Month: August 2025

ServiceNow Q2 Earnings: Inside the AI Push Toward $1 Billion ACV by 2026

Posted on by io-fund

In this post, we examine the AI platform, products, and other driving forces behind ServiceNow’s (NOW) beat-and-raise earnings results for Q2, plus: 

  • ServiceNow’s evolution from a provider of SaaS solutions for IT service management to an agnostic AI platform aspiring to impact nearly every facet of the enterprise. 
  • The company’s impressive QoQ acceleration across subscription revenue, margins, RPO, and large deal activity. 
  • The cost of meeting AI demand through cloud infrastructure costs, and the news of a deal for multi-billions in cloud commitments through 2030. 
  • Plus, who’s really winning the race in AI enterprise. 

Last month, after ServiceNow reported second quarter results that exceeded expectations on multiple fronts, shares of NOW rose by 6%. The company is attempting to reposition itself beyond a provider of cloud-based digital workflows to what they are calling “the AI-powered operating system for enterprise transformation.”  

Yet, the market is cautious as the stock is down nearly 20% YTD and lags other AI software stocks – our analysis below looks at the puts and takes weighing on the stock. 

ServiceNow’s Q2 Results Help to Sustain AI Narrative 

As CEO Bill McDermott enthusiastically delivered highlights from his company’s second quarter on the call, he echoed the company’s marketing with repeated use of the word “any,” as in the ServiceNow platform’s ability to integrate with any data, any workflow, any tech stack, any cloud and hyperscaler, any AI agent and LLM, any system across the enterprise, in any industry. McDermott is confident that his firm is delivering the unified solution to what he says is the #1 focus of leading enterprises and CEOs—AI transformation. 

Many tech companies talk about their all-in-one platform as the be-all, end-all solution for every challenge facing the enterprise, but ServiceNow has the metrics to warrant watching the stock closely in future quarters. Most notably, Q2 2025 total revenue of $3.215 billion, representing 21.5% YoY growth in constant currency, up from 20% last quarter for an acceleration of 150 bps. The 150 bps acceleration in total revenue gives credence to McDermott’s statements that the company is seeing increased customer demand for AI transformation solutions, as well as strong execution across sales and product teams.    

In addition, ServiceNow reported subscription revenues of $3.1 billion representing 21.5% YoY growth. This is up from $3.01 billion last quarter for QoQ growth of 3.3%. The current RPO of $10.9 billion represents growth of 21.5% YoY and is up from $10.3 billion last quarter for QoQ growth of 5.8%. Total RPO was $23.9 billion up from $22.1 billion last quarter for YoY growth of 25.5% and QoQ growth of 8.1%. 

In Q2, ServiceNow guided for growth of 20% to 20.5% on subscription revenues yet current RPO growth is expected to lag at 18.5%. Typically, it’s best if cRPO growth exceeds subscription revenue growth. Notably, free cash flow is lumpy between quarters yet the company has a sizable free cash flow margin regardless at 48% last quarter and 16.5% this quarter. In both quarters, FCF expanded on a YoY basis. 

For full year guidance, guidance was reaffirmed for subscription gross margin to hold steady at 83.5%, operating margins at 30.5%, and free cash flow margin at 32%—indicating confidence in long-term profitability and efficiency. 

Now Assist Sees AI Deals Grow 50% QoQ 

ServiceNow also delivered strong numbers showcasing momentum in large deals and increased annual contract value (ACV). In Q2, AI deals were up 50% QoQ, including 89 deals with $1 million in net new ACV. There are 528 customers that now have more than $5 million in ACV, a 19.5% YoY increase. The number of customers with more than $20 million ACV grew by 30% YoY, representing strong relationships with top customers. ServiceNow has also shared that 85% of the S&P 500 are actively using ServiceNow’s platform or services. 

The primary driver of the increases in deal size and volume is Now Assist, the company’s flagship generative AI suite of applications, agents, LLM, and customizable tools built directly into the NOW platform. Now Assist drastically simplifies AI integrations and makes it easy for non-technical people to work with, talk to, manage, and customize all the AI capabilities available on the platform. The key components are Skills, which can be thought of as customizable building blocks for performing tasks like summarizing incidents or suggesting next steps in processes; AI Agents, which are autonomous agents with reasoning and planning capabilities extending far beyond chatbots, including the ability to automate tasks, solve problems, and proactively manage workflows; and Agentic AI Orchestrator, which acts as a coordinator with and manager of other agents and systems, not just from ServiceNow but from other companies, too. 

Here is what was stated on the earnings call: 

“Our beat and raise quarter showcases the mission critical nature of the ServiceNow AI Platform. Every business process in every industry is being refactored for agentic AI. ServiceNow has never been more differentiated as a full-stack agentic operating system for the enterprise.” 

ServiceNow confidently reiterated its goal of reaching $1 billion in ACV from Now Assist by 2026. The I/O Fund foresees this being an important moment for the stock as few AI midcap software stocks have reached this scale. The company has this confidence due to agentic AI, and also due to Now Assist unifying additional solutions, workflows and data across multiple enterprise productivity tools—ITSM, CSM/CRM, HRSM, DevOps, Sales, and more.  

Another key product in the generative AI suite is AI Control Tower, a centralized command center and single-pane-of-glass orchestration layer for managing, optimizing, and governing AI across the enterprise. Launched earlier this year, AI Control Tower allows third-party applications to integrate seamlessly into the ServiceNow platform, and it provides the business context organizations need to connect AI initiatives to core business services and technologies in the rest of the tech stack. It provides AI lifecycle management, real-time reporting, risk and compliance monitoring to help organizations scale AI responsibly and efficiently.  

McDermott referenced AI Control Tower during the earnings call Q&A when he was asked to explain the success the company is having at the C-level and to define the one asset that will help ServiceNow win in the long run. He described AI Control Tower as the governance piece that unifies so many of the other apps and AI solutions organizations are juggling, minimizing the pain and complexity of integration including vendor management that enterprises have been facing for the past 50 years.  

As today’s enterprises race to transform and consolidate every aspect of their business through AI, leaders are struggling to choose, let alone integrate, 10, 15, 20 or more components of the tech stack, with new AI offerings rolling out and vying for inclusion every day. AI Control Tower can manage systems and other agents from other companies, not just ServiceNow’s. The agents need managing just like people do, McDermott added.   

Within two months of its launch, AI Control Tower surpassed the company’s internal targets for the entire year.  

ServiceNow’s Stock Sells Off Due to Cost of Scaling AI 

The day after its Q2 earnings release, shares of NOW retracted 3% as a regulatory filing revealed the company is set to spend $4.8 billion in total commitments for cloud infrastructure through 2030. The largest partner among the cloud providers is Google, for $1.2 billion over the next five years. 

With leadership bullish on Now Assist reaching its goal of $1 billion in ACV by 2026, the company appears to be preparing to report AI revenue independent of other revenue sources. Given the run rate above and assuming no acceleration, we consider the spend net neutral as the ACV would net very little ($800M in 4 years). The market will want to see ACV higher than this to offset the spend. 

The disclosure of $4.8 billion in cloud commitments share a similar narrative as the $85 billion annual cloud capex lift that Alphabet guided to last week —AI demand is skyrocketing, and so are the costs of meeting it. This is a dynamic that investors should factor in when assessing any stock in the AI sector. 

Find out the Top Enterprise AI stock we like better … 

This quarter, one enterprise AI stock reported commercial RPO that was so high, it’s nearly inconceivable. Commercial RPO represents the value of contracted commitments; so, in other words it’s revenue that has not yet been recognized but is in the pipeline to be recognized over the next few years.  

The reported Commercial RPO from this Top Stock coupled with its growth rates puts this company on track to see anywhere from $100 billion to $200 billion in AI revenue by the close of the decade — which would represent a significant milestone that only Nvidia has reached. Find out what the Top Stock is below. 

Sign up for free below to get Beth’s latest write-up on the world’s leading AI software stock.

To access more in-depth analysis and AI growth stock recommendations, join tens of thousands of investors who are already following Beth and the I/O Fund.

Microsoft FYQ4: One of the Strongest Earnings Reports in Multi-Decade History 

Recently, in the Top 15 AI Stocks analysis it was stated “If Nvidia holds the crown in the AI hardware arena, then Microsoft holds the crown in the AI enterprise arena.” Tonight, Microsoft proved why the AI Enterprise crown is rightfully theirs. 

Management came out swinging this evening on multiple fronts. First off, the acceleration in Azure and Other Services to 39% up from 35% last quarter was significantly higher than expected, with the Street calling for growth of 33.7%. To grow nearly 40% at this scale is impressive.  

Microsoft also revealed its Azure revenue number for the first time of $75 billion for FY2025 (although not entirely surprising as we were modeling for Azure to be hitting $80 billion very soon). From there, the CFO guided for 37% growth in Azure for next quarter – indicating continuing a high growth rate at scale will not be a problem in the near-term (note, H2 is expected to see lower growth than H1). 

However, if we look at Commercial RPO, it’s clear something big is going on. Last quarter, we pointed out that Commercial RPO was the one key metric we were watching, stating: “Commercial RPO growth above 30% suggests that Microsoft’s stock could (finally) resume strength again.” At the time, RPO was at $315 billion, up 34% and 33% on a constant currency (CC) basis.  

This quarter, Commercial RPO has accelerated to $368 billion, up 37% and 35% on CC basis. Microsoft’s Commercial RPO was in the mid-$100 range in 2022-2023 period to help illustrate how quickly contracted revenue has grown. Wow. We do not typically see such large growth rates on such a large RPO base. It’s almost inconceivable.  

A few years back, I described in detail why AI is first and foremost an enterprise technology, specifically calling out Microsoft’s path to $100 billion in AI revenue by 2027. We are seeing this materialize now. Microsoft is putting formidable distance between itself and best-of-breed cloud players. To illustrate, stocks like Confluent are down 27% after hours following the loss of a large customer.  

In addition to the key metrics stated above, management carries a sense of confidence  when analysts question the ROI on capex. And when Mark Zuckerburg boasted about building a gigawatt-plus cluster called Prometheus next year, Satya made sure to lead his introduction by saying “We stood up more than 2 gigawatts of new capacity over the past 12 months alone.” You’ll find more commentary on this below. 

Revenue – Azure reported as standalone segment for first time 

Revenue was up $76.4 billion for growth of 18% or 17% in constant currency. This is up from last quarter with growth of 13% or 15% in constant currency and beat consensus of $73.83 billion. For the fiscal year ending in June, the company reported revenue of $281.7 billion, up 15%.  

Azure revenue was reported as a standalone metric for the first time, being stripped out of “Azure and Other Services.” The company stated Azure saw $75 billion in revenue or growth of 34%. For comp purposes, the original segment grew 39% up from 33% / 35% on CC basis last quarter.  

Below, you can see the visible acceleration in overall revenue

Bar chart showing Microsoft’s year-over-year revenue growth from Q1 FY24 to Q4 FY25, ranging from 12.3% to 17.6%.

Below you can see that 39% is the highest growth rate we’ve seen in some time for Azure and Other Services:

Bar chart showing Microsoft Azure year-over-year growth in constant currency from Q1 FY2024 to Q1 FY2026, rising from 30% to a peak of 39% in Q4 FY2025 before easing to 37% in Q1 FY2026.

Looking forward, management guided for revenue of $75.25B at the midpoint, beating consensus of $74.15B. This would represent growth of 14.7%. 

According to the CEO, Microsoft is ahead of other hyperscalers in speed of data center buildouts: “We continue to lead the AI infrastructure wave and took share every quarter this year. We opened new DCs across 6 continents and now have over 400 data centers across 70 regions, more than any other cloud provider. There is a lot of talk in the industry about building the first gigawatt and multi-gigawatt data centers. We stood up more than 2 gigawatts of new capacity over the past 12 months alone. And we continue to scale our own data center capacity faster than any other competitor.” 

Revenue segments – Cloud has highest growth rates since 2022 

Cloud reported some of its highest growth in three years. The CEO stated: “Through software optimizations alone, we are delivering 90% more tokens for the same GPU compared to a year ago” as well as “ 

  • Microsoft Cloud was up 27% and up 25% on CC basis for revenue of $46.7B. This marks the highest quarterly growth rate since CY2022 
  • Gross margin was 70% up 100 basis points from 69% last quarter 
  • Productivity and other Businesses was $33.1 billion, up 16% and 14% on CC basis.  
  • Intelligent Cloud was up 26% and up 25% on CC basis for revenue of $29.9 billion. This was the highest growth rate since CY2022 
  • More Personal Computing was up $13.5B for growth of 9% 

Commercial Bookings Surpasses $100 Billion for the first time 

To help support the case for future growth, both commercial bookings and commercial RPO came in surprisingly strong.  

The CFO stated that for the first time commercial bookings surpassed the $100 billion mark, increasing 30% on CC basis. Commercial RPO increased to $368 billion, up 35% on CC basis with 35% recognized in revenue in the next 12 months. 

Additional key metrics: 500 trillion tokens processed last year; 800M AI Product Users 

Azure is always the main metric looked at, yet we should pause and share a few more important key metrics in this banner report. 

  • Copilot apps have surpassed 100 million monthly active users across commercial and consumer.  
  • Across broader AI features, there are over 800 million monthly active users. 
  • Foundry Agent Service is now being used by 14,000 customers to build agents.  
  • 80% of Fortune 500 use Foundry, processing 500 trillion tokens, up 7X YoY.  
  • Microsoft Fabric is a data and analytics platform for AI workloads, with revenue up 55% year-over-year and over 25,000 customers. According to management: “It's the fastest-growing database product in our history.” 
  • There are 20 million GitHub Copilot users. GitHub Copilot enterprise customers increased 75% quarter-over-quarter and 90% of the Fortune 100 use GitHub Copilot.

Margins & Earnings 

EPS of $3.65 beat consensus estimates of $3.38.  

  • Gross margin was 68.5% up from 68.1% last quarter for gross profit of $52.4B. 
  • Operating margin of 44.9% was up from 44% for operating profits of $34.3B. 
  • Net margin was 35.6% up from 34.9% last quarter for net profits of $27.2B. 

Cash flows & capex raised to eye-watering $30B per quarter  

  • Operating cash flow of $42.6B was up 15% YoY 
  • Free cash flow of $25.6B was up 10% YoY 
  • Capex of $24.2 billion was up 27% YoY with management guiding for capex of $30 billion next quarter.

