This article is a continuation of our free newsletter from May 23, Nvidia Stock Faces a Choppy Q2, But Tailwinds Build for H2 Acceleration. 

For our Premium Members, we discuss the following:  

• Our analysis on the stock’s valuation and if the stock is a “buy” or a “hold” given the stock faces immense demand from the AI economy yet must also weather geopolitical tensions. 
• The I/O Fund’s trading plan for TSMC including never-before published buy targets over a 12 to 18-month time frame.

TSMC’s Valuation: 

Historically, semiconductors do not trade at the valuations we saw in 2024. Therefore, the market is essentially saying (given the risks around China), we are not willing to pay the exuberant premium of 2024. Valuation is the primary reason most semiconductors are flat over a 1-year period.  

This is visible in TSMC’s forward PE ratio to where anything over 20 is quite rare. The 3-year median is 18.5 while the stock is trading at 21. The forward PE ratio peaked at 30. 

When you zoom out 10 years, the TTM PE ratio rarely trades over 25 except for the blowoff top in 2021 and the AI boom of 2024. 

When you look at the top line, something similar is seen to where the stock is trading at the 5-year median of 10 PS on a TTM basis. 

On a forward basis, the stock is trading at 8.3 — which essentially means the stock is fully valued unless a technical setup shows us the broad market, semiconductor baskets (ETFs) and/or other leaders like Nvidia are ready to resume leading the market. Rarely will we buy a stock that is at its 3-year or 5-year median unless there is broader participation. With that said, once there are signals that TSMC and a few other AI stocks are ready to lead again, we will not hesitate to buy as the stock is a safe, long-term winner in our opinion.   

A Few Simple Reasons we like TSMC as a Long-term Winner: 

• Demand exceeds supply and will into the foreseeable future  
• It’s one of the only companies that has strong pricing power – in fact, it exceeds Nvidia on this point. Reference my Q2 webinar around minute 13:32 
• The margins and the cash separate it from other semiconductor choices 
• The United States government will ensure TSMC is successful as a matter of global dominance 
• One thing to watch out for: TSMC is exposed to smartphones and even with outsized AI demand, HPC segment can be lumpy and cyclical. The H2 slowdown that management guided for could put pressure on the stock.

Taiwan Semiconductor (TSM) Technicals Overview: 

By Knox Ridley 

Like the entire market, TSM is coming to the end of an impressive recovery off the April 7th lows. Note how price went vertical in early – mid May in the chart below. This happened with the highest amount of volume and momentum that we have seen in the bounce, so far.  What has followed is a continuation higher in price; however, with less volume and less momentum. This is a common occurrence toward the end of a trend. Furthermore, since late May, TSM has been trading within a rising wedge pattern, which is a common pattern seen in the last push higher of a trend.  

As long as TSM holds over $188, we can see a continuation of this drift higher throughout June.  Once we break below $188, we will see a reversal of this bounce. When this happens, what will be important are two factors on determining the next larger move in TSM, as well as the larger market: 

What is the pattern the correction takes? If we see a messy/overlapping drop that takes the shape a of a 3-wave pattern, then we believe TSM is setting up for a bigger push to new highs later into the year. If instead, we see a more aggressive/direct drop lower that takes the shape of a 5-wave pattern, we are setting up for a larger drop below the April 7th lows. 

Any drop, regardless of pattern, must hold over $146. Below this level, and the odds greatly favor that we are heading to new lows.  

Based on how the next correction plays out within the above parameters, there are two general scenarios that the price action best represents: 

Red – This would see the next drop taking the shape of a 5-wave pattern that ultimately breaks through $146. If this happens, we will see final targets for this drop to be, at least, in the $120s.  

Green – If we see the next drop take the form of a 3-wave drop that holds over $146, then we could be setting up for a rally toward the $300s.  

As stated, both fading momentum and volume, coupled with a filled-out pattern is suggesting that we are closer to the end of this bounce. Once it completes, the nature and depth of the correction will determine if we aggressively buy more or hedge our position.

Recommended Reading:

• Dell Riding Nvidia’s Tailwinds to Record $12.1B in AI Server Orders in Q1
• Nvidia Q1/Q2 Guide: Blackwell is (Finally) Here
• Nvidia Stock Faces a Choppy Q2, But Tailwinds Build for H2 Acceleration
• Microsoft Stock Surges After Q3 2025 Earnings: What Separates Azure from AWS, Google Cloud

Dell reported surging demand in AI optimized servers in Q1 with orders of $12.1 billion. This outpaces the entirety of last year while representing a 612% sequential increase from $1.7B last quarter. To further compare, the peak quarter for orders last year was $3.6B. 

Server shipments were low in Q1, which has readthrough to Blackwell as all around Q1 was slow for Blackwell servers. Server shipments were guided to be nearly 4x higher sequentially in Q2. Check out the graph below for the sudden inflection point from this quarter in terms of server growth. 

This strong AI server shipment forecast contributed to a nearly $4 billion beat for Q2’s guidance. Notably, Dell did not raise its revenue forecast for the year, suggesting that tariff-related impacts may still bite in H2, or that AI server shipments will be lumpy and not be linear from here out. 

Cash flows improved significantly in Q1, with strong triple-digit YoY growth for both operating and free cash flow. Adjusted EPS missed consensus estimates by more than 8%. Despite misisng estimages, EPS increased 17% or 3X faster than revenue.  

Revenue Growth to Accelerate 11 Points in Q2 

Dell reported $23.38 billion in revenue in Q1, a slight <1% beat to estimates as all of its core businesses grew in the quarter. Revenue growth decelerated to 5.1% YoY in the quarter with Dell forecasting a sharp acceleration in Q2 as it is now rapidly ramping AI server shipments after orders surged in Q1. 

For Q2, Dell guided $28.5 to $29.5 billion in revenue, or 15.9% YoY growth at the $29 billion midpoint, which marks a nearly 11-point sequential acceleration. Interestingly, while Q2’s guidance was nearly $4 billion ahead of the consensus estimate for 0.9% growth to $25.26 billion in revenue, Dell opted to maintain its FY26 revenue forecast at $101 to 105 billion.

Key Operating Segments 

Infrastructure Solutions Group 

Dell’s ISG segment grew 12% YoY to $10.32 billion in revenue, as Dell’s surge in AI server orders did not translate into booked revenue this quarter. ISG operating income was $0.99 billion, up 36% YoY for a 9.7% operating margin. This was up 1.7 points YoY in what is typically the lowest seasonal quarter for profitability for the segment.  

In Q1, AI server orders were up 612% YoY and QoQ to $12.1 billion with Dell saying this exceeded the entirety of their fiscal 2025 AI server shipments of $9.8 billion. This surge in orders brought Dell’s AI server backlog up to $14.4 billion, up from $4.1 billion in Q4. 

However, Q1’s AI server shipments were just $1.8 billion, up just 6% YoY and down more than (14%) QoQ. This likely boils down to the timing of Blackwell’s ramp, as Dell projected more than $7 billion in shipments in Q2.  

This also raises the question that Q2’s shipment forecast is simply a surge aligning with Blackwell’s strong ramp, as Nvidia’s earnings pointed toward yesterday. With that said, AI server shipments could normalize at a much lower quarterly run rate, something in the range of $3.5 billion to $4 billion (with what we know today). Dell is remaining conservative by only slightly changing the language of its AI server guidance for the year, previously sticking to $15 billion but now aiming for $15B+.  

Within ISG: 

• Servers and Networking revenue grew 16% YoY to $6.32 billion, with Dell stating that demand has grown for a sixth consecutive quarter, with traditional servers seeing double digit growth. Revenue has continued to decelerate off of Q2 FY25’s peak at 80%, though the $7 billion AI server shipment forecast will reverse this trend.  
• Storage revenue increased 6% YoY to $4.0 billion, the third consecutive quarter of storage growth. 

Client Solutions Group 

Client Solutions segment revenue fared much better than expected despite weak Consumer revenue, with growth of 5% YoY to $12.51 billion. This accelerated from 1% growth in Q4 and marked Dell’s second consecutive quarter for growth. CSG operating income was $653 million, down (16%) YoY for a 5.2% margin. 

This growth was driven by increased momentum in Dell’s Commercial PC business, where Dell said that demand was up YoY for a fifth consecutive quarter and up double-digits this quarter. Management also said that they are “seeing clear indications that the install base is upgrading to new Windows 11 PCs, many of them AI PCs.” 

Commercial’s momentum helped offset Consumer weakness, as revenue decelerated further, dropping (23%) QoQ and (19%) YoY, versus a (12%) YoY decline in Q4. Within CSG: 

• Commercial revenue accelerated from 5% in Q4 to 9% in Q1 to $11.05 billion. 
• Consumer revenue declined (19%) YoY to $1.46 billion. 

Margins Down Sequentially on Seasonality, Mixed YoY 

Dell had forecast its adjusted margins to come down sequentially due to seasonality, which played out in the quarter. On a YoY basis, gross margins contracted though margins down the line were relatively strong, suggesting Dell is beginning to capture some operating leverage via cost cuts. 

