Lumentum: Stronger QoQ Growth than Coherent, New $600M Quarterly Revenue Target

Posted on September 3, 2025June 30, 2026 by io-fund

Lumentum has been on our radar for more than one year, as the company supplies components for datacom transceivers and optical interconnects with tech that has caught the attention of heavyweight Nvidia. We’ve been closely monitoring Lumentum and waiting patiently for their EML lasers for 200G to ship, enabling 800G and 1.6T bandwidths.

As discussed in the past, optical interconnects help data centers accelerate data throughput between data centers and inside the data center between servers or racks, while reducing latency and power consumption. AI is driving cloud demand higher from the hyperscalers, leading to more data being created and processed, thus helping drive a need for these interconnects to meet demand for high-speed, low power data transmission in data centers.

Specifically, Q4’s report provided confirmation of the EML laser ramp, as EMLs achieved an all-time high for shipments with revenue more than doubling versus its June 2024 baseline. Management also cited a “substantial” 200G EML order to be fulfilled in the December quarter, although offered little additional clarity on the size of the order.

Overall, Lumentum was quite confident in its growth opportunities from EML lasers, optical circuit switches and co-packaged optics heading into 2026. The company provided a new $600 million quarterly revenue target it expects to reach by next June or earlier, up from $424 million in the current quarter.

Lumentum also was arguably much stronger than peer Coherent with accelerating QoQ growth of 16.1% growth in its data center segment compared to Coherent at 5% QoQ. We break all of this down below.

Revenue Growth Re-accelerating after Tough FY24

Lumentum reported Q4 revenue of $480.7 million, beating analyst estimates by a modest 2.29%. This was a notable uptick on the top-line, with growth of 13.1% QoQ, accelerating 7 points, and 55.9% YoY, accelerating 42 points. This growth begins to support the thesis that Lumentum is past the cyclical low it experienced in FY24, including US imposed trade restrictions that resulted in lost revenue.

Guidance for Q1 FY26 came in at $510 to $540 million, representing 55.8% growth YoY and a slight moderation to 6% QoQ growth. Management attributes the strong forward revenue guide to surging AI workloads and the “shift toward high-speed photonics for hyperscale cloud operators.” Looking beyond the Q1 guide, analysts' expectations for Q2 and Q3 of FY26 reflect growth decelerating to 39.2% and 38.2% YoY, respectively. Regardless, this is still very strong growth.

FY25 revenue came in at $1.65 billion, with growth rebounding to 21% YoY from FY24’s (23%) YoY decline. FY26 is expected to see revenue growth accelerate nearly 20 points to almost 40% YoY, with current estimates at $2.29 billion.

The turnaround is from AI helping to drive a rebound in the Cloud and Networking segment, and is also due to the end of a deep trough in the telecom-exposed segment of Industrial Tech.

Key Segments: Cloud & Networking QoQ Growth Accelerates to 16%

Lumentum has two key segments: Cloud and Networking & Industrial Tech. Cloud and Networking continues to lead as the company’s primary growth source, representing ~85% of total revenue last quarter.

Cloud & Networking Q4 revenue came in at $424.1 million, representing 66.5% YoY growth. Additionally, the segment’s QoQ growth of 16.1% accelerated sharply from 7.6% QoQ in Q3, coming in much stronger than Coherent, where growth decelerated from 10% QoQ to 5%.

Management cited a few factors behind the outperformance in Q4: strong hyperscaler demand driving more than 50% QoQ growth in cloud modules, all-time high in EML shipments, and strong transceiver demand. Of these, EML drove the results this current quarter: “In Components, we achieved an all-time high in EML shipments, nearly doubling the revenue compared to our June quarter 2024 baseline.”

For Q1, management expects Cloud & Networking to be up QoQ, and based on guidance, this would likely correspond to approximately 10% QoQ growth at midpoint. Management indicated there was potential for strong growth starting in the upcoming December quarter: “Recently, we received a substantial order for 200-gig lane speed EML chips, which we expect to fulfill in the December quarter. Overall, we expect 2026 to be a breakout year for laser chip sales of both 100-gig and 200-gig lane speeds.”

Industrial Tech revenue came in at $56.6 million in Q4, representing 6% growth YoY but a (6%) QoQ decline. Management acknowledged that the segment revenue is seasonal and therefore volatile.

For Q1, management guided for Q1 revenue to be approximately flat QoQ, or a marginal 2-3% YoY increase.

It is worth noting that, like many of the AI names we cover, customer concentration is a risk present in Lumentum: two customers currently represent 31% of total revenue. This figure is consistent with the customer concentration reported last year. As the company continues to grow revenues, we would look for this ratio/concentration to decrease, signaling less reliance on any one customer and increased market penetration.

When asked about customer concentration for specific products, such as cloud modules and OCS, they stated that due to their being capacity constrained, it was unlikely they would take on new customers.

Operating Margin Recovery

The re-acceleration in revenues mentioned above drove solid in GAAP gross margin to 33.3%, higher than the 28.8% percentage seen in Q3 and double the 16.6% margin from Q4 FY24. Continued improvement in margins will confirm that management is not only capturing market share in a cost-effective manner but also effectively integrating previous acquisitions in a shareholder-friendly manner.

Non-GAAP gross reiterates this story, as Q4’s 37.8% margin continued to expand versus the prior quarter comp of 35.2% and prior year comp of 27.8%.

It is worth noting that in 2024, gross margins were negatively impacted due to US-imposed trade restrictions which limited the Company’s ability to sell to certain products to one customer. This resulted in roughly $20 million of inventory obsolescence write-offs, a temporary but negative impact to gross margins.

The revenue growth and improved unit economics lead to continued progress on operating margins as well. Q4’s GAAP operating loss of ($8.4 million) represents a (1.7%) operating margin, compared to (8.9%) in Q3 FY25 and (43.3%) in Q4 FY24.

Non-GAAP operating margin of 15.0% expanded nicely compared to prior quarter of 10.8% and prior year quarter of (5.1%). Most of the profit margin is driven by the Cloud and Networking segment, which boasted a margin of 23.6% in Q4, up more than 13 points YoY, whereas Industrial Tech’s margin improved 6 points to just 6%.

For Q1, management guided for continued expansion in adjusted operating margin to 16.0-17.5%, demonstrating continued operational efficiencies alongside strong top-line growth.

Regarding margin expansion, it’s likely to continue the closer Lumentum gets to the $600 million goal with a gross margin of close to 40%: “So because of that and the focus really being on the components business, getting us to $600 million, we should see a nudge-up again on gross margins, getting us close to the 40% that we outlined in the April OFC presentation where we said that we thought at $600 million would be between 37% and 40%. And just given the mix that we're seeing in front of us, we should be at the higher end of that range when we get to $600 million.” The opening remarks reaffirmed this goal: “Cloud revenue is growing well over 20% annually […] gross margins are set to surpass 40%” with the goal of seeing another 220 bps minimum by June 2026.

Adjusted Net Income Margin Continues Path of Expansion

Lumentum reported adjusted EPS of $0.88 in Q4, beating estimates of $0.81 and improving against the $0.57 reported in Q3 and $0.06 reported in the year ago quarter. Q4’s adjusted net income margin of 13.1% reflects continued operational improvements and the fourth consecutive quarter of sequential improvement (from 9.6% in Q3, 7.5% in Q2, and 3.6% in Q1).

As seen below, revenue growth when combined with operating margin expansion leads to sizable increases in the bottom-line returns. Management guided for $0.95 to $1.10 in adjusted EPS in Q1, up nearly 470% YoY, while Q2 is expected to see 176% growth to $1.16.

Cash and Balance Sheet: Positive Operating Cash Flow = Operational Flexibility

As we look at the business and its cash flow, the turn to positive operating cash flow this quarter and continuation of that trend will help alleviate any investors’ concerns about liquidity. Cash flows have been lumpy, though Q4 saw Lumentum report the highest operating cash flow margin in the past two years. However, free cash flows are pressured as Lumentum reinvests to expand manufacturing capacity.

Operating cash flow increased 80% YoY to $64 million, representing a 13.3% margin. This expanded nearly 2 points from 11.5% in the year ago quarter and was a notable uptick from (0.4%) in Q3.
For FY25, operating cash flow was up ~5x to $126.4 million, for a 7.7% margin, improving from a 1.8% margin in FY24.
Free cash flow declined (7%) YoY to $10.1 million, for a 2.1% margin, down from 3.5% in the year ago quarter.
As a result of elevated capex, FY25 free cash flow was ($104.7 million), for a (6.3%) margin, improving only slightly from (8.3%) in FY24.
Cash and equivalents of $877.1 million in Q4, largely in line with the $866.7 million reported in Q3. Debt remained largely consistent with the prior few quarters at $2.57 billion.
Inventory came in at $470.1 million, which continues to grow compared to the $422.9 million reported in Q3’25 and $398.4 million reported in Q4’24. Management stated that the inventory increase will support expected growth in Cloud & Networking. EML laser inventory was quoted as “very low” with management saying they are “basically shipping everything that we can make.”

The company uses significant financing in the form of convertible debt to fund day-to-day operations and investment. This capital structure (e.g. high debt to equity ratio) will amplify shareholder returns but can also put a strain on operating cash flow should the company run into short-term cash constraints.

Another key point to continually monitor will be levels around inventory. Significant increases in inventory levels or increases in DIO (Days Inventory on Hand) may be a warning signal of future write downs with P&L impact. For now, we would give the company a healthy balance sheet rating while acknowledging that Lumentum may need to access capital through markets should liquidity become tight.

Earnings Q&A:

New Medium-term Revenue Target at $600M

Given that Q1 would satisfy Lumentum’s May 2024 guidance to reach $500 million in quarterly revenue in calendar 2025, management has provided a new near-term revenue target, now projecting $600 million in quarterly revenue by Q4 FY26 or earlier.

The new target received a fair amount of attention on the earnings call Q&A, namely regarding what products drive this growth and the outlook for margins. Given the strong language from management, the current takeaway is this guidance could be conservative. Of course, we need a few more earnings reports to see if a higher number materializes, yet strong growth all around is being forecast.

There are four areas that will help Lumentum meet and potentially exceed this forecast. Given the company is expected to report strong 30%+ growth while expanding its margins over the next few quarters, it makes sense to break out management commentary by each product to help organize the many moving parts:

EML Lasers: Management stated there was a large order that is ramping soon: “Recently, we received a substantial order for 200-gig lane speed EML chips, which we expect to fulfill in the December quarter. Overall, we expect 2026 to be a breakout year for laser chip sales of both 100-gig and 200-gig lane speeds.”
This space is highly competitive. When asked why Lumentum is gaining market share over competitors, management stated the following: “Our customers typically report a significantly higher yield on their cloud modules using our EMLs over competitors. That allows us some pricing latitude, which has been super favorable.”
Cloud modules drove half of the sequential revenue growth in the period with over 50% QoQ growth in the quarter. Regarding future growth, it was stated the September quarter would not be as strong, yet would ramp quite quickly in the December quarter and beyond: “The cloud modules will definitely be a step-up. I think we had a really big step-up this quarter, a 50% sequential gain in terms of top line. I think we'll hit a little bit of an ebb here in the next quarter, but then we'll see a pretty dramatic acceleration in cloud modules in our December quarter, March quarter and June quarter.”
Regarding optical circuit switches, it was stated during the Q&A that the ramp will result in significant revenues: “I think that we'll start to see more meaningful revenue, meaning very, very significant revenues in Q1, Q2 and then certainly in the back half of calendar 2026. So it is a ramp. There's some gradualness to it. There's a couple of inflection points. The first inflection point is probably early in '26, but then a more meaningful inflection point in the back half of '26. Right now, we're honestly limited by how many we can build, right? We're trying to ramp this thing very quickly. We see a tremendous level of demand, but we are limited by how much we can supply.” Something similar was later echoed, indicating FY2026 will see more OCS revenue as the year progresses: “We start to see revenue — meaningful revenue contributions in the first half, significant revenue contributions for OCS in the second half.”
Co-packaged optics (CPOs) are not contributing to revenue now yet could materialize into one of the biggest opportunities among all of the components and subsystems that Lumentum supplies. This is one to keep a close eye on.