Earnings Call Q&A: 

Capex Spend Correlates to $368B in RPO: 

Every Big Tech company will be asked about ROI on capex spending, and the CFO handled the question quite well, stating: “when you think about the full year comments I've made on CapEx as well as the Q1 guidance of over $30 billion, you first have to ground yourself in the fact that we have $368 billion of contracted backlog we need to deliver, not just across Azure but across the breadth of the Microsoft Cloud. 

So in terms of feeling good about the ROI and the growth rates and the correlation, I feel very good that the spend that we're making is correlated to basically contracted on the books business that we need to deliver and we need the teams to execute at their very best to get the capacity in place as quickly and effectively as they can. 

And so when you look, and we've talked about the growth rate [of capex] will decline year-over-year, but at its core, our investments, particularly in short-lived assets like servers, GPUs, CPUs, networking storage, is just really correlated to the backlog we see and the curve of demand. And I talked about, my gosh, in January and said I thought we'd be in better supply demand shape by June. And now I'm saying I hope I'm in better shape by December.”

Conclusion: 

This was an earnings report for the ages – simply because the Commercial RPO is massive, and Microsoft is proving they can grow at a scale we haven't seen yet in AI software. Earlier today, I had stated on Bloomberg that Microsoft could see $40 billion in AI revenue sometime in 2026 – which is a massive number, but what's most important is the rapid ascent in reaching that number.  

If you zoom-out, a few years back I've made the case that Microsoft could see as much as $100 billion in AI revenue by 2027 and then I upped it to $200 billion by 2028.  Should we see this ballpark figure, it would mark a rapid ascent hard to fathom a few years back. This earnings report is a step in the right direction to meet that mark.

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Vertiv Q2: Margins to Rebound by Q4, Yet Growth is Decelerating 

Posted on by io-fund

Vertiv offered a mixed report this quarter with stronger commentary about Q4 as opposed to Q3, along with a slight miss on adjusted operating margin. Considering the margins are already thin for many AI hardware stocks, any miss tends to be amplified. With that said, the stock has been on a tear off the Apri lows – up 130% since early April. Given the report was not a blowout, a cooling off may be in order regardless of the earnings numbers. 

Notably, Vertiv will not win any hypergrowth stock awards, especially as management has previously offered CAGR guidance of 15% to 17% through 2029. Rather, it’s where Vertiv is positioned as an AI infrastructure partner especially as the trend turns toward modular infrastructure that makes this a stock to watch.  

Essentially,  all roads point toward Vertiv’s power and thermal solutions becoming increasingly important for future generations of rack scale solutions. Personally, I’d like to see material evidence the current CAGR guidance through 2029 will end up 2-3X higher before we add VRT to our portfolio. This is AI, so anything is possible. I've outlined important information on how Vertiv can achieve this under the Q&A section below. 

Specifically for this earnings report, the following are a few key items: 

  • Vertiv reported a large beat this quarter with 35% revenue growth in Q2 due to the America geo reporting very strong YoY growth while EMEA lagged. 
  • Vertiv missed on adjusted operating margin, largely due to impact of tariffs and operational inefficiencies. The company lowered their adjusted operating margin for the year despite QoQ adjusted operating margin increases through Q4. 
  • However, if management meets their margin guidance for Q4, it will represent the strongest margins since the company has been on the public markets with adjusted operating margin of 23.6%  
  • EPS growth surpassed top line growth at 42% 
  • Modular AI infrastructure remains Vertiv’s top catalyst and makes this stock one to watch 

We’ve covered Vertiv in the past here “AI Data Center Direct Liquid Cooling Stock” and “Vertiv Q1: Inflection Point Muted, AI Factories Catalyst for 2026” 

Revenue Rises 35% in Q2, FY25 Hiked to $10B 

Vertiv reported 35.4% YoY growth in revenue in Q2 to $2.64 billion, with organic growth of 34% on continued strength in the Americas and APAC, noting that demand remains strong with its order pipeline expanding in all regions. 

Supported by these demand signals and favorable pricing, Vertiv hiked its full year revenue guidance to $9.925 to $10.075 billion ($10 billion at midpoint), up $550 million from its prior view for $9.325 to $9.575 billion. This points to YoY growth of 24.8% YoY, more than 7 points higher than its prior guidance. Organic growth was raised to 23% to 25%, up 6 points from its prior guidance at midpoint. 

Despite the FY25 raise, Vertiv is still guiding for a rather swift topline deceleration through Q4. 

  • Q3 revenue was guided between $2.51 to $2.59 billion, or 23% YoY growth at the $2.55 billion midpoint. Organic growth was guided to be 20% to 24%. This sequential decline goes against typical seasonality for VRT. 
  • Q4 revenue was guided at $2.735 to $2.815 billion, or 18.3% YoY at the $2.775 billion midpoint. Organic growth was guided at 16% at midpoint. This would represent a ~17 point deceleration in growth in the second half of the year. 

If we zoom out, then Q2 represents the largest beat Vertiv has seen in recent years. As we look forward, the guide for Q4 represents a $200M increase between Q3-Q4. 

Source: Seeking AlphaSeeking Alpha 

America Region Reports Strong Growth of 43% 

As noted previously, the Americas and APAC drove Q2’s outperformance, with Americas growth accelerating more than 14 points sequentially. This is the strongest growth in the Americas region we’ve recorded since covering the stock for 2.5 years.  

  • Americas revenue increased 42.9% YoY and 43.2% organic to $1.60 billion. Growth was driven by hyperscale and colocation markets with strength in switchgear, busway, liquid cooling, and infrastructure solutions. 
  • APAC revenue accelerated slightly to 36.9% YoY and 36.8% organic to $560.2 million. Growth was primarily driven by hyperscale and colocation markets in China. 
  • EMEA revenue accelerated back into the double digit range after a soft Q1, up 12.5% YoY and 7% organic to $475.6 million. Vertiv said its EMEA pipeline remains strong with continued sequential growth. 

For Q3: 

  • Americas growth is expected to be in the mid-30% range. 
  • APAC growth is expected to be in the low 20% range. 
  • EMEA growth is expected to be down high single digits. 

Backlog, Orders Growth Slows 

Though Vertiv’s backlog increased to $8.5 billion, growth is decelerating, now at 21% YoY versus 25% in Q1 and 30% in Q4. This is also the slowest growth for Vertiv’s backlog since Q4 2023.  

TTM organic orders growth also decelerated more than 9 points sequentially, from 20% in Q1 to 11% in Q2.  

Margins to Expand Through Q4, Yet FY25 Operating Margin Lowered Slightly 

Margins expanded sequentially in Q2, with net margin moving into the double-digit range. Vertiv forecast Q3 and Q4 adjusted operating margin to expand sequentially, yet lowered its full-year guidance to account for tariff countermeasures and other factors. 

Vertiv expects to be back to normal on adjusted operating margin by Q4, stating they will expect to see a margin of 23%+: 

“Full year adjusted operating margin is projected to be approximately 20% at the midpoint, 60 basis points higher than last year despite tariff headwinds, and 50 basis points lower than prior guidance. We continue to drive margin improvement, including positive price/ cost and productivity. And implied in our guidance is fourth quarter adjusted operating margin in excess of 23%, once again, keeping us on track to attain our long-term target by 2029.” 

  • Gross margin was 34%, down 4 points YoY but up 0.3 points QoQ. 
  • GAAP operating margin was 16.8%, down 0.4 points YoY but up 2.5 points QoQ. 
  • Adjusted operating margin was 18.5%, down 1.1 points YoY but up 2 points QoQ. Vertiv said the YoY decline stemmed from accelerated R&D investments, high supply chain and manufacturing transition costs stemming from tariff mitigation efforts, and operational inefficiencies from stronger than anticipated growth. Vertiv said it expects these factors to resolve by year-end. 
  • GAAP net margin was 12.3%, up 3.2 points YoY and 4.2 points QoQ. Adjusted net margin was 14.1%, up 0.9 points YoY and 1.8 points QoQ. 

For Q3 to see slight margin inflection from disappointing Q2 margins: 

  • GAAP operating margin was guided to be 18.2% at midpoint, up 0.3 points YoY and 1.4 points QoQ. 
  • Adjusted operating margin was guided to be 19.75% to 20.25%, or approximately flat YoY and up 1.5 points QoQ at the 20% midpoint. Vertiv said the QoQ improvement will stem from moderating operational inefficiencies. 
  • GAAP net margin was guided to be 13.1%, up 4.6 points YoY and 0.8 points QoQ. Adjusted net margin was guided to be 14.9% at midpoint, up less than 1 point YoY and QoQ. 

Q4 to see a return to higher margins: 

  • GAAP operating margin was guided to be 22%, up 2.5 points YoY and 3.8 points QoQ.  
  • Adjusted operating margin was guided to be 23.6% at midpoint, up 3 points YoY and 3.6 points QoQ. 
  • GAAP net margin was guided to be 15.8% at midpoint, up 9.5 points YoY and 2.5 points QoQ. Adjusted net margin was guided to be 17.4%, up 1 point YoY and 2.5 points QoQ. 

Should Q4 margin guidance materialize … 

It’s important to note that if the Q4 margin guidance materializes, then Vertiv will be reporting the best margins since going public in 2020. This is visible in the adjusted operating margin chart listed above. 

The proverbial “seeing the forest through the trees” is that Q2 was weaker than expected yet Vertiv’s management is guiding quite strong as we exit the year. 

FY25 Margins to see impact from tariffs and operational inefficiencies: 

  • GAAP operating margin was guided to be 18.1% at midpoint, up 1 point YoY.  
  • Adjusted operating margin was lowered slightly to 19.7% to 20.3%, or 20% at midpoint, down half a point from its Q1 guidance for 19.75%-21.25%, or 20.5% at midpoint. This reflects the operational inefficiencies from tariff mitigation, accelerated R&D investments and capacity expansion efforts. 
  • GAAP net margin was guided to be 12.6%, up 6.4 points YoY. Adjusted net margin was 14.8%, up 1 point YoY. 

EPS growth exceeded revenue growth at 42% 

While adjusted EPS growth was rather robust in Q2, growth is expected to the mid 20% level by Q4, mirroring revenue growth. 

  • Q2 adjusted EPS of $0.95 beat estimates for $0.84, increasing 41.8% YoY. GAAP EPS of $0.83 beat estimates for $0.71. 
  • Q3 adjusted EPS was guided at $0.94 to $1.00, or up 28% YoY at the $0.97 midpoint. This was marginally ahead of estimates for $0.96. 
  • Q4 adjusted EPS was guided at $1.23 at midpoint, up 24.2% YoY and ahead of estimates for $1.14. 

For FY25, Vertiv boosted its adjusted EPS outlook from $3.55 to $3.80 at midpoint, pointing to YoY growth of 33%. Heading into Q2’s report, FY26 growth was projected at 23%, though this may be revised higher given the improvement in net margin through year-end.   

Cash Flows and Balance Sheet 

Cash flow margins dipped slightly sequentially, and remain lower than last year. However, Vertiv also boosted its FY25 adjusted free cash flow guidance by $100 million this quarter. 

The company offered the following commentary regarding cash flows being lumpy but directionally positive: 

“And finally, on this page, adjusted free cash flow was down $60 million from last year's second quarter, primarily due to favorable trade working capital timing last year. But year-to-date adjusted free cash flow is up 24%. And as you will see in a few slides, we are raising our full year guidance by $100 million to $1.4 billion. In short, you can likely check the box on free cash flow.” 

  • Operating cash flow was $322.9 million in Q2 for a 12.2% margin, down more than 7 points YoY and nearly 3 points QoQ. 
  • Adjusted free cash flow was $277 million in Q2 for a 10.5% margin, down more than 6.5 points YoY and 2.5 points QoQ. For FY25, Vertiv guided for $1.375 to $1.40 billion in adjusted FCF, up from its prior view for $1.25 to $1.35 billion. This implies that Vertiv is expecting ~$859 million in adjusted FCF in 2H to reach the midpoint of its guide. 
  • Cash and equivalents rose to $1.74 billion, while debt remained steady at $2.9 billion. Net leverage was 0.6x in Q2, versus 0.8x in Q1. 

Earnings Q&A: 

Weak Q2 margins set to significantly rebound by Q4 

Vertiv’s margins fall into the “fair” category when compared with other AI hardware peers. Across the sector, we see a wide spectrum — Nvidia and Broadcom deliver “excellent” margins, while Dell and Supermicro are at the “weak” end. Vertiv consistently sits in the middle: not low enough to be concerning, but not high enough to command a premium valuation.  

For AI hardware investors, it’s important to recognize that earnings reactions are often driven more by margins than by top-line growth—a sharp contrast to hypergrowth and software stocks, where revenue acceleration tends to be the primary catalyst. 

Starting in 2023, Vertiv began a period of critical margin expansion, as the company had a negative GAAP operating margin in 2022 prior to the AI boom. The GAAP operating margin was 17% in the last quarter, up from 14.5% last quarter – yet the margins were flat from the year ago quarter and down from 19.5% in Q4. 

The CEO offered more color regarding margins, stating the executional challenges were primarily in the EMEA region: “The temporary costs of the supply chain and manufacturing transition to tariff-optimized footprint are higher than we initially estimated. We're also experiencing some temporary costs to deliver a steeper growth than expected and some executional challenges in EMEA. We expect all these factors will significantly moderate during the year, and we believe they will be materially resolved by year-end.” 

He also concluded the call stating: “We are vigorously addressing the temporary margin challenges. This has my and my team's full attention. I'm confident we will see constant improvement.” 

Quite a few analysts asked about margins during the Q&A, showing how nervous analysts can get about this line item even when management guides for healthy margins by year-end. Of the many questions on margins, the following Q&A exchange stood out as it discusses why management has confidence margins can expand into H2.  

Nicole Sheree DeBlase, Deutsche Bank  

I just had a question on margin. So the guidance implies like a 10 basis points year-on-year decline in margins in the third quarter, and then a pretty big step-up to like over 200 basis points of expansion in the fourth quarter. So probably a question for David. But can we kind of walk through some of the puts and takes that give you guys confidence in that step-up?  

David J. Fallon, CFO: 

Yes. I think it's 2 things, Nicole. Number one is the benefit of operational leverage. And you can get our exact Q4 numbers in the appendix, but there's over $200 million increase in sales expected in Q4 versus Q3. So that definitely provides the benefits of operational leverage.  

And the other bucket is simply addressing the operational inefficiencies and execution challenges that we've seen in Q2 into Q3. Once again, we believe all of these should be resolved in Q4. So it may be oversimplifying things, but I think those are the 2 buckets that drive the improvement from Q3 to Q4.” 

New Reporting Metric Starting in Q4 

Vertiv will no longer report on quarterly orders and backlog information, and instead will report a new metric “projected full year orders.” 

