Catalyst
As discussed in our previous writeup on Coherent, the company supplies EML Lasers, VSCEL Lasers and CW Lasers for silicon photonics. While 100G per lane for 400G and 800G optical transceivers is what is supporting the growth now, it’s expected that 200G per lane and even 400G per lane for 1.6T optical transceivers is what will drive growth in H2 of this year.
Per the earnings call:
“So obviously, for the industry, the next — for the data center, the next big transition in terms of data rate is 1.6T, and we showed 3 different versions, one that was based on our 200G EML technology, one that was based on our 200G VCSEL and then another one based on our silicon photonics […] and then timing of impact would be on 1.6T, we continue to view the 1.6T ramp as we've said in past quarters. We expect 1.6T revenue to start in this current calendar year.”
The CEO also called out the importance of being early (and perhaps first) to release 400G per lane 3.2T in the future: “And then my other one that I really liked was we demonstrated 400G differential EML. And the reason that one is important is because that's really the foundation laser technology for 3.2T transceivers. So we're deep into the development of our portfolio of 3.2T transceivers and demonstrating that key laser capability of 400G is a really important milestone.”
According to a press release in March, Coherent was the first to release a 400G per lane EML for 1.6T, showing Coherent is working hard to remain a supplier of choice in a highly competitive market. According to Cignal AI, 400G and 800G modules grew 4X in 2023 and were expected to continue growing significantly in 2024 with Coherent noted as one of the leaders in the space.
To some extent, indium phosphide capacity is the limiting factor for these technologies, with Coherent stating they expanded capacity rapidly in the current quarter: “In Q3, we once again expanded our capacity both sequentially and year-over-year with year-over-year capacity growing by over 3x.” You can read more about InP here.
Coherent stated half of their revenue comes from EMLs, which is the main growth story right now: “As I mentioned in the prepared remarks, if we look at our transceiver revenue, actually over half the revenue is based on EML. So over half of our transceiver revenue comes from EML-based transceivers.”
Co-Packaged Optics and Optical Circuit Switches (OCSs):
Co-packaged optics also represents a significant opportunity for Coherent with an announcement in March that the company is collaborating with Nvidia on co-packaged optics at the time of the GTC conference. We prepared our Members for this announcement last quarter by stating in our post-earnings write-up, which was focused on CPOs:
“Looking beyond traditional pluggable optics, there is an increasing amount of discussion around co-packaged optics (CPOs), which places the optical transceivers directly on the chip package, rather than using separate optical modules. This results in faster data transmission, reduced latency and higher bandwidth. This may be the best of both worlds: the performance of optical yet with reduced power consumption. Tracking this is especially important as since we last covered copper/Semtech, there have been reports that copper is “causing concurrent issues with overheating and glitching” with rumors Nvidia will launch a CPO switch at the upcoming GTC. That could mean Coherent will be a lead supplier for the anticipated CPO switch – we will be monitoring this closely.”That could mean Coherent will be a lead supplier for the anticipated CPO switch – we will be monitoring this closely.”
CPOs will be a strong growth story for Coherent as we move into 2026, and we will be tracking this closely as we go along.
Another growth story for 2026 is optical circuit switches, which were covered in our original Coherent write-up. On the call, it was implied that COHR believes it can outmatch Lumentum on OCS technology (LITE is MEMS-based): “We also continue to make good progress with our new data center optical circuit switch or OCS platform, which drives a significant expansion in our data center addressable market opportunity. The underlying technology in our OCS switch is based on field-proven digital liquid crystal technology that has been deployed for many years in demanding telecom applications. Our technology has tremendous benefits versus the mechanical MEMS-based solutions offered by others, and our customer engagement and enthusiasm around our OCS platform continues to grow.”
We will also keep an eye on this and let you know when timing approaches for OCS to become a growth driver.
China Manufacturing is Minimal:
China was bound to come up and Coherent communicated their rather insulated from China comparatively speaking:
“Christopher Rolland Susquehanna Financial Group:
So perhaps first, a follow-up on your manufacturing footprint, specifically for transceivers. I guess I think you're in China and Malaysia with that manufacturing. Do you have the capacity to serve American customers via Malaysia? Or how is China involved in that?
And then perhaps if you could give us some color as to what percent of your business might actually end up in America. So yes, can you fully serve America out of Malaysia? And what percent goes to the U.S.
James Anderson CEO, President & Employee Director:
Yes. On the first part of the question, the answer is yes. In fact, today, if you look at our U.S.-based, for instance, customers like hyperscaler customers, those transceivers come from Malaysia. So yes, we're — today, we're supporting our U.S. customers almost entirely from Malaysia.