In the current quarter, management announced “Our commitment to co-packaged optics or CPO is stronger than ever. We just received the largest single purchase commitment in company history […] Our investments in this facility will position us for a significant revenue ramp in CPO by the second half of calendar 2026.”

An analyst asserted in the call that Lumentum has the leading technology for co-packaged optics, which is an important statement given Nvidia is rumored to be rolling out their own internal CPOs in the coming year.

Here’s the original announcement from Nvidia. We covered it here.

“Simon Matthew Leopold

And then as a follow-up, I wanted to check in on the CPO opportunity as well. So that sounds like it's progressing. Last we spoke, it sounded like you were the only approved supplier in the ecosystem for the high-powered laser. Wondering how you're thinking about your position in that market in terms of quantifying as well as your ability to remain a sole source supplier? How is the competitive landscape?”

Optical Circuit Switching Ahead of Schedule and Margin Accretive

We pointed out in Coherent’s post-earnings analysis, Coherent Q4: Data Center Growth Slowing QoQ; Competitive Concerns, that optical circuit switching would increase COHR’s TAM by ~$2 billion, while booking its first revenue last quarter.

Similar to Coherent, Lumentum also booked its first OCS revenue in the fourth quarter with shipments to two hyperscaler customers, yet there were more positives revealed.

What’s more notable is this OCS revenue is two quarters ahead of expectations with more customers; as Raymond James analyst Simon Leopold pointed out: “you previously suggested you'd see first revenue in the December quarter. So this is 2 quarters earlier than what we were thinking and we're thinking one customer, not two.”

Lumentum stated that its OCS order book is expanding with both customers, and it now has a third hyperscaler committed to deploy its OCS in calendar 2026. Management believes that their “leadership in optical performance, particularly in 300×300 form factors has allowed us to capture volume opportunities earlier than competitors.” This hints at possibly winning customers from Coherent, who only said that customer engagement in OCS was “very strong” but did not explicitly state hyperscaler wins.

CEO Michael Hurston also offered clarity on the ramp trajectory for OCS and when revenue is expected to inflect:

“I think the current quarter, next quarter and the December quarter are still ramping. We're ramping because we're building our capacity in Thailand to support the customers. I think that we'll start to see more meaningful revenue, meaning very, very significant revenues in Q1, Q2 and then certainly in the back half of calendar 2026. So it is a ramp. There's some gradualness to it. There's a couple of inflection points. The first inflection point is probably early in '26, but then a more meaningful inflection point in the back half of '26. … We see a tremendous level of demand, but we are limited by how much we can supply.”… We see a tremendous level of demand, but we are limited by how much we can supply.”

Supply constraints aside, OCS is an attractive growth lever for Lumentum as it is accretive to margins. Management said that OCS enjoys margins “significantly above corporate margin averages,” and will be accretive in 1H 2026 as volumes will then begin offsetting dilutive impacts from the factory ramp. This will need to be watched closely considering Lumentum is walking a fine line by simultaneously accelerating in-house OCS manufacturing capacity and expanding indium phosphide production for co-packaged optics (CPO).

800G and 1.6T Shipping, EMLs Sold Out; Company Capacity Constrained

Given the similarities between Coherent and Lumentum as neck-and-neck competitors, it’s interesting to see some of the nuances in commentary for the ramp of 800G and 1.6T over the coming quarters.

Notably, Lumentum shared that it had received a “substantial” 200G EML chip order that it expects to fulfill in the December quarter (Q2 FY26), though management offered little clarity on the size or revenue potential of this order.

Management shared that EML shipments on the 800G transceivers (100G per lane) are continuing to climb, while they are “starting to see the early ramp of 1.6T.” For 1.6T specifically, management said growth would “feather in next year” with the first 200G shipments just now arising. Overall, Lumentum expects 2026 to be a breakout year for laser chip sales on both 100G and 200G speeds.

This is more subtle than Coherent in saying that 800G is “ramping very quickly,” with 1.6T growing on top of that. However, Lumentum made the point of saying that most hyperscalers remain on 800G platforms “probably the next couple of years at a minimum,” as 1.6T is “just getting started,” hinting that the stronger growth for 1.6T may not be seen until 2026 to 2027 and beyond.

Lumentum also dropped an important tidbit relating to competitive pressures, growth and margins. Management said that “customers typically report a significantly higher yield on their cloud modules using our EMLs over competitors,” which has given them “super favorable” pricing. This is likely a key factor behind expanding margins in Cloud & Networking and why capacity is sold out for the year.

Capacity Constraints:

Although Lumentum pointed out that they are the largest supplier in terms of capacity with their Japan factory outputting more EMLs than any other location, capacity constraints were a frequent mention throughout the call.

Lumentum stated outright that while capacity is ramping, demand continues to outpace supply and is expected to remain that way through fiscal 2026. Hurlston said that EMLs are sold out for the balance of the year, and management is being selective in choosing customers based on that limited capacity. He added that completing the transition from 3-inch to 4-inch wafers should help boost capacity, though he did not comment on an estimated completion date. It’s likely that Lumentum will continue to invest in expanding capacity over the next few quarters to help meet high demand, after spending $59 million in capex primary for capacity expansion in Q4, or 12% of revenue.

Limited Cloud Module Customer Engagement

Despite management’s optimism on cloud modules delivering substantial growth into calendar 2026, CEO Michael Hurlston emphasized that three customers would likely be their limit with little room to bring new customers onboard in the near-term. This stems partially from a focus on the highest margin opportunities (OCS being accretive and cloud modules not being accretive), as well as being supply constrained. This is similar to what we discussed in our April analysis, Lumentum at Inflection Point with 20% QoQ Growth in AI-Related Segment, where management pointed out that yield and supply issues were hindering growth.

Hurlston said that Lumentum is focused primarily on these three customers, and that new customer additions in the near term will be minimal. He was straightforward in saying that while Lumentum does expect cloud modules to be beneficial from a revenue growth perspective over the next four to eight quarters, they will drag on gross margins — in the best case scenario, Hurlston said the company expects cloud modules to maybe push 30% gross margins, nearly 10 points lower than corporate gross margins.

Tariff Impacts from Japanese Fabs, China-Sourced Cloud Modules

Tariffs are important to touch upon given the recent fluidity in tariff policy, considering Lumentum is inherently much more exposed to tariffs than Coherent with its supply chain presence in Japan and China.

When asked about the recent 100% tariffs on semiconductor imports and impacts from its Japanese fab presence, management clarified that they “determined that our products are exempted from any of the tariffs that would be applicable in that new guidance” and are “fairly comfortable” that Lumentum will not be impacted.

Additionally, management stated that at the start of fiscal Q4, they believed they would have had “up to a 100 basis point negative impact from tariffs. And yet in Q4, we actually had minimal impact of tariffs.” For Q1’s guidance, management said they included a slight impact “just in case something new pops up in the remaining part of August and September, and we'll see at the end of the quarter where that ends up. But for now, no material changes in our business.”

Lumentum also commented on its expansion efforts in Thailand at its Nava facility, as this is expected to help diversify away from China. CEO Michael Hurlston acknowledged that “a lot” of Lumentum’s cloud modules are sourced from China, and the Thailand footprint should offer some flexibility when it comes to tariffs.

Additional Points:

Apple’s partnership with Coherent: We covered the multi-year partnership between the two in our COHR analysis, with COHR’s revenue expected to see a more meaningful boost in 2H 2026 and into 2027. Analysts asked if Lumentum saw that business area becoming more significant in the future, to which management responded that “Face ID and 3D sensing will be a minimal part of our business on a go- forward basis.”

Conclusion

Lumentum delivered a solid Q4 report with accelerating sequential growth in its Cloud & Networking segment, whereas Coherent fell short of the mark with data center growth decelerating. Q4’s report gave more confirmation and confidence in Lumentum’s EML strength and ramp, with a substantial 200G EML order on the deck for fulfillment in Q2 FY26.

Management appeared quite confident in capitalizing off a trio of growth opportunities from EML lasers, optical circuit switches and co-packaged optics heading into 2026, though there are still lingering concerns about capacity constraints and tariff impacts given manufacturing concentration in Japan and China.

Of the opportunities mentioned above, CPOs are a key catalyst that could provide upside to this stock. CPOs will offer the performance of optical yet with reduced power consumption, with a company like Lumentum supplying the lasers and optical engines that are mounted closer to the switch ASICs. Overall, this would mark a shift in the current AI networking architectures with Lumentum downwind of that shift come 2026. We will be watching this very closely and have a trade setup in mind for this stock.

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock and crypto entries and exits. Beth Kindig offers weekly deep dives including lesser-known cryptocurrencies and AI stocks, plus the team offers trade alerts. The I/O Fund team is one of the only audited portfolios available to individual investors. To receive $100 off our Advanced tier use ADVANCED100 or click here and email your request to upgrade.4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock and crypto entries and exits. Beth Kindig offers weekly deep dives including lesser-known cryptocurrencies and AI stocks, plus the team offers trade alerts. The I/O Fund team is one of the only audited portfolios available to individual investors. To receive $100 off our Advanced tier use ADVANCED100 or click here and email your request to upgrade.

Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Recommended Reading:

Lumentum: Stronger QoQ Growth than Coherent, New $600M Quarterly Revenue Target

Posted on September 3, 2025June 30, 2026 by io-fund

Lumentum also was arguably much stronger than peer Coherent with accelerating QoQ growth of 16.1% growth in its data center segment compared to Coherent at 5% QoQ. We break all of this down below.

Revenue Growth Re-accelerating after Tough FY24

The turnaround is from AI helping to drive a rebound in the Cloud and Networking segment, and is also due to the end of a deep trough in the telecom-exposed segment of Industrial Tech.

Key Segments: Cloud & Networking QoQ Growth Accelerates to 16%

Industrial Tech revenue came in at $56.6 million in Q4, representing 6% growth YoY but a (6%) QoQ decline. Management acknowledged that the segment revenue is seasonal and therefore volatile.

For Q1, management guided for Q1 revenue to be approximately flat QoQ, or a marginal 2-3% YoY increase.

Operating Margin Recovery

Non-GAAP gross reiterates this story, as Q4’s 37.8% margin continued to expand versus the prior quarter comp of 35.2% and prior year comp of 27.8%.