The following was stated on the call: “Beginning on our Q4 and full year 2025 earnings call, we will provide projected full year orders rather than quarterly orders and backlog information. We believe this better aligns with how we run our business. We will provide updates on the full year projections quarterly as we progress through the year and as we deem necessary.” 

This could create a boost to Vertiv’s stock to remove the lumpiness from quarterly reports and to also be more forward looking in terms of visibility offered to investors. 

AWS announcement sent shares tumbling in early July 

Recently, an announcement that AWS is pursuing their own thermal management solutions caused weak price actionin the stock.  

Management used the words “co-engineering” when asked about the announcement, implying they stand to profit regardless of how each hyperscaler uniquely approaches cooling solutions. 

“So I don't think there should be any scare. This is not an anomaly in the way the market works. And we are here to scale with our hyperscale customers. We are here to co-engineer with them.” 

Great Lakes Acquisition  

Vertiv’s is acquiring Great Lakes Data Racks & Cabinetsfor $200 million for its portfolio of high-end rack solutions, including custom racks, integrated cabinets, heavy-duty designs, and advanced cable-management systems. The acquisition will help Vertiv to deliver AI-ready solutions to hyperscalers and neoclouds. According to Vertiv, they are paying 11.5X projected 2026 EBITDA.  

Perhaps most importantly, the deal will be able to increase Vertiv’s capacity quite quickly: 

“With manufacturing and assembly facilities in the U.S. and Europe, we anticipate Great Lakes will enhance our ability to serve customers with speed and scale.” 

The deal is expected to close in Q3. Vertiv has $1.7B in cash on its balance sheet and $2.9B in debt. 

DCD Modular AI Infrastructure 

In a previous analysis we pointed toward AI factories as a catalyst for Vertiv: 

“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.” 

DCD stands for data center dynamics and refers to modular infrastructure that is desirable for its rapid and efficient data center buildouts. The pre-engineered and factory-built modules offer power, cooling and IT equipment that can be deployed much faster than traditional data centers. 

In this earnings report, the CEO discussed DCD modular AI infrastructure, stating: “That is certainly a trend that we see. We know that the industry needs speed, and speed in construction is paramount, full success for our customers. But also, as I said several times, this is a construction industry. And if you have to build very, very complex systems like data centers, on site, at speed, then there certainly are challenges, shortages, manpower, skilled labor shortages, and surely things can be done better in a prefabrication setup and mode.” 

For AI, where compute density and thermal loads are significantly higher, modular solutions are particularly ideal as they offer optimized power distribution, advanced liquid cooling integration, and scalable “white space” that can be expanded in phases without disrupting existing operations.  

Ultimately, this reduces deployment from years to months and positions Vertiv as a choice partner for the physical layer (power and cooling) for those that specialize in the logic layer (compute and networking). 

Conclusion: 

Given the margin improvement expected in Q4, Vertiv will likely see a second wind come H2 – especially if the top line holds a surprise or two as it did this past quarter with an 11% top line beat.  

Modular AI infrastructure continues to be a primary catalyst for Vertiv, and a viable path for the company to exceed the stated CAGR of 15% to 17% through 2029 (and potentially make its way into the I/O Fund’s portfolio).

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.

Recommended Reading:

Is Bitcoin’s Bull Run Nearing a Top? What the Herd Missed at $16,000 and is Missing Now 

Posted on by io-fund

In late 2022, Bitcoin dropped into the $16,000 range in the wake of the FTX scandal. At the time, the landscape was void of credible institutional buy calls. Instead, most of Wall Street stood on the sidelines or echoed consensus risk-off narratives.  

Now, as Bitcoin trades more than 600% above its 2022 bottom, a tidal wave of institutional optimism has arrived with many analysts and money managers calling for a doubling in price before year-end. These predictions, while headline-grabbing, arrived only after Bitcoin had already made the bulk of its move in late 2024. 

Sentiment is a powerful force in the markets. Historically, the most optimistic bullish narratives tend to emerge when prices are extended, while more cautious narratives often appear near market lows. 

Meanwhile, the I/O Fund has consistently set ourselves apart with early, accurate Bitcoin coverage starting in 2019. While others chased the 2021 hype with $200,000 or $500,000 price targets, we took a disciplined approach—cutting crypto exposure by half to lock in gains. More recently, when Bitcoin dropped to the $16,000 region, we issued a Strong Buy Alert to our free subscribers, which was featured on Tier 1 media.  

These calls were rooted in a systematic approach to analyzing and investing in Bitcoin through the lens of technical analysis, on-chain analysis, and monitoring global liquidity trends. 

Now, the system that helped us identify the $16,000 bottom in Bitcoin is telling a more complex story. Global liquidity appears to be stalling and setting up for a reversal. This is historically not good for Bitcoin and tends to coincide with major tops. This inflection point lines up with our Technical Analysis that has us in the final leg of the multi-year bull market.  

However, the size of this final leg is what is in question. While we believe a modest move higher has the most probable scenario, On-Chain Analysis supports a large push higher that could exceed the $200,000 region before hitting a cyclical top. For this reason, we explain our game plan in this report to protect our well-earned gains while remaining positioned for the bulk of the next move higher, no matter where the final target is. 

On-Chain Analysis – The Case for Bitcoin $200,000 

We’ve consistently relied on WealthUmbrella’s top-tier On-Chain Analysis throughout this cycle. Their model flashed a buy alert in December 2022, around the same time our own system showed a major opportunity in Bitcoin. Since then, they’ve remained as bullish as we have been. The below section was contributed by WealthUmbrella, and they see higher levels before a cyclical top is likely in for Bitcoin.  

Volatility Is Low 

One of the most meaningful signals today is realized volatility, which simply measures how much Bitcoin’s price has actually moved (up or down) over a recent period. Right now, that volatility is close to a historic low.

Chart created by WealthUmbrella showing that current realized volatility levels resemble market lows rather than major tops.

Chart created by WealthUmbrella, shows that the current level of realized volatility resembles major lows, not what we see around major tops. 

Historically, major tops in Bitcoin—both short-term and long-term—have happened when volatility was rising or already high. So, this current period of low volatility is not something we usually see at the end of a bull run. In fact, it looks more like what we saw at the bottom in late 2022, just before Bitcoin began its massive recovery.

As Bitcoin becomes more mature—especially now that large institutions are involved—some decline in volatility is to be expected. But a full market top forming while volatility is still at record lows would be something unprecedented. 

The Supply Side Remains Strong 

There’s also strength under the surface. During the recent rally, long-term Bitcoin holders (those who held through prior cycles) were gradually selling. But that selling pressure has cooled off. 

Chart by WealthUmbrella showing strong Bitcoin demand in August 2025.

Chart created by WealthUmbrella shows the demand for Bitcoin remains healthy in August of 2025. 

Meanwhile, new Bitcoin wallets with a balance of zero – i.e., new investors to Bitcoin —are increasing. This means retail demand is growing steadily. That trend has actually picked up pace in recent weeks, which is a healthy sign. 

The Dip Could Be Setting the Stage for the Next Move Up 

This doesn’t mean Bitcoin won’t dip a bit lower short term. Its recent price action has been closely tied to movements in the stock market, especially because ETF inflows are driving a lot of the demand. The good news is that this small pullback has already helped cool off some of the overbought conditions that had built up, which should set the stage for another leg higher.  

One of our key models, the Metcalfe Law Discount/Premium (MLDP) Z-Score, confirms this. This model is based on the idea that Bitcoin’s value comes from the size and activity of its network (similar to how Metcalfe’s Law values a communications network). The Z-Score shows how “hot” or “cold” the market is relative to its historical patterns. 

Chart by WealthUmbrella showing the Metcalfe Law Discount/Premium (MLDP) Z-Score with significant room to rise before reaching levels linked to major market tops.

Chart created by WealthUmbrella shows the Metcalfe Law Discount/Premium (MLDP) Z-Score has ample room to run before hitting a level associated with a meaningful top. 

Right now, the Z-Score is down to 0.91. For context, that’s one standard deviation lower than where it was when Bitcoin first crossed $112.9K on July 10. That kind of cooling historically creates room for further upside. 

However, our indicators suggest that the next push higher will not be the last or will be a rather large push higher. Our confidence is grounded in a group of in-house models we call Market Top indicators. These models are designed to signal when the market is getting truly euphoric—and they’ve done a good job across different Bitcoin cycles. 

Chart by WealthUmbrella showing three primary top indicators for Bitcoin’s ecosystem, all indicating that Bitcoin is not currently at risk of a market top.

Chart created by WealthUmbrella shows that their 3 primary top indicators, which track different elements of Bitcoin’s ecosystem, are in alignment that Bitcoin is not in threat of topping out, yet. 

What’s imperative to understand is that these models each look at different parts of the ecosystem—network activity, profit-taking behavior, capital flows. So the chance that all of them would miss the mark at the same time is very low. And if that ever did happen, it would likely mean Bitcoin’s fundamentals have changed in a way that’s never happened before. 

To further back this claim, we have run intensive simulations to estimate where Bitcoin’s cyclical top could land. That means: what price would Bitcoin need to reach for all our major models to flash “this is the top”? Using various models, tell us what price would trigger them to signal a top. 

The result of this simulation including price targets for a Bitcoin cycle top are discussed in the last section of this report…. 

How Global Liquidity May Derail the Move to $200,000 

Liquidity is one of the most overused—and least understood—terms in financial markets. It refers to the availability of capital in the system—specifically, how easily businesses, consumers, and financial institutions can access cash or credit. 

In today's global economy, liquidity is inseparable from debt dynamics. It is not the creation of new debt that dominates capital flows, but the ability to roll over existing obligations. In fact, three out of every four global financial transactions are related to debt refinancing, not expansion. Moreover, nearly 80% of global lending now requires collateral, typically in the form of high-quality, low-volatility assets like U.S. Treasuries. 

This creates a framework where liquidity—and by extension, risk appetite—is dictated by how cheaply and easily borrowers can refinance without overcollateralizing. The more capital that’s freed up through this process, the more capital can rotate into risk-on assets such as Bitcoin. 

A number of variables influence liquidity conditions: 

  • Central bank policy 
  • Fiscal spending 
  • The Treasury General Account (TGA) 
  • Federal Reserve repo operations 
  • Broad equity market performance 
  • Bond market volatility 

Collectively, these forces determine whether capital and confidence flow into the system or are pulled out. However, among all these variables, the most powerful and persistent driver of global liquidity is the U.S. Dollar. 

Roughly 64% of global debt is denominated in USD—which means foreign borrowers who accessed cheap U.S. capital must continue sourcing dollars to service that debt. When the dollar weakens relative to their local currencies, less local currency is needed to meet dollar obligations. This frees up capital that can chase higher-yielding risk assets, including Bitcoin. 

This inverse relationship between the U.S. Dollar Index (DXY) and Bitcoin has been both consistent and predictive across cycles: 

Chart showing how Bitcoin market tops historically coincide with periods of U.S. dollar weakness.

Bitcoin tops have an inverse relationship to the strength of the U.S. Dollar.   

In the above chart, three dynamics are evident: 

  • Every major Bitcoin bull market occurred during a declining dollar. 
  • Every significant Bitcoin bear market coincided with a rising dollar. 
  • The steepness of the dollar’s trend often defines the magnitude of Bitcoin’s move in the opposite direction. 

We are now approaching a critical inflection point. The Dollar Index has been in a clear downtrend since peaking in late September 2022—just weeks before Bitcoin bottomed. The most recent leg of this decline in the dollar shows a completed five-wave structure, typically the final phase of a correction before a reversal. Momentum is starting to shift upward, and a sustained move above 101 on the DXY would confirm a major low and the onset of a new dollar uptrend.

Chart showing the U.S. Dollar Index (DXY) forming a potential bottom in August 2025, suggesting possible headwinds for Bitcoin and other risk assets due to reduced global liquidity.

As of August 2025, the U.S. Dollar Index (DXY) appears to be forming a significant bottom and initiating a new uptrend. A strengthening dollar typically signals a contraction in global liquidity, which could pose headwinds for the ongoing Bitcoin bull market and other risk assets. 

The implications are profound. A rising dollar increases the cost of servicing USD-denominated debt for foreign borrowers, draining liquidity from the system and reducing available capital for speculative assets like Bitcoin. In other words, a stronger dollar means tighter global liquidity, and risk assets must adjust accordingly. 

However, until DXY can break above $101, it can still make another low, which will further support higher prices in Bitcoin. The takeaway here is to note that the U.S. dollar is closer to a major low than most think. While it can extend further, once we get evidence of a trend reversal, this should line up with a topping process in Bitcoin. Until then, we can and should see Bitcoin continue on an upward trajectory

Using Technical Analysis to Organize the Current Risk in Bitcoin 

On-Chain Analysis supports an eventual move to ~$200,000 in Bitcoin before seeing a cyclical top. However, we are seeing the U.S. Dollar close to putting in a major low and threatening to drain global liquidity in the coming uptrend.  

When we see potentially conflicting data points between liquidity dynamics and On-Chain Analysis, we tend to lean into Technical Analysis to define the risk parameters in our portfolio. The below section outlines the two most likely paths Bitcoin will take, including the game plan we intend to follow to protect our gains and not miss any of the remaining uptrend….

Is Bitcoin a Buy Right Now? Join Us for a Free 1-Hour Webinar on Bitcoin from a leading team in crypto 

Risk managing Bitcoin and other cryptocurrencies has helped the I/O Fund to become a high performing tech portfolio. If we were a hedge fund, we’d rank #2. If we were an ETF, we’d rank #5.tech portfolio. If we were a hedge fund, we’d rank #2. If we were an ETF, we’d rank #5. 

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  • The webinar will be recorded and sent to all participants 

Bitcoin is tracing a textbook five-wave advance from its 2022 lows, and by our count, we are now in—or very near—the completion of the final 5th wave. 

In Elliott Wave Theory: 

  • Markets move in 5 waves, where waves 1,3,5 are in the predominant direction of the trend, while waves 2 and 4 are corrections within that trend. 
  • Wave 3 is the most explosive segment—driven by panic short-covering, breakout buying, and peak momentum/volume. 
  • Wave 5 is often deceptive. It represents late-cycle optimism, where retail investors and lagging institutions enter, believing the trend is just beginning. It tends to produce a higher high on lower momentum and lower volume. 

This current pattern is unfolding exactly as expected. The vertical move in late 2024 was the Wave 3 breakout, marked by peak RSI, momentum, and volume. Every move higher since has shown diminishing participation, with weekly RSI repeatedly stalling around the key 72 level—a threshold that historically coincides with local tops. 