• GAAP gross margin was 21.1%, down half a point YoY and more than 2.5 points sequentially due to lower storage and higher AI server mix. Adjusted gross margin was 21.6%, down more than half a point YoY and more than 2.5 points sequentially. 
• GAAP operating margin was 5.0%, up more than 0.8 points YoY as Dell cut expenses by (3%) YoY, but down 4 points sequentially on seasonality. Adjusted operating margin was 7.1%, up half a point YoY but down 4 points sequentially.  
• GAAP net margin was 4.1%, lower than last year’s 4.5%. Adjusted net margin was 4.6%, up 0.3 points from 4.3% last year.  

Adjusted EPS Misses Estimates, Though FY EPS Guide Raised 

Dell reported a fairly large (8.3%) miss on adjusted EPS, reporting $1.55 in the quarter versus its guidance for $1.65 and analyst estimates for $1.69. However, Dell raised its FY26 EPS guidance, speaking to management’s confidence in executing as AI servers ramp and tariffs cloud the macro outlook. 

For Q2, Dell guided for $2.15 to $2.35 in adjusted EPS for growth of 15% at midpoint, marking a slight deceleration from the 17.4% growth reported in Q1. Q3 and Q4 are expected to see EPS growth decelerate a bit further, with growth of just 10.7% in Q4. 

For the full year, Dell slightly raised its FY26 adjusted EPS guidance to $9.40 for 15% growth, up from its prior view for $9.30 for 14% growth. Dell also slightly hiked its GAAP EPS view for FY26, now seeing $7.99 for 25% growth versus its prior view for $7.85 for 23% growth. 

Cash Flows Show Strong Triple Digit Growth 

Some of the stronger numbers of the report aside from AI server orders were Dell’s cash flow metrics, showing strong triple digit growth and a return to double digit margins for OCF. 

• Operating cash flow rose 168% YoY to $2.80 billion. OCF margin was 12.0%, up more than 7 points from 4.7% a year ago and more than 9.5 points higher than Q4’ s 2.4% margin. 
• Free cash flow rose 388% YoY to $2.23 billion, while adjusted free cash flow rose 258% YoY to $2.23 billion. FCF and adjusted FCF margin was 9.5%, a significant improvement from 2.1% and 2.8% a year ago.  
• Cash, equivalents and investments totaled $9.29 billion, up more than $4 billion QoQ. Debt also rose more than $4 billion QoQ to $28.78 billion. 
• Inventories were $7.42 billion, up more than 10% sequentially.  

Share Buybacks and Dividends: 

In the recent quarter, Dell returned $2.4 billion to shareholders with 22.1 million shares of stock repurchased and also paid a dividend of $0.53 per share. The CFO pointed out that since the start of 2023, Dell has returned $13.2 billion to shareholders through stock repurchases and dividends. 

Earnings Q&A: 

Lumpy Server Orders – Not Budging on the $15B Annual Forecast 

Per our analysis yesterday, Nvidia stated the ramp for Blackwell is happening very quickly “On average, major hyperscalers are each deploying nearly 1,000 NVL72 racks or 72,000 Blackwell GPUs per week and are on track to further ramp output this quarter.” 

Dell primarily focuses on Tier 2 CSPs, yet a press release was issued stating the following that would indicate Dell is shipping Nvidia’s largest systems at scale: “One of Dell’s U.S. factories can ship thousands of NVIDIA Blackwell GPUs to customers in a week. It’s why they were chosen by one of their largest customers to deploy 100,000 NVIDIA GPUs in just six weeks.” 

Also buried in the call was a comment by the CEO stating they have 3,000 AI customers – which feels very high to me given the current order number (meaning orders should follow i time): “Our enterprise growth is exciting with over 3,000 customers now buying various forms of our Dell AI factories. We saw a mix from Hopper technology and Blackwell technology across those. We saw it with [Worm and x86] (ph), so a great cross-representation there.” 

Despite this excitement, Dell offered a muted tone on the call especially as they declined to increase their AI forecast for $15 billion in AI servers this year, stating: “The customer deployments that we have in front of us are large. They're complex. They have very detailed schedule deliveries. There's lots of dependencies on this. We've talked about this business being lumpy and nonlinear. The dependencies in this business are waiting for data centers to be built, power to be provided, direct liquid cooling infrastructure put in place. We're orchestrating a highly complex supply chain [..]” and later it was stated: “[…] I like our prospects of converting more pipeline in the second half, but at this point, we're on the $15 billion plus side. Our annual guidance that we just delivered suggests that's exactly where we are.” 

My readthrough is that Dell is not willing to offer guidance on these systems that have had many delays. From what I can tell, companies in the United States supply chain would rather just surprise the market down the line than overpromise on something outside of their control.  

When it comes to other Nvidia server makers such as Foxconn, Wistron and Quanta, many of them have extensive manufacturing operations in China (although headquartered in Taiwan). I would not be surprised if we see Nvidia more “encouraged” to use USA-based server makers such as Dell somewhere down the line. 

Discussions around AI Server Margins 

There was an exchange around ISG margins on the call with an analyst trying to pinpoint if AI servers result in “a low single-digit operating margin” — however, management pushed back on this stating that ISG margins are expanding on a QoQ basis due to AI servers. 

Because AI server margins can make or break a stock like Dell (or Supermicro), I’m quoting the response in full – this is about the guide and not the current quarter results, which had lower margins. 

The CEO stated: “When I think about AI and the numbers that we gave, the $7 billion of incremental revenue. When you look at it, I believe it's roughly $4 billion on a year-over-year basis. It's roughly $5 billion on a quarter-over-quarter basis. And it drives significant gross margin dollar growth on both a year-over-year and quarter-over-quarter basis. And it drives significant operating income dollar growth on a quarter-over-quarter and year-over-year basis. I'll turn it over to Yvonne, she can add more.” 

The CFO later stated: “Yes, I'd say embedded within the guide is a 10% quarter-over-quarter increase in gross margin dollars. As Jeff mentioned, we're seeing — what we're seeing in ISG quarter-over-quarter is [indiscernible] $5.3 billion more revenue, with roughly $0.5 billion more in operating income, which is being driven by AI server profitability and to a lesser extent improvement in the profitability within our Storage portfolio.” 

This would mean the flat guide on adjusted operating margin is coming from traditional servers as it was stated in the opening remarks: “We are expecting sub-seasonal performance in traditional server and storage, our larger profit pools that provide scale, as customers evaluate their IT spend for the year given the dynamic macro environment.” 

Weak Macro Backdrop: 

When asked directly about a tariff pull forward, Dell cut to the chase and confirmed they believe a pull forward occurred in all three of their traditional businesses of PCs, storage and non-AI servers. 

The CEO was quite granular in discussing the details: 

“Jeff Clarke: 

 I think I mentioned in my remarks at North American, EMEA and APJ all grew double digits from a demand perspective. We did see a slowdown in month three. Month one was greater than January. Month two was greater than February. Month three slowed in weeks 10 through 12 in actually all three US businesses, commercial PCs, traditional servers, and storage. So clearly there is a bump along the journey there, along they reference to that with a slowdown in our traditional server business. So, a pull ahead. We are still optimistic about the year. We have all of the businesses growing. We are maybe a little more needed in what we think in those businesses. They may be down a point in terms of their absolute market growth. I don't think anyone knows, but when you look at traditional servers, you look at storage, the other two businesses that I was referring to. I think, both were growing nicely. North America speed bump with 10 through 12 in month three. Worked our way through that. We now have that reflected in our guidance in Q2.” 

Conclusion: 

We took a stab at Dell as it was becoming apparent from Nvidia’s report that Dell would likely beat its AI server business. It was a blowout in that regard, as the chart shows, yet there are a few puts and takes to consider. First off, Dell is not comfortable guiding to more than what they are sure will be delivered in light of many delays with Blackwell. Secondly, Dell’s other segments saw a pull forward and will weigh on results as we move into future quarters. However, one reason we took a stab is that a bullish setup is forming – like with many AI stocks right now, it requires some patience.

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:

• Nvidia Q1/Q2 Guide: Blackwell is (Finally) Here
• Nvidia Stock Faces a Choppy Q2, But Tailwinds Build for H2 Acceleration
• Microsoft Stock Surges After Q3 2025 Earnings: What Separates Azure from AWS, Google Cloud
• AMD Beats in Q1 Yet Q2 Data Center to Decline due to Export Controls
• Astera Labs: Product Differentiation is Set to Soar in H2 and Beyond

Nvidia posted a strong Q1 and marginally missed estimates in Q2 due to Blackwell revenue that exceeded expectations. The larger Blackwell systems are in full production and are shipping in volume now, which sets up a strong second half of the year.  

According to management commentary, the ramp is happening very quickly: “On average, major hyperscalers are each deploying nearly 1,000 NVL72 racks or 72,000 Blackwell GPUs per week and are on track to further ramp output this quarter.” The rough math here implies hyperscalers are deploying $3 billion every week right now since each rack goes for $3 million. Furthermore, the run rate of this comment implies data center revenue will be above and beyond analyst consensus for Q2, Q3 and Q4 – thus, either analyst consensus comes up or these systems will become further supply constrained somewhere down the line and analysts are being conservative for now. 