For Q1, management guided for continued expansion in adjusted operating margin to 16.0-17.5%, demonstrating continued operational efficiencies alongside strong top-line growth.

Adjusted Net Income Margin Continues Path of Expansion

Cash and Balance Sheet: Positive Operating Cash Flow = Operational Flexibility

Operating cash flow increased 80% YoY to $64 million, representing a 13.3% margin. This expanded nearly 2 points from 11.5% in the year ago quarter and was a notable uptick from (0.4%) in Q3.
For FY25, operating cash flow was up ~5x to $126.4 million, for a 7.7% margin, improving from a 1.8% margin in FY24.
Free cash flow declined (7%) YoY to $10.1 million, for a 2.1% margin, down from 3.5% in the year ago quarter.
As a result of elevated capex, FY25 free cash flow was ($104.7 million), for a (6.3%) margin, improving only slightly from (8.3%) in FY24.
Cash and equivalents of $877.1 million in Q4, largely in line with the $866.7 million reported in Q3. Debt remained largely consistent with the prior few quarters at $2.57 billion.
Inventory came in at $470.1 million, which continues to grow compared to the $422.9 million reported in Q3’25 and $398.4 million reported in Q4’24. Management stated that the inventory increase will support expected growth in Cloud & Networking. EML laser inventory was quoted as “very low” with management saying they are “basically shipping everything that we can make.”

Earnings Q&A:

New Medium-term Revenue Target at $600M

EML Lasers: Management stated there was a large order that is ramping soon: “Recently, we received a substantial order for 200-gig lane speed EML chips, which we expect to fulfill in the December quarter. Overall, we expect 2026 to be a breakout year for laser chip sales of both 100-gig and 200-gig lane speeds.”
This space is highly competitive. When asked why Lumentum is gaining market share over competitors, management stated the following: “Our customers typically report a significantly higher yield on their cloud modules using our EMLs over competitors. That allows us some pricing latitude, which has been super favorable.”
Cloud modules drove half of the sequential revenue growth in the period with over 50% QoQ growth in the quarter. Regarding future growth, it was stated the September quarter would not be as strong, yet would ramp quite quickly in the December quarter and beyond: “The cloud modules will definitely be a step-up. I think we had a really big step-up this quarter, a 50% sequential gain in terms of top line. I think we'll hit a little bit of an ebb here in the next quarter, but then we'll see a pretty dramatic acceleration in cloud modules in our December quarter, March quarter and June quarter.”
Regarding optical circuit switches, it was stated during the Q&A that the ramp will result in significant revenues: “I think that we'll start to see more meaningful revenue, meaning very, very significant revenues in Q1, Q2 and then certainly in the back half of calendar 2026. So it is a ramp. There's some gradualness to it. There's a couple of inflection points. The first inflection point is probably early in '26, but then a more meaningful inflection point in the back half of '26. Right now, we're honestly limited by how many we can build, right? We're trying to ramp this thing very quickly. We see a tremendous level of demand, but we are limited by how much we can supply.” Something similar was later echoed, indicating FY2026 will see more OCS revenue as the year progresses: “We start to see revenue — meaningful revenue contributions in the first half, significant revenue contributions for OCS in the second half.”
Co-packaged optics (CPOs) are not contributing to revenue now yet could materialize into one of the biggest opportunities among all of the components and subsystems that Lumentum supplies. This is one to keep a close eye on.

Here’s the original announcement from Nvidia. We covered it here.

“Simon Matthew Leopold

Optical Circuit Switching Ahead of Schedule and Margin Accretive

Similar to Coherent, Lumentum also booked its first OCS revenue in the fourth quarter with shipments to two hyperscaler customers, yet there were more positives revealed.

CEO Michael Hurston also offered clarity on the ramp trajectory for OCS and when revenue is expected to inflect:

800G and 1.6T Shipping, EMLs Sold Out; Company Capacity Constrained

Given the similarities between Coherent and Lumentum as neck-and-neck competitors, it’s interesting to see some of the nuances in commentary for the ramp of 800G and 1.6T over the coming quarters.

Capacity Constraints:

Limited Cloud Module Customer Engagement

Tariff Impacts from Japanese Fabs, China-Sourced Cloud Modules

Additional Points:

Apple’s partnership with Coherent: We covered the multi-year partnership between the two in our COHR analysis, with COHR’s revenue expected to see a more meaningful boost in 2H 2026 and into 2027. Analysts asked if Lumentum saw that business area becoming more significant in the future, to which management responded that “Face ID and 3D sensing will be a minimal part of our business on a go- forward basis.”

Conclusion

Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.

Dell Q2: Exceptional AI Growth yet AI Margins Miss the Mark

Posted on August 29, 2025June 30, 2026 by io-fund

Dell raised AI server shipments for the fiscal year from $15 billion to $20 billion, for a raise of 33%. AI servers are expected to account for nearly 19% of Dell’s revenue in FY26 following ISG growing an impressive 63% QoQ.

Management stated it was the “single largest number of customers that we sold in a quarter” and “it is the most revenue we generated to enterprise customers in a quarter to date.”

The size of AI revenue is impressive and ranks Dell in the top 10 companies on the public markets by size of AI revenue. Consider that Broadcom will deliver a similar number this year.

However, the key difference with Dell is the margins are slim – with one analyst asserting that AI server margins could be as low as 2.5% calculated off the guide. The GAAP numbers show gross margin dipped although operating margin held steady. The CFO did state margins would improve into the second half.

There were some notable comments around the enterprise AI market heating up, plus a mention of having 6700 unique customers in their pipeline (sounds like a large number when you think of the high customer concentration most hardware companies must contend with).

Overall, the margins overshadowed the otherwise exceptional AI growth. Until the margins improve, the market will not be rewarding the stock the same as its AI peers.

Revenue Growth Accelerates to 19% YoY

Dell reported $29.78 billion in revenue in Q2, coming in above the high-end of its guided $28.5-29.5 billion range and beating estimates of $29.2 billion by 2.7%. This corresponded to growth of 19.1% YoY, a sharp 14 point sequential acceleration, driven primarily by outperformance in AI servers with record shipments.

This growth is expected to be somewhat of a one-off, with Dell guiding for just 11% YoY growth in Q3 to $26.5-27.5 billion in revenue.

For FY26, Dell boosted its revenue outlook by $4 billion at midpoint, now seeing $105-109 billion, up from $101-105 billion previously; this corresponds to growth of 11.9% YoY. This places Q4 revenue at a tentative $26.8 billion, or $0.8 billion ahead of estimates.

On closer view, Dell’s FY26 guidance raise was $1 billion lower than its AI server guidance raise of ~$5 billion, suggesting that there may be some demand-related headwinds in PCs or other segments it needs to parse through.

Key Segments

Infrastructure Solutions Group (ISG) up 63% QoQ, Server Shipments up 356% QoQ

As expected, Dell’s ISG revenue experienced significant growth in Q2, up 44.2% YoY and 62.8% QoQ, driven by strong outperformance in AI server shipments in the quarter. For Q3, Dell guided for ISG growth in the low-20% range YoY, likely driven by normalizing AI server shipments.

Q2’s AI server shipments came in well above Dell’s $7 billion guide, rising 356% QoQ and 165% YoY to $8.2 billion. Although orders more than halved sequentially to $5.6 billion, Dell’s AI server backlog remained elevated at $11.7 billion.

As a result of the strong shipments in Q2, taking 1H to $10 billion, Dell raised its AI server shipment outlook for the year from $15 billion to $20 billion. While this is a welcome increase, the dichotomy between shipments and orders raises some concern, with Dell shipping only $10 billion of its $18 billion in orders booked so far this fiscal year.

Additionally, the FY guide again points to normalizing AI server shipments of ~$5 billion/quarter in 2H, a slight uptick from our Q1 readthrough of $3.5-4 billion, but still a bit soft when factoring in backlog and orders.

Within ISG:

Servers and Networking revenue: $12.94 billion, up 68.7% YoY and 104.8% QoQ. This is the strongest combination of YoY and QoQ growth for the subsegment since Q2’25, driven primarily by that AI server strength.
Storage revenue: $3.86 billion, down 3.0% YoY and down 3.5% QoQ.

ISG operating income was $1.47 billion, up 14.5% YoY and up 47.3% QoQ. However, this reflected an operating margin of 8.8%, down from 9.7% in Q1’26 and down from the 11.0% reported in Q2’25.

The CFO stated margins would improve in H2: “Our ISG operating income rate was down year-over-year to 8.8% of revenue. As we have outlined before, the mix of our AI business will have an impact on our margin rates. In the second quarter, we saw a significant shift in our mix to AI as the team executed very well and drove record AI shipments. This was the primary driver of our operating income rate this quarter, partially offset by lower operating expenses. Given our engineering differentiation and integration, we expect our AI margin rates to improve in the second half.”

Client Solutions Group (CSG)

CSG revenue rose less than 1% YoY and was approximately flat QoQ to $12.50 billion, as Commercial momentum faded. CSG operating income was $803 million, or a 6.4% margin, up from 5.2% in Q1’26 but down from 6.6% in Q2’25.

Commercial revenue of $10.78 billion declined (2.4%) QoQ and decelerated 7 points to 2.1% YoY, despite Dell noting that commercial PC demand grew YoY for the sixth straight quarter. Consumer revenue rebounded 17.7% QoQ but remained down (7.3%) YoY to $1.72 billion.

For Q3, Dell guided for CSG revenue growth to rebound to the mid single-digits.

Gross Margins Dip Below 20%, Operating Margins Show Strength

Dell’s gross margins dipped below 20% for the first time in three years, and this margin compression was a key focus point on the earnings call, as analysts wanted to understand underlying drivers and forward expectations.

Management indicated that margin degradation was driven by AI server mix shift but expects to see improvements into the back half of FY26. We will continue to monitor how gross margins trend in future reports.

In Q2, GAAP gross margin contracted nearly 300 bps YoY and QoQ to 18.3%, while adjusted gross margin was nearly 400 bps lower YoY to 18.7%. Operating margins showed some strength and reflected economies of scale driven by top-line growth, as GAAP operating margin expanded both YoY and QoQ.

GAAP operating margin was 5.9%, up from 5.4% in the year ago quarter and 5.0% in Q1.
Adjusted operating margin was 7.7%, down slightly from 8.1% in the year ago quarter but up from 7.1% in Q1.

GAAP net margin was 3.9%, up from 3.4% in the year ago quarter but down slightly from 4.1% in Q1.
Adjusted net margin was 5.3%, down slightly from 5.5% in the year ago quarter but up from 4.6% in Q1.

EPS

Dell reported $2.32 in adjusted EPS in Q2, a marginal $0.03 beat versus estimates. Adjusted EPS growth did reaccelerate to 22.8% this quarter, though this is likely to be the peak growth quarter for the fiscal year as the margin compression led to a soft Q3 EPS guide.

For Q3, Dell guided for just 11% YoY growth to $2.45 in adjusted EPS at midpoint, below estimates for 18.5% growth to $2.55. For Q4, analysts are projecting 11% growth to $2.98.

For FY26, Dell updated its adjusted EPS guidance to $9.55 at midpoint, up 25% YoY, ahead of estimates for $9.37. This will likely force revisions in Q4 to move 7-9% higher considering adjusted EPS is pegged at approx. $6.32 through Q3.