3-day Bitcoin chart indicating the final fifth wave of the bull cycle, with potential for one more upswing before transitioning to a bear market.

A 3-day chart shows Bitcoin is in the final 5th wave of its bull cycle. Either we have one more minor swing, or one more larger swing before starting a new bear cycle. 

Based on momentum and volume dynamics, and in alignment with our structural wave count since early 2023, we are closely tracking two primary outcomes: 

  • Red – Bitcoin makes one final push toward ~$128,000 – $149,000. Price remains capped below the key $149,000 level. This triggers a breakdown through successive support zones: $109,000 – $104,500, $92,900 – $86,750. This confirms the end of the larger 5th wave, initiating a multi-month corrective phase with downside targets ranging between $70,000 and $40,000. 
  • Green – Bitcoin finds support between, preferably, $109,000 – $104,500. However, it can still test the $92,900 – $86,750 region and still be valid. A renewed leg higher breaks the $149,000 region with accelerating volume and momentum. This opens the door to extended Wave 5 targets between $200,000 and $225,000, and best line up with the Wealth Umbrella scenario. 
Daily Bitcoin chart highlighting potential final swings in the bull cycle, with $133,000 marked as a strong resistance level.

A daily chart showing the potential final swings in Bitcoin’s bull cycle. The $133,000 region will be a strong barrier to overcome.  

Interestingly, when we circle back to WealthUmbrella’s simulation, the results of their price projections for this cycle best lines up with the scenarios presented above.

Chart showing the Bitcoin price thresholds that would activate peak signals across three major top indicators.

According to WealthUmbrella, their conclusion is that the average cycle top is now clustering around $214,000, the average cycle top is now clustering around $214,000, with tight variation across all three models. Furthermore, The MLDP Z-Score model would hit next time its typical “euphoria” zone (3 standard deviations) around $144,000–$165,000, which is significantly below our estimated cycle top. This reinforces our view that the MLDP remains the best short-term reference model for now. 

In conclusion, while global liquidity appears to be approaching an inflection point, both Technical Analysis and On-Chain Analysis support another push higher, which would target ~$140,000. This is where Technical Analysis departs slightly from On-Chain Analysis. While we see a path to $200,000, as outlined in our green count, we will take some gains on the next push, then wait to see how price reacts in this region to determine if we cut more, or add it back for the push to $200,000. 

Without a systematic game plan based in correlated analysis, sentiment coupled with convincing narratives are designed to force investors to do the wrong thing at the wrong time. We’ve seen this time and time again when classic financial analysts attempt to justify higher targets around major tops.  

Chart illustrating how narrative-based investing in Bitcoin has historically led to poor outcomes.

Historically, narratives-based investing in Bitcoin has been a problem.  

Using the system outlined in this report, the I/O Fund has been able to navigate the extreme swings in Bitcoin with uncanny accuracy. While liquidity is flashing yellow, on-chain analysis is flashing green, providing a complex picture. Regardless, both inputs line up with us being in the final 5th wave of a multi-year bull cycle, which are accounted for in our Elliott Wave counts.   

Considering the risk, we plan to trade the remainder of this 5th wave – take gains in the next run higher, wait for confirmation on the following drop or bigger breakout to get back in, or the break-down of critical support to sell the other half. 

Free 1-Hour Webinar on Bitcoin!

If you are sitting on outsized crypto gains and have no exit plan or wanting to participate in the next run higher in crypto, we encourage you to join a special webinar next Thursday, 8/21 at 4:30 EST, with the I/O Fund’s lead technical analyst, Knox Ridley, and WealthUmbrella founder, Vincent Duchaine. Together, they’ll dive deep into the internal health of both crypto and equity markets, reveal what smart money is doing, and lay out a tactical roadmap for what comes next. Whether you're trying to lock in gains or position for the next breakout, this session will give you a major edge.

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Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own BTC at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

AppLovin Q2: Operating Margin doubles; H2 commentary is strong 

Posted on by io-fund

Applovin reported revenue of $1.26 billion compared to consensus of $1.28 billion according to some sources yet others reflect the consensus we had of $1.22 billion, thereby it’s debatable if the top line beat. Our notes show App beat, although narrowly.  

Management had guided last quarter for revenue of $1.195B to $1.215B, representing YoY growth of 69.5% at the midpoint. By this standard, as well, Applovin beat with growth of 77%.  

On the bottom line, the company had a large beat with EPS of $2.39 compared to $1.99 EPS expected, representing growth of 169%. This was a 45 point beat on growth rate for the bottom line. Adjusted EBITDA doubled to $1.02 billion, up from $943 million last quarter. This represents an adjusted EBITDA margin of 81%.  

As management alluded to on the earnings call, the company “prints cash” with a 61.3% operating cash flow margin and a 61% free cash flow margin.  

The Q&A was primarily focused on when Applovin plans to launch its self-serve ad platform, as this should create a boost for growth. Management was encouraging saying “as soon as possible” yet the tone on the earnings call was particularly optimistic about Q4 being a bigger quarter for the company. Details on why management had the confidence to call out Q4 specifically are noted below. 

Revenue  

Regardless of a nominal decimal point that caused a beat (or miss), the quants may have quickly sold the report after hours from mistakenly pricing Applovin for a deceleration from the March quarter to the June quarter.  

  • Overall revenue last quarter was $1.48B versus this quarter at $1.26B. As we covered in the past, this is due to Applovin divesting its mobile gaming “Apps” business, with the sale completed on June 30th. Therefore, if you adjust for this sale, revenue for the ads business in Q1 was $1.15B for QoQ growth of 8.7%. 
  • The current quarter marks an acceleration from 71% YoY growth yet QoQ growth is slowing.  
  • For next quarter, Applovin expects to see $1.33 billion in revenue, slightly above estimates for $1.31 billion. This represents 59% YoY growth and QoQ growth of 5.5%.  

As stated, Applovin divested its Apps business, which was weighing on both growth and margins. For example, Applovin had been reporting low growth in this segment of (13%) growth in the March quarter leading up to the sale.  

Margins and EPS: Operating margin doubled to 76% … what?! 

Applovin’s revenue growth is only part of the story, whereas the bottom line is what sets Applovin apart. I can count on one hand (or maybe even one finger) the number of tech companies that have reported a 76% GAAP operating margin.  

It may be common for tech companies to be in hypergrowth stage at times, yet very few ever reach the quality margins that App is reporting quite early in its company history.  

The bottom line presented below is a thing of beauty. The margins have clearly benefited from divesting the Apps business, which had been weighing on the margins.  

  • Gross margin of 88% compares to last quarter at 81.7% and the year ago quarter at 73.85.  
  • Operating margin of 76% expanded from 44.7% last quarter and more than doubled from the year ago quarter at 36.2%. Wow!! 
  • Net margin of 65% expanded from 38.8% last quarter and doubled from 28.7% in the year ago quarter. Wow!! 

Earnings per share of $2.39 beat estimates for EPS of $1.99, representing growth of 169%. This was a large beat as growth was expected to be 123.5% on the bottom line.  

Cash Flow Margin of 61% 

In yet another impressive bottom-line number, Applovin reported a 61% free cash flow margin for free cash flow of $768 million. The company has been strong on cash for sometime, yet this still represents a 540 bps expansion QoQ and 20-point expansion YoY.  

The operating cash flow margin of 61.3% is up from 56% last quarter for operating cash of $772M. The company has $1.2 billion in cash on the balance sheet including $425M from the sale of the Apps business. The company has $3.7B in debt.  

Applovin does share buybacks with 900,000 shares repurchased in the last quarter for a total of $341 million funded through free cash flow. This lowered share count form 346M to 342M last quarter.  

Earnings Q&A: 

Self-Serve platform set to launch October 1st 

Management has repeatedly stated that gaming alone can sustain growth of 20% to 30% YoY. Therefore, the catalyst for the next few years is securing additional supply, such as e-commerce, as well as opening up the AXON ad platform to more advertisers.  

The AXON ads manager recently became self-service, which means it can scale at levels not previously seen by offering self-service interface for Applovin’s 1 billion reach. As of now, Applovin is limited in the number of advertisers it can manually on board. According to the opening remarks: “With the rollout going smoothly, we are ready to widen access. On October 1, 2025, we plan to open the AXON ads manager on a referral basis, perfectly timed for the holiday season. Feedback from these partners will guide our global public launch in the first half of 2026. To date, web advertising campaigns have been limited to the United States. On October 1, we plan to open our platform to most major international markets.” 

When it comes to e-commerce, Applovin explained they limited the number of advertisers initially in order to make sure the tools were working properly, and they are now satisfied with the results and ready to launch self-serve on an invite basis to start. 

Per the Q&A: 

“And then the last point to remember is another one of my prepared remarks highlighted the fact that we have constrained the advertisers we even have live today by not allowing them to buy our audience that's international. The vast majority of our user audience is outside the U.S. We will be releasing almost all markets once we go into this October 1 release.” 

Looking longer-term, by matching categories such as e-commerce with a self-serve platform, Applovin discussed a flywheel effect: “So in terms of opportunity for us, not only does opening up the platform get us more demand, which is going to be massively accretive and incremental to our business. It gets us more data. And so every single quarter, you're going to have that flywheel effect that, that then paired with our engineers' ability to take added data and improve the technology and its interpretation of that data creates a real strong foundation for growth for a long time to come.” 

Commentary that Q4 will be strong: 

During the Q&A, there were a few mentions that Q4 should be strong along with mention of upside to the numbers come 2026.  

I want to make money in 2026 about as much as I want to make money in 2025, so this kind of discussion is my favorite moment during an earnings call (…and is the reason I take the time to listen to these calls and not run the transcript through Chat-GPT, like many, many research sites do these days!)  

Here’s one example: 

“We expect that will increase the advertiser count quite quickly and also allow us to go through live examples of advertisers coming in self-service all the way to scale on our product. Assuming all that goes well, then we talked about opening up the platform entirely to the world in first half of next year. We think as advertiser count grows on our business, especially in categories outside of gaming, you're going to see a lot of upside in the numbers that we're able to report.” 

Here was a more specific mention to Q4: 

“As we go into Q4, that's a huge holiday shopping season. So not only are you going to see the cohort that we have live spend a lot more. You're also going to have new onboarding happening for the first time in our history at a rate that's much higher than we will have ever seen before. So we fully expect that e-commerce will see a pretty substantial ramp-up through that, what you can call a soft launch period and then, obviously, as we go into a broader global release, the impact from that.” 

It was repeated again with more details around the compounding effect of onboarding the many new advertisers for existing gaming inventory and also new categories: 

“Now it's not necessarily true that we're going to take our queue that's built over the last year and just say, everyone you're in. They're still going to have to get invited to get into the platform. So it will be still curated onboarding. The reality is like Q4 is going to end up being a fun quarter. You've got the advertiser cohort that we didn't have last Q4 that was growing in the quarter to the point where we reported huge numbers and then had huge numbers in Q1. But we're going to have those advertisers primed and ready to go for the full Q4. We're going to have advertisers inviting their friends onto our platform in Q4, and we're going to be opening up international all at the same time. 

So there's going to be a lot of fun moment — moments for us and our customers in this e-commerce or web-based category that will set sort of a new baseline for that business. And then obviously, then we will go through hopefully another inflection when we really truly open up the platform and try to get into a state where we're more stable long term.” 

Quick Note on 2026-2027: 

Although further out, there was talk that lower fees on the App Store should become a tailwind for Applovin 4-8 quarters out: “So no impact yet. And I would guess it will probably take 2 to 4 quarters from some impact. And by 4 to 8 quarters, you're going to get pretty material impact in pricing on our platform.” 

Conclusion: 

I’ve never been one that needs the market to agree with me, and I am afraid on this one the market and I will have to agree to disagree as the price is down after hours. This was a stellar report with all fundamental boxes ticked, a team that has proven to execute, and incoming catalysts that are quite well-timed to where the market is selling the stock while we maybe have two quarters (or less) to wait for an inflection. 

Of course, this requires some speculation as consensus will not reflect management commentary until there are material results. But after all, that’s where the real money is made. Let's hope the formula of "believe what you see" works for us again as the growth, historic margins and the ability to print cash all point toward a solid stock while management hints they have more in store for shareholders around year-end.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in APP at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

AppLovin Q2: Operating Margin doubles; H2 commentary is strong 

Posted on by io-fund

Applovin reported revenue of $1.26 billion compared to consensus of $1.28 billion according to some sources yet others reflect the consensus we had of $1.22 billion, thereby it’s debatable if the top line beat. Our notes show App beat, although narrowly.  

Management had guided last quarter for revenue of $1.195B to $1.215B, representing YoY growth of 69.5% at the midpoint. By this standard, as well, Applovin beat with growth of 77%.  

On the bottom line, the company had a large beat with EPS of $2.39 compared to $1.99 EPS expected, representing growth of 169%. This was a 45 point beat on growth rate for the bottom line. Adjusted EBITDA doubled to $1.02 billion, up from $943 million last quarter. This represents an adjusted EBITDA margin of 81%.  

As management alluded to on the earnings call, the company “prints cash” with a 61.3% operating cash flow margin and a 61% free cash flow margin.  

The Q&A was primarily focused on when Applovin plans to launch its self-serve ad platform, as this should create a boost for growth. Management was encouraging saying “as soon as possible” yet the tone on the earnings call was particularly optimistic about Q4 being a bigger quarter for the company. Details on why management had the confidence to call out Q4 specifically are noted below. 

Revenue  

Regardless of a nominal decimal point that caused a beat (or miss), the quants may have quickly sold the report after hours from mistakenly pricing Applovin for a deceleration from the March quarter to the June quarter.  

  • Overall revenue last quarter was $1.48B versus this quarter at $1.26B. As we covered in the past, this is due to Applovin divesting its mobile gaming “Apps” business, with the sale completed on June 30th. Therefore, if you adjust for this sale, revenue for the ads business in Q1 was $1.15B for QoQ growth of 8.7%. 
  • The current quarter marks an acceleration from 71% YoY growth yet QoQ growth is slowing.  
  • For next quarter, Applovin expects to see $1.33 billion in revenue, slightly above estimates for $1.31 billion. This represents 59% YoY growth and QoQ growth of 5.5%.  

As stated, Applovin divested its Apps business, which was weighing on both growth and margins. For example, Applovin had been reporting low growth in this segment of (13%) growth in the March quarter leading up to the sale.  

Margins and EPS: Operating margin doubled to 76% … what?! 