Among the many reasons that Blackwell is an improvement compared to the Hopper architecture, management focused on inference stating: “Compared to Hopper, Grace Blackwell is some 40 times higher speed and throughput compared.” 

The loss of China revenue in Q1 was $2.5 billion yet inventory charges were higher at $4.5 billion from orders placed prior to April 9. For Q2, the loss of China revenue was $8 billion –or about $2 to $3B higher than the typical $5.5B in China revenue. The readthrough is that Blackwell came in $2-$3B above analyst expectations to absorb that impact from China, since guidance marginally missed. 

You can view an interview on Fox where I discussed the puts and takes going into the earnings report plus the new price target I/O Fund published here. If you’re brief on time, the takeaway is that Blackwell has enough ammo to push the stock into the mid-to-high $200s or a $6+ trillion market cap. I discuss this and more below. 

Slight Revenue Beat in Q1, Marginal Miss in Q2 

Nvidia reported a slight revenue beat in Q1, reporting 69.2% YoY growth to $44.06 billion in revenue, just ahead of the $43.25 billion consensus.  

For Q2, Nvidia guided $45 billion, +/- 2%, representing a deceleration to 49.8% YoY growth and a marginal miss at midpoint versus consensus at $45.66 billion. At the low end of the guide, revenue growth would be up only 2.3% sequentially, reflecting how large of an impact the H20 ban is having on growth.  

Nvidia also quantified more of the H20 impact, providing details on the revenue impact to both Q1 and Q2 – in total, both quarters are seeing a combined impact of just over $15 billion. Nvidia added that the inventory charge of $4.54 billion was less than the $5.5 billion anticipated as it was able to re-use certain materials.  

For Q1, Nvidia said that it recorded $4.6 billion in H20 revenue, or about 10.4% of revenue, while it was unable to ship an additional $2.5 billion of H20 revenue due to export restriction. In total, this implies $7.1 billion in H20 revenue in Q1. This would represent around 16% of total revenue or 18.2% of data center revenue in the quarter.  

For Q2, Nvidia said that its guidance reflects the loss of approximately $8 billion in H20 sales, implying nearly 13% QoQ growth was expected to fill extremely high Chinese demand for the chip. However, based off management’s commentary, its $45 billion guide for Q2 suggest that other Blackwell SKUs are ramping rapidly and filling much of the H20 void.  

Key Segments 

Data Center 

Nvidia reported 73.3% growth in data center revenue to $39.11 billion in Q1, marginally higher than analyst expectations from Visible Alpha of $39.08 billion. This marked the end of Nvidia’s seven-quarter streak of $1 billion-plus beats in the segment – based on the Visible Alpha estimate, Nvidia beat by just $33 million, its lowest in the past nine quarters.  

Compute revenue rose 76% YoY but just 5% QoQ to $34.16 billion, impacted by the H20 ban, while Networking revenue rebounded swiftly, rising 56% YoY and 65% QoQ to $4.96 billion. Nvidia said Networking’s performance was “driven by the growth of NVLink compute fabric in our GB200 systems and continued adoption of Ethernet for AI solutions at cloud service providers and consumer internet companies.” 

In contrast to the prior two quarters, Nvidia did not give a number for Blackwell revenue in the quarter, stating only that its Blackwell ramp expanded to all customer categories and that large CSPs remained its largest customers at just under 50% of data center revenue. 

Nvidia also said that its hyperscaler customers “are each deploying nearly 1,000 NVL 72 racks or 72,000 Blackwell GPUs per week,” with this output level on track to ramp further this quarter.  

• Gaming revenue rebounded sharply, rising 48% QoQ and accelerating 53 points sequentially to 42% YoY with revenue of $3.76 billion in Q1. Nvidia said that this was driven by its Blackwell architecture and the fastest ramp in company history. 
• Automotive revenue rose 72% YoY but declined (1%) QoQ to $567 million.  
• Pro Viz revenue rose 19% YoY and was approximately flat QoQ at $509 million. 
• OEM and Other revenue rose 42% YoY but declined (12%) QoQ to $111 million. 

Margins Take Large Hit from H20, Though Q2 Points to Swift Rebound 

Nvidia’s margins took a rather large hit from the H20-related inventory write-down, with gross margin and operating margins contracting significantly. However, management’s guidance for Q2 points to a rapid recovery in margins as Blackwell ramps, likely aided by its pricing power.  

• GAAP gross margin was 60.5% and adjusted gross margin was 61%, around 10 points below management’s initial guidance for 70.6% and 71% due to the $4.54 billion charge related to the H20 ban. Management noted that excluding the charges associated with the ban, adjusted gross margin would’ve been 71.3%, at the upper end of the guided range of 71% +/- 0.5%. 
• For Q2, management guided for 71.8% GAAP gross margins and 72% adjusted gross margins, a rebound of approx. 11 points sequentially. 
• GAAP operating margin was 49.1%, well below guidance for 58.5% and a sequential contraction of 12 points. Adjusted gross margin was 52.8%, nearly 10 points below the guide for 62.6% and a sequential contraction of more than 12 points.  
• For Q2, management’s guidance implies operating margins will rebound with gross margins, projecting approximately a 10 point sequential expansion to a 59.1% GAAP and 63.1% adjusted operating margin.  
• GAAP net margin was 42.6%, while adjusted net margin was 45.2%. The broad-based margin recovery in Q2 is expected to mostly transfer through to the bottom line, with management guiding for a 7.6 point recovery to a 50.2% GAAP net margin. 

EPS Beats, Growth Expected to Rebound 

Nvidia reported a slight EPS beat despite the margin contractions, with adjusted EPS of $0.81 coming in ahead of the $0.75 estimate. GAAP EPS of $0.76 missed estimates for $0.81. 

Adjusted EPS growth slowed quite dramatically, decelerating more than 38 points sequentially, in part due to the H20 ban; Nvidia noted that excluding the ban, adjusted EPS would be $0.96. This would represent YoY growth of 57.4% versus the 32.8% reported. 

Looking ahead, adjusted EPS growth is expected to rebound and remain in the low to mid-40% range as margins recover. However, given that Q1’s EPS excluding the ban showed growth in the high-50% range, estimates may move higher as Q2’s margin outlook shows almost no persisting impact. 

Cash Flows and Balance Sheet 

Cash flows were surprisingly strong as Nvidia’s cash flow margins expanded approximately 20 points sequentially, while it added more than $10 billion in cash to its balance sheet. 

• Operating cash flow was $27.41 billion, up nearly 79% YoY on higher revenue, timing of its cash collections, and lower cash taxes. OCF margin was 62.2%, up 20 points QoQ and more than 3 points YoY. Nvidia said it expects a substantial increase in cash taxes in Q2, which will weigh on OCF.  
• Free cash flow was $26.14 billion, up 75% YoY. FCF margin was 59.3%, up nearly 20 points QoQ and just 2 points YoY. 
• Inventories were $11.33 billion, rising more than 12% QoQ. However, days sales of inventory decreased from 86 days in Q4 to 59 days in Q1, due to the sharp increase in COGS from the H20 inventory charges. 
• Accounts receivable were $22.1 billion, declining just over (4%) QoQ. Days sales outstanding decreased sequentially from 53 days to 46 days due to improved shipment linearity (shipments more evenly distributed throughout the quarter) and timing of collections. 
• Cash and equivalents rose more than $10 billion sequentially to $53.69 billion, despite Nvidia returning more than $14.3 billion to shareholders in the quarter with $14.1 billion in share repurchases. 
• Debt remained steady at $8.46 billion. 

Earnings Q&A: 

Inference Demand is Skyrocketing 

In the opening remarks, management stated they are seeing “a sharp jump in inference demand.” Our firm recently covered the 5X increase in tokens quoted by Microsoft to 50T tokens per month and 100T per quarter stated in their most recent earnings report. In that analysis, we pointed toward up to $18 billion in annualized revenue for API usage in high-end models. Google recently stated at their I/O Developer event they are processing 450T tokens per month up 50X from a year ago. 

In the opening remarks the following was shared about the NVL72 inferencing capabilities: “Inference serving startups are now serving models using B200, tripling their token generation rate and corresponding revenues for high-value reasoning models such as DeepSeek-R1 as reported by artificial analysis. NVIDIA Dynamo on Blackwell NVL72 turbocharges AI inference throughput by 30x for the new reasoning models, sweeping the industry […] In the latest MLPerf Inference results, we submitted our first results using GB200 NVL72, delivering up to 30x higher inference throughput compared to our 8-GPU H200 submission on the challenging Llama 3.1 benchmark.” 

Later, in the Q&A session, Jensen Huang stated inference is reaching an inflection point, stating “we've reached an extraordinary milestone with AIs that are reasoning, are thinking, what people call inference time scaling. Of course, it created a whole new — we've entered an era where inference is going to be a significant part of the compute workload.” 

It was then re-emphasized again in the Q&A with Huang stating: 

“Yeah, thanks. Thanks, Ben. I would say compared to the beginning of the year, compared to GTC timeframe, there are four positive surprises. The first positive surprise is the step function demand increase of reasoning AI, I think it is fairly clear now that AI is going through an exponential growth, and reasoning AI really busted through [… So, number one is inference reasoning and the exponential growth there, demand growth.” 