Looking out to FY27, EPS growth is expected to cool to 15.1% YoY to $10.79.

Cash Flow Margins Decline Sequentially as Accounts Receivable Surge

While Dell did report record 1H operating cash flow at $5.3 billion, cash flow margins contracted from Q1 as accounts receivables surged more than 50% QoQ.

Cash & Cash Equivalents were $8.15 billion in Q2, up from $7.7 billion in Q1. Debt was largely flat with Q1 at $28.7B.
Operating cash flow came in at $2.54 billion in Q2, down from to $2.8 billion in Q1 but nearly doubling against $1.34B in Q2’25. OCF margin was 8.5%, down from 12.0% reported in Q1’26 but up from 5.4% reported in Q2’25.
Free cash flow came in at $1.87 billion, down from $2.23 billion in Q1 and up from $1.28 billion in Q2’25. FCF margin was 6.3%, down from 9.5% reported in Q1’26 but up from 5.1% reported in Q2’25.

Behind the sequential decline in cash flow margins was a 53.5% QoQ increase in accounts receivable to $15.02 billion. On a YoY basis, AR was up 31.9% YoY. DSO as of Q2’26 was ~46 days, compared to ~41 days in Q1 FY26 and ~39 days in Q2 FY25. This jump corresponds with the explosion in AI Server shipments, as revenue recognition occurs at shipment and cash is collected later-on. AI server customers are large enterprise & CSP buyers which may negotiate longer credit terms compared to the consumer / SMB segments. The jump in AR nearly matches the $6.4B sequential increase in payables which largely offsets the impact to cash conversion. The combination in higher AR & AP should indicate to investors that Dell may be carrying larger working capital load tied to the ramp of Blackwell – both collecting later from customers and paying later to suppliers.

Inventories of $7.21B reflects a (2.8%) decline compared to $7.42B as of Q1’26 and 21% increase compared to the $5.95B as of Q2’25.

Share Buybacks and Dividends: $1.3B returned to shareholders through buybacks of $.9B and $.3B in dividends during Q2.

Earnings Call Q&A

The call was split between analysts poking around to see if the $20B fiscal year AI shipment guide was conservative or not, and other analysts finding creative ways to reaffirm the margins would improve in the second half of the year.

Commentary on AI Shipments

Dell asserted in their commentary they are winning deals due to the speed to market their company offers: “Customers are seeing real-time the value in our ability to deploy large-scale clusters quickly and reliability.”

They reiterated they were the first to stand up the GB200 NVL72 and GB300 NVL72s: ‘We were the first in the world to ship both the NVIDIA NVL72 solution last year and the NVL72 system in July.”

When asked right out the gate if the $20B was too low, the CEO stated it was not on their end rather the constraint is the complexity of the systems that are being stood up:

“You've heard us talk about the numbers, but I always sit back and like to reflect on so far through the first half of the year, we've sold $17.7 billion of AI infrastructure. then we shipped $10 billion of that, which would imply we'll ship about $10 billion in the second half equal to the 20. The 5-quarter pipeline continues to grow. — exciting in that pipeline as we saw the sovereign opportunities and the enterprise opportunities grow double digits. But there's complexity here and the complexity lies into these are large-scale deployments. Many have scheduled deliveries and those scheduled deliveries are dependent on things like buildings being ready, power being installed, cooling being installed. — and they are managing a very complex supply chain and a transition as you called out to Blackwall Ultra.”

Margins to Improve by Q4:

The CFO stated the margins would improve by Q4 for increased profitability due to a higher mix of storage and traditional servers.

“From a storage perspective, storage is expected to perform better sequentially in the second half. with more Dell IP as well as normal seasonal acceleration in the fourth quarter. that acceleration in the fourth quarter that storage weighting is what's driving a significant amount of that expected profitability that's implied in our fourth quarter guide. raditional servers are expected to grow in the second half. And of course, we expect our operating expenses to continue to come down as well. So net-net, we expect to be able to deliver more profitability in the second half, and you see that again weighted into the fourth quarter.”

However, for now AI servers are gross dollar accretive and rate dilutive, which we saw this quarter as Dell had a lower gross margin despite adding $500M in gross profits. Dell explained they do foresee their AI server margin expanding as they will have a higher mix of enterprise and sovereign customers compared to cloud service providers (CSPs) where the margins are lower.

“And then if I go back to your question about margins, it's what I tried to articulate earlier with [indiscernible] we expect the onetime costs in our supply chain to reconfigure and to expedite materials not to be in place in the second half. We think there's some opportunity for us to continue to value engineer the scaling of the P&L. And then lastly, the enterprise customers and shipping to enterprise customers and the opportunity to attach unstructured storage, networking and our professional services around that.”

How Low are AI Server Margins, Exactly?

One analyst stated their math implies server margins could be as low as 2% to 2.5% – hence the stock selling off despite the strong AI growth. This is because Dell guided for $4B raise in revenue but only $110M in net profit.

Dell raised their FY2026 revenue from $103B at the midpoint to $107 at the midpoint, with the assumption this from AI servers.
However, Dell only raised GAAP EPS from $7.98 at the midpoint to $7.99 at the midpoint. Adjusted GAAP EPS for the year was raised from $9.40 to $9.55.

This prompted the following exchange, which reveals just how slim the AI server margins are. Notably, the CFO did not deny this calculation.

“Amit Daryanani, Evercore:

I guess I just had a question on the fiscal '26 guide, the way you folks have raised it. You're raising the top line by 4 points or bottom line by about $0.15. It sort of looks like $4 billion more of revenues and about $100 million, $110 million more of net income. And I'm sure there's a lot of moving parts over here, but it almost looks like AI server margins are in the 2%, 2.5% zone for you folks. But maybe just talk about why is the conversion margin so low for the incremental revenues that are coming into the model what are the other puts and takes around it, assuming AI margins are better than that 2.5% matter imply?

CFO:

So if I think about the guide that we have for the second half, certainly, the demand dynamics play a key role in that. So if I think about the traditional server when I think about the AI mix, the biggest impact to the second half and the profitability and outcome is the seasonality within the ISG business and within storage. And so when I think through how we're going to drive more profitability, really do think it's holistic across the board, but it is weighted towards the standard seasonality in the fourth quarter from a storage standpoint. So that's what is embedded within the guide. That's what you can see. That's what we deliver historically, and we — we'll do that again this fiscal year.”

Conclusion:

AI server shipments were a highlight, but AI server margins are a lowlight. That muddies the outcome as typically an investor should be able to celebrate when a portfolio holding reports this kind of AI growth, yet there is very little to celebrate given such thin profitability from the AI segment.

We have a tiny placeholder on this stock of 1% until management can prove there’s an attractive AI business to invest in. We are on the lookout to make sure AI servers have not become a race to the bottom in the competitiveness of winning the Blackwell business.

Should Dell revive its margins, which according to management will be accomplished through the storage attach rate and thier IP portfolio, the stock could become more attractive especially given $20B in AI revenue is nothing to scoff at. Basically, Dell is one to watch but we will not be adding to the position at this time.

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Nvidia Q2: Guidance for Q3 Saved the Day; $10T Market Cap Prediction Revisited

Posted on August 28, 2025June 30, 2026 by io-fund

Nvidia is the global AI compute leader and there is not a distant second. Therefore, reporting (1%) for Q2’s compute segment should have tanked the stock. Instead, we are seeing a mild reaction because Q3 was quite strong and spells good things to come for Nvidia in the second half of the year.

Given we are on the cusp of Blackwell starting to drive the stock’s narrative (c’mon already), it’s a good time to pause and talk about where Nvidia could go from here. I revisited the medium-term and longer-term forecast on a few pre-earnings discussions and was pleasantly surprised that Jensen Huang did the same on the earnings call.

Also important for I/O Fund members who hold AI networking positions, the report was much stronger than expected with networking up a whopping 46% QoQ and 78% YoY to $7.25 billion. This foreshadows what’s to come in the AI networking space; and should be a boon for stocks like Astera Labs and Credo which supply Nvidia.

Despite Q3 putting Nvidia right on track, I would not be surprised if the market offers soft price action on the stock in the near-term. The China narrative is confusing (and beaten to death), Q2 should mark a bottom and semiconductors don’t do well at their cyclical bottoms, plus the AI market is running on fumes until Nvidia can carry the market (Q3-Q4).

First, we will run through the financials, and then in the second section I’ll break down what I think you can expect on this stock for the remaining part of this year, into calendar year 2026 and by the end of the decade.

Slight Revenue Beat in Q2, Solid Q3 Guide

Nvidia reported $46.74 billion in revenue in Q2, slightly ahead of estimates for $46.13 billion. This corresponded to growth of 55.6% YoY, decelerating more than 13 points from 69.2% in Q1; on a QoQ basis, revenue increased just 6.1%, slowing from 12% in Q1.

This is expected to be a temporary lull in sequential growth, as Nvidia guided for $54 billion in revenue, +/- 2%, for Q3, corresponding to 53.8% YoY growth and a rebound to 15.5% QoQ growth. This was ahead of estimates for $52.7 billion, even with Nvidia noting that this guidance assumed no H20 sales in the upcoming quarter.

For FY26, Nvidia is currently expected to report 55.4% revenue growth to $202.8 billion, though it is likely that this figure is revised higher, towards $205 billion, accounting for the slight beat in Q2 and Q3’s guide.

Key Segments: First Sequential Decline in Compute Revenue, No China Sales

Nvidia’s data center revenue increased 56% YoY and 5% QoQ to $41.1 billion, a marginal miss versus estimates for ~$41.2 billion in the quarter. This is also the smallest sequential increase since Hopper’s breakout quarter at just ~$2 billion.

Notably, Q2’s data center result would mark the segment’s first miss since Q4 FY23 as Q1 was essentially in-line.

While Compute revenue was up 50% YoY, the segment reported an unusual (1%) QoQ decline to $33.8 billion, a sharp shift from double-digit growth in late FY25 and 5% in Q1. Nvidia said the sequential decline was driven by a $4 billion QoQ reduction in H20 sales, as it reported no H20 sales to China this quarter and $0.65 billion in H20 sales to an unrestricted customer outside of China.

On a more positive note, Nvidia said that it is continuing to ramp Blackwell and now Blackwell Ultra GPUs, with growth of 17% QoQ. Based on comments from Q1 placing Blackwell revenue in the $23.5-24B range, this would place Blackwell revenue approaching $28 billion.

Networking growth was also robust in Q2, helping offset the softness in Compute as revenue rose 46% QoQ and 78% YoY to $7.25B. This marked a 22 point acceleration from 56% YoY growth in Q1. Nvidia said the strong performance in Networking was driven by “growth of NVLink compute fabric for GB200 and GB300 systems, the ramp of XDR InfiniBand products, and adoption of Ethernet for AI solutions.”

Gaming revenue was $4.29 billion, rising 14% QoQ and accelerating 7 points to 49% YoY. Nvidia said this was driven by sales of Blackwell-based GPUs.
Automotive revenue rose 69% YoY and 3% QoQ to $586 million.
Pro Viz revenue rose 32% YoY and 18% QoQ to $601 million.
OEM and other revenue rose 97% YoY and 56% QoQ to $173 million.