And then on the second part of the question, I think you were asking about like total revenue by geography, how much is North America based. I don't know.”
Conclusion:
NVIDIA’s Spectrum-X and its Quantum-X Infiniband systems require ultra-high bandwidth and low-latency optics, both of which align with Coherent’s product roadmap. Nvidia’s NVLink speeds are expected to double from the fourth generation to the fifth generation as Blackwell is released to support the high-speed data transmission from AI workloads. This is expected to drive outsized demand for the 800G and 1.6T laser designs that Coherent specializes in.
Coherent is a company with a vanilla management team that tends to keep mum about anything progressing in the pipeline; likely to avoid stepping on any toes with Nvidia. Although Coherent faces competitive risks with gross margins that reveal commoditized pricing pressure, this next year is likely the most important year in Coherent’s history as their positioning in the optical module market will be tested.
There are no major flags in this report and no major catalysts in this quarter. Due to the competitive risks, we are watching Lumentum quite closely as well as both are strong players with EML lasers going into the highly anticipated NVL systems launch in the second half of the year.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Core Scientific laid the footprint for strong growth in HPC (colocation) revenue by the end of the year as it begins to bring online billable capacity for CoreWeave and subsequently rapidly ramp capacity of 250MW. This is the riskiest stock in our portfolio when you consider the current fundamentals are (at face value) of poor quality with revenue declining (55%) YoY and (16%) QoQ to $79.5 million this quarter compared to $179.3 million in the year ago quarter. The company reported an operating loss of $42.6 million and negative adjusted EBITDA of ($6.1) million.
We’ve covered Core Scientific transitioning from Bitcoin mining operations to data centers in more detail here. The company noted that it remains on track to deliver 250MW of billable capacity to CoreWeave by the end of 2025, with the first 8MW tranche to be delivered by the end of May, expanding 5x to 40MW by the end of Q2. According to the earnings call, the Denton facility is a site CoreWeave is working on with Open AI with a recent $12 billion investment.
On the call the company stated: “At full scale, the site will represent around 260 megawatts of billable capacity. To put that in perspective, we broke ground in January, and in just roughly four months, we've achieved meaningful progress. It's a powerful demonstration of our ability to execute quickly and at scale, with before-and-after pictures included in our updated investor presentation.”
Refresher on Core Scientific's Business Model
Before we go into the earnings report, I think it’s appropriate to pause and review Core Scientific's business model given it’s quite unique, and to also help translate what the company is setting up to do in terms of future revenue.
Core Scientific was a major Bitcoin miner that is transitioning to power AI data centers with their primary customer being CoreWeave worth about $10.2 billion when fully realized over a 12-year period for 590 MW of HPC infrastructure. Roth MKM sees CORZ having about $1.6B in revenue by 2027, up from $473M expected today.
CoreWeave, the primary customer, fronts the capex which allows Core Scientific to grow capacity, without which, the business model would not work as CORZ would struggle to raise the level of capital required to acquire more sites and modify the existing infrastructure.
Here is what was shared regarding CoreWeave putting up the capex costs in the most recent earnings call: “From a capital perspective, CoreWeave is funding virtually all of the CapEx associated with these deployments. Our only direct capital outlay on the contract is the $104 million associated with the 70-megawatt expansion we announced during our last earnings call. That structure significantly reduces our capital burden, keeps our balance sheet leverage like compared to peers and gives us the flexibility to use debt more strategically for future growth. We believe this approach sets us apart and creates a clear path to long-term value creation.”
Revenue
Revenue continued to be impacted by Bitcoin’s halving and Core Scientific’s operational shift from Bitcoin to HPC. While the ramp in AI/HPC revenue approaches, crypto self-mining remained the primary driver of the YoY decline in Q1 as it contributed nearly 85% of revenue. Q1 revenue declined (55.6%) YoY, missing estimates by nearly 7%.
Crypto self-mining revenue declined (55.2%) YoY to $67.2 million, impacted by a (75%) decline in Bitcoin mined and shift to HPC
Crypto hosted mining revenue declined (87%) YoY to $3.8 million, again impacted by the HPC shift.
Colocation (HPC) revenue was approximately flat QoQ at $8.6 million.
Here is what was stated on the call about the revenue decline: “The sequential revenue decline was primarily driven by mining disconnections and relocations as we continue converting sites to support high-density colocation. More specifically, we earned 719 Bitcoin in the first quarter compared to 974 in the fourth quarter.”
Quickly ramping capacity for CoreWeave in Q2 through year-end is expected to drive significant growth in Colocation revenue. Management says they expect the 250MW will allow them to enter 2026 with annualized colocation revenue of ~$360 million ($90 million per quarter), up more than 10x from its $8.6 million ($34.4 million annualized) in Q1.