Note on Valuation: 

I've written a substantial amount on Blackwell — perhaps the most important being my $10T prediction came out about two months after Blackwell was announced at GTC. If you read-between-the-lines on our new price target, then I’m saying Nvidia can reach more thn a $6T market cap as soon as next year. 

This relies on two assumptions. The first is that we see Nvidia reach the valuation it saw in 2024 when the forward PE Ratio was at 50 forward a handful of times. That implies a move of up to 51% as it stands today. 

On the top line, NVDA has traded as high as 28 forward PS, implying room of up to 75%. 

The second assumption is that Nvidia beats estimates, forcing the valuation higher. We’ve seen a small glimpse of this in Q2 with $2 to $3B in Blackwell revenue absorbing China losses. However, I’ve been crystal clear that it’s the August call and November call that will be fireworks. I expect to see Nvidia grand slam beats in these quarters especially and/or analyst consensus moving up into those quarters, creating more room in the valuation then the 50% to 75% we see currently.  

Conclusion: 

The marginal miss in Q2 would have been more pronounced if Blackwell were not ramping. Pay attention, as this is the cyclical bottom for Nvidia as the Hopper generation fades out and yet its earnings reports have been unscathed. The future is bright and the fireworks are locked and loaded for H2.

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.

Recommended Reading:

• Nvidia Stock Faces a Choppy Q2, But Tailwinds Build for H2 Acceleration
• Astera Labs: Product Differentiation is Set to Soar in H2 and Beyond
• AMD Beats in Q1 Yet Q2 Data Center to Decline due to Export Controls
• Amazon: AI Powerhouse Driving Margin Transformation, Retail in Tariff Crosshairs

This article is a continuation of our free newsletter from May 23, Nvidia Stock Faces a Choppy Q2, But Tailwinds Build for H2 Acceleration.

For our Premium Members, we discuss the following: 

• What AI-Related Suppliers and Competitors are Saying Ahead of Nvidia Earnings, including an important supplier correlation that broke down in November and worsened in April.
• The timing of when Big Tech capex will hit peak growth and what this means for Nvidia’s stock
• The I/O Fund’s trading plan for Nvidia including never-before published buy targets over a 12 to 18-month time frame.

What AI-Related Suppliers and Competitors are Saying Ahead of Nvidia Earnings: 

Unlike software, hardware ramps can take considerable time – in this case, Blackwell will have taken nearly 18 months from its announcement in March of 2024 until it ramps in volume in H2 2025. Given the improving, yet still muted commentary from Nvidia suppliers, the I/O Fund is looking toward Nvidia's August and November earnings calls as being the stronger earnings reports this year. 

Here is what you need to know about Q1 and Q2 so far – some of which has been reported on while other notable points are being reported for the first time: 

AMD to See $700M Impact in Q2; $1.5B Impact in FY2025 

AMD is a solid company to track not only for its unique, underdog ascent in the AI market, but also because the company is similarly impacted with export license restrictions on the MI308 variant from tis MI300 series GPUs. Management stated the export restrictions will lead to a $700 million loss in revenue for AMD in Q2.  

Here is a statement by CEO, Lisa Su: 

“As a reminder, in April, a new export license requirement was put in place for MI308 shipments to China, the impact of which is included in our guidance. We expect revenue to be approximately $7.4 billion plus or minus $300 million. This includes an estimated $700 million revenue reduction as a result of the new export license requirement. Despite this headwind, the midpoint of our guidance represents 27% year-over-year revenue growth.  For the full year 2025, we estimate the revenue impact due to the export license requirement to be approximately $1.5 billion.” 

In terms of data center growth, it’s expected that AMD’s data center segment will decline in Q2 due to the loss of MI308 revenue yet will resume growth in Q3 and Q4. 

Server Makers: Dell, Super Micro and HPE 

When we look at AI server makers, there are signs that supply chain bottlenecks are easing — yet not at the pace originally expected for H1 2025.  

Super Micro: the Nvidia Proxy 

Super Micro is an obvious place to start when parsing out GPU shipments given the AI server maker led the market during the Hopper generation and grew from $7 billion in annual revenue to an expected $22 billion for the fiscal year ending in June – more than a 3X increase from the Hopper generation. When you look further out to include Ampere GPUs, revenue increased 7X from $3 billion in annual revenue to $22 billion in the current fiscal year ending in June. 

Pictured Above: Supermicro’s revenue has correlated to Nvidia’s until only very recently. The disconnect that began in November has worsened in the latest quarter. 

Super Micro offered a disappointing report as sales declined 19% QoQ and management lowered guidance for FY2025 revenue from $23.5B to $25B to $26B to $30B. At midpoint, this represents a 13.4% miss compared to previous guidance. Notably, this miss is concentrated in the current quarter as the company’s fiscal year ends in June. 

While some are pointing toward a transition from Hopper to Blackwell as the issue, to be clear, it’s more likely the China impact from the H20 restrictions combined with delays for NVL72 volume shipments. 

Regarding the NVL72s, Supermicro pointed toward direct liquid cooling as the primary hangup for the delays in the Q&A:  

“Michael Ng 

Great, thanks Charles, that's very helpful. And just as a follow up, can you talk about whether or not you're seeing differences in demand between HGX versus NVL 72 racks? Any differences there either in customer demand or your ability to fulfill demand on either product? Thank you. 

Charles Liang 

Yes, we see strong demand for kind of GB200 NVL 72 and B200 liquid cooling. But customer liquid cooling data center basically a little bit dead. So that's why they are waiting there, waiting a little bit more than what we expect. So but however the solution, their data center will be ready very soon and we to see our schedule is getting much more exciting now.” 

Regarding the H20 impact, Supermicro’s Asia revenue increased 10 points QoQ, which suggests Supermicro was a beneficiary of an increase in China orders to some degree:

Supermicro 10-Q Filing May 2025Supermicro 10-Q Filing May 2025 

When looking back, this percentage of Asia revenue is nearly 2X higher than previous quarters this year: 

• Percentage of Asia sales were 13.5% in the December quarter and 17.9% in the December 2023 quarter 
• Percentage of Asia sales was 16.1% in the September quarter and 10.6% in the September 2023 quarter 

Source: Supermicro 10-Q Sept and 10-Q Dec10-Q Sept and 10-Q Dec 

On an annual basis, Supermicro has not reported Asia revenue higher than 21.9% — proving the 29.4% in the latest quarter is certainly an outlier for this company.

Supermicro 10-K Annual FIlingSupermicro 10-K Annual FIling 

Overall, both Supermicro and AMD point toward Nvidia’s Q2 as likely the choppiest quarter the company has faced in some time. 

Additional Server Makers: 

One data point does not make a trend, therefore, it’s prudent to check if these conclusions are being echoed elsewhere. As you’ll see below, the worst is likely behind us for Blackwell delays yet suppliers are not exactly surging in their AI segments ahead of deliveries in this specific quarter.  

Dell: 

Dell has not reported since February, which provides another month of visibility into how Q1 may fare yet does not offer much in terms of March or April. The company reported AI orders of $1.7 billion, down (53%) QoQ and shipments of $2.1 billion, down (28%) QoQ with $4.1 billion in backlog as customers work through “technology changes.”  

Looking ahead, Dell foresees $15B in AI shipments this year yet the guide for the current quarter missed estimates. Dell’s quarter ends in April and the company guided Q1 revenue in the range of $22.5B to $23.5B, representing YoY growth of 3.4% at the midpoint, missing estimates by 3% yet expects adjusted EPS to grow 25% YoY to $1.65. 

Dell is a mixed bag of course as there is significant consumer exposure on the PC side – yet interesting enough, analysts are more bullish on PCs outperforming in the upcoming quarter than AI servers due to a pull forward ahead of tariffs with Raymond James stating: ‘The AI transition between GPU generations has been more disruptive than anticipated, and checks suggest PC purchases have been pulled forward in anticipation of tariffs.” 

Overall, we need to hear Dell’s update following Nvidia’s earnings before any conclusions can be drawn. What we do know is that in February, Dell was not too confident about their next quarter’s guide, hence lowering it by 3%. 

HPE: 

Hewlett-Packard is smaller in terms of AI revenue yet reported similar results as Dell in the March earnings report with AI systems mix falling 6.2% QoQ from 17.7% to 11.5%. According to the CEO, the headwinds are unlikely to clear up in Q2: “We recognized roughly $900 million of [AI systems] revenue, up from about $400 million last year, but down sequentially as expected due to chip availability and customer readiness. We expect these factors will continue to affect our AI systems business.” HPE has a mix of segments in total revenue, yet the company’s guidance missed Q2 estimates by 6.6%.  

Looking forward, HPE’s statements match what others are saying, which is that Blackwell is finally ramping – although at lower levels than originally estimated: " In AI, we continue to see strong demand from model builders and service providers. We booked $1.6 billion in new AI system orders in the quarter, bringing our cumulative AI system orders to $8.3 billion. The Blackwell GPU generation of products represented approximately 70% of our new order intake in Q1.” 