Margins Outperform in Q2 with Strong Expansion

Despite the softness in data center compute, Nvidia outperformed on margins, beating its guidance across the board and delivering a notable uplift in operating margin. Nvidia guided for more sequential improvement in operating margin in Q3, to the highest level since Q1 FY25.

GAAP gross margin was 72.4% in Q2, slightly ahead of guidance for 71.8%. Adjusted gross margin was 72.7%, or 72.3% excluding $180M in H20 inventory releases, ahead of guidance for 72%.
For Q3, Nvidia guided for GAAP gross margin to improve nearly 1 point to 73.3%, +/- 0.5%, and adjusted gross margin to improve to 73.5%, +/- 0.5%.
GAAP operating margin was 60.8% in Q2, improving nearly 12 points QoQ and coming in 1.7 points ahead of guidance for 59.1%. Adjusted operating margin was 64.5%, also up nearly 12 points QoQ and 1.4 points ahead of guidance for 63.1%.
For Q3, Nvidia guided for GAAP operating margin to expand 1.6 point QoQ to 62.4%, signaling continuing operating leverage tailwinds in the quarter. Adjusted operating margin was guided at 65.7%, up 1.2 points QoQ.
GAAP net margin was 56.6%, up 14 points QoQ and more than 6 points ahead of guidance for 50.2%. Adjusted net margin was 55.2%, up 10 points QoQ.
For Q3, Nvidia’s guidance implies a GAAP net margin of 52.9%, moderating 3.7 points QoQ.

Slight Adjusted EPS Beat in Q2

Nvidia reported just a 3.9% adjusted EPS beat in Q2, reporting $1.05 in earnings versus estimates for $1.01. This corresponds to growth of 54.4% YoY, rebounding substantially from Q1’s H20-affected 32.8% growth. Adjusted ESP growth is expected to remain strong through the rest of the fiscal year, at 47.2% and 53.2% in Q3 and Q4.

For FY26, analysts are currently expecting Nvidia to earn $4.36 in adjusted EPS, up 45.8% YoY. This has improved $0.20 since May’s estimate of $4.16, or 39.2% YoY growth. While still early, Nvidia’s earnings growth is expected to remain quite strong in FY27 at 38% YoY to $6.02.

Cash Flow Margins Drop to Lowest Level since Q4 FY23

Nvidia’s cash flow margins dropped to the lowest level since Q4 FY23, as sharp QoQ growth in accounts receivable and inventories weighed on both operating and free cash flow.

Operating cash flow was $15.37 billion, down from $27.41 billion in Q1. OCF margin was 32.8%, down nearly 30 points QoQ and more than 15 points lower YoY.
Free cash flow was $13.45 billion, down from $26.14 billion in Q1. FCF margin was 28.8%, again down more than 30 points QoQ and more than 16 points lower YoY.
Accounts receivable surged $5.7 billion QoQ, or nearly 26%, to $27.8 billion. Nvidia said this was driven by timing of cash collections and Blackwell Ultra ramping late in the quarter.
Inventories rose more than $3.6 billion QoQ, or 32%, to $14.96 billion, to support Blackwell Ultra’s ramp.
Cash and equivalents totaled $56.8 billion, while debt remained steady at $8.47 billion.

$200 Billion Run Rate (and why it matters)

The Q3 guide was key as if we assume a similar mix of data center to other segments, Nvidia’s Q3 guidance puts it on the brink of achieving a $200B data center run rate with Q3 data center at $48.5B DC at midpoint.

We had outlined more than a year ago in our free analysis that analyst estimates were too low, Nvidia Q1 Earnings Preview: Blackwell And The $200B Data Center stating: “These are the current estimates, yet if the analysts are correct, then the far right of the graph will end in $50B quarterly revenue. The difference between the current consensus and this much higher trajectory can be summarized in one word: Blackwell.” At the time, consensus was that we end the year with $33B in revenue.

In fact, if we grow 10% QoQ in Q4 (it’s likely to be higher), then the data center will have quarterly revenue of $53.4 billion or about 62% higher than where analyst estimates were in May of 2024. This is a substantial disconnect for the world’s most valuable company (and a profitable one for investors who track this).

The reason this matters is that if we nail the $50B quarter (very likely we do at $53.4B) then we are on track to hit a $75 billion data center quarter by the end of fiscal 2027. This assumes a 50% CAGR over 6 quarters and 10%-11% QOQ data center growth. Keep in mind, capex just grew 23% QoQ – which helps illustrate why 10% to 11% QoQ should be doable.

If we do reach a $75 billion data center quarter compared to the $47 billion quarter that was recently reported, then that’s tracking about 60% growth in the AI segment. When you layer-in that we like to buy low when we can, and the market likes to sell semiconductors stocks at cyclical lows (when it’s really the best time to buy) we may see even more upside.

Note: I elaborated on this pre-earnings in various interviews this week including Bloomberg, Schwab and Fox Business. Bloomberg, Schwab and Fox Business.

$6 Trillion Market Cap Prediction – Revisited

Nvidia has a 30 forward PS 3-year median but even if we go with something more reasonable like a 20 forward PS, then the market cap would be $6 trillion for $300 billion data center revenue.

From my perspective, it’d be better to get the stock lower if there is high confidence in reaching this market cap.

$10 Trillion Market Cap – Revisited

To get to a $10 trillion market cap at a 20 forward PS, Nvidia’s revenue would have to be $500 billion. Analysts have the company reaching this a little after the year 2033 whereas I believe it will reach $10 trillion before 2030.

The reality is that with Nvidia’s trajectory, we could see this market cap as early as 2028. That’s because we have not factored in software to the equation, which is expected to be an equal size market as hardware. The timing on software is tricky, and thus the I/O Fund has primarily preferred lower risk, yet also hypergrowth AI hardware stocks.

Nvidia essentially has to grow the data center at a 30% CAGR for two years from 2026-2028 to reach my prediction of $10 trillion market cap two years early.

That would mean analyst estimates are five years off as analysts have Nvidia reaching this revenue into the first quarter of 2034.

Note that I'm not stuck on this happening – we will shift if the market shifts. However, it leads back to why Q3 puts us right on track as the $50B data center quarter is achievable this year (the first milestone for these predictions).

What Jensen Huang said in the Earnings Call

I’d call this the total addressable market (TAM) earnings call as that was the predominant theme.

In the opening remarks, JH stated: “We see $3 trillion to $4 trillion in AI infrastructure spend in the — by the end of the decade.” This was followed up by commentary that he sizes the market at $600 billion today. The math there is 5X growth.

These are strong comments and thus it was followed up on during the Q&A where JH expanded his comments to say:

“And so over the next couple of years, you're going to — well, you asked about longer term. Over the next 5 years, we're going to scale into with Blackwell, with Rubin and follow-ons to scale into effectively a $3 trillion to $4 trillion AI infrastructure opportunity. The last couple of years, you have seen that CapEx has grown in just the top 4 CSPs by — has doubled and grown to about $600 billion. So we're in the beginning of this build-out, and the AI technology advances has really enabled AI to be able to adopt and solve problems to many different industries.”

This was followed up on by an analyst who asked for more specifics about what Nvidia’s share of that would be. Frankly, my guess would have been about 30% to 50% for Nvidia but management stated it would be closer to high 50% to 70%.

“Benjamin Alexander Reitzes

Jensen, I wanted to ask you about your $3 trillion to $4 trillion in data center infrastructure spend by the end of the decade. Previously, you talked about something in the $1 billion range, which I believe was just for compute by 2028. If you take past comments, $3 trillion to $4 trillion would imply maybe $2 billion plus in compute spend. And just wanted to know if that was right and that's what you're seeing by the end of the decade. And wondering what you think your share will be of that. Your share right now of total

infrastructure compute-wise is very high, so I wanted to see. And also if there's any bottlenecks you're concerned about like power to get to the $3 trillion to $4 trillion.

Jen-Hsun Huang

[…] United States represents about 60% of the world's compute. And over time, you would think that artificial intelligence would reflect GDP scale and growth and so — and would be, of course, accelerating GDP growth.

And so our contribution to that is a large part of the AI infrastructure. Out of a gigawatt AI factory, which can go anywhere from $50 billion to plus or minus 10%, let's say, $50 billion to $60 billion, we represent about $35 billion plus or minus of that and $35 billion out of $50 billion per gigawatt data center.”

My thoughts are that this could be “CEO math” which is often too high. For example, JH had said 1K racks were shipping per week yet the reality is this print didn’t confirm that statement was true. The CFO did state that in this earnings call, and naturally, CFOs tend to be more accurate so let’s see if the 1K rack statement comes to fruition in the next earnings report.

Regarding what was stated above, if the current number is $600B for AI infrastructure and we have close to a $200B run rate, then 33% is a good solid number to work with, especially given energy will take front and center on costs as we go along. At $3-$4 trillion, JH is basically stating Nvidia could have a $1 trillion data center segment if Nvidia sees 33% of that by the end of this decade. That would be up from a $184B data center segment today and up from a $200B data center segment in Q3.

Additional Commentary:

Management drew attention to the magnitude that demand outstrips supply: “Right now, the buzz is — I'm sure all of you know about the buzz out there. The buzz is everything sold out. H100 sold out. H200s are sold out. Large CSPs are coming out renting capacity from other CSPs. And so the AI-native start-ups are really scrambling to get capacity so that they could train their reasoning models. And so the demand is really, really high”

In terms of why Rubin can stand its own against previous generations of GPUs and continue to drive forth demand, management expanded on the advent of reasoning agentic AI:

“At the highest level of growth drivers would be the evolution, the introduction, if you will, of reasoning agentic AI. Where chatbots used to be one shot, you give it a prompt and it would generate the answer, now the AI does research. It thinks and does a plan, and it might use tools. And so it's called long thinking; and the longer it thinks, oftentimes, it produces better answers.

And the amount of computation necessary for 1 shot versus reasoning agentic AI models could be 100x, 1,000x and potentially even more as the amount of research and basically reading and comprehension that it goes off to do.”

Lastly, keep an eye on networking as it is a subtle clue that the NVL72s are starting to move the needle – above all else, we want to see these larger systems shipping as these massive SKUs are already at $28B this quarter and have a long runway to go. As you know, we are positioned to capture the AI networking tailwinds from these larger systems:

“Networking delivered record revenue of $7.3 billion, and escalating demands of AI compute clusters necessitate high efficiency and low latency networking. This represents a 46% sequential and 98% year-on-year increase with strong demand across Spectrum- X Ethernet, InfiniBand and NVLink. Our Spectrum-X enhanced Ethernet solutions provide the highest throughput and lowest latency network for Ethernet AI workloads. Spectrum-X Ethernet delivered double-digit sequential and year-over-year growth with annualized revenue exceeding $10 billion. At Hot Chips, we introduced Spectrum-XGS Ethernet, a technology design to unify disparate data centers into giga-scale AI super factories. [ CoreWeave ] is an initial adopter of the solution, which is projected to double GPU-to-GPU communication speed.”

Conclusion:

I wouldn’t be surprised if the market continues to sell this report, as the market likes to do at cyclical lows for semiconductor companies. What’s quite impressive is that Nvidia has continued to beat even at its cyclical low (defined as being in-between GPU generations) and despite the curveball with China’s H20 revenue.