This ramp is expected to drive a significant rebound in Core Scientific’s revenue growth, with analysts currently expecting the company to exit 2025 at ~$160 million in revenue, approximately double Q1’s level. This would correspond to growth of 68.3% YoY, a more than 120 point acceleration as the year progresses.
However, it’s important to note that estimates have come down sharply over the past three months:
Q2 revenue was estimated to decline just (10%) to $126.6 million at the end of February, but is now seen declining (34%) to $93.1 million.
Q3 revenue was estimated to rise 84.4% to $175.8 million, but is now expected to rise 27.5% to $121.2 million.
Q4 revenue was estimated to rise 110.5% to almost $200 million, but is now expected to rise 68.3% to $159.8 million.
Despite these changes in estimates, management reiterated they are on track to reach their capacity goals: “Looking ahead, I'm even more confident than I was just two months ago in our ability to hit our milestones, 250 megawatts by the end of this year, inclusive of Austin and 590 megawatts by early 2027.”
The company pointed toward growth potential as well, stating there are additional opportunities to add the following capacity: “On the organic side, we remain confident in our ability to add approximately 300 megawatts of billable capacity across our existing sites by the end of 2027. Looking ahead, we also continue to believe there are significant opportunities to grow into new geographies, and we're targeting an additional 400 megawatts of billable capacity through new site development over the next three years.”
Margins
Gross margin expanded sequentially, but operating margin widened to more than (50%) as rising costs bit into weaker revenue. While Colocation promises to bring substantial revenue streams and strong tailwinds to growth through year-end, margins at the moment are minimal, even with power costs being passed through to CoreWeave.
Gross margin was 10.3% in Q1, expanding from 5% last quarter but well below the 43.3% margin from the year-ago quarter due to the Bitcoin halving and operational shift.
Operating margin was (53.6%), widening from (41.9%) last quarter and a stark contrast to the 30.3% margin from a year ago. The significant YoY difference was primarily caused by a more than (89%) YoY decline in gross profit and a 137% increase in SG&A expenses.
By segment:
Crypto self-mining gross profit margin was 9%, down from 49% a year ago, impacted by the shift to HPC and a (75%) decline in BTC mined, partially offset by a 74% increase in the average price of BTC and a 33% decrease in power costs.
Crypto hosting gross profit margin was 46%, up from 32% a year ago, primarily due to lower power costs.
Colocation gross profit margin was 5%.
EPS
Core Scientific benefited significantly from a $621.5 million mark-to-market adjustment on its warrants, and as a result, it reported $580.7 million in net income. This represented $1.25 in EPS, which is not comparable to the ($0.12) estimate due to the warrant impact. Stripping out this impact, net income would be ($40.8) million.
Core Scientific is currently expected to record losses through the rest of the year, shrinking each quarter from ($0.11) in Q2 to ($0.03) by Q4.
Cash and Balance Sheet
Core Scientific burned through a substantial chunk of cash in the quarter as it continues on its operational shift.
Operating cash flow was ($40.6) million for a (51.1%) margin.
Free cash flow was ($129.0) million for a (162.3%) margin, as Core Scientific’s capex rose 177% YoY to $88.4 million.
Cash and equivalents totaled $697.9 million, with Core Scientific burning through $138 million in cash in the quarter.
Debt totaled $1.12 billion. Management also shared long-term debt leverage targets on the call — per the CFO: “And over time, we believe our net debt to adjusted EBITDA leverage can and should trend toward approximately 4 times, consistent with peers in the space.”
Adjusted EBITDA was ($6.0) million for an (8%) margin, down from $88 million or a 49.1% margin in the year ago quarter.
Core Scientific also recognized $42 million in prepaid colocation license fees as deferred revenue in the quarter.
Earnings Call Q&A:
No New Customers Yet; but Enterprise Customers on the Horizon
The market will reward Core Scientific if the company can add more customers. In our previous write-up we stated the company’s goal is to have CoreWeave customer concentration to be 50% or less by 2028. This remains the goal with no updates on customer concentration improving:
“Now, to be clear, we haven't signed a new customer yet, but our sales pipeline is expanding. It includes a healthy mix of hyperscale and large enterprise customers, and we are actively negotiating with multiple customers today […] We currently have several non-hyperscale deals in our pipeline, ranging from 50 megawatt to 100 megawatt customers. These are substantial deployments, and they come with a return profile that's attractive […] I'm more confident than ever in our ability to build a customer base that is more diverse, more balanced, and more strategically aligned with our long-term vision. Our target remains the same, to have Core represent less than 50% of our billable capacity by the end of 2028.”