Applovin’s revenue growth is only part of the story, whereas the bottom line is what sets Applovin apart. I can count on one hand (or maybe even one finger) the number of tech companies that have reported a 76% GAAP operating margin.  

It may be common for tech companies to be in hypergrowth stage at times, yet very few ever reach the quality margins that App is reporting quite early in its company history.  

The bottom line presented below is a thing of beauty. The margins have clearly benefited from divesting the Apps business, which had been weighing on the margins.  

  • Gross margin of 88% compares to last quarter at 81.7% and the year ago quarter at 73.85.  
  • Operating margin of 76% expanded from 44.7% last quarter and more than doubled from the year ago quarter at 36.2%. Wow!! 
  • Net margin of 65% expanded from 38.8% last quarter and doubled from 28.7% in the year ago quarter. Wow!! 

Earnings per share of $2.39 beat estimates for EPS of $1.99, representing growth of 169%. This was a large beat as growth was expected to be 123.5% on the bottom line.  

Cash Flow Margin of 61% 

In yet another impressive bottom-line number, Applovin reported a 61% free cash flow margin for free cash flow of $768 million. The company has been strong on cash for sometime, yet this still represents a 540 bps expansion QoQ and 20-point expansion YoY.  

The operating cash flow margin of 61.3% is up from 56% last quarter for operating cash of $772M. The company has $1.2 billion in cash on the balance sheet including $425M from the sale of the Apps business. The company has $3.7B in debt.  

Applovin does share buybacks with 900,000 shares repurchased in the last quarter for a total of $341 million funded through free cash flow. This lowered share count form 346M to 342M last quarter.  

Earnings Q&A: 

Self-Serve platform set to launch October 1st 

Management has repeatedly stated that gaming alone can sustain growth of 20% to 30% YoY. Therefore, the catalyst for the next few years is securing additional supply, such as e-commerce, as well as opening up the AXON ad platform to more advertisers.  

The AXON ads manager recently became self-service, which means it can scale at levels not previously seen by offering self-service interface for Applovin’s 1 billion reach. As of now, Applovin is limited in the number of advertisers it can manually on board. According to the opening remarks: “With the rollout going smoothly, we are ready to widen access. On October 1, 2025, we plan to open the AXON ads manager on a referral basis, perfectly timed for the holiday season. Feedback from these partners will guide our global public launch in the first half of 2026. To date, web advertising campaigns have been limited to the United States. On October 1, we plan to open our platform to most major international markets.” 

When it comes to e-commerce, Applovin explained they limited the number of advertisers initially in order to make sure the tools were working properly, and they are now satisfied with the results and ready to launch self-serve on an invite basis to start. 

Per the Q&A: 

“And then the last point to remember is another one of my prepared remarks highlighted the fact that we have constrained the advertisers we even have live today by not allowing them to buy our audience that's international. The vast majority of our user audience is outside the U.S. We will be releasing almost all markets once we go into this October 1 release.” 

Looking longer-term, by matching categories such as e-commerce with a self-serve platform, Applovin discussed a flywheel effect: “So in terms of opportunity for us, not only does opening up the platform get us more demand, which is going to be massively accretive and incremental to our business. It gets us more data. And so every single quarter, you're going to have that flywheel effect that, that then paired with our engineers' ability to take added data and improve the technology and its interpretation of that data creates a real strong foundation for growth for a long time to come.” 

Commentary that Q4 will be strong: 

During the Q&A, there were a few mentions that Q4 should be strong along with mention of upside to the numbers come 2026.  

I want to make money in 2026 about as much as I want to make money in 2025, so this kind of discussion is my favorite moment during an earnings call (…and is the reason I take the time to listen to these calls and not run the transcript through Chat-GPT, like many, many research sites do these days!)  

Here’s one example: 

“We expect that will increase the advertiser count quite quickly and also allow us to go through live examples of advertisers coming in self-service all the way to scale on our product. Assuming all that goes well, then we talked about opening up the platform entirely to the world in first half of next year. We think as advertiser count grows on our business, especially in categories outside of gaming, you're going to see a lot of upside in the numbers that we're able to report.” 

Here was a more specific mention to Q4: 

“As we go into Q4, that's a huge holiday shopping season. So not only are you going to see the cohort that we have live spend a lot more. You're also going to have new onboarding happening for the first time in our history at a rate that's much higher than we will have ever seen before. So we fully expect that e-commerce will see a pretty substantial ramp-up through that, what you can call a soft launch period and then, obviously, as we go into a broader global release, the impact from that.” 

It was repeated again with more details around the compounding effect of onboarding the many new advertisers for existing gaming inventory and also new categories: 

“Now it's not necessarily true that we're going to take our queue that's built over the last year and just say, everyone you're in. They're still going to have to get invited to get into the platform. So it will be still curated onboarding. The reality is like Q4 is going to end up being a fun quarter. You've got the advertiser cohort that we didn't have last Q4 that was growing in the quarter to the point where we reported huge numbers and then had huge numbers in Q1. But we're going to have those advertisers primed and ready to go for the full Q4. We're going to have advertisers inviting their friends onto our platform in Q4, and we're going to be opening up international all at the same time. 

So there's going to be a lot of fun moment — moments for us and our customers in this e-commerce or web-based category that will set sort of a new baseline for that business. And then obviously, then we will go through hopefully another inflection when we really truly open up the platform and try to get into a state where we're more stable long term.” 

Quick Note on 2026-2027: 

Although further out, there was talk that lower fees on the App Store should become a tailwind for Applovin 4-8 quarters out: “So no impact yet. And I would guess it will probably take 2 to 4 quarters from some impact. And by 4 to 8 quarters, you're going to get pretty material impact in pricing on our platform.” 

Conclusion: 

I’ve never been one that needs the market to agree with me, and I am afraid on this one the market and I will have to agree to disagree as the price is down after hours. This was a stellar report with all fundamental boxes ticked, a team that has proven to execute, and incoming catalysts that are quite well-timed to where the market is selling the stock while we maybe have two quarters (or less) to wait for an inflection. 

Of course, this requires some speculation as consensus will not reflect management commentary until there are material results. But after all, that’s where the real money is made. Let's hope the formula of "believe what you see" works for us again as the growth, historic margins and the ability to print cash all point toward a solid stock while management hints they have more in store for shareholders around year-end.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in APP at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

AMD Reports in Line while AI Story to Improve from Here 

Posted on by io-fund

AMD reported in line, yet the market’s short attention span has likely forgotten the QoQ decline in the data center was expected. Per our last earnings report writeup: 

“For Q2, data center will decline due to the MI308 revenue being excluded. When asked about future quarters, the CEO Lisa Su stated the DC segment would resume growth after Q2: “in Q2, it's not going to grow year-over-year just given what we've said about the $700 million coming out of Q2 and how we had previously talked about the evolution. But we do believe that we'll grow year-over-year going forward, in Q3 and Q4 certainly, for us to do the full year with strong double-digit growth.” 

Therefore, what matters for the purpose of our position is if AMD can execute and drive much better data center segment results in Q3 and Q4. For example, in the opening remarks, it was stated while citing the Oracle deal which includes 130,000 MI355s: 

“We began volume production of the MI350 series ahead of schedule in June and expect a steep production ramp in the second half of the year to support large-scale production deployments with multiple customers.” 

We go through the obligatory financials below while noting from the earnings call additional comments about the one thing that really matters – that AMD executes in H2 and further executes in 2026.  

Revenue beat driven by Client and Gaming segments: 

AMD reported a slight beat on the top line at $7.685B in revenue compared to estimates of $7.43B. This represents growth of 31.6% compared to growth of 27.4% expected. Where the beat is somewhat problematic is that it was driven by Client and Gaming, rather than the data center. 

However, in terms of a bright spot in the report and a data center inflection point, Q3 estimates were at $8.3B going into the print and management is guiding for $8.7B at the midpoint for growth of 28% YoY and 13% growth QoQ. This will be driven by data center, as was alluded to on the earnings call: “Sequentially, we expect revenue to grow by approximately 13%, driven by strong double-digit growth in the Data Center segment with the ramp of our AMD Instinct MI350 series GPU products […]” with Client expecting to see only modest growth. 

In addition, AMD estimates have been steadily rising after a trough of sorts earlier this year. For example, the September quarter was expected to see as low as 17% growth per consensus in May, yet is now at 28% per management guidance.  

Revenue Segments: Data Center declines QoQ from China Loss 

Last quarter, management had stated, “we expect data center segment to decrease due to the exclusion of MI308 revenue.” Therefore, it was not a surprise when data center was down (11.8%) QoQ yet was up 14% YoY for revenue of $3.24B. This compares to DC revenue of $3.67B last quarter and $2.84B last year.  

Here is what it looks like on a YoY basis: 

Gaming and Client exceptionally strong in Q2 

While many consumer device companies are struggling right now, AMD is breezing past consumer demand concerns with incredibly strong Client and Gaming revenue. Whether this can sustain or if it was a pull forward remains to be seen, with management guiding for Q4 to be seasonally weaker than usual. 

  • Client revenue of $2.5B up 9% QoQ and up 68% YoY 
  • Gaming revenue of $1.1B up 73.4% QoQ and up 73% YoY 
  • Embedded revenue of $824M, flat QoQ and down 4.5% YoY 

According to the opening remarks, it was not a pull forward rather the popularity of its Ryzen processors and Radeon 9000 GPUs that drove the strong performance.  

Regarding Client CPUs, it was stated: 

“We delivered record desktop channel CPU sales as Ryzen processors consistently topped the best-selling CPU lists at major global e-tailers throughout the quarter [..] In mobile, demand for AMD-powered notebooks was strong with sellout growing by a large double-digit percentage year-over-year. We drove a richer mix of higher ASP mobile parts year-over-year as we expanded our share in the premium notebook segment where our Ryzen AI 300 CPUs deliver leadership performance and value for both general purpose and AI workloads. In commercial PCs, Ryzen adoption accelerated as OEM consumption increased more than 25% year-over-year.” 

Regarding the Radeon series which drove 74% QoQ growth in Gaming, there were partnerships with Microsoft/Xbox and Sony. The following was also stated: “In PC gaming, demand for our latest-generation Radeon 9000 series GPUs was very strong, with desktop GPU sell-through accelerating in the quarter as demand outpaced supply.” 

Despite Client being strong this quarter, management cautioned this is inventory building for the holiday season and this segment will be down in the fourth quarter “strong double digits.” 

Margins down due to China; Expected to rebound quickly  

EPS was in line with expectations at $0.48 yet was down (30%) from $0.69 in the year ago quarter. The company is expected to rebound quickly with EPS of $1.15 next quarter.  

Gross margin of 40% is significantly lower than previous quarters in the 50% range. This represents profit of $3.1B due to $800M in inventory changes from expert controls. Management pointed out that minus the $800M, gross margin would have been 54%: “Excluding the $800 million inventory write-down related to data center AI export controls, gross margin was 54%, marking our sixth consecutive quarter of year-over-year margin expansion led by a richer product mix.” 

 Adjusted gross margin of 43% represents adjusted gross profit of $3.33B. Notably, the margins were guided correctly and in line with expectations following the loss of China revenue discussed in the previous quarter.  

Operating margin of (2%) for operating profits of ($134M) also included the $800M in inventory changes. Adjusted operating margin of 12% was guided correctly and was in line with expectations. Adjusted operating profits of $897M beat expectations for $882M.  

Net margin of 11.3% was 600 bps higher than the previous year and 230 bps higher than last quarter. However, adjusted net margin was down significantly by 10 points to 10.2%.  

Cash Flow margins Improve QoQ, Debt profile improves 

AMD’s cash flow margins sustained well at 20% operating cash flow margin compared to 13% last quarter and 10% OCF margin last year. Free cash flow margin of 15% also expanded from a year ago at 8% margin and up from 10% FCF margin last quarter.  

AMD has cash of $5.9B on the balance sheet and debt of $3.2B, down from $4.2B last quarter.

Earnings Call Q&A: 

Key points on how AMD plans to execute from here: 

Sovereign AI to pick up in 2026: 

In the opening remarks, management discussed its “multibillion-dollar collaboration with HUMAIN to build AI infrastructure powered entirely on AMD CPUs, GPUs and software.” The HUMAIN deal refers to a $10 billion joint venture between Saudi Arabia and AMD to create an AI hyperscaler for the country’s sovereign AI initiatives.  

According to Lisa Su during the Q&A: “So look, we're really excited about the overall AI opportunity for us with MI355 and the MI400 series as we go through the back half of this year and into 2026 […] I think you heard from Tareq that was — he was at our event saying that, that would start with MI355, that we would expect that, that would continue on. I think what's attractive about our offering is our open ecosystem, and I think that really resonates with the sovereign community. But to your original question, I think it's an additive opportunity, and it's one that we believe will continue to be very important for us going forward with both MI355 as well as the MI400 series.” 

MI350s starting to ramp: 

When asked about the size of opportunity from the MI300s and MI350 Series this year (mainly the MI350s) and if this can get to $7B, management declined to be specific yet stated: “I think what we said in the prepared remarks is that we are seeing a strong ramp from Q2 into Q3. MI355, we actually started production in June. So we had some shipments sort of in the month of June, but it really is ramping as we go through this quarter and the third quarter. So in terms of guideposts, we said it would grow year-on-year from last year. And that, I think, is a strong ramp, and then we would expect it to grow into the fourth quarter as well.”

MI400s to ramp next year including Helios: 

The MI400 series will be the start of rack-scale systems for AMD, starting with Helios, which will connect up to 72 GPUs similar to Nvidia’s NVL72 systems. According to AMD, Helios will “deliver up to a 10x generational performance increase for the most advanced Frontier models, and we believe it will be the highest-performance AI system in the world when it launches.” The last part is doubtful yet the effort to close the gap with Nvidia will likely go a long way when coupled with lower pricing.  

AMD’s goal of reaching tens of billions in MI400 sales was also elaborated on: 

“Joseph Moore   Morgan Stanley: 

You used this language before, the kind of tens of billions opportunity around MI400. Can you talk about the time frame when that might occur and not to pin you down too much, but — and what would help you get to that level sooner rather than later? Should we think of that as a 2027 realistic outcome that you could be looking at $20 billion-plus? Just a little bit more color on that tens of billions comment. 

Lisa Su   Chair, President & CEO: 

Yes. I mean, maybe without being specific, Joe, I can give you sort of the way I look at it and back to this notion of are we incrementally more confident. I think we're seeing a lot of positive signs in our AI customer adoption, I think the strength of the MI350 series, the very positive feedback that we're getting on MI400 from customers, the work that we're doing in terms of ensuring that we are fully ready for large-scale deployments of not just inference but training. 