Vertiv: 

Vertiv is not a server maker, rather provides the power supply and thermal management solutions required for data center infrastructure. The company lowered its guidance last quarter, yet raised guidance in the most recent quarter – pointing toward a successful resolution to thermal management issues for Blackwell rack-level systems. Here is what management stated: “The $150 million increase in organic sales is driven by both the first quarter and higher expectations in the second quarter versus what was implied in our prior guidance.” 

On the call, an analyst asked if Vertiv “precedes the chip shipments” to which the CEO answered affirmatively by 3-6 months. Therefore, the encouraging inflection seen in Vertiv’s report is unlikely to result in an immediate correlation to Nvidia.  

Note on Foxconn: 

Foxconn (Hon Hai) is a crucial part of Nvidia's Blackwell supply chain, with it reportedly having the world’s largest GB200 manufacturing facility in Mexico. Foxconn said in Q1 that AI server revenue rose 50% YoY, and projected that Q2’s AI server revenue would double QoQ and YoY. Management explained that the reason Q1 did not double was “mainly due to the GB series entering mass production at the end of 1Q25,” and that most of those products would be delivered in 2Q25. Foxconn added that “HGX demand will continue to expand.” 

For Q2, Foxconn said that AI servers were entering high-volume production, and would account for a larger portion of revenue at 50% of server sales, up from 40-42% in 2024. Foxconn also expects AI server revenue to improve each quarter of the year, and it reaffirmed guidance for AI server revenue to grow more than 50% YoY to surpass NT$1 trillion (US$33.0 billion) on high demand.  

JP Morgan believes that Foxconn entered its large-scale ramp of GB200 production in late March, targeting 30,000 rack shipments for the full-year, with 10,000 of those being GB200/300 NVL72. This suggests that the ramp is still in the early stages, though accelerating into the summer months based on recent rack shipment estimates in April. 

Obligatory Discussion on Capex 

Capex and how it relates to AI spending needs no introduction at this point. Investors have never had it so easy as to track demand openly like we can with Big Tech’s disclosures on their quarterly and fiscal year capex guidance. Here is an overview of just how current guidance from Big Tech: 

• Amazon has forecast capex of more than $100 billion this year, up from $78 billion in 2024. This represents the largest amount being spent by a single tech company and is a higher mix of custom silicon compared to GPUs.  
• Alphabet has forecast capex of $75 billion this year, up from $52.5 billion in 2024. 
• Meta has forecast capex of $68 billion this year, up from $39.2 billion in 2024. This represents the largest growth among the Big Tech companies this calendar year at 74%. 
• Microsoft has forecast capex of $80 billion this fiscal year ending in June, up from $44.5 billion. Given Microsoft has a mid-year fiscal year, this represents the largest growth among tech companies over the past 12 months at 80%.  

I want to caution that peak years for AI capex growth are likely behind us. Collectively, Microsoft, Amazon, Meta and Google are projected to spend more than $330B on capex in 2025, up nearly 34% YoY. According to UBS, estimates for capex will rise less than 10% YoY to $364B, with Amazon’s capex nearly flat and Meta seeing the largest increase at 15% YoY. 

Wall Street has consistently placed capex estimates too low, meaning it’s likely we see greater than a 10% YoY increase next year, yet the chances growth rates accelerate beyond this year’s 34% growth is not likely (hence the statement we’ve likely hit peak growth). 

Microsoft recently offered a glimpse that the voracious appetite to grow AI infrastructure may eventually come back down to earth. Management said capex in fiscal 2026 (beginning in the second half of calendar 2025) will grow at a slower pace than FY2025, with a higher mix of short-lived assets. Additionally, capex declined sequentially for the first time in 2 years, at $21.4 billion versus $22.6 billion in the prior quarter. Q3’s figure was also slightly lower than expected due to variability in timing of data center leases, though capex is expected to increase sequentially in fiscal Q4.   

There are many avenues for Nvidia to continue its AI dominance, which we’ve covered for the past 2-3 years on the premium site to prepare our readers for Nvidia's long runway. Flat capex will likely spook the markets (more likely in January 2026 than in July) yet we would be buyers as we are quite clear Nvidia’s AI thesis goes well beyond AI servers and infrastructure. 

I/O Fund’s Buy Plan

By Knox Ridley 

Since launching the I/O Fund live portfolio in May of 2020, Nvidia is one of only three positions we have owned without interruption. Since 2021, Nvidia has remained in the top three, which was two years ahead of the AI surge. 

On a more granular level, we backed up our research with 9 buy alerts that we sent to our Members when NVDA was under $20 from 2021 – 2022. Being early to the A.I. trend has been one of the primary reasons why the I/O Fund was able to outperform our benchmarks and competition in 2023 – 2025.  

However, unlike many, we favor an active approach – i.e., taking gains in positions, and reducing risk, regardless of how bullish our long-term thesis may be. Stocks do not move in a straight line, and although we believe that we are in the early innings of A.I., we think investors should expect periods of volatility that punctuate the larger trend higher.  

For this reason, we cut ¼ of our Nvidia position in June of 2024 at $129.49, just before Nvidia saw a greater than 35% drawdown into August. We further cut half of our position at $127 and $140 on February 6th and 20th of this year, just before Nvidia dropped more than 40% into the April 7th lows.  

While both technical and fundamental concerns were the reasons behind these decisions to take gains, we were able to follow up these sales with buys at much lower prices. In our January 2025 article, titled, “Where I Plan to Buy Nvidia Stock Next,”we outlined our long-term targets in the $90s and $80s. We were able to execute this plan on April 4th at $94 and at $87 on April 7th. These were prices targets that I had been discussing with our premium members in my weekly Thursday webinar  for many months. 

Now that we have seen 54% bounce off the April lows, we believe Nvidia, and the markets are at a major inflection point.  

Technical Analysis 

We’ll begin with the bigger trend that started on the October lows in 2022. You can see how vertical the pattern is. This is a standard 5-wave pattern, which can allow for two general interpretations on where Nvidia is likely heading next: 

• Blue – This is our primary analysis and suggests that the April low was the end of the larger 4th wave decline. This would mean that Nvidia is setting up for a 5th wave push to new highs, which should target $170 – $195 then $240 – $295. This will complete the larger uptrend pattern and likely give way to a multi-month correction.  
• Red – This scenario has the August 2024 low as the bottom of the 4th wave, and the weak and messy push higher into the February high as the final 5th wave in this uptrend pattern. The next larger drop should be a more direct pattern that ultimately breaks below $97. This will setup the final drop to the $70s – $60 region. 

NVDA is setting up for a reversal. Note the RSI indicator below. It is currently at the same level that the February top occurred, as well as the first major drawdown in late 2022. This is a key region where bounces tend to fail. Also, note how volume continues to drop the higher we go. There are less buyers the higher we go, which is not a good sign.  

What will be key is how Nvidia retraces. If we see a messy and overlapping drop that resembles a 3-wave drop, it is signaling that the bullish blue count is likely in play. On the other hand, if we see a more aggressive and direct drop that resembles 5-wave drop, it will support the probability that the red count is what is in play.  

If we zoom in on the current 2025 trend, we can get a better idea of what these paths might look like.  This is also the chart we will use to establish a risk management plan for any new buys.  

Nvidia broke out from the down trend line that started at the February 2025 top. This is historically a bullish signal, and one that favors the bullish scenario. Furthermore, the smaller degree count looks incomplete. As long as $129 holds, I expect NVDA to push to the $143 – $149 region before putting in a local top.  

As stated before, if the next drop is a 3-wave move that is messy and overlapping, we will target the $116, $110, $103 region for an additional buy. As long as this drop holds over $97, we expect to see a low, followed by a larger push into the $240 – $294 region in the coming months. If we instead see a more direct drop that resembles a 5-wave drop, we will be on high alert. A break below $97 will setup a final drop into the $76 – $60 region. This will setup a tremendous buying opportunity, if it happens.  

The I/O Fund is closely monitoring Nvidia for a potential entry point. Join us Thursdays at 4:30 p.m. in our Advanced Market webinars, where we’ll outline our strategy for initiating a position with maximum upside in mind. Learn more here.

Pro Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgrade

Please note: The I/O Fund conducts research and draws conclusions for the 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.

Recommended Reading:

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• Coinbase Q1: Options Trading Platform M&A, Otherwise Lackluster Report
• Coherent FQ3: Positioned to Supply NVIDIA as GPU Clusters Scale with 800G and 1.6T Transceivers
• Astera Labs: Product Differentiation is Set to Soar in H2 and Beyond

Coherent reported a double beat in Q3 with revenue growth of 24% and EPS growth of 141% YoY. The top line beat was driven by Data Center and Communications revenue growing 46% YoY. While this growth moderated slightly from the prior quarter, Nvidia suppliers should see a meaningful acceleration in the second half of the year. 

Analysts have yet to fully factor in this acceleration, but as NVIDIA ramps Blackwell-based systems and scales out its Spectrum-X Ethernet and Quantum-X Infiniband platforms, suppliers of high-speed optical interconnects are likely to see an increase in demand. Coherent, as a key ecosystem partner to NVIDIA in silicon photonics and co-packaged optics (CPO), is well positioned to benefit as hyperscalers upgrade to 800G, 1.6T, and eventually 3.2T.  