Our fundamentals process favors QoQ acceleration and the 15% QoQ growth for Q3 helps put our estimates right on track. The strong networking growth spells good things to come as it indicates it’s the larger systems that are propping up the growth (Blackwell was stated to have grown 17% QoQ).

Now is the perfect time to pause and look a the medium-term and longer-term picture to answer for ourselves if the world’s most valuable company can continue to grow – or are we in a bubble? Each Member will need to decide that for themselves although my answer is “yes, for many AI stocks we are in a bubble – but for Nvidia, we are not.” Hopefully, this post-earnings writeup helps to substantiate why I continue to believe there is room in this stock.

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 NVDA at the time of writing and may own stocks pictured in the charts.

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Coherent Q4: Data Center Growth Slowing QoQ; Competitive Concerns

Posted on August 22, 2025June 30, 2026 by io-fund

Coherent has all of the right products to potentially become a sizable player in AI networking. Primarily, Coherent’s growth story centers around supplying Nvidia with pluggable optical transceivers (400G, 800G, 1.6T) including EML lasers, VSCEL lasers and CW lasers, and emerging CPO technologies for next-generation switches and interconnects.

Transceiver speed has been growing with the highest data rates ranging from 100G to 200G to 400G. AI servers are driving a market for 800G data rates, which are shipping in production now, and 1.6T rates, which are initially shipping yet expected to grow in volume come 2026.

Coherent’s transceivers work with both Ethernet or InfiniBand, as well as proprietary protocols such as Nvidia’s NVLink and Nvidia’s interconnect chips NVSwitch. The company has stated that their 100ZR pluggable transceivers can upgrade old 10GBps Ethernet links with 100 GBps at the optical network edge, representing a 10X upgrade.

Coherent designs and manufactures the components, such as lasers, detectors and passive optics. Manufacturing the components (as opposed to buying them) is a strength as the company has supply chain resiliency by controlling the end-to-end process, and the manufacturing takes place primarily in the United States with some in Europe.

What COHR must navigate is that other companies also offer optical interconnects, and thus, competition is heightened in the datacom transceivers, silicon photonics, and CW/EML/VSCEL laser space. For example, Chinese companies such as InnoLight and Eoptolink compete with Coherent, larger companies like Broadcom, and then smaller companies with agile engineering like Lumentum also directly compete. In fact, Lumentum’s report was stronger than Coherent’s report this quarter in a a few key areas which likely drove COHR’s weak price action.

In terms of fundamentals, Coherent was weak in terms of the company guiding for lower sequential growth in its datacom segment than the prior two quarters. The company’s margins are also coming under pressure, which is the most important line item for a hardware company in terms of investor appetite.

With that said, I don’t think Coherent is out of the game by any means. There are some important things in the pipeline – all discussed for you below.

Quick note on Coherent Divesting the Aerospace and Defense Business:

This quarter, Coherent divested its underperforming segment Aerospace and Defense; selling the unit for $400 million. This will help the company streamline its operations and provide more cash to help pay down elevated debt. The sale will result in Coherent exiting from 10 sites and reducing employee count by 550 employees, and thus, will be accretive to EPS.

According to analyst notes, the expected headwind to revenue will be $170 million, thus growth will appear lower in the forward growth estimates provided below although the company will be growing organically at a higher rate.

Revenue Growth Decelerating to Single-Digits

Coherent reported a slight 1.1% beat to revenue estimates, reporting Q4 revenue of $1.53 billion, up 16.4% YoY. Revenue growth has decelerated more than 10 points since the start of the fiscal year.

For Q1, Coherent offered guidance for $1.46 to $1.60 billion in revenue, or $1.53 billion at the midpoint, excluding ~$0.02 billion in revenue related to its Aerospace & Defense unit that it expects to occur after the sale is closed.

This compares to consensus estimates for $1.55 billion. On a YoY basis, this points to YoY growth of 13.3% at midpoint, with growth expected to decelerate to the mid single-digit levels in both Q2 and Q3.

For fiscal 2025, Coherent reported 23.4% YoY growth in revenue to $5.81 billion, driven by a 51% increase in data center and communications revenue, offset by a (2%) decline in industrial and other revenue. This is discussed further in detail below.

For fiscal 2026, Coherent is expected to report just 8.4% revenue growth to $6.3 billion, down from 10.0% growth to $6.37 billion at the end of July; however, the decline in growth estimates looks to stem from the Aero & Defense unit divestment. BofA had estimated the sale would create a ~$170 million headwind (implying ~$6.2 billion), yet estimates are only ~$70 million lower, suggesting other segments are offsetting some of the impact.

May 2025 Investor’s Day:

A few months back, Coherent provided updated growth targets for revenue and earnings. It’s notable that Coherent is guiding for lower top line growth in the coming years yet helps to illustrate the primary growth will be on the bottom line.

Revenue growth of 23% in FY25 versus target model of 10% to 15%
Yet, operating margin expansion expected of 6.2+ points to 24% operating margin

Source: Coherent Investor DayCoherent Investor Day

Key Segments: Networking Growth Decelerates to 39%

Networking remains the primary driver of Coherent’s growth, with the company announcing that it commenced revenue shipments of its first 1.6T transceiver products and its first differentiated liquid-crystal optical circuit switch (OCS) platform.

Networking revenue rose 39% YoY and 5% QoQ to $945.2 million in Q4, with its share of revenue growing by two points sequentially to 62%. For the full year, Networking revenue rose 49% YoY to $3.42 billion, accounting for 59% of revenue.

Growth has decelerated steadily throughout the fiscal year, from 61% in Q1 to 45% growth in Q3 and now 39% in Q4. However, the primary concern is that the segment was showing a rather sharp deceleration on a QoQ basis, to the lowest sequential growth since early FY24. Coherent reported just 5% QoQ growth in networking in Q4, versus 10% in Q3.

Lasers revenue declined (2%) YoY and (4%) QoQ to $348 million, the segment’s first YoY decline in five quarters. Lasers accounted for 23% of revenue in Q4, down from 24% in Q3. For the full year, Lasers revenue grew just 3% to $1.44 billion.

Materials revenue declined (15%) YoY and was flat QoQ at $236.2 million, its sharpest decline since Q1. Of the three segments, Materials was the only to see revenue decline in FY25, down more than (6%) YoY to $953.8 million.

End Markets: Data Center Reporting Low 3% QoQ Growth

Turning to end markets, Coherent has now reorganized its reporting into just two end markets: Data center and Communications, and Industrial (which includes its previously reported Instrumentation and Electronics end markets).

The main concern is that Data center growth has slowed dramatically on a QoQ basis, from 11% last quarter to 3% in Q4, despite signs of accelerating AI systems demand (capex spend increasing from Big Tech, Blackwell shipping, Blackwell Ultra seeing initial shipments, etc)

Data center and Communications revenue rose 39% YoY and 5% QoQ in Q4 to $942 million. For the full-year, revenue increased 51% to $3.44 billion.

Within this, Data center revenue increased 38% YoY but just 3% QoQ. For FY25, Data center revenue rose 61% YoY. Similar to Networking, the major concern here is that Data center growth has slowed dramatically on a QoQ basis, from 11% last quarter to 3% in Q4, despite those signs of accelerating AI systems demand.

Management did state that “sequential growth rates can fluctuate quarter-to-quarter based on lumpiness of demand from our customers or supply or capacity related things,” but they offered little to soothe fears of rising competitive pressure within Nvidia’s supply chain. Aside from saying the see strong demand ahead, management dodged the question about when Data center’s QoQ growth would accelerate.

In a brief update on the Data center product roadmap, Coherent said it expects 1.6T transceiver volume to ramp throughout calendar 2025 with more meaningful contribution in calendar 2026, while demand continued to grow in Q4 for <1.6T data rates.

For Communications, Coherent said Q4 saw accelerated growth, up 11% QoQ and 42% YoY. For the year, Communications revenue grew 23%. Management stated that the 100G ZR product family is ramping rapidly, and they expected increasing revenue contribution through FY26 from 100G, 400G and 800G ZR/ZR+ transceivers.

Industrial revenue declined (8%) YoY and (2%) QoQ to $587 million, while revenue for the full-year declined (2%) YoY to $2.37 billion. Coherent said that above-market growth in industrial lasers and services was offset by a decline in silicon carbide, consistent with softer end market demand from autos. Management said that silicon carbide has stabilized and is not expected to be a headwind in FY26.

Margins Expand YoY in FY25

Despite gross margin expanding in Q4, GAAP operating margin shrunk, pressuring GAAP EPS; however, adjusted operating margin met management’s guidance for the quarter. For the full-year, Coherent delivered expansion for gross and operating margins.

Q4 GAAP gross margin was 35.7%, up 2.8 points YoY and half a point QoQ. Adjusted gross margin was 38.1%, slightly above the midpoint of guidance for 37-39%, up 2.3 points YoY but down 0.4 points QoQ.
Q4 GAAP operating margin was 0.4%, down 4.4 points YoY and QoQ; as a result of the pending divestment, Coherent recorded $85 million in asset impairment charges, impacting the margin. Adjusted operating margin was 18%, up 2.6 points YoY but down 0.6 points QoQ.
Q4 GAAP net margin was (6.3%), down 2.6 points YoY and down 7.3 points QoQ. Adjusted net margin was 12.6%, up more than 4 points YoY and nearly 1 point QoQ.

For Q1 FY26, management offered guidance for adjusted gross margin and adjusted operating expenses:

Adjusted gross margin was guided between 37.5% to 39.5%, up 1.8 points YoY and 0.4 points QoQ at midpoint.
Adjusted operating expenses were guided between $290-310 million, implying adjusted operating margin at 18.9%, up 2.8 points YoY and 0.9 points QoQ.

For FY25:

GAAP gross margin expanded 4.3 points YoY to 35.2%, while adjusted operating margin expanded 3.6 points YoY to 37.9%.
GAAP operating margin increased 3 points YoY to 5.0%, while adjusted operating margin increased 4.7 points YoY to 17.8%.
GAAP net margin expanded 4.1 points YoY to 0.8%, while adjusted net margin expanded 3.8 points to 11.9%.

EPS Beat in Q4, Guidance In-Line Q1

Coherent reported an 8.7% adjusted EPS beat in Q4, though offered guidance for Q1 in line with consensus estimates.

Q4 adjusted EPS was $1.00, ahead of estimates for $0.92 and representing YoY growth of nearly 64%. For Q1, Coherent guided for $0.93 to $1.13 in adjusted EPS, in line with the $1.03 estimate at midpoint and representing a deceleration to ~39% YoY growth. The deceleration is stemming from minimal expansion in adjusted margins in recent quarters combined with the top-line deceleration.

For FY25, Coherent reported 192% YoY growth to $3.53 in adjusted EPS. FY26 is estimated to see growth moderate to 30% YoY to $4.59, while management noted that the Aero & Defense divestment is expected to be accretive to EPS.

Cash and Balance Sheet

Cash flows moderated and cash flow margins shrunk to the lowest levels in the past six quarters. Coherent also noted that proceeds from the divestment will be used to pay down debt.