I think when we get to tens of billions of dollars, we're talking about significant gigawatt-scale type deployments. And those would be important for us to get there. And we're certainly, I think, engaged with all of the right customers that can enable that type of ramp. But I won't necessarily speculate on the exact time other than to say, certainly, that would be our set of aspirations.” 

It was later stated: “We would expect significant revenue contribution from Helios in 2026.” 

Conclusion: 

In my Top 15 stocks report the conclusion was the following: The risk to AMD is primarily in Q2’s data center growth decline, and how quickly can the company ramp its MI355s and subsequent MI400s while in the midst of Nvidia’s large shadow – will we see a solid surprise arrive in Q3, Q4 or even into next year? My best guess is the most meaningful AMD moment is not likely to occur during Blackwell’s NVL72s release – I think 2025 belongs to Nvidia and somewhere between 2026-2027 we switch it up. 

AMD has required some patience, but 40% returns YTD are not bad. We weren’t expecting much from this report given the concise management commentary from last quarter. However, we do foresee watching this stock very closely come 2026 with a placeholder in the portfolio should AMD surprise before then.

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. Beth Kindig and the I/O Fund own shares in “AMD” at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

Astera Labs Q2: Blowout with double digit Beat/Raise; Emphasis on future growth 

Posted on by io-fund

Astera Labs reported a blowout quarter with beat/raise that is impressive even for ALAB’s standards. Not only did Astera Labs beat by nearly $20M or 11.3% but the guide exceeded this and beat by 14.35%. 

To sweeten the deal, the roughly $20M beat flowed through to profits for a company that is comfortably GAAP profitable despite a fairly recent IPO in 2024 with elevated stock-based compensation at 20% of revenue.  

The fundamental profile of Astera Labs could not be cleaner, and when it comes to its products, the company said all the magic words such as ramping in volume, new design wins with ten customers including merchant GPUs and ASICs, plus a line of sight to further sales growth from their many product lines in H2 2025 and 2026, and the upcoming UALink consortium in 2027. 

To illustrate, in the opening remarks, the company pointed toward the drive for low latency PCIe as the primary contributor to the beat/raise across both the Aries and Scorpio products. Launched only this year, Scorpio now exceeds 10% of total revenue “making it the fastest-ramping product line in Astera Labs’ history.”  

Management also stated there were new design wins across multiple customers this quarter with PCIe6 solutions beginning “volume ramp during the quarter within rack-scale merchant GPU-based systems.” This is music to our ears as it indicates ALAB is a direct beneficiary to the highly anticipated Blackwell systems. More specifically, it was stated the Scorpio smart fabric switches transitioned to volume production in Q2 for PCIe6 scale-up applications “deployed within GPU customized rack scale solutions.” 

UALink was also discussed at length, which is the open source alternative to proprietary interconnect protocols such as Nvidia’s NVLink. The data rate specifications of up to 200G per lane combined with the low latency of PCIe6 puts Astera in an “excellent position.” Per management: “As a leading promoter of UA Link, Astera Labs is committed to developing and commercializing a broad portfolio of UA linked connectivity solutions ranging from AI fabrics to signal conditioning solutions and other I/O components. Proliferation of UA Link in 2027 and beyond will represent a long-term growth vector for Astera Labs.” 

In terms of quantifying where this could lead, management stated: “scale up connectivity for rack-scale AI infrastructure alone will add close to $5 billion of market opportunity for us by 2030” although truly the opportunity could be higher given it was also stated: “our silicon dollar content opportunity has expanded into the range of multiple hundreds of dollars per AI accelerator which has effectively established a new revenue baseline for the company.” From there, it was further stated that Scorpio-X will cause the dollar content opportunity to increase even further: “Given the extreme importance of scale-up connectivity to overall AI infrastructure performance and productivity, we see Scorpio X Series solutions as the anchor socket with the next-generation AI ranks. We are engaged with over 10 unique AI platform and cloud infrastructure providers who are looking to utilize our fabric solutions for their scale-up networking requirements. We look for Scorpio series to begin shipping for customized scale-up architectures in late 2025, with a shift to high-volume production over the course of 2026.  

With the ramp of Scorpio X Series for scale-up connectivity topologies next year, we expect our overall silicon dollar content opportunity per AI accelerator to significantly increase. Overall, we expect this to be another step-up from a baseline revenue standpoint. Also, given the sale of the scale up connectivity opportunity, we expect our Scorpio X Series revenue to quickly outgrow Scorpio P-Series revenue. In 2026 and beyond, cloud platform providers and hyperscalers will begin to deploy next-generation platforms as the industry transitions to AI infrastructure 2.0.” 

Usually, I put these bigger quotes at the bottom under the Q&A yet I didn’t want our Members to miss the emphasis the earnings call had on future growth. But be sure to not miss the additional strong commentary regarding H2 2025, 2026 and 2027 noted below.  

We’ve covered more on Astera’s products and positioning in this analysis here and here.analysis here and here. 

Revenue Beats by 25 Points, Guide Beats by 22.8 Points (wow!) 

Astera Labs reported revenue of $191.9 million, beating consensus of $172.5 million for growth of 150% YoY and 20% QoQ. About eight months ago in November, analyst consensus for the June quarter was for 85% growth — thus the company has nearly doubled these expectations in less than a year. Going into the print, analysts had been steadily raising consensus for growth expectations of 124.4% and Astera beat these estimates by 25 points. This technically marks accelerating growth from last quarter, which reported growth of 144.3%. 

For the September quarter, the beat is also pronounced on a YoY basis although less so on a QoQ basis given the strong beat this quarter. Management guided for revenue of $206.5 million at the midpoint for growth of 82.6% YoY and 7.6% QoQ. Going into this print, analysts were expecting 59.8% growth, with Astera beating by 22.8 points.  

For perspective, about eight months ago, Astera was expected to report $157.5 million for 39.3% growth in the upcoming September quarter. Today, Astera is guiding for more than double growth expectations from less than a year ago. I’m presenting these historical estimates to help illustrate just how quickly Astera has skyrocketed from ideal positioning in the AI networking stack. We’ve covered more on Astera’s products and positioning in this analysis here and here. 

Margins and EPS: The $20M beat flows directly to profits 

The only thing that can sweeten the deal of a 25-point top line beat is a similarly strong bottom line beat. Astera delivered in that regard with a GAAP operating margin of 20.7% compared to 7.9% expected. This led to GAAP profits of $39.8M compared to $13.7M expected, helping to see the operating leverage as the $19.4M beat flowed nicely down the income statement (plus some).

Here’s a visual on how the GAAP profile of ALAB has rapidly improved: 

  • Gross margin of 75.8% was up 90 bps from last quarter yet was down 210 bps from the year ago quarter. This led to gross profits of $145.6M, beating the guide for $127.7M. Adjusted gross margin was similar at 76%. 
  • GAAP operating margin of 20.7% is a major win for ALAB investors as the company is now comfortably GAAP profitable despite stock based compensation being around 20% of revenue. 
  • Adjusted operating margin of 39.2% compares to the guide for 31.1% leading to adjusted operating profits of $75.3 million. This is significantly higher than the adjusted operating profits of $18.7 million in the year ago quarter.  
  • The GAAP net margin of 26.7% for net income of $51.2M is significantly higher than the (9.8%) net margin from a year ago and represents a 670 bps improvement QoQ.  
  • The adjusted net margin of 40.7% is up from 28.9% last year and 330 bps improvement QoQ.

Cash: 

Astera’s cash from operations increased significantly with an operating cash flow margin of 70.5% up from 38.7% last year. This totaled operating cash of $135.4M with $1.07B in cash on the balance sheet and no debt. 

The company provided a 6 month statement for its cash flows rather than a quarterly statement, but it’s easy enough to deduce that the majority of operating cash flow went to the cash reserves as free cash flow. On a six month basis, the company had free cash flow of $139M with $6M last quarter, leaving about $133M in free cash flow this quarter for a FCF margin of 69.3%.

Earnings Q&A: 

More commentary regarding future growth: 

To say you have 10 customers (who we can infer are at massive scale) is a strong statement for a company like Astera Labs sitting at a run rate of roughly $800M. Buried in the call, management clarified these customers are “nearer-term opportunities that we are tracking based on PCIe.” 

What Astera is referring to is that PCIe 6.0 doubles the bandwidth of PCIe 5.0, reaching up to 256 GB/s. This is crucial for Blackwell GPUs, as the increased bandwidth translates into faster data transfers for quicker processing and reduced latency when training an AI model training and for inference. 

At the end of the call, it was also clarified the way these customers will ramp should help growth into the foreseeable future: 

Sujeeva De Silva   ROTH Capital Partners 

Helpful. And then my follow-up on Scorpio X, you talked about 10 customer engagements. I'm wondering if that implies multiple programs per customer, if they're going to think about using you standard in their platforms? Any color on how those are kind of shaping up would be helpful in programs versus customers. 

Sanjay Gajendra   Co-Founder, President, COO & Director 

Yes. So 10 plus we noted are unique customers now within each customer, there are multiple opportunities that we're tracking. Some of them are design wins, and some of them are ramping to production. Some of them are design ins going through qualification. Some of those are early engagement. So in general, we are very pleased with the amount of traction that we're seeing for our Scorpio family.”

There was additional commentary offered in terms of how they plan to retain these customers and perhaps even increase their sales during the transition to UALink open standards: 

“And we do have, like I noted, several customers, we are counting 10 plus right now that are looking at leveraging some of these open standards, whether it's PCIe in the short term, combination of PCIe and UA Link in the midterm and transitioning perhaps to a broader UA Link deployment in 2027 and later. So overall, I think the momentum is shifting positively, and we are excited to be in the middle of it and driving the adoption of open and scalable supply chain in the market.” 

Later, it was clarified the ten customers are primarily for Scorpio X-Series – which has not even ramped yet – spelling good things for future growth. 

“This, we see, like you noted, as an anchor socket because that is truly the socket that holds all the GPUs together, and today, like we noted, we have 10 plus customers that we are engaging when it comes to scale up networking using Scorpio X-Series.”  

It was later stated the X-Series will grow beyond Scorpio P-Series which is what is driving the growth right now: “For the X Series, we do have preproduction volumes here, but really, that starts to go into high volume production during the course of 2026 and layering even more growth. Ultimately, what we called out is the X Series is going to grow to be bigger than P-Series" 

There were a few additional comments pointing toward strong growth in 2026: 

“The scale up this year is predominantly preproduction volumes. And these systems are pretty complex that they're shipping into. So we like to try to be conservative on how we telegraph those going forward. But the volume opportunities scale up connectivity for switching is a much bigger dollar opportunity for us as we look forward. But those designs really will start to enter into full volume production during the course of 2026. So not a driver in the next couple of quarters.” 

Conclusion: 

Astera is a strong contender for best earnings report of the quarter – not only in I/O Fund’s portfolio but broadly speaking across the tech sector (the other contender across the tech sector is Reddit).  

This company is firing on all cylinders with unique positioning in the AI economy as they serve both merchant GPUs and custom silicon – which is what makes 10 customers a possibility.  

What I liked most about this call was management clearly outlining how they plan to drive future growth across its product lines, plus across a diverse set of customers throughout 2026 – and they furthered the discussion on how ALAB will strategically continue to drive growth during the anticipated transition to UALink in 2027.  

The note from our last portfolio meeting following my Top 15 Stocks report was “is 20% allocation too high for Astera Labs?” Apparently not. It’s at 16% now, and by default, will open at a higher allocation tomorrow.

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. Beth Kindig and the I/O Fund own shares in “ALAB” at the time of writing and may own stocks pictured in the charts.

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Supermicro Fails to impress; Volatility is here to stay 

Posted on by io-fund

Just when you think the controversy around Supermicro has cleared, the company offers a fiscal year guidance of $33 billion that beats consensus by 10.8% at $29.8 billion, and yet a  statement in the February call has been misconstrued to lead to what the market is calling a significant miss.

The comment in the February call was the following: “With that, I am confident we will finish this fiscal year strongly with revenue in the range of $23.5 billion to $25 billion and I believe we have potential to reach $40 billion for fiscal year 2026.” 

Therefore, instead of going off analyst consensus, there are reports that Supermicro missed based off that comment about six months ago. This will mark the first time in my memory that a comment two quarters prior is how the market is measuring current fiscal year guide instead of going by analyst consensus.  

In addition, a report came out after hours that Supermicro servers may have been smuggled into China through Singapore and Japan. Notably, Dell serversand others have been implicated in the past as it goes without saying that if Nvidia GPUs were known to be smuggled, then servers from Nvidia’s well-known suppliers were smuggled.  

Those items are less of a concern, whereas margins and cash remain the predominant concern for Supermicro. However, I suspect this time next year the troubles SMCI faces will be a distant memory as even the way the company is raising cash hints toward an underlying strength the current price action (and valuation) does not reflect.  

Notably, this stock does not offer quality fundamentals, and thus it’s reserved for our Advanced tiers and we will adhere to all technical stops. 

Revenue Slightly Misses: 

Looking beyond the controversies, what is on deck for this quarter is that Supermicro has slightly missed on key headline numbers. 

  • Q4 FY2025 was expected to be $6 billion at the midpoint yet came in at $5.8 billion for growth of 8% YoY and 25% QoQ. 
  • Q1 guide of $6.5B missed consensus of $6.55B 
  • Q1 guide for $0.46 EPS missed consensus of $0.59 EPS 

If we look a bit closer, we see that technically Supermicro is guiding to grow at a larger percentage this year than they did last year at 50% for the current fiscal year compared to 47% last fiscal year.  

According to management, the current quarter missed for the following reasons that are now cleared: “Shortfall stem from 2 key factors: a capital constraint that limited our ability to rapidly scale production and specification changes from a major new customer that delay revenue recognition because of new ad of some new ad features. The capital constraints will no longer an issue after we filed the fiscal year '24 10-K and large customer orders are now slated for recognition in September and December quarters. Following close collaboration to align with the customers' update future requirements.” 

Segments & Geos: USA % Declines Significantly  

  • AI platforms represented over 70% of Q4 revenues across both enterprise and cloud service provider markets. This number has not changed on a QoQ basis or YoY basis, rather has been consistently at 70%. 
  • Enterprise reported $2.1 billion up 7% YoY and up 6% QoQ. Growth was higher on a QoQ basis last quarter up 38% QoQ. For the fiscal year, enterprise grew 38%. 
  • OEM appliance and large data center segment revenues were $3.7 billion, representing up 2% year-over-year and up 40% quarter-over-quarter. For the fiscal year, OEM and Large DC grew 50% YoY. 