To refresh your memory, Coherent has many products that participate in the AI-driven datacom transceiver and optical interconnects market. Primarily, the growth story centers around supplying Nvidia with pluggable optical transceivers (400G, 800G, 1.6T) including EML lasers, VSCEL lasers and CW lasers, and emerging CPO technologies for next-generation switches and interconnects.  

Coherent is certainly not without competitors, and this is the main risk the company faces. Management is tasked with executing flawlessly in an environment where components may see supply disruptions and must also move quickly to make sure they are first to market to support higher bandwidths. Optical transceivers are at risk of being commoditized as reflected in Coherent’s low margins. 

Revenue 

Coherent delivered another quarter of record revenue driven by strong AI data center demand, with revenue rising 4.4% QoQ and 23.9% YoY to $1.50 billion. This beat the consensus estimate for $1.44 billion by more than 4%, and marks a third straight quarter of >20% revenue growth.  

For Q4, management guided a wide range for revenue, forecasting $1.425 to $1.575 billion. At the $1.5 billion midpoint, this represents flat QoQ and 14.5% YoY growth, slightly ahead of estimates for 12.1% growth. Revenue growth estimates for the next two quarters have moved higher since our last Q2 report, from the mid-9% range to double-digit growth through FQ1 2026. 

Industrial is weighing on the growth while Datacom is expected to grow: “Yes, if you look at the midpoint of the guidance that Sherri provided on revenue, roughly flat at the midpoint sequentially. But within that, what I would say is we're expecting data center and communications to be sequentially up in the current quarter and then our industrial-related end markets to be sequentially down.” 

Key Segments & End Markets 

Networking remains the primary driver of Coherent’s growth as the company continues to release new optical networking solutions, including the industry’s first 400G electro-modulated laser (EML) to pave the way for 3.2T optical transceivers, as well as VCSEL-based CPO solutions.  

Networking revenue increased 46% YoY and 10% QoQ to $897 million, or ~60% of revenue. Though growth continues to decelerate from Q1’s 61% print, the segment’s growth is much stronger this year compared to last. For the first nine months, networking revenue was $2.48 billion, up 53% YoY.  

Lasers revenue softened, rising 4% YoY but dipping (3%) QoQ to $363.9M. This compares to 6% YoY and 8% QoQ growth last quarter to $375.3 million. Lasers accounted for 24% of revenue, down from 26% in the prior quarter as networking gained share.  

Materials revenue remained soft, recording a YoY decline for the third consecutive quarter in Q3, though it lessened to just (1%) to $236.7 million. Of Coherent’s three revenue segments, Materials is the only to see a YoY decline for the first nine months of the year. Materials accounted for 16% of revenue.  

By end markets, data center and communications continues to expand its revenue share, now accounting for 60% of revenue in Q3, up from 57% in Q2, helping offset softer growth in Industrial, Implementation and Electronics.  

Data Center and Communications revenue increased 46% YoY and 9% QoQ to $897 million, slowing from 58% growth last quarter.  

Within Communications, Telecom grew 2% QoQ and 21% YoY driven by data center interconnects. We’ve covered the DCI opportunity previously here, which could evolve to become a significant opportunity. 

Industrial revenue increased 5% YoY and 1% QoQ to $440 million, accounting for just over 29% of revenue. 

Implementation revenue was down (2%) YoY but flat QoQ to $96 million, accounting for over 6% of revenue. Electronics revenue declined (11%) YoY and (15%) QoQ to $66 million, accounting for less than 5% of revenue. 

Margins  

Coherent’s gross margin was at the higher end of management’s forecasted range and operating margin was more than 1 point ahead of its guide. Margins are expected to expand in Q4, although overall, margins are lower than a stock like Astera for example – which affects valuation.  

The company recently restructured the business to divest the silicon carbide portion, which is also contributing to better margins for next quarter: “So I think you're referring to some of the restructuring that we've taken and the portfolio actions associated with it. And so what I would say is that the actions that were taken in terms of an underutilized assets or underutilized businesses, that benefit is — certainly will contribute to our financials from a gross margin and OpEx perspective, depending on the nature of the actual divestiture.” 

• Q3 GAAP gross margin was 35.2%, expanding nearly 5 points YoY. Adjusted gross margin was 38.5%, at the higher end of the 37-39% guided range, expanding nearly 5 points YoY and slightly sequentially.  
• GAAP operating margin was 4.8%, up 3 points YoY. Adjusted operating margin was 18.6%, up 6 points YoY and well ahead of the 17.4% guided figure. This highlighted some improvement in operating leverage for Coherent, expanding faster than adjusted gross margins.  

For Q4, management is holding adjusted gross margin guidance steady at 37-39%, while guiding for an 18% adjusted operating margin. Coherent is beginning to close in on its long-term gross margin targets of 40% over the last two quarters, though it still needs to make some considerable progress or drive faster growth in higher-margin products to reach this threshold in fiscal 2026.  

EPS 

Coherent reported a 5.8% EPS beat in Q3 as it benefited from strong margins down the line, reporting $0.91 in EPS. This represented growth of 141% YoY, decelerating from 256% YoY growth in Q1.  

For Q4, management offered a wide range for $0.81 to $1.01 in adjusted EPS, with the $0.91 midpoint in-line with estimates. For FY25, Coherent is currently expected to record more than 107% YoY growth to $3.46, though growth is expected to slow to 26.2% YoY to $4.37 in FY26. While the dollar figure for FY26’s EPS has not changed over the past three months, the growth figure is technically 17 points slower due to the higher base it’s growing from in FY25, at $3.46 estimated versus $3.02 three months ago. 

Cash Flows and Balance Sheet 

Cash flow margins expanded slightly YoY, with operating cash flow margin remaining in the double-digits, though just barely. Inventories ticked slightly higher, and accounts receivable rose rather quickly sequentially in Q3, with Coherent likely preparing for AI data center products such as Nvidia’s Blackwell to ramp in the back half of the year.  

• Operating cash flow was $162.9 million for a 10.9% margin, expanding from a 9.7% margin a year ago. This was the fourth consecutive quarter of a double-digit OCF margin. 
• Free cash flow was $51.1 million for a  3.4% margin, expanding from a 2% margin a year ago. 
• Inventories ticked nearly 4% higher QoQ to $1.39 billion, though accounts receivable showed a much larger jump at more than 13% QoQ to $1.01 billion.  
• Cash and equivalents totaled $890.3 million, while debt decreased slightly to $3.73 billion as Coherent paid down $136 million of debt in the quarter.  

According to the CFO, the company has paid down $386M total for 2.1X debt leverage: “We paid down $136 million in debt during the quarter using cash from operations. This brings our fiscal year-to-date total debt payments to $386 million, reducing our debt leverage to 2.1x as defined in the credit agreement.” 

When asked about inventory building, management stated they would not guide beyond one quarter yet see Datacom segment growing: “Yes. We don't guide beyond the current quarter, but what I would say is in datacom, we continue to see strong demand signals from our customers, both kind of shorter-term demand signals, which would be purchase orders and backlog, but also longer-term demand signals like the forecast that they'll give us a 12- or 18-month forecast. And so we continue to see strong demand from the data center customers. So we're expecting that business to continue to grow.” 

Earnings Call Q&A 

Upcoming 1.6T Shipments are a Major Catalyst

As discussed in our previous writeup on Coherent, the company supplies EML Lasers, VSCEL Lasers and CW Lasers for silicon photonics. While 100G per lane for 400G and 800G optical transceivers is what is supporting the growth now, it’s expected that 200G per lane and even 400G per lane for 1.6T optical transceivers is what will drive growth in H2 of this year.  

Per the earnings call: 

“So obviously, for the industry, the next — for the data center, the next big transition in terms of data rate is 1.6T, and we showed 3 different versions, one that was based on our 200G EML technology, one that was based on our 200G VCSEL and then another one based on our silicon photonics […] and then timing of impact would be on 1.6T, we continue to view the 1.6T ramp as we've said in past quarters. We expect 1.6T revenue to start in this current calendar year.” 

The CEO also called out the importance of being early (and perhaps first) to release 400G per lane 3.2T in the future: “And then my other one that I really liked was we demonstrated 400G differential EML. And the reason that one is important is because that's really the foundation laser technology for 3.2T transceivers. So we're deep into the development of our portfolio of 3.2T transceivers and demonstrating that key laser capability of 400G is a really important milestone.” 

According to a press release in March, Coherent was the first to release a 400G per lane EML for 1.6T, showing Coherent is working hard to remain a supplier of choice in a highly competitive market. According to Cignal AI, 400G and 800G modules grew 4X in 2023 and were expected to continue growing significantly in 2024 with Coherent noted as one of the leaders in the space.  

To some extent, indium phosphide capacity is the limiting factor for these technologies, with Coherent stating they expanded capacity rapidly in the current quarter: “In Q3, we once again expanded our capacity both sequentially and year-over-year with year-over-year capacity growing by over 3x.” You can read more about InP here. 