The advantages of enterprise customers were discussed further in the call, with Core Scientific likely needing to first prove it’s been able to stand up Blackwell systems before demand increases from a broader set of customers.
“Adam Sullivan
Yeah, it's a great question. Thanks Darren. Large enterprises, the timeline to get into final contract details are definitely faster than on the hyperscale side. There's a natural inclination to move towards hyperscale from the broader perspective of their creditworthiness. But the large enterprises that we're looking at today are I think $75 billion market cap plus and represent a creditworthiness that we find very acceptable in the return profile of these are higher than hyperscale deals as well. So, as we evaluate potential multitenant build-outs going forward, large enterprises could represent significant anchor tenants for those new sites to allow us to begin development in new geographies and start building out new sites”
The CEO reiterated again they are getting close to signing more enterprise customers:
“And so, we're currently evaluating a number of different deal structures that we're in discussions with clients. And I would say we're excited about the return profiles the large enterprises represent because they do have the capability, based on their scale and their size, that they're demanding today to represent an acre tenant for us to open up a new site location. And so, we will continue to evaluate deals going forward, and we're excited about the continuously growing pipeline in large enterprise channel.”
In time, however, Core Scientific believes it will prove itself to other hyperscalers, stating: “I think our delivery and execution is only going to breed confidence kind of as this year goes on. And again, we're probably one of the only data center providers right now that's going to launch 250 megawatts in a single calendar year of what essentially is going to be more than 100,000 of GB200.”
Tariffs
It wouldn’t be a Q1 earnings report if I did not address tariff commentary from the call. Core Scientific stated they have procured components to deliver on time this year and into the first part of 2026, although there seemed to be some hesitation when looking further out. Although management put a positive spin on it, there’s a scenario that should be monitored which is that data center builds become more expensive as we approach 2026, and thus, budgets could tighten.
Paul Golding:
Thanks so much. Just quickly a housekeeping question I wanted to ask regarding digital asset mining. I think previously you'd mentioned that the digital asset mining hosting the capacity was you were going to exit that by year end. Just wanted to confirm that that was still the plan since we saw some revenue come through this quarter for that.
And then, my main question is around long lead time items. Just referencing your commentary around 2025 goals, the equipment being acquired to meet those goals. Wanted to ask about ’26 hearing about long lead times for step down infrastructure and other components, particularly around electrical equipment, and so just wanted to see how that was progressing as well? Thank you.
Matt Brown:
Yeah. I think the way to look at this is 2025, we've already secured all that equipment and most of it is already sitting in the ground either in warehouses adjacent to the projects that are ongoing or at the project site themselves. So, 2025 is locked in from an equipment standpoint.
2026, we have a good read-through on both the availability and cost for all that equipment. A lot of that through the first half of ’26 has already been procured, and a few portions of that will start taking delivery towards the second half of this year for projects that are going to extend that are going to start launching in 2026.
With that said, I think this part of this touches on tariffs and equipment availability. With our strong relationships with our suppliers that I would say we have really, really good insights in the availability and that we're not really too concerned right now about not being able to take receipt of equipment and meeting our dates or any buy dates to meet our delivery goals.”
Conclusion:
Core Scientific is the highest risk stock in our portfolio as it takes a leap of faith that the partnership with CoreWeave is setting a standard in terms of standing up and powering up data centers very quickly. This quarter the company is starting to transition toward AI revenue rather than bitcoin revenue (i.e., primarily Bitcoin losses). According to analyst estimates, CORZ looks to be returning to revenue growth by Q3 which gives you a good idea as to when AI should be leading the market again as CoreWeave is a strong proxy for when Nvidia will resume its product cadence.
We feel confident taking on the challenge of owning CORZ although it will require an active stance with risk management controls in place.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Astera Labs reported an impressive beat and raise in Q1, with GAAP margins strengthening as revenue continues to grow at a triple-digit rate. On top of this impressive beat, the growth story for Astera Labs is only beginning. The commentary regarding their product diversification and higher dollar content going into the second half of the year was quite clear as to the growing opportunity this company is poised to capture.
Primarily, Astera offers unique positioning that allows them to capture both the merchant GPU market and custom silicon market across its three products lines Astera, Taurus and Scorpio. This widens the TAM and allows for steady revenue growth despite hiccups or delays from a single AI system (which we’ve seen plenty of disruption recently across those with high customer concentration with Nvidia).