Operating cash flow was $130.3 million in Q4, down approximately (20%) YoY and QoQ. OCF margin was 8.5%, down nearly 4 points YoY and the first single-digit margin in the last five quarters.
For FY25, operating cash flow rose 16% YoY to $633.6 million, for a 10.9% margin, down 0.7 points YoY due to the softer Q4.
Free cash flow was ($1 million) in Q4, for a (0.1%) margin, down nearly 5 points YoY. It also was the first quarter with negative FCF since Q2 FY24.
For FY25, free cash flow was $192.8 million, down (3%) YoY. FCF margin was 3.3%, down nearly 1 point YoY.
Cash and equivalents were $909.2 million, while debt was $3.69 billion.
Inventories rose 3.6% QoQ to $1.44 billion.

Earnings Call Q&A:

800G and 1.6T Shipping, yet Data Center reporting declining QoQ growth

As discussed in our previous writeup on Coherent, the company supplies EML Lasers, VSCEL Lasers and CW Lasers for silicon photonics. While 100G per lane for 400G and 800G optical transceivers is what is supporting the growth now, it’s expected that 200G per lane and even 400G per lane for 1.6T optical transceivers is what will drive growth in the coming quarters.

Management offered the following update in terms of 800G ramping now and 1.6T ramping i the coming quarters:

“Okay. On the first part of the discussion, the way — I think the way to think about it is if you start with the 800-gig ramp, the 800-gig is obviously growing this calendar year versus prior. We expect 800-gig to grow again next calendar year, and that's ramping very quickly. And then on top of that, 1.6T, we believe, starts to ramp on top of that 800-gig ramp. We saw initial revenue in the prior quarter. We expect that revenue to grow over the coming quarters.”

In the May investor’s day, the company provided the following timeline for the ramp of the new data rates, showing Coherent has a healthy pipeline over the next few years.

However, despite these updates – the market is nervous that Coherent is not able to compete given data center sequential growth is declining QoQ. There was a pointed question on the call on the unusual QoQ decline Coherent is expecting (lumpiness). Although the answer from the CEO does not directly address the timing issues, the concern is significant enough to quote the exchange in full:

Vivek Arya, BofA:

So the first one, Jim, I realized this is a little bit more short-term oriented. But when I look at your data center and communications segment, sequential growth rate has gone from 9% in March to 5% in June, and I think your September implied is probably at or somewhat below this number, even though you're starting to ramp 1.6T and OCS. So what is the right way to interpret, right, this kind of somewhat slowdown because when I look at the deployment of AI clusters, they seem to be accelerating in the back half and one of your closest peers guided to double-digit sequential growth. So how would you address that pushback and do you think the sequential growth rates can start to reaccelerate at some point?

James Robert Anderson, CEO

Yes. Thanks, Vivek. On a quarter-to-quarter basis, the sequential growth rates can fluctuate quarter-to-quarter based on lumpiness of demand from our customers or supply or capacity related things, so. But I think if you look over the full year of fiscal '25, I'm quite pleased with our growth in data center for full year. We saw over 60% growth and even faster growth in the higher speed data rates. And we believe over that fiscal '25, we gained share over that fiscal '25. We feel good about fiscal '25 results. And as I said, looking forward into the current fiscal year, again, we see very strong demand ahead of us, and a number of different growth vectors, 800-gig, 1.6T. We talked about OCS as well — as well as seeing very strong demand in our DCI segment. So we feel good about the growth ahead of us. And certainly, making sure that we've got all the capacity in place to meet that — those demand signals.

InP Capacity Tripled plus 6-inch production line offers additional capacity

EMLs were traditionally used by telecom customers, yet became attractive for AI servers due to meeting the 200G per second speeds necessary for 1.6T optical modules to support AI models. These are called single mode optics, made of Indium Phosphide, which has been used instead of silicon for long-haul networking due to being a superior choice for optical functions, such as enabling the laser, modulator, photodetector and amplifier.

InP is more expensive at the component level as four EMLs are needed compared to two lower-cost CW lasers for silicon photonics modules, yet this difference at the component level can be made up for in data centers as InP reduces power consumption.

Setting aside the data center segment lumpiness, one reason Coherent may not be down for the count (time will tell) is they have recently tripled their InP capacity and are rolling-out a 6-inch InP production line for yet another significant increase in capacity.

According to Coherent, this will be the world’s first 6-inch wafers for InP. Inevitably, there were questions on the call about how quickly Coherent could produce more EML and CW lasers plus Co-Packaged Optics (CPOs) with this new production line:

“This is a big benefit to us in 2 ways, both capacity, obviously, on a larger wafer size we get a significant increase in capacity. But also, we expect a significant cost structure advantage. And so as we fully ramp that capacity both the ability to just drive higher volume, but lower cost structure is a big advantage for that. So we're really excited about that and looking forward to that ramp.”

Apple Partnership on VSCEL Lasers:

Apple and Coherent have partnered in the past, yet there was a new partnership announced recently for VSCEL lasers to be used in iPhones and iPads. Per the opening remarks:

“As mentioned in a recent Apple announcement regarding their American manufacturing program, we've entered into a new multiyear agreement with Apple for a new generation of VCSEL products that support Apple's iPhone and iPad products. We expect revenue from this expanded partnership with Apple to begin in the second half of calendar '26.”

Analysts are penciling in 2027 as the year where Coherent could see a more meaningful boost in revenue although despite this takeaway, management did repeat impact would be seen H2 CY2026:

“Yes, we feel really good about that expansion. I would describe it as an expansion of the partnership. It's a new generation of VCSELs that go into Apple iPad and iPhones and we do see that as an increase in revenue that will start to have impact to our revenue in the second half of next calendar year, so second half of '26”

Additional Key Points:

There are many moving pieces with Coherent and the following are also notable points from the earnings call:

Optical circuit switching will increase their TAM by $2 billion. OCS was covered in the past here. Coherent has a more advanced approach to OCS through liquid crystal technology versus the more mechanical MEMS technology that competitors offer.
Communications revenue is particularly resilient with 11% QoQ growth (outpacing DC when you separate the two). Driving this QoQ growth is DCIs (data center interconnects). Although recognized outside of the data center segment as part of telecom, the demand is driven by AI as the long-distance data transmissions were traditionally used for telecom purposes, yet and can range up to hundreds of kilometers and are now seeing demand for data center buildouts.
USA footprint: Coherent has 20 U.S. manufacturing locations in 13 states, an advantage should trade wars heat up.

Conclusion:

Coherent is in all the right place, but they are certainly not alone. The market and BofA analyst are correct to question why Coherent’s data center growth is declining QoQ especially given their competitor Lumentum had a solid earnings report. Lumentum saw 16% QoQ growth in Cloud & Networking in its Q4 and guided for ~10% QoQ in Q1.

Ultimately, we had trimmed Coherent quite a bit prior to the report simply because we felt Credo and Astera Lab deserved higher allocations. After the report, I feel the same – which is that Coherent has some work to do to not only secure a spot in our portfolio but to compete with the strong AI networking stocks we already own.

On our Discovery tier, we discuss if stocks we don't own such as Lumentum are a buy or not, plus other Nvidia Blackwell beneficiaries and AI data center energy plays. Portfolio Manager, Knox Ridley, also recently held a Discovery webinar discussing setups for new stocks. Sign up now to read more of our cutting-edge research and to view the 1-hour webinar.

Current Pro and Advanced Members: To subscribe to Discovery with 30% off, please click here to email us or email premium@io-fund.com and mention code DISCOVERY30.Current Pro and Advanced Members: To subscribe to Discovery with 30% off, please click here to email usclick here to email us or email premium@io-fund.com and mention code DISCOVERY30.

Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.

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 do not own shares in COHR at the time of writing and may own stocks pictured in the charts.

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Innodata: FY25 Revenue Growth Raised to >45%, yet Largest Customer Revenue is Flat for Two Quarters

Posted on August 15, 2025June 30, 2026 by io-fund

Innodata boosted its full-year revenue growth outlook by five points in Q2, now forecasting more than 45% growth this year, driven by strong demand, significant new deal wins and a large pipeline geared toward the second-half of the year.

However, digging into the details reveals that Innodata’s largest customer has not expanded over the last two quarters, and remains at the $135 million annualized rate as stated in Q4. This comes despite Innodata discussing expansion opportunities with this customer and a second SOW signed in Q1, with growth not yet materializing.

The CEO offered an update in Q2 that they’ve won “several new projects” with their largest customer and have others in the pipeline:

“We recently won several new projects with our largest customer and we have others in pipeline that are not yet included in our forecast, but which we think are reasonably likely. Several of these new projects are under the second SOW we reported signing with this customer last quarter. We believe that the second SOW potentially gives us access to an even larger generative AI revenue pool with this customer.”

Innodata is a $1.5B market cap stock highly dependent on the announcement of new customer wins and expanding its projects with the largest customer. Our strategy is to watch price closely for the best risk/reward on an entry; and any entry will have a tight stop.

We’ve discussed in the past that Innodata appears to have a low valuation when compared to peers. Our previous analysis also went into the details of Innodata’s products, market positioning and can be found here: “Innodata: Early-Stage AI Data Engineering; Lumpy Growth”

Discovery Members: You are invited to join Knox Ridley on Monday, August 18th at 4:30 pm EST for a special Discovery webinar where he will discuss technical setups on Discovery stocks.a special Discovery webinar where he will discuss technical setups on Discovery stocks.

Revenue up 79.4% YoY

Innodata reported a slight revenue beat in Q2, with revenue coming in 3.6% ahead of estimates to $58.4 million, up 79.4% YoY. This did mark a more than 40 point deceleration in growth sequentially, yet that was expected coming into the quarter.

However, there have been some shifts in forward estimates for Q3 and Q4. For Q3, revenue estimates have been revised nearly $2 million lower since June, now projecting revenue of $59.8 million for growth of just 14.5% YoY. Q4 revenue has been revised more than $5.5 million higher to $70.9 million, for growth of almost 20% YoY. This suggest Q3 is now expected to see be a bottom of sorts before rebounding and reaccelerating into 2026.

For the full-year, Innodata raised its revenue growth guidance from 40% to >45%, now implying revenue of >$247 million, up from $239 million as of Q1. It is important to keep in mind the fluid nature of Innodata’s business, and that any new contractual agreements or expansions could have a large and/or immediate impact on revenue. 

Management stated that the guidance hike was driven by “significant new deals that have been finalized since our last call as well as several deals that we believe are highly likely to close in the near term.” Any of these new deals could easily boost growth depending on how quickly they scale.

One key point that could be behind the post-earnings sell-off was some comments made by management around customer engagement and deal sizes. CEO Jack Abuhoff said that with one Big Tech customer, Innodata was “recently awarded a number of significant engagements… enabling us to forecast $10 million of revenue from this customer in the second half of this year,” up from $0.2 million over the last four quarters. Given the size of the revenue guide raise at just $8 million implied, this comment raises some questions about growth in 2H from other core customers.

Largest Customer Accounts for 58% of Revenue

Innodata provided only a brief update on customer progress this quarter, one with its largest customer and the other being the $10 million revenue opportunity discussed above.

With its largest customer, Innodata said that it won “several new projects,” with some of these being under the second scope-of-work (SOW) signed last quarter. Management added that there are other projects in the pipeline with the customer that are not yet included in its forecast, but are “reasonably likely” to be signed in the future.