Coherent stated half of their revenue comes from EMLs, which is the main growth story right now: “As I mentioned in the prepared remarks, if we look at our transceiver revenue, actually over half the revenue is based on EML. So over half of our transceiver revenue comes from EML-based transceivers.” 

Co-Packaged Optics and Optical Circuit Switches (OCSs):

Co-packaged optics also represents a significant opportunity for Coherent with an announcement in March that the company is collaborating with Nvidia on co-packaged optics at the time of the GTC conference. We prepared our Members for this announcement last quarter by stating in our post-earnings write-up, which was focused on CPOs:  

“Looking beyond traditional pluggable optics, there is an increasing amount of discussion around co-packaged optics (CPOs), which places the optical transceivers directly on the chip package, rather than using separate optical modules. This results in faster data transmission, reduced latency and higher bandwidth. This may be the best of both worlds: the performance of optical yet with reduced power consumption. Tracking this is especially important as since we last covered copper/Semtech, there have been reports that copper is “causing concurrent issues with overheating and glitching” with rumors Nvidia will launch a CPO switch at the upcoming GTC. That could mean Coherent will be a lead supplier for the anticipated CPO switch – we will be monitoring this closely.”That could mean Coherent will be a lead supplier for the anticipated CPO switch – we will be monitoring this closely.” 

CPOs will be a strong growth story for Coherent as we move into 2026, and we will be tracking this closely as we go along. 

Another growth story for 2026 is optical circuit switches, which were covered in our original Coherent write-up. On the call, it was implied that COHR believes it can outmatch Lumentum on OCS technology (LITE is MEMS-based): “We also continue to make good progress with our new data center optical circuit switch or OCS platform, which drives a significant expansion in our data center addressable market opportunity. The underlying technology in our OCS switch is based on field-proven digital liquid crystal technology that has been deployed for many years in demanding telecom applications. Our technology has tremendous benefits versus the mechanical MEMS-based solutions offered by others, and our customer engagement and enthusiasm around our OCS platform continues to grow.” 

We will also keep an eye on this and let you know when timing approaches for OCS to become a growth driver. 

China Manufacturing is Minimal:

China was bound to come up and Coherent communicated their rather insulated from China comparatively speaking: 

“Christopher Rolland   Susquehanna Financial Group: 

So perhaps first, a follow-up on your manufacturing footprint, specifically for transceivers. I guess I think you're in China and Malaysia with that manufacturing. Do you have the capacity to serve American customers via Malaysia? Or how is China involved in that?  

And then perhaps if you could give us some color as to what percent of your business might actually end up in America. So yes, can you fully serve America out of Malaysia? And what percent goes to the U.S. 

James Anderson   CEO, President & Employee Director: 

Yes. On the first part of the question, the answer is yes. In fact, today, if you look at our U.S.-based, for instance, customers like hyperscaler customers, those transceivers come from Malaysia. So yes, we're — today, we're supporting our U.S. customers almost entirely from Malaysia.  

And then on the second part of the question, I think you were asking about like total revenue by geography, how much is North America based. I don't know.” 

Conclusion:

NVIDIA’s Spectrum-X and its Quantum-X Infiniband systems require ultra-high bandwidth and low-latency optics, both of which align with Coherent’s product roadmap. Nvidia’s NVLink speeds are expected to double from the fourth generation to the fifth generation as Blackwell is released to support the high-speed data transmission from AI workloads. This is expected to drive outsized demand for the 800G and 1.6T laser designs that Coherent specializes in. 

Coherent is a company with a vanilla management team that tends to keep mum about anything progressing in the pipeline; likely to avoid stepping on any toes with Nvidia. Although Coherent faces competitive risks with gross margins that reveal commoditized pricing pressure, this next year is likely the most important year in Coherent’s history as their positioning in the optical module market will be tested.  

There are no major flags in this report and no major catalysts in this quarter. Due to the competitive risks, we are watching Lumentum quite closely as well as both are strong players with EML lasers going into the highly anticipated NVL systems launch in the second half of the year.

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

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AMD reported a double beat in Q1 with revenue of 36% and data center growth of 57%, with the beat filtering down to the bottom line with EPS growth of 55% — ahead of revenue. 

However, the excitement from the beat soon faded after hours as the earnings call Q&A was decisively about the impacts of China export controls. AMD is the first to report among the larger AI accelerator design companies this quarter, and the information shared offers a glimpse at the harsh reality that AI semiconductors face as these companies adjust to global tensions.   

For AMD, the impact of the MI308 being banned from China will be $700 million in Q2 and $1.5 billion in fiscal year 2025. This impact seems significant given AMD is $5B-ish in AI revenue, yet AMD assured analysts on the call their data center revenue would see “strong double-digit growth” this year despite declining sequentially in Q2.  

On the Client side, analysts were also concerned that perhaps AMD saw a pull-in ahead of tariffs as PCs (Client) reported 68% YoY growth, to which management assured analysts many times on the call that it was due to higher average sales prices. However, keep in mind, the chances AMD remains completely unscathed from a weaker consumer due to the cumulative effects of tariffs is unlikely. 

AMD’s Revenue Increases 36% YoY  

AMD reported Q1 revenue of $7.44 billion, solidly ahead of the $7.12 billion estimate and above the upper range of its guidance for $7.1 billion, +/- $300 million. Revenue growth accelerated to 35.9% YoY, led by data center and client, though this is expected to be the peak growth quarter for the year.  

For Q2, AMD guided revenue to be approximately flat QoQ at $7.4 billion, +/- $300 million. This represents YoY growth of 26.7% at midpoint, a more than 9 point sequential deceleration. Revenue growth is currently expected to decelerate further in 2H, with analysts estimating that AMD will exit 2025 with growth of just 12.3% YoY. 

What’s important to note is that estimates for the back half of the year have been revised quite a bit lower over the past three months as tariffs and export controls have set in. In February, Q3 and Q4 revenue growth was estimated to be 6-7 points higher at 23.2% YoY and 19.2% YoY.   

Export Controls Result in $700M Revenue Loss for Q2, $1.5B for FY2025 

It was welcomed that management quantified the export control impact to understand better how the company can weather the loss of revenue.  

Here is what the CFO stated in her opening remarks: 

“As a reminder, in April, a new export license requirement was put in place for MI308 shipments to China, the impact of which is included in our guidance. We expect revenue to be approximately $7.4 billion plus or minus $300 million. This includes an estimated $700 million revenue reduction as a result of the new export license requirement. Despite this headwind, the midpoint of our guidance represents 27% year-over-year revenue growth. 

For the full year 2025, we estimate the revenue impact due to the export license requirement to be approximately $1.5 billion.” 

On one hand, it is quite impressive AMD can overcome this impact and meet consensus for next quarter. On the other hand, analysts have been lowering estimates as AMD was supposed to see revenue of $7.77 billion for growth of 33% as of last October rather than the 26.7% in the current quarter.  

There were a few questions from analysts about the export license requirements, which are detailed below under the Q&A section.  

Key Segments 

Data Center to Decline Next Quarter 

Data Center revenue grew 57% YoY but declined (5%) QoQ to $3.67 billion, driven by sales of EPYC CPUs and Instinct GPUs, and accounting for over 49% of AMD’s revenue in the quarter. While growth decelerated from 69% in Q4, it’s coming against a much tougher comp at 80% YoY whereas Q4 of last year offered a lower comp of 38% in Q4 2023.  

AMD stated they gained market share again this quarter helped by EPYC 5th Gen Turin processors, which recently launched in October. EPYC-powered cloud instances doubled YoY among Forbes 2000 enterprises with on-prem growing by a “large double-digit percentage.” According to the opening remarks, there is “a clear path to continued share gains as customers ramp their 5th Gen EPYC offerings.” 

Regarding GPUs, management stated their AI revenue increased by a “significant double-digit percentage year-over-year.” The MI325X is shipping in volume while the next-gen Instinct MI350-series chips are on track for “accelerated production by mid-2025.” We discussed last quarter that AMD was pushing up their delivery on the MI350s to mid-year for relative competitiveness. That’s a nice way of saying while Blackwell is delayed, AMD will attempt to nibble at their market share with a more aggressive timeline on their next generation. In the slide presentation, AMD stated they are partnering with Oracle to deploy a large cluster of MI355X GPUs and 5th Gen EPYC CPUs.  

Data Center operating income was $932 million for a 25% margin, up from a 23% margin in the year ago quarter. However, it was 5 points lower sequentially and the lowest operating margin for the segment since last Q1. 

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

Client & Gaming 

Client and Gaming revenue rose 28% YoY, driven by 68% YoY growth in client revenue to $2.29 billion as gaming revenue declined (30%) YoY to $647 million. Sequentially, Client revenue was down less than (1%) from Q4 while Gaming revenue rebounded 15% QoQ. AMD said the segment’s growth was driven by strong demand for Zen 5 Ryzen processors.  

Client revenue stood out in Q1, outpacing Data Center growth by more than 10 points YoY against its toughest comp in recent quarters at 85% YoY in Q1 2024. 