In addition to being a strong custom silicon vendor for hyperscalers, Astera will participate in Blackwell once it (finally) ships in volume as the company offers PCIe scale-out and Ethernet scale-up. Their new products Scorpio P-Series and Scorpio X-Series are fabric switches that are particularly well-suited for the immense demand that is expected for customization of racks as architectures scale-up in the second half of the year and beyond.
Notably, Aries PCIe retimers and Taurus Ethernet smart cable modules are driving the revenue today with the Scorpio P-Series beginning to ramp. However, there are many catalysts on the horizon for Astera which adds to the trifecta of a strong growth story:
Serving both ASICs and GPUs greatly increases TAM and diversifies revenue; rare in the AI systems ecosystem
Preparing to serve the scale-out demand with increasing higher dollar content; specifically on Scorpio but also on Aries
Offering strong cross-sell opportunities as it aims to be the first to solve unique challenges for both GPU and custom silicon utilization – and is solving these issues in a way that avoids vendor lock-in for the large hyperscalers who want a mix of both custom silicon and merchant GPUs (Nvidia or AMD).
Below, we look at Astera’s exceptional earnings report and provide notable commentary as to why Astera’s streak is likely to continue for some time.
Revenue Grows 144% in Q1
Astera Labs reported a blazing 144.3% YoY revenue growth in Q1 to $159.4 million, topping analyst estimates for $151.5 million in the quarter. Management said they witnessed strong demand for PCIe scale-up and Ethernet scale-out solutions for custom ASIC platforms, with initial shipments starting for its Scorpio P-Series and Aries 6 retimers in merchant GPUs.
For Q2, Astera delivered a solid raise at $170 to $175 million, more than 7% ahead of the $160 million estimate. This points to YoY growth of 124.5% at midpoint, ahead of estimates for just 108% YoY.
Astera has seen revenue growth decelerate over the past few quarters, with growth expected to continue decelerating as Astera laps its rapid ramp quarters. What’s impressive about this ramp is that Astera is guiding to deliver this 125% growth in Q2 against its 619% YoY comp (against a small base), for its seventh-straight triple-digit growth quarter.
For the full-year, Astera did not provide a guide, though estimates heading into Q1’s report were pointing to 70.4% YoY growth to $675.2 million in revenue. However, given that Q1 and Q2 have combined for a $20 million beat compared to current estimates, it’s likely that full-year revenue estimates will likely move closer to (or above) $700 million in the coming days. This would correspond to YoY growth of nearly 77%.
According to discussions on the call, management is being conservative in their guidance, stating they have more visibility than most as they are closer to their lead GPU customer (Nvidia) with hints that the larger systems will start shipping preproduction volumes at the end of this quarter. “I think the — so we will always continue to be conservative, just to underline what Jitendra said. But having said that, the revenue models and the guidance that we are providing or the outlook that we're sharing comprehends all this because we are so close to this customer that we see a lot of stuff, and we're able to consider and contemplate that when we provide guidance.”
Margins: Astera Becomes GAAP Profitable
Astera is making considerable progress on strengthening its GAAP operating margin, having guided for a (0.2%) margin in Q1 but reporting a 7.1% margin. This also marks a strong 15 point expansion in just 2 quarters. Elevated SBC at nearly 28% of revenue in Q1 is behind the wide disconnect between GAAP and adjusted margins, though it signals strong GAAP profitability potential in the coming quarters/years as revenue continues to scale.
Q1 gross margin was 74.9%, ahead of guidance for 74%.
GAAP operating margin was 7.1%, well ahead of guidance for (0.2%) and up from 0.1% in the prior quarter. Adjusted operating margin was 33.7%, up more than 14 points from 24.3% in the year ago quarter but down from 34.3% last quarter.
GAAP net margin was 20%, expanding nearly 30 points in three quarters. Adjusted net margin was 37.4%, up more than 15 points from 22% in the year ago quarter but down nearly 10 points sequentially.
Astera is guiding for margins to remain strong in Q2, with GAAP operating margin expanding. Gross margin was guided at 74% once again, while GAAP operating margin is forecast at 7.9%, up 0.8 points sequentially. Adjusted operating margin is forecast to contract 2.6 points QoQ to 31.1%.
The company foresees gross margin being stronger in the second half, yet was careful to temper the market expectations by stating gross margin goal is to remain above 70%. “So with that wider range of margins, we still expect our longer-term gross margin targets of 70% to be the direction we're heading, not this year, but over time. So I would still encourage people to think about the margins as we grow the company to trend towards 70%.”
EPS
Astera delivered an impressive 350% beat to GAAP EPS estimates in Q1, driven by its operating margin expansion, while forecasting EPS above estimates for Q2.
Adjusted EPS of $0.33 beat estimates by $0.05, representing YoY growth of 230%.