Asia saw a large increase YoY at 91% compared to the United States declining 33%. Per the CFO remarks: “By geography, the U.S. represented 38% of Q4 revenues, Asia, 42%; Europe, 15%; and the rest of the world, 5%. On a year-over-year basis, U.S. revenues decreased 33%, Asia increased 91%, Europe increased 66% and Rest of World decreased 3%.” 

The United States also decreased on a QoQ basis by 21% compared to APAC increasing 78%, Europe increasing 196% and ROW increasing 53%. 

This may reflect orders getting pushed out as the GB200s were absent from the earnings call with a stronger focus on B200s, B300s and GB300s. The decline in the USA revenue is substantial as this geo represented the bulk of SMCI’s revenue at 61% last year compared to 38% this quarter. 

Margins are Weak: 

  • Non-GAAP gross margin of 9.6% was down 10 basis points from last quarter at 9.7% but losing any ground on gross margin for Supermicro is often penalized given how thin the margins are. The margin miss and EPS miss was from “tariff impact” according to the opening remarks. 
  • This led to a slight EPS miss with $0.41 reported versus consensus of $0.44 EPS. 
  • Gross margin is expected to be similar to current quarter of 9.7%. According to the CEO, their long-term gross margin is goal is 15%. 

SMCI is an outlier for our portfolio as we rarely allow such thin margins to take up allocation. The Q4 adjusted operating margin was 5.3% compared to 5% last quarter. The GAAP operating margin was 4% with $228M in operating profits.  

Cash and Debt: 

This is the most troublesome area for Supermicro as the company must raise cash to fund operations. We closed our position at the highs last year based on this issue, given the valuation was quite high at the time (and now it’s quite low) stating cash is the Achilles heel.  

This past quarter, the company completed a convertible bond offering, raising $2.3 billion in gross proceeds. This could dilute the stock by up to 7%. There is a covered call spread to the convertible bond offering, which means effective dilution may be lower than 7% if the stock goes up. On one hand, that’s nice the management team foresees the stock price going up. On the other hand, you can see they are resorting to many measures to raise cash and hedge the impact of the dilution to shareholders, meaning, this could become a vicious cycle to where Supermicro must always raise cash to fund its operations.  

To further the creative financing, Supermicro also executed a $1.8M facility which allows SMCI to sell qualified accounts receivable. Again, it is interesting to see a third party has enough faith in Supermicro’s billing structure to take on the nonrecourse sale of accounts receivable, yet serves to illustrate SMCI must continuously raise cash to increase its capacity.  

The company has cash of $5.2B with debt of $4.8B, for a net cash position of $412M, up from a net cash position of $44M last quarter.  

GB200 NVL72s Absent from Conversation 

Analysts asked about the GB200s in as many ways they could think of, and the reply was always the same … that Supermicro is not shipping these rather are preparing to ship the GB300s. Here’s one of many responses like this one: 

“Nehal Sushil Chokshi 

I have 2 questions. First one is, what is going to be the driver of the projected Q2 uptick to the September quarter revenue? And maybe that can also help us understand why you're guiding to no operating leverage, I believe, effectively the guidance implies about a flat operating margin from the June quarter, September quarter. 

David E. Weigand 

So the — in terms of the customers, we have a lot of customers that are building out a really good deployments. And so that's what gives us a guide to the first quarter. So we've been shipping AMI 355X and GB300. And so we expect that to ramp in Q1. And that's really what's giving us our guide.” 

In the opening remarks, the GB200s were left out: “Notably, we were able to deliver our B200 systems with an industry-leading time to market to our customers. We are confident our B300 and GB300 solutions will deliver a similar, if not even better time to market and time to online advantages for customers, helping them accelerate their AI deployments faster than others.”

Data Center Building Block Solution  

Supermicro highlighted their data center building block solution, stating it reduces time to convert data centers for high-density direct liquid cooling from 12-18 months down to 3-6 months. According to the opening remarks: “Several DCBBS components are now shipping or entering production, supporting a growing demand for high-performance, energy-efficient data center infrastructure. equally important, DCBBS meets the growing demand for a comprehensive one-stop shop solution, including software-defined infrastructure, system management, AI workload optimization networking deployment and all different levels of services.” 

Management specifically called out Europe and Asia as strong demand for this product: “There are so many contracts, especially in Europe — in Europe, in East, in Asia. So they're all really a great — their AI infrastructure for their country. for their company. And we are working very closely with you there.” 

Management stated that they expect DCBBS to represent 20% to 30% of revenue by this time next year: 

“Q: But did you say that the data center building block solutions will be around 20% to 30% of total revenue in the September quarter? 

Charles Liang 

No. I mean I will be maybe next year summer. So it will ramp gradually not immediately.” 

Conclusion: 

If we read between the lines, Supermicro is cautioning that Nvidia’s highly anticipated Blackwell arrival is either not on time for this quarter or will not going to directly benefit SMCI until Blackwell Ultra ships in Q3. Meanwhile, Astera Labs is giving the green light on PCIe6, which indicates Nvidia’s larger systems are moving somewhere along the supply chain.  

We have a setup for Supermicro that we are tracking and a stop we will follow should the stock break that stop. Until then, it’s just another wild ride with Supermicro – one that we feel is worth taking until technicals signal otherwise.  

Please join Knox this Thursday at 4:30 p.m. ET to discuss entries, exits and more regarding Supermicro, AMD, Astera Labs and the upcoming Applovin report.

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. Beth Kindig and the I/O Fund own shares in “SMCI” at the time of writing and may own stocks pictured in the charts.

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Bloom Energy: First Direct Hyperscaler with Oracle; More are Likely to Follow 

Posted on by io-fund

Bloom Energy is retracing the 10% pop it saw yesterday from the news Bloom has agreed to supply Oracle with solid oxide fuel cell (SOFC) servers. Despite Bloom Energy being in direct contact with its first hyperscaler customer with Oracle, the drawback is that BE had already baked this into fiscal year guidance. Thus, the company was only able to reiterate fiscal year guidance of $1.65 to $1.85 billion, corresponding to YoY growth of 19.1%.  

Despite the weak price action from inflated expectations around the Oracle deal, there were many bright spots in the report. Bloom reported its third consecutive quarter of record revenue and profits and reported six consecutive quarters of profitability in the Services segment.  

Bloom also outlined a plan to double its factory footprint from 1 GW to 2 GW by the end of 2026 to meet growing demand, with this expected to cost in the “ballpark of $100 million,” funded through a recent refinance of debt notes for $113 million.  

To help compare, Data Center Frontier estimates that BE has deployed 400 MW of capacity to data centers this year,  and has delivered 1.5GW of power in total across 1,200+ global installations. Therefore, 2GW exceeds Bloom’s total history of installations and is about 5X its 2025 data center business.  

Details around its new partnership with Oracle were the main focus on the call, plus how quickly Bloom can scale capacity and how the company plans to fund any future expansion.  

Although we expect Bloom to be very volatile, the fact is that very few alternative energy companies can move as quickly as BE in what our firm has dubbed an energy crisis in getting power to data centers.  

As the CEO stated on the call, to wait 5-7 years is “untenable.”  To compare, Bloom will power Oracle with on-site power solutions in as soon as 90 days. Additional key customers for BE include American Electric Power (AEP), Quanta and Equinix. Notably, Amazon and Cologix are customers of Bloom through AEP in Ohio.  

Perhaps the most important statement on the call was when the CEO stated: “We expect new orders from other AI hardware ecosystem players soon, complementing demand we see from our more traditional commercial and industrial customers.” 

Revenue Beats by 6%, Yet FY25 Guide Maintained 

Bloom reported a nearly 6% beat to estimates in Q2, reporting $401.2 million in revenue versus estimates for $378.9 million. Revenue grew 19.5% YoY, slowing from 38.6% growth in Q1.  

According to management, this represents the highest revenue and most profitable Q2 yet: “Bloom had an excellent quarter, the highest revenue and most profitable second quarter in our 24-year history […] Over the last couple of calls, I've told you that our business is at an inflection point as demand for clean, reliable and rapidly deployable power is surging. Now there is tangible evidence.” 

Growth is expected to rebound to the high-20% level in Q3 to $424.9 million, though notably this comes against a substantially weaker comp in Q3 2024’s (17.5%) decline. On the other hand, Q4 faces a difficult 60% comp, and as a result, growth is estimated to be <7% YoY to $610.5 million. 

Despite the beat in Q2 and recent deal with Oracle to deliver fuel cells to AI data centers within 90 days, Bloom maintained its full-year revenue guidance at $1.65 to $1.85 billion. This corresponds to YoY growth of 19.1%.   

Key Segments 

Product revenue growth moderated slightly in Q2 but remained in the 30% range, while Installation and Electricity both declined YoY, reversing from strong growth last quarter.  

  • Product revenue increased 31.1% YoY to $296.6 million, slowing from 38% growth in Q1.  
  • Installation revenue declined (12.5%) YoY to $37.4 million, reversing sharply from 194% growth last quarter.  
  • Service revenue increased 3.7% YoY to $54.4 million, rebounding from a (5%) decline in Q1. 
  • Electricity revenue declined (9.8%) YoY to $12.8 million, reversing from 92% growth in Q1. 

Operating Margins Expand  

On a YoY basis, margins have improved quite substantially. Bloom is transforming into a stronger company fundamentally when considering its GAAP operating margins were previously deep in the red double-digits. 

Gross margins dipped sequentially, yet operating margins expanded on a GAAP and adjusted basis. Notably, Bloom believes their operating margins will continue to expand: “Between that combination and our cost reduction continuing, you should absolutely expect our operating income to keep getting better as we go forward.” 

  • GAAP gross margin was 26.7%, down 0.5 points QoQ but up more than 6 points YoY. Adjusted gross margin was 28.2%, also down 0.5 points QoQ and up more than 6 points YoY.  
  • GAAP operating margin is approaching positive territory at (0.9%) in Q2, up nearly 5 points QoQ and 6 points YoY.  
  • Adjusted operating margin was 7.1%, up more than 3 points QoQ and 8 points YoY. Adjusted EBITDA was $41.2 million. 
  • GAAP net margin was (10.6%), down 3.3 points QoQ and up nearly 8 points YoY. Adjusted net margin was 5.5%, up 3.5 points QoQ and 9.7 points YoY.  

EPS 

Bloom beat EPS estimates on an adjusted basis as adjusted margins expanded down the line, though GAAP EPS fell short.  

  • Adjusted EPS of $0.10 beat estimates for $0.02, and represented a notable $0.16 improvement YoY.  
  • GAAP EPS was ($0.18), missing estimates for ($0.10) as GAAP net margin declined sequentially. 

Looking ahead, Bloom is expected to see profits at least at this level through the end of the year, generating the bulk of its earnings in Q4 at $0.31.  

Cash and Balance Sheet 

Cash flows worsened sequentially, with operating cash flow falling by more than ($100 million) versus Q1. This weighed on unrestricted cash and equivalents, while debt was unchanged. 

  • Operating cash flow was ($213.1 million) in Q2 for a (53.1%) margin, nearly double Q1’s ($110.8 million) outflow. For the first half of 2025, operating cash flow was ($323.9 million), approximately flat YoY. 
  • Bloom guided for FY25 operating cash flow to be approximately flat to FY24 at $92 million, suggesting 2H operating cash flow in the range of $410 million, likely concentrated heavily in Q4. 
  • Free cash flow was ($220.4 million) in Q2 for a (54.9%) margin. For the first half, FCF was ($345.3 million), just over a 1% improvement YoY. 
  • Unrestricted cash and equivalents totaled $574.8 million, down from $794.8 million in Q1. This raises the risk that Bloom will turn to financing methods as Bloom likely awaits cash flows meaningfully improving in Q4.  
  • Debt remained steady at $1.13 billion.. According to the opening remarks: “Finally, during the second quarter, we refinanced $113 million of our convertible note that was due in August 2025 to provide more optionality to fund future growth. It was exchanged into our existing 2029 convertible notes.” 
  • Inventories were $690 million, up 12.7% QoQ from $612.5 million in Q1, supporting some near-term deployment growth for the Oracle partnership.  

Earnings Q&A: 

Bloom becoming more attractive to hyperscalers: 

When asked about the Oracle deal, the CEO stated that it was “islanded power” to where Bloom is the first source and the second source (rather than being backup power to the grid) and that “it will be one single data center that the first project will power and we are working with them on many of the projects” — hinting the partnership is expected to expand over time and is “extremely significant” for Bloom Energy. 

“So we see this as extremely significant, and we are the primary source, and it is load following. So it will prove that we can load follow at large scale. It will prove that we can operate at large scale and most importantly, AI speed. It will prove that we can install stamp sizes at that level within the 90 days that we have told you we would do in our opening remarks.” 

There was also discussions that Bloom may have an important cross-sell opportunity beyond time to power, which is a combined heat power solution that helps to increase efficiency through thermal management. It was briefly mentioned it could save up to 20% of power costs: “And you are correct to point out from a value proposition wise, right, it is the equivalent of not needing 20% of your power in a data center, right? It is the equivalent of not paying for it when you have taken care of your cooling with our waste — with the waste heat as opposed to putting more electricity. That's a big deal.” 

Overall, Bloom is quite confident their solution drives down costs compared to other solutions. When asked how they compare to natural gas turbines, the CEO stated: “On the other hand, those turbines have at least 15 to 20 percentages — like percentage points more fuel that they will consume compared to us. So on the OpEx, there's a significant win. And on top of that, we have no air pollution, whereas getting an air permit to put a lot of turbines if you live in a populated area is very difficult. You're probably reading in the press. 

So you combine all those things, A, because we are easier to permit, we remove the friction to permitting, so we are faster. Time to power is everything in this business. Secondly, operating cost is lower. CapEx is at parity. You put them all together, I think we compare more than favorably to any other alternative way of producing electricity.” 

2GW on the Way to Multi-GW 

According to management, it will cost $100 million to grow from 1GW to 2GW capacity: “So we are funded for what we — we are well funded for what we need to do in terms of going to 2 gigawatts. Round ballpark numbers, think about $100 million is how you should be thinking about this. And it will come spread over quarters. And we have enough.” 

An analyst asked what gives management the confidence to double capacity – (which is more than just doubling capacity as it also represents more capacity than the company has installed in its lifetime at 1.5GW).  

The CEO pointed toward the visibility in backlog and also the large capex spend and what that essentially means for power capital equipment: 

“So we have told you in the past that in the last 2 quarters, we have seen strong commercial activity. We have told you that it is very diverse, and it is high quality. At this point in time, when we look at that pipeline, it has gotten us to a level of confidence where we absolutely feel like this is the right thing to do. That's why we are expanding the capacity, number one, right? 