Analysts poked around quite a bit on whether the high growth rate from the Client segment was a pull-in to get ahead of tariffs. Management pushed back on it being from tariffs and stated it was due to average sales prices: “And in particular, on your question of Client performance, we've certainly looked very carefully at the ordering patterns and what customers are telling us. We have not seen a lot of tariff-related activity in that business. I would say, though, what we have seen is a real stronger mix and strength in our overall ASPs. So the desktop channel, which is an area where we have a very strong gaming products right now, actually performed well above seasonality in Q1, and that is really the strength of the ASPs there. So that's what we saw in Q1.”

Combined operating income for the two was $496 million for a 17% margin, up from a 10% margin in the year ago quarter. However, operating income was flat QoQ. 

Embedded  

Embedded revenue declined (3%) YoY and (11%) QoQ to $823 million. While in line with guidance for a modest decline, AMD noted that the YoY decline was due to mixed end market demand.  

Embedded operating income was $328 million for a 40% margin. 

Margins Steady, but Q2 to See Sharp Decline Due to China Export Controls 

While adjusted margins remained steady sequentially, AMD is taking a rather large hit in Q2 to their margins due to the MI308s. In mid-April, AMD flagged an $800 million hit from charges related to inventory, purchase commitments and related reserves, and as a result, guided adjusted gross margin to contract rather sharply. This will weigh heavily on adjusted operating margin in Q2. 

• Q1 GAAP gross margin was 50%, up 3 points YoY, while adjusted gross margin was 54%, up 2 points YoY. 
• GAAP operating margin was 11%, a strong expansion of 10 points YoY, and adjusted operating margin was 24%, up 3 points YoY.  
• GAAP net margin as 9%, up 7 points YoY, and adjusted net margin was 21%, up 2 points YoY. 

For Q2, including the $800 million impact, AMD guided for a 43% adjusted gross margin (or 54% excluding it). With management forecasting operating expenses of ~$2.3 billion in Q2, adjusted operating income including the charge would be projected at $882 million for a 12% margin.  

Excluding the impact (at that 54% adjusted gross margin), AMD’s expense guide would see adjusted operating margin at 23%, down 1 point QoQ.  

EPS Posts Slight Beat in Q1

AMD reported adjusted EPS of $0.96 in Q1, slightly ahead of estimates for $0.93. This represented YoY growth of 54.8%, accelerating from nearly 42% growth last quarter.  

Similar to revenue, Q1 is currently expected to be peak growth for EPS, with Q2 estimated to record 27.8% growth before slowing to the low 20% level by Q4. However, management commented that EPS growth is expected to grow much faster than revenue in Q2: “Looking at Q2, at the middle point of our guidance, revenue will be increasing 27%, and we do expect the earnings per share growing much faster than the top line revenue growth.” 

Cash and Balance Sheet 

AMD closed its acquisition of ZT Systems in Q1, which added more than $2 billion to both its cash and debt. Cash flow margins also expanded YoY with margins remaining in the double digits. 

• Operating cash flow was $939 million for a 13% margin, expanding from a 10% margin in the year ago quarter.  
• Free cash flow was $727 million for a 10% margin, expanding from a 7% margin a year ago. 
• Cash and short-term investments increased nearly $2.2 billion to $7.31 billion, while debt rose more than $2.4 billion to $4.16 billion. 
• Adjusted EBITDA was $1.95 billion for a 26% margin. 
• Inventories were $6.42 billion, up from $5.74 billion last quarter. 

When asked about inventory, AMD stated it was due to preparing for the H2 ramp: “Well, on the inventory side, we built some inventory primarily to support very strong client and server ramp and also the second half Data Center GPU ramp. As you probably know, the lead time is really long to build. For the Q3, Q4 ramp, we really need to start the wafers right now. That's why the inventory has increased.” 

Earnings Call Q&A: 

MI350s and MI400s: 

AMD is poised to become a stronger contender in the next two generations of Instinct GPUs.  The MI350s will launch this quarter and the MI400s will launch in 2026. The MI350s feature the CDNA 4 architecture and will increase memory capacity and bandwidth by 1.5X with 288GB of HBM3e, and support for 35X higher throughput for better inference performance than the previous generation MI300Xs. Built on TSMC’s 3nm node, the MI350s also offer better efficiency and a 7X increase in AI compute capabilities.  

The MI400s will offer a rack-scale architecture, assisted by AMD's acquisition of ZT Systems, a company that specializes in complex server designs. The MI400 will feature CDNA Next architecture with multiple chiplets and separate active interposers, with rumors the MI400s will be designed to increase data flow efficiency.  

With the MI400s, AMD will be tasked with launching rack scale systems more smoothly than what we’ve seen from Nvidia these past two quarters. Here is what was said on the call in terms of the MI400 potentially closing the gap competitively with Nvidia – notably, AMD and all AI accelerators will remain in second place into the foreseeable future, yet the MI400 could be the moment when AMD becomes a firm second place winner. 

“I think, look, we're excited about the MI350 Series launch that's coming up, but we are extremely excited as well about the MI400 Series and the road map there. I think we've been very active with customers on our road map. As you know, this is one of those areas where you absolutely have to be planning many quarters in advance for that. One of the primary reasons we acquired ZT Systems was exactly to address this rack-scale architecture.”

Export Controls and AI Diffusion Rules: 

There was a question about the overall TAM of the AI market given China will no longer be a customer, and about the AI diffusion rules that have a deadline of May 15th to establish new rules. Lisa Su does not think China affects the $500B TAM she originally stated a few quarters ago, stating: “I think we always expected that there would be some amount of, let's call it, limitation on sort of leading-edge GPUs going into China. So that was factored in to our TAM expectation when we talked about $500 billion. So I don't think that dramatically changes the TAM.” 

However, when it comes to AI diffusion rules, she was not as definitive as to the impact: “At the end of the day, when we look at sort of the U.S. AI companies, we have leading-edge technology. We want to ensure that the rest of the world can really use us as the primary platform. So I think it will be important to work through the AI diffusion rules and all of that as we think about longer-term TAM.” 

Management Adamant Client Revenue is from Higher ASPs: 

There were a few opportunities where management declined to connect higher Client growth to tariffs, and rather was adamant it’s from the strength of their product portfolio. AMD is being quite bold to state they are not seeing an impact from tariffs and do not expect to see a meaningful impact. Here is one of the exchanges in the Q&A: 

CJ Muse: 

I wanted to revisit your assumptions around Client. If you were to just flatline the Q1 actual, you would grow the business about 30%. You're obviously very bullish on taking share. You talked about huge tailwinds from ASPs. But curious, when you put it all together, how should we think about traditional seasonality into the second half, particularly with the potential of some pull-ins here in the first half? 

Lisa Su: 

Sure, C.J. It's a fair question. Look, we want to be very clear that our Client business performance is primarily driven by the strength of the product portfolio. And it's driven by some of the desktop channel products that traditionally are not so well tracked if you look at sort of the IDCs of the world. We are planning for, let's call it, second half sub-seasonal given that we're off to such a strong start in the first half of the year. And that is what we're putting into our sort of internal planning number. So you wouldn't see necessarily typical seasonality since the first half is better than seasonal. 

That being the case, I think we feel strongly that, from a consumption basis standpoint, we see the data. So when we look at the Q1 performance, it was a very, very strong Q1 in terms of sell-out and consumption for our desktop business. And as we start Q2, we're now 4 weeks into it, we see those patterns continuing. So we're in an upgrade cycle right now. Gaming CPUs are usually repurchased when there are gaming GPUs that come out in new cycles. And I think we're benefiting from that on both the CPU and the GPU side, which is great. I mean, we're very happy with that, and we're ramping up production to ensure that we keep the channel full. 

Conclusion: 

AMD put up a solid report for Q1 on all accounts, yet the industry-wide headwinds that will take effect in Q2 introduce uncertainty for the semiconductor sector as a whole. Of the companies that will be affected, AMD is communicating they are ready to weather the storm. In data center CPUs, they have one of the most underrated products of all time – EPYC CPUs which continue to take substantial market share. In AI, they have a solid line up with the MI350s expected to launch this quarter to help offset the weight of losing China – in fact, by Q4, AMD is forecasting the loss of China revenue will be fully absorbed and there will be no impact by the time year closes out. In Client, they have some of the strongest AI PCs on the market and are confident average sales prices will remain above industry average for 2025. 

However, AMD is a semiconductor stock in the center of a massive shift to supply chains and is in the crosshairs of a geopolitical war that will be defined by policies surrounding AI. It’s not a matter of if there will be rules that change how AI chips/components are exported, rather how severe those rules will be. Investors should be prepared for volatility as AI Diffusion rules will be set on or around May 15th.  

I believe we will see near-term volatility but that ultimately AI companies in the United States will emerge stronger than they are today as we are all finally acknowledging that AI is not a fad, or a buzzword. Rather, the future of the country’s dominance relies on this technology succeeding, and conversely, relies on United States AI companies strategically denying AI systems to other countries. As an investor, you will never get a clearer signal as to the importance of a technology. 

Overall, given volatility could be in our future as AI investors, this is a stock to watch closely should we get an even lower valuation, especially given where it's trading today is already quite cheap.

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

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