GAAP EPS of $0.18 beat estimates by $0.14, improving from $0.14 in Q4 and marking its second straight quarter of GAAP profitability on the bottom line.
For Q3, Astera guided for adjusted EPS between $0.32 and $0.33, approximately flat QoQ but up 150% YoY at midpoint. GAAP EPS was guided at $0.10 to $0.11, what would be a third consecutive quarter of GAAP profitability albeit down (42%) QoQ.
For the full-year, analysts currently expect Astera to report 50% YoY growth to $1.26 in adjusted EPS, with FY26 EPS growing 36% to $1.72. Heading into Q1’s report, GAAP EPS was expected to be $0.29 for the full-year, but considering Astera is guiding to deliver that figure in 1H, estimates are likely to move substantially higher.
Cash Flows and Balance Sheet
Cash flow margins expanded slightly YoY, though inventories rose and accounts receivable doubled sequentially.
Operating cash flow was $10.5 million for a 6.6% margin, expanding slightly from a 5.6% margin in the year ago quarter.
Free cash flow was $6.0 million, for a 3.7% margin, improving from a 0.3% margin in the year ago quarter.
Cash and equivalents increased $11.1 million QoQ to $925.4 million, while debt remained zero.
Inventories rose 18.2% QoQ to $51.1 million, likely driven by the ramp of Astera’s Aries 6 and Scorpio P-series products.
Accounts receivable surged 100.5% QoQ to $69.8 million, driven by Astera’s largest customers. Astera’s receivable balance from its top customer in the quarter rose 363% QoQ to $20.9 million, while its balances from its second and third largest customers rose 75% and 90% QoQ to $14.7 million each. Days sales outstanding also increased from 20-ish days in the past to 40 days this quarter. This is likely foreshadowing Astera is preparing for larger shipments in the next 1-2 quarters.
Customer Concentration and China Revenue
Astera is diversifying its customer base beyond its two largest customers, though it remains quite concentrated with its top four customers accounting for 80% of its Q1 revenue and its top two customers accounting for 49% of revenue. Although Astera does not disclose the exact customers, at one point, their largest customerwas AWS.
SEC filings show that China revenue has been growing as a percentage of revenue from under 15% in Q3, then surged to 35% in Q4, and remaining elevated at 28% in Q1. FY24 exposure was 18.3%, up from <5% in FY23
However, on the call, management stated it was less than 10% of revenue. Perhaps the difference being end market customer is less than 10% yet manufacturing in China represents a larger portion. Addressing this difference in the SEC filing on the call would have been ideal.
Thomas O'Malley Barclays Bank
First one is for you, Mike. You mentioned that there was a China impact on your sales. It's never been a significant portion of your model. But could you give us a feeling just how large that impact was and what that impact will be over the next couple of quarters?
Michael Tate CFO
Yes. So we ship into China with our retimers predominantly right now and they were attached to third-party merchant GPU systems, both were restricted hard stop during the quarter. So there was a modest impact that we have to overcome.
China revenues, when you look at end customer demand, is less than 10% of our revenues. So it's been manageable enough and given the strength of our business and other product lines to continue to grow through this challenge.
Earnings Call Q&A:
Higher Dollar Content from Scorpio-X and Aries PCIe6 Retimers
As growth investors, we are always looking for a catalyst that can sustain growth, or ideally, accelerate growth. For semiconductors and hardware components, there is no better catalyst than incoming higher dollar content for hardware companies.
Therefore, Astera Labs used these words many times on their call. Diving into the details of this, it’s primarily two products where they are forecasting higher dollar content and average sales prices (ASPs):
Aries PCIe6 retimers:
The transition from PCIe5 to PCIe6 will result in higher unit growth and higher ASPs including a gearbox that improves signal quality. PCIe 6 doubles the bandwidth from the 5th generation, with up to 256 GB/s of bandwidth per lane, which will require faster supporting components, such as the retimers that Astera Labs offers.
Here is what was stated on the call: “In fact, we have already started shipping preproduction volume for supporting some of the opportunities. And this would, again, not create an additional TAM to our Aries business because it's adding to the retimer TAM, but essentially bringing in a higher level of ASP simply because you're able to not only do retiming, but also do some of the speed matching that I noted.”
Scorpio X-Series:
The Scorpio P-Series is shipping this quarter and are qualified for Nvidia systems, yet the X-Series will ship in H2 with a bigger opportunity for custom silicon clusters. The Scorpio P-Series is a small chip that connects the CPU, GPU, NIC and NVMe storage. Rather than building a large switch, the company built a smaller device that is more efficient for high-speed signals to help feed GPUs with data. The fewer ports and smaller switch decrease complexity in a bid to compete against Broadcom with twice the lane count.
