Last quarter, I began providing a comprehensive ranking of the top AI stocks in our universe. Our portfolio benefited from this exercise, and we hope yours did too.  

Perhaps most beneficial is taking a moment on a quarterly basis to be as objective as possible. Information in the form of earnings reports, product announcements, news headlines, and even social media exuberance can cloud an investor’s decisions. It is not only the volume of information, but the speed at which information comes daily to where it can be hard to discern the true winners from those catching a fleeting headline. 

The report below is designed to be objective in a no holds barred approach. Because we manage our own money full-time, we are laser-focused on ways to improve on a quarterly basis. Similar to the Q3 2025 report, the analysis below tops out at over 16,000 words, totals 43 pages and took three weeks to write. Even if we’ve held a stock for years, we update the investment thesis and re-examine the fundamentals. There is no stock that is immune to being cut from our portfolio if it cannot prove it’s one of the best AI stocks at this moment. Vice versa, to be added for the first time, a stock must be able to prove it can hold its own among already-strong choices. 

After rigorous examination, the list below summarizes the strongest AI stocks of Q4 2025 and the top 3 Thematic Trends that I believe will help drive the AI market to new heights. 

AI Networking: The Exponential Investment Opportunity 

Each quarter, the I/O Fund scans hundreds of tech companies and their quarterly earnings reports for anomalies. To be precise, we track 188 data points on each portfolio company and top-ranking stocks we don't own totaling about 40 stocks a quarter for a total of over 7,000 data points. This quarter, one metric stands out as truly exceptional: Nvidia’s networking growth of 46% QoQ and 98% YoY to $7.25 billion. In the previous quarter, Nvidia’s networking grew 64% QoQ after declining (3%) in the previous quarter. Management stated the networking to compute attach rate is 75% in the fiscal Q4 earnings call. 

Here is why this data point is unique – if Nvidia’s networking segment were a standalone segment, it would place #3 in the world on AI revenue with Azure reporting about $36 billion per year in AI revenue (at $75 billion total with a statement that half is AI-related) versus Nvidia’s networking now on a $28 billion run rate. Broadcom would be fourth at $6.2 billion AI revenue guided for next quarter, or about a $25B run rate.  

There’s an argument to be made that Google Cloud or AWS would be in the running, however, they do not breakout AI revenue yet. An investor can also reasonably assume if it was at Azure’s level or higher, they would share their first place standing among the Big 3.  

Yet, if any of those leading AI companies grew their AI segment 46% QoQ, their stock would go wild. The metric was missed because it was buried in Nvidia’s Compute weakness/China noise, yet this number is truly the bellwether as we move into Q3.  

It also gives me a nostalgic pause as I was early to cover the importance of the Mellanox acquisition in both 2019 and 2020 stating: “Mellanox’s Ethernet switch systems are the most used internal system in the top 500 in a recent report released at ISC High Performance, with 247 systems, and InfiniBand is the second most-used, with 140 systems. However, InfiniBand, a computer-networking communications standard, connects the most high-powered computers where the presence of Ethernet is nearly non-existent […] This is a strategic acquisition for Nvidia and Mellanox to become the strongest combination for artificial-intelligence and machine-learning computations.” You will be hard-pressed to find an equity analyst covering the AI market that closely back in 2019-2020 at the height of Covid.  

Turning our attention to 2025 and beyond, we want to look at what stocks are downstream from the number one growth market at scale.at scale. As stated, it’s not only the largest QoQ growth across AI, but rather it’s that Nvidia was able to grow its networking segment 46% QoQ while operating as the world’s third-largest AI segment.  

My readthrough is that something important is ramping, and it will be back-half weighted. You’ve known for many quarters that the “something” is the new Blackwell GB200 system. What is newer information is that Blackwell Ultra GB300 is also ramping nearly simultaneously.  

Per Nvidia, 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.” 

Double-Clicking on the Network Requirements of the GB200s and GB300s 

Nvidia’s networking segment is a proxy for the AI networking allocation we hold in our portfolio. The quarterly numbers that Nvidia provide relate to their proprietary InfiniBand networking and the NVSwitches that help to route NVlink connections for GPU-to-GPU communication.

However, as the 75% attach rate above describes, there is a roughly 25% opportunity for other networking vendors to participate. Additionally, there are times that Nvidia will outsource components or cabling rather than build every single component in-house. In some instances, sourcing raw earth materials such as indium phosphide (InP) would prove quite challenging. Therefore, the information below may relate to Nvidia’ proprietary networking, yet it has important readthroughs to carefully selected suppliers. 

Generally speaking, networking cables, ASICs and components required for GPU interconnects will increase 5X to 9X as we move from the HGX/DGX systems to the NVL72 systems. Given the GPU count will increase 9X from 8 GPUs to 72 GPUs, it makes sense that networking will increase similarly. 

This is inferred by a few key points in terms of how the architecture is shifting from the 8-GPU HGX/DGX systems in the Hopper generation. These older systems that shipped in 2023-2024 used four NVSwitch ASICs to connect eight TensorCore H100 GPUs.  

Source: Nvidia Technical BlogNvidia Technical Blog 

Networking is at the heart of the Blackwell architecture as the increased bandwidth is instrumental in driving the higher performance. The NVLink domain moves from supporting eight GPUs to 72 GPUs with a speed of 1.8 TB/s. Nvidia’s 5th generation NVLink interconnects will deliver a higher aggregate bandwidth of 9X to 18X compared to Ethernet and InfiniBand in previous generations. By increasing the bandwidth, the NVL72 systems will pool together compute and memory for up to 4X faster training and 30X faster inference. 

This is accomplished with 18 NVSwitch ASICs, up from four in the HGX/DGX systems. That’s a 4.5X increase in NVSwitch ASICs.  

Source: Nvidia Technical Blog, “Nvidia Contributes Nvidia GB200 NVL72 Designs to Open Compute Project”Nvidia Contributes Nvidia GB200 NVL72 Designs to Open Compute Project”

If you look below at the specs between the larger NVL systems and the two HGX SKUs, you can see it’s not only compute performance that increases 10X (petaFLOPs) but also aggregate memory bandwidth and speeds.  

The main takeaway is that scale-up architectures are as much about networking as they are about compute. The goal is to add more GPUs that can effectively distribute training and inference across a large cluster, which includes sharing data and memory, synchronizing, and exchanging model parameters.  

Therefore, the interconnect or “connectivity layer” must scale accordingly to prevent GPUs from idling and waiting for data across the increased number of GPUs that are operating in parallel and at scale. High-speed communication is central to Blackwell and future generations of GPUs because the goal of a GPU-cluster is to act as a single processor. As AI systems grow GPUs by 9X, but also clusters grow from 100s of thousands to millions, there will be significantly more components required such as retimers, switch fabrics, silicon photonics, transceivers, cables and controllers.

However, despite Nvidia and Broadcom dominating the AI networking space, there remains immense opportunity for smaller, lesser-known suppliers.  

Key opportunities mentioned above include PCIe components, as this is needed to connect the GPU to CPUs, memory and storage. Specialized copper cables are needed to connect AI servers to networking switches, and for linking many servers together. Retimers help to extend data integrity beyond short distances. The jump from 400G to 800G to eventually 1.6T on data rates will require an additional upgrade to nearly every component in the network layer, such as switch ASICs, optical transceiver modules, faster digital signal processors (DSPs) and retimers/redrivers. When