Innodata’s largest customer accounted for 58% of revenue in Q2 and 59% of revenue for 1H, implying contributions of ~$33.9 million in Q2 and $68.9 million in 1H. This represents no change from Q4 (ie. no expansion) when it was stated the customer was at a $135 million annualized run rate, or ~$34 million quarterly.

Innodata also had no other >10% customers, implying the remaining customers are not spending more than $5.8 million per quarter with the company. The forecast for $10 million in 2H from another customer would likely make said customer Innodata’s second largest and a second >10% customer.

AI Segment Grew 99% YoY on Top of Tough Comps

DDS remains the key driver of Innodata’s growth due to its role in handling AI data preparation, labeling and annotation, AI training and related services.

DDS revenue grew 99% YoY to $50.58 million, though this was slightly down sequentially from $50.83 million in Q1. Although the segment’s growth barely dropped out of the triple-digit range, what’s impressive is that revenue still practically doubled YoY against a 93% growth comp.

Synodex revenue rose 4% YoY to $2.06 million, slowing from nearly 8% growth in Q1.
Agility revenue rose 11.5% YoY to $5.75 million, flat with growth from Q1.

Margins and Adjusted EBITDA expand significantly YoY

Innodata’s margins have significantly expanded YoY, which helps set Innodata apart from stocks in the $1B or $2B market cap range (Innodata is at $1.5B market cap). There was a marginal sequential decline QoQ yet not enough to matter in terms of the overall improvement seen from strong margin and adjusted EBITDA expansion over the past few quarters.

For example, GAAP operating margin was up 14 points YoY from 1.3% to 15.3% in the current quarter.

Q2 GAAP gross margin was 39.4% in Q2, down nearly half a point sequentially but up nearly 11 points YoY. Adjusted gross margin was 42.9%, down slightly from Q1 but up more than 9.5 points YoY.
Q2 GAAP operating margin was 15.3%, up 1.1 points sequentially and up more than 14 points YoY.
Q2 GAAP net margin was 12.4%, down 1 point sequentially but up from approximately 0% in the year ago quarter.

Turning to adjusted EBITDA — Innodata saw a slight sequential improvement in adjusted EBITDA margin in Q2, though on a YoY basis, adjusted EBITDA margin expanded more than 14 points. Innodata had guided for YoY growth in adjusted EBITDA with no further clarity, and has currently reported nearly $26 million for 1H ’25 versus $34.6 million for all of FY24.

Consolidated adjusted EBITDA margin was 22.7%, up from 21.8% in Q1 and 8.6% in the year ago quarter.
DDS adjusted EBITDA margin was 24.2%, up from 22.7% in Q1 and just 5% in the year ago quarter. Tracking DDS’ adjusted EBITDA is important considering the segment accounts for more than 92% of consolidated adjusted EBITDA.
Synodex adjusted EBITDA margin was 22.3%, up from 20.8% in Q1 but down from 26.3% in the year ago quarter
Agility adjusted EBITDA margin was 9.7%, faring the worst out of the three segments as this was down 4 points from Q1 and down nearly 10 points YoY.

EPS Beat by 80% yet EPS expected to decelerate in coming quarters

Innodata handily beat on EPS in Q2, reporting $0.20 in GAAP EPS versus consensus estimates for $0.11. Looking ahead, Q3 EPS estimates are following revenue in moving slightly lower, while Q4 estimates have moved slightly higher. Since our last report, Innodata: Early-Stage AI Data Engineering; Lumpy Growth, here’s how estimates have changed:

Q3 EPS has been revised $0.03 lower, from $0.17 to $0.14, for a YoY decline of more than (73%), though as a reminder the year-ago comp is technically inflated from a $5.9 million income tax benefit.
Q4 EPS has been revised $0.02 higher, from $0.19 to $0.21, for a YoY decline of (31.2%).

For FY25, Innodata is expected to report EPS of $0.76, down (14.6%) YoY before rebounding to 34.5% growth in FY26 to $1.02. To note, FY26’s EPS estimate is still unchanged since June’s writeup.

Cash Flow Declines 60% QoQ

Another blemish in Q2’s report were cash flows, which declined more than (60%) sequentially. Innodata’s balance sheet remains healthy, and the company still has the entirety of its $30 million credit line available.

Operating cash flow was $4.23 million, down (61%) QoQ. OCF margin was 7.3%, down more than 11 points QoQ. For 1H, operating cash flow was $15.1 million, up more than 139% YoY.
Free cash flow was $2.5 million, down more than (70%) QoQ. Free cash flow margin was 4.3%, down more than 10 points QoQ. For 1H, free cash flow was $11.0 million, up nearly 5x YoY.
Cash and equivalents totaled $59.8 million, and debt remained zero.
Deferred revenue was $6.5 million, down from $8.0 million in Q1.

Earnings Call Q&A

There were two topics on the earnings call Q&A session worth highlighting. The first was questions about Scale AI and if Innodata will see more customers onboard as a result of Meta’s large investment of $14.3 billion. The second was why agentic AI will drive more uses cases for the simulation data solutions such as what Innodata and its competitors offer.

Scale AI’s investment is a potential/speculative tailwind:

We covered why Scale AI’s investment could be a potential/speculative tailwind in our prior analysis stating: " Following Meta’s investment, it was rumored that Google, OpenAI and Tesla are looking elsewhere to avoid strengthening Meta at the cost of their proprietary data. Although it’s speculative, the exodus of major players from Scale AI could become a tailwind for Innodata. “

An analyst asked something similar on the Q2 earnings call. The CEO remained vague yet did state that something could materialize in the next couple of months:

“George Frederick Sutton, Craig-Hallum Capital Group:

Nice results. Congratulations. So I wondered if we could talk about during the quarter, your largest competitor, Scale AI was a large majority purchased by Meta. And we've had a few of the large tech companies come out and say they would no longer work with Scale AI. These ostensibely would be tech companies that you have statements of work with. So I'm just curious if you can kind of give us the after effect of that acquisition as you've seen it.

Jack S. Abuhoff, President, CEO & Director

[…] We have, in light of this stepped up that effort with certain companies and there are certain conversations that are going on and are now planned to be happening over the next couple of months that I think could be very exciting for us. I don't know that I can get into particulars much beyond that, but I'll reiterate that we do see an opportunity to accelerate our market presence.”

Agentic AI to drive forward major use cases:

Although agentic AI may still be a few years out before it’s commercially viable, the CEO pointed out the future of large language model (LLM) improvements lies in the quality of data. In order to have agentic AI that can tackle multivariant problems, training data will need to be supplemented with simulation training data.

The CEO stated the following on the call:

“We believe agent-based AI is going to serve as the cornerstone technology that unlocks the full value of large language models and generative AI for enterprises. Moreover, we believe that progress on Agentic AI is likely to soon result in a ChatGPT moment for robotics. Within the next several years, we believe Agentic AI will be served at the edge in hardware devices with which we will commonly interact in many respects in our lives. We believe the market for simulation data services and evaluation services to drive Agentic AI and robotics is likely to dwarf the market for frontier model post-training data.”

Conclusion:

We pointed out in our original analysis that Innodata has many competitors, and we provided an overview of how Innodata must find a path to compete with AI-native startups for data-as-a-service for AI training data. As proven by Scale AI, the market for data labeling and supervised learning is only going to grow in importance – but will Innodata be able to compete? That is a question this earnings report did not answer for investors. For an opportunity like this, we rely heavily on technicals.

Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.

Recommended Reading:

Innodata: FY25 Revenue Growth Raised to >45%, yet Largest Customer Revenue is Flat for Two Quarters

Posted on August 15, 2025June 30, 2026 by io-fund

The CEO offered an update in Q2 that they’ve won “several new projects” with their largest customer and have others in the pipeline:

Revenue up 79.4% YoY

Largest Customer Accounts for 58% of Revenue

Innodata provided only a brief update on customer progress this quarter, one with its largest customer and the other being the $10 million revenue opportunity discussed above.

AI Segment Grew 99% YoY on Top of Tough Comps

DDS remains the key driver of Innodata’s growth due to its role in handling AI data preparation, labeling and annotation, AI training and related services.

Synodex revenue rose 4% YoY to $2.06 million, slowing from nearly 8% growth in Q1.
Agility revenue rose 11.5% YoY to $5.75 million, flat with growth from Q1.

Margins and Adjusted EBITDA expand significantly YoY

For example, GAAP operating margin was up 14 points YoY from 1.3% to 15.3% in the current quarter.

Q2 GAAP gross margin was 39.4% in Q2, down nearly half a point sequentially but up nearly 11 points YoY. Adjusted gross margin was 42.9%, down slightly from Q1 but up more than 9.5 points YoY.
Q2 GAAP operating margin was 15.3%, up 1.1 points sequentially and up more than 14 points YoY.
Q2 GAAP net margin was 12.4%, down 1 point sequentially but up from approximately 0% in the year ago quarter.

Consolidated adjusted EBITDA margin was 22.7%, up from 21.8% in Q1 and 8.6% in the year ago quarter.
DDS adjusted EBITDA margin was 24.2%, up from 22.7% in Q1 and just 5% in the year ago quarter. Tracking DDS’ adjusted EBITDA is important considering the segment accounts for more than 92% of consolidated adjusted EBITDA.
Synodex adjusted EBITDA margin was 22.3%, up from 20.8% in Q1 but down from 26.3% in the year ago quarter
Agility adjusted EBITDA margin was 9.7%, faring the worst out of the three segments as this was down 4 points from Q1 and down nearly 10 points YoY.

EPS Beat by 80% yet EPS expected to decelerate in coming quarters

Q3 EPS has been revised $0.03 lower, from $0.17 to $0.14, for a YoY decline of more than (73%), though as a reminder the year-ago comp is technically inflated from a $5.9 million income tax benefit.
Q4 EPS has been revised $0.02 higher, from $0.19 to $0.21, for a YoY decline of (31.2%).

For FY25, Innodata is expected to report EPS of $0.76, down (14.6%) YoY before rebounding to 34.5% growth in FY26 to $1.02. To note, FY26’s EPS estimate is still unchanged since June’s writeup.

Cash Flow Declines 60% QoQ

Operating cash flow was $4.23 million, down (61%) QoQ. OCF margin was 7.3%, down more than 11 points QoQ. For 1H, operating cash flow was $15.1 million, up more than 139% YoY.
Free cash flow was $2.5 million, down more than (70%) QoQ. Free cash flow margin was 4.3%, down more than 10 points QoQ. For 1H, free cash flow was $11.0 million, up nearly 5x YoY.
Cash and equivalents totaled $59.8 million, and debt remained zero.
Deferred revenue was $6.5 million, down from $8.0 million in Q1.

Earnings Call Q&A

Scale AI’s investment is a potential/speculative tailwind:

An analyst asked something similar on the Q2 earnings call. The CEO remained vague yet did state that something could materialize in the next couple of months:

“George Frederick Sutton, Craig-Hallum Capital Group:

Jack S. Abuhoff, President, CEO & Director

Agentic AI to drive forward major use cases:

The CEO stated the following on the call:

Conclusion:

Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.

Recommended Reading:

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

Posted on August 14, 2025June 30, 2026 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).

Recommended Reading:

Supermicro Fails to impress; Volatility is here to stay

Posted on August 6, 2025June 30, 2026 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.

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

Posted on August 6, 2025June 30, 2026 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.

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