The X-Series is for back-end networking in GPU-to-GPU configurations (and custom silicon configurations), and will offer a higher port count. Astera is essentially building something similar to Nvidia’s NVSwitch with the X-Series, but for PCIe-enabled GPUs and ASICs. Per the last earnings call: “And this one, like Mike noted, it's a greenfield use case, meaning if you keep Nvidia and NV Switch aside, everyone else is starting to build configurations that are obviously going to need some kind of a switching functionality, which is what we are addressing with our X Series device.”
The X-Series improves efficiency for ever-increasing AI cluster sizes. The majority of AI clusters are in the tens of thousands GPUs, but are expected to go to the hundreds of thousands (already has with X and some other Big Tech companies), and will see AI clusters with millions of GPUs over the next couple of years.
In an effort to identify a catalyst that can sustain Astera’s exceptional growth, it would be this product that does so. The X-series is used to interconnect GPUs for higher GPU utilization, resulting in higher ASPs. Per the call: “So to that standpoint, X-Series does bring in a lot more value, and therefore, you can assume that the ASPs tend to be significantly higher. And that's — again, there are different — the X-Series is not one device, to be very clear, there are multiple part numbers. So there would be situations where maybe one part number is not at the same level as P-Series. But in general, you can just look at it from a per lane standpoint or per port standpoint, and look at the value delivered. And on that basis, the X-Series will always be a much more valuable, much more higher ASP product than a P-Series.
Notably, Astera maintains their largest opportunity for the X-Series is on the custom silicon side although they foresee hyperscalers wanting to customize their racks in a way that prevents vendor lock-in from both Nvidia and Broadcom.
“So these are fabric switches that are used to interconnect multiple accelerators together. So to that standpoint, a, it's not only a significant dollar opportunity because the ASP of this product tends to be high. But these are also products that are turning out to be anchor sockets for us. If you think of an AI rack being built, you have the accelerators and then you have the fabric that interconnects the accelerators.
So what we are transitioning and what we're excited about is that the Scorpio X device is now translating to be an anchor socket. Think of it as like a mothership around which we are able to now add a lot more products that go along with it, whether it's the silicon level products or module or other form factors that we're considering.
So overall, I want to say that from an opportunity space standpoint, for Astera, the custom ASIC-based implementation tends to offer a lot more opportunities.”
We’ve covered Astera’s products more in-depth in previous analysis here and here.here and here.
Scale-Up will Drive More Revenue
As we’ve discussed in great detail in previous analysis on Blackwell, scale-up architectures combine many GPUs or custom chips into one system with dozens of AI accelerators and soon hundreds of AI accelerators communicating in one cluster.
In line with Scorpio-X being a strong catalyst for the company, management double-downed on why scale-up is a massive opportunity for their products specifically, stating it will result in “hundreds of dollars per accelerator and serve as an anchor socket for integrating additional Astera Labs solutions.” They also stated “increasing accelerator cluster sizes, faster interconnect requirements and overall system complexity challenges are creating substantial dollar content opportunities.”
Given they provided an idea as to the dollar amount per accelerator, there was a question on the call relating to this. Again, I’m pulling out this exchange because a hypergrowth stock like Astera certainly needs additional forward-looking growth opportunities to justify it being in our portfolio – of which I believe scale-up opportunities satisfies this requirement.
Blayne Curtis Jefferies
I wanted to talk about scale up. You mentioned it several times. I think you even said a couple of hundred dollars per accelerator. Today, I think you're selling some retimers and then some PCIe cabling. Can you walk us through the progression of scale up in your participation and kind of can you maybe set some timing? Because I know UAL is probably later next year. So what's the scale-up opportunity for you in between now and then?
Jitendra Mohan Co-Founder, CEO & Executive Director
Blayne, this is Jitendra. Scale up presents a very good opportunity for us. As you know, so far, our revenues have been driven primarily by scale-out opportunities. But for the first half, as Sanjay laid out, we have a significant contribution from scale-up.
And the reason that's so important for us is scale up is really a very rich opportunity of high-speed interconnects that need to deliver low latency and high throughput. And that's where we play today with our Aries retimer products and starting shipments of Scorpio X family.
And we do expect this opportunity to continue to grow as cluster sizes grow and the data rates increase. So we have significant opportunities that we are working on for PCI Express based scale-up networks based on our current Scorpio X family.
But then it also dovetails very nicely into UAL, and we expect this to be a multibillion-dollar opportunity as we provide a full holistic portfolio of devices to address UAL infrastructure.