Number two, this should be fairly simple, and it should be mind-boggling for all of us, and we shouldn't get numb to this fact. The large hyperscalers put together are going to spend more than $1 billion a day on CapEx, weekday and weekend. It's more than $500 billion are going to be spent just in this calendar year by those people. So you take that number of $500 billion and you say, an order of magnitude down, at least $50 billion of power capital equipment needs to be spent to electrify that additional demand that's going to come on.” 

Tax Credit Benefits: 

Lastly, tax credits are a tailwind for Bloom Energy as there are tax credit benefits to companies who use their energy solutions. According to the CEO during the Q&A session, it’s about a 30% incentive: 

K. Sridhar   Co-Founder, CEO & Chairman 

[..]  So it is a flat 30%, okay? Whereas in the previous version of the bill that ended last year, but safe harbored now, our customers can avail of either 40% or 50%, depending on whether they are not in an energy community or in an energy community. If they're not in an energy community, it's 40%. If they're in an energy community, it's 50%. So from that perspective, yes, their subsidies go down a little bit. But given how high the price of electricity has gone up, at 30%, our attractiveness will be extremely high.” 

Conclusion: 

Bloom Energy is reserved for Advanced members because it does not have a quality fundamental profile, mainly seen in its need to raise cash to build capacity. However, there is a hypergrowth story here for many years to come. Bloom provides immediate time to power within 90 days compared to nuclear in 5-7 years’ time. The company articulates why they can compete with natural gas turbines with roughly 20% better energy costs albeit Bloom is an alternative energy source and many data center operators have less experience with hydrogen fuel cells. That is why Bloom will become more of a snowball effect, to where each deal (Oracle, AWS via AEP, and Quanta) will build on itself to prove to future hyperscalers that Bloom is not only a viable choice but a preferred method to quickly get power to data centers.  

What I’m saying — perhaps in a long-winded way — is that it’s the intraquarter deal announcements that will move this stock. I anticipate the I/O Fund will actively trade Bloom over the next few GPU generations as they push forward power requirements that only a handful of companies can (quickly) meet. Bloom is one of those companies.

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.

Recommended Reading:

Is the S&P 500 Overdue for a Correction? 2025 Forecast & Buy Levels to Watch

Posted on by io-fund

In our last Broad Market Report titled, Historic Uncertainty Meets $7 Trillion Dollar Debt Wall: What Comes Next For The S&P 500, the S&P 500 was trading near 5800 and still well below its February high. We outlined the unique macro risks that were dominating investor sentiment, which were at historic extremes. At the same time, technical signals suggested a path to new all-time highs remained likely

“The market breadth, Q1 earnings beats, and the size of this rally suggest that new all-time highs are likely to follow; however, one cannot underestimate the unique risks within the backdrop of markets.” 

Since then, the S&P 500 has surged through overhead resistance, validating many of those technical setups. In fact, the market largely ignored the unique macro risks, many of which are still present.

This is why we continue to lean into technical analysis to guide our positioning: even a sound macro thesis can be overruled by market trends and patterns that are in play.

That said, sentiment has now shifted in the opposite direction—toward euphoria. With tariffs de-escalating, policy shifting toward growth, and risk appetite soaring, we’re beginning to see signs of overheating that have historically led to healthy corrections.

Just as we outlined in our free October and February reports, our base case called for elevated volatility—but with the expectation that it would be buyable. That thesis is once again coming into focus. If the upcoming correction holds above critical support, we believe it will set the stage for another exceptional buying opportunity.  

Why We’re Watching Market Breadth Closely as Divergences Resurface 

Market breadth remains one of the most dependable ways to assess the strength of a trend. When the S&P 500 makes new highs without confirmation from key leadership—such as semiconductors or the Mag 7—it typically signals a weakening advance. 

We used this exact framework in late 2024 in our report, “AI Stocks Signal A Correction Before A Buying Opportunity Emerges,”AI Stocks Signal A Correction Before A Buying Opportunity Emerges,” when we shifted to a defensive posture ahead of a multi-month drawdown. At the time, participation narrowed as the index climbed—something we’re seeing again now. 

“While the market continues to push higher, it has been doing so without the support of key stocks and sectors. Unless that divergence resolves to the upside, it tends to be a warning.” 

That warning is back. The S&P 500 has notched new highs, yet several of the most important confirming indices are missing in action. Of the eight leading markets we monitor for confirmation, seven are currently diverging from the index: 

  • Equal-Weighted S&P 500 
  • Small Caps 
  • Semiconductors 
  • High Beta Growth 
  • Financial Conditions Index 
  • Transportation Stocks 
  • CBOE Volatility Index (VIX) 
  • Advance-Decline Line 
Chart showing divergence between S&P 500 and seven out of eight key confirming indices, signaling potential market instability.

Each of these has a strong historical track record of leading turns in the broader market. The Advance-Decline Line, in particular, tracks market participation—and it's deteriorating as the index rises. This shrinking participation is statistically rare and often precedes meaningful pullbacks. 

Equally critical is the behavior of economically sensitive areas like Small Caps, the Transportation Sector, and the Equal-Weight S&P 500—all of which tend to lead in and out of market corrections. The Semiconductor sector, meanwhile, is ground zero for the AI hardware boom and arguably the most important sector in the current cycle. None of these are confirming the S&P 500’s breakout. 

We’re also watching the VIX closely. While volatility typically declines as equities rise, it tends to tick up in tandem with the index just before major turns. That’s exactly what we’re seeing now—a non-trivial development that deserves attention. 

The above markets have a long history of leading market turns. The Advance Decline Line measures market participation, which is shrinking the higher the market goes. This is a rare signal that should not be ignored.  

The Equal Weight S&P 500, Transportation Sector and Small Caps, for example, are more economically sensitive, so tend to lead the broad market in and out of corrections. The Semiconductor sector is the most important broad sector in this bull market, as it is where the dominant AI hardware stocks reside. All of which are not confirming the S7P 500’s push to new all-time highs.  

The Vix is a measure of expected volatility over the next 30 days. When the market goes up, it goes down. However, just before market turns, we’ll see this index move with the S&P 500, which is exactly what is happening today.

The Mag 7 Leadership Is Fading 

The only market that is trending higher with the S&P 500 is the equal-weighted Mag 7. History will remember this bull market as being led by the Mag 7, which are the mega-cap growth stocks involved in the current phase of the A.I. trend – Nvidia, Microsoft, Meta, Google, Amazon, Tesla, Apple. Although material AI monetization is more nuanced, this group has consistently served as a proxy for the health of the bull market.  

However, if we look under the hood, out of the seven market leaders, only 3 have made it past their 2024 highs – Nvidia, Meta, Microsoft. The rest are either rangebound or in active downtrends. This lack of broad participation raises the likelihood of a near-term pullback.

As of July 2025, only two of the Magnificent Seven stocks — Nvidia and Microsoft — are trading above their 2024 highs, signaling narrowing market leadership.

As of July 2025, the only Mag-7 that are above their 2024 highs are Nvidia, Microsoft, Nvidia. 

It’s important to clarify: not every breadth divergence leads to a correction. However, every major correction begins with weakening breadth. If these divergences continue, the market is more likely to follow the path of its weakest links. On the other hand, if all eight of the non-confirming indices begin to reverse higher, it would likely result in a powerful trend continuation.

This is why we don’t act on breadth signals in isolation. Instead, we combine them with a rules-based checklist of additional clues that help confirm a potential reversal. For now, the weight of evidence is tilting defensive—just as it did in late 2024.

Stock Market Is Extremely Overbought 

When evaluating overbought conditions, many investors default to the Relative Strength Index (RSI)—a widely used momentum gauge. While RSI has merit, its most common interpretation (readings over 70 indicating “overbought”) can be misleading in strong market environments.  

In strong uptrends, RSI can remain above 70 for extended periods. De-risking solely based on that threshold often leads to premature exits—and missed upside. For example, in the chart below, derisking when RSI first hit 70 would have left an additional 11% of upside on the table.

The RSI often reaches extreme levels mid-trend rather than at turning points, making it unreliable for identifying true overbought or oversold conditions.

The RSI is not the best indicator to gauge overbought/oversold levels, as it tends to hit extremes in the middle if a trend, not the end.  

For this reason, I prefer the Margin Risk Indicator developed by WealthUmbrella, which identifies the stages of risk within a trend. For one, it has a more robust set of inputs, including: momentum, the slope of the trend, options market positioning, breadth and volatility.  

When this indicator moves above 11, it tends to warrant caution, as the market risk is elevated and ripe for a pullback. Any reading over 12, and especially over 13 is considered extremely overbought. It is rare that the indicator stays in this overheated reading for long, signaling that the market is close to a pullback. Unlike the RSI, this indicator tends to trigger closer to the end of a trend, as shown below.

The WealthUmbrella Margin Risk Indicator provides more accurate signals of overbought and oversold conditions than RSI by triggering closer to trend reversals.

The WealthUmbrella Margin Risk Indicator is a much better tool for gauging overbought/oversold conditions than the RSI, as it tends to trigger closer to the end of a trend.  

Today, the reading is at a rare 13, which has only happened less than 1.5% of trading days since the 2009 low. On average, when this reading flashes, the market only has between 1-3% more upside before seeing a correction.

The WealthUmbrella Margin Risk Indicator is flashing a rare reading of 13, highlighting extreme overbought conditions that often signal upcoming trend changes in the market.

The WealthUmbrella Margin Risk Indicator is flashing a rare 13, signaling an extremely overbought market, and tends to precede trend changes. 

Fund Managers Are ‘All-In’ as Cash Positions Hit 12-Year Lows 

These overbought conditions are also showing up in fund manager positioning. The most recent Bank of America’s Global Manager Survey saw the biggest spike for risk over the last 3 months on record. The current cash levels, as of July 15th, is at 3.9%, which is the lowest cash position in over 12 years, signaling that investors are, once again, all in on stocks. 

Bank of America’s July 2025 Global Fund Manager Survey shows cash levels at 3.9%—the lowest in over 12 years—indicating extreme bullish positioning and heightened risk.

This doesn’t mean a crash is imminent. But it does mean risk is rising, and returns are likely to compress in the near term. When signals like this cluster with breadth and sentiment extremes, we begin to prepare—not predict—for a market transition.

Stock Market Warning Signs Align with Broader S&P 500 Analysis 

Below are the levels we are watching that will confirm if the market is headed lower – and by how much. We use these levels to hedge our portfolio and to help protect our gains – which is what we did near the top in early January and again in February. We also use these levels to buy back lower – which is what we did in April and March when we entered 20 tranches.  

We won’t always get it right, nor is that the point. The point is to protect our money to to the best of our ability through risk management. Sign up below for free to receive the SPX levels we are watching. 

Subscribe for Free Below to see our updated game plan, which includes: 

  • The most probable path we expect equities to take through the second half of 2025. 
  • The key levels that must hold to keep that path in play. 
  • And what our strategy becomes if those levels fail. 

One of these scenarios is starting to take shape — read this timely analysis below.

The risks worth mentioning in the S&P 500 are mounting. For one, it is just below a major trend line. This trend line, which marked February's peak, now serves as significant resistance. 

Another point worth mentioning is how the bounce in the S&P 500 off the April low is now trending higher on less volume and momentum. On nearly every chart that we track, the higher we go, the less enthusiasm is being shown with buyers, which almost always precedes a trend change. 

Furthermore, the RSI is just under the bear market resistance zone. When the RSI is below this region, and price is at new highs, it is a warning. In powerful market moves, which tend to be in the middle of a trend, we will see this region break to the upside and oscillate around this zone. This has yet to happen. A failure at this region historically leads to sizable corrections.  

The I/O Fund’s general market outlook for 2025 and 2026, highlighting key trends, risks, and opportunities in the broader stock market.

The I/O Fund’s general outlook for the broad market into 2025 and 2026. 

As long as the market remains above 6200 – 6105, we can continue to drift higher. Below these levels will signal a top, of sorts. Once this happens, there are two general scenarios that best fit the price patterns:  

  • Green – This is the most probable scenario based on the perceived price pattern. We are in the final 5th wave of the cyclical bull market that started in 2022. The pattern of this bull market is a diagonal pattern, which means the coming correction will be an overlapping/3-wave drop that holds over 5345. We will then see a final multi-month swing to new highs. 
  • Blue – This is the next likely scenario. Here, the market gave us a rare and extremely shallow B-wave correction. As B-waves are the most variable wave pattern within Elliott Wave, we have to account for this. In fact, the same rare occurrence happened in late 2024. In this scenario, we would see a minor correction back to 6200, yest hold this level. Then we would continue to grind higher toward 7200 into this Fall. 
  • Red – While I do not have this as I high likelihood, the price patterns allow for this to unfold. Here, the cyclical bull market that started in 2022 ended in February of 2025. The current bounce is a correction within a larger drawdown. This means the next drop will be a more aggressive/5-wave drop that breaks through 5920, 5768, 5645, 5515, and final 5345. Each level that breaks, the higher risk will become. If this happens, then we will exceed the April lows before finding meaningful support.  

In conclusion, while we do not believe a market crash is the most probable scenario, it should be acknowledged considering the market pattern allows for it. Regardless of what we expect, the market is the greatest predictor of future events. We do intend to let the market tell us what to do in the coming correction.  

Since the April lows, we have maintained our original game plan – reposition defensively into the bounce and let the market tell us what the next move will be.  In other words, if the next pullback is a messy/3-wave drop, we will position aggressively for the next trend higher. If instead we see an aggressive/5-wave drop, we will patiently wait for lower levels to position.  

Even though we were very defensive going into this year, we were quite clear in October and February that any volatility would be bought. Within our premium subscription we issued 22 buy alerts between March 3rd and April 7, with 12 of those buy alerts happening between April 4th – 7th. We do not know many out there that were buying these lows as aggressively as we were.  

Today, we are echoing the same game plan that we outlined in February – the market is, once again, setting up for a correction, the nature of which will likely set up another excellent buying opportunity.

If you have missed out on the A.I. trend, are afraid it’s a bubble, or are not sure how to get involved, we encourage you to attend our upcoming weekly webinar for premium members. Next Thursday, August 7th, at 4:30 ET. In this upcoming webinar, we will discuss our game plan regarding the remainder of 2025. We will list buy targets for great AI names as well as go over how we plan to raise cash and further hedge our portfolio if this bear market continues into 2026. Learn more 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.

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