And as far as the UAL itself is concerned, the spec is not final. It's been released as the 1.0 spec. And so you can imagine that the products will start to be worked on now and start to see first samples in 2026 with the revenue contribution the following year. So that is a very big opportunity that we are very well positioned to take advantage of.
Commentary on Blackwell Delay
I’m certainly liking Astera’s commentary a lot better this quarter than last quarter in terms of us-Nvidia bulls being closer to the bigger Blackwell moment – although I will say it’s unclear right now if Nvidia will go more directly to Blackwell Ultra and skip the more problematic Blackwell NVL system SKUs (I will cover the scenarios as to how we get to H2 pre-earnings). To provide a preview, I have zero expectations that Nvidia’s Q1 will be a good report, instead, we are looking toward the August call and the October call as the stronger moments for AI this year.
Regardless, Astera is one to watch in terms of getting commentary on when we can expect Nvidia’s next catalyst – and we are getting a yellow light improved from a red light last quarter. I believe next quarter will be the green light: all systems go. But this requires patience as this puts us into late summer/early Fall but should be fully resolved by the Q4 time frame.
As noted in the past, the PCIe6 retimers are especially indicative of when Nvidia’s Blackwell systems are shipping. Per our previous analysis “PCIe 6.0 was expected to ramp with support initially offered in the GB200s. Back in March, Astera demo’ed PCIe 6.0 for a wide range of Blackwell products.
There was also indication back in the August call that Gen 6 was confirmed to be used in Blackwell’s GB200, and there were initial shipments: “We have started shipping initial quantities of preproduction orders of our PCIe Gen 6 solution, Aries 6. We ship and support our hyperscaler customers initial program developments that are based on Nvidia's Blackwell platform, including GB200.”
The Scorpio P-Series is also integrated into Nvidia’s Blackwell MGX systems per a recent announcement. Perhaps the strongest comment on the call regarding Nvidia timing was this: “Looking ahead to Q2, we anticipate accelerated shipments of Scorpio P-Series switches and Aries 6 retimers on customized rack scale AI platform based on market-leading GPUs. Additionally, we continue to identify further opportunities for Scorpio P-Series outside of rack scale systems with multiple engagements on modular topologies that support enhanced customization.”
In the opening remarks, it was also stated: “I'm excited to share that we will begin shipping preproduction volumes for Scorpio X-Series starting late this quarter” and later it was expanded on:
Sanjay Gajendra Co-Founder, President, COO & Director
“And then on the — Yes. On the customer on the business side, just to touch on that question that you asked. The great thing about our overall revenue profile is that there are multiple ways in which we are approaching the market, the diversity across both custom ASIC-based platforms versus merchant GPU-based platforms, scale up versus scale out and the multiple product lines that we have enables us to approach the market in many different ways.
And to that standpoint, for us, for first half, what we are expecting is that our revenue would be driven largely by the PCIe scale-up and the Ethernet scale-out opportunities along with the initial shipment of Scorpio P-Series and Aries 6 going into the customized rack.
And second half, of course, lays nicely on top with some of the production ramps that we're expecting with the customized racks, which again, for us, is the Scorpio switches, along with the PCIe 6 retimers.
These are now qualified. So we are starting to see that shipments start becoming significant. So that's part of the second half, and second half, of course, we have CXL initial shipments that we're expecting for production volumes and the Scorpio X switches for the scale up going into the custom ASICs.
Those are also expected to start hitting production — initial production volumes in the second half of this year, which essentially gives us multiple ways, if you will, and sets us up nicely for future revenue growth even beyond '25.”
Conclusion:
The market reaction on Astera may be muted, but I’m liking this report much better than last quarter. The commentary around H2 is becoming clearer and in terms of a holding period, 6-9 months is a brief period of time to wait if the stars are aligning across the suppliers.
I do not have high expectations (at all) for Nvidia’s Q1 but Astera is one piece of the puzzle pointing toward our AI portfolio leading again come August, and then October, and perhaps it’s a big enough splash that the streak continues into January and beyond as well. We will take this one quarter at a time, but I’m hearing what I want to hear, and that’s a sigh of relief. Keep in mind, the I/O Fund strives to be early so do not expect the market to agree with me immediately.
Of course, the path to Q2 earnings calls in July/August and then Q3 calls in Oct/Nov will be incredibly tricky as semiconductors are in the hot seat for global tensions. I’d expect near-term volatility in AI hardware stocks that eventually resolves in our favor. While many are likely nervous about how semiconductors fare, I’m excited as we are quite clear on what to buy and I will be happy to get these stocks on discount if the market is foolish enough to give it to us.
p.s. excuse the typos as our team is in a fast sprint covering many earnings reports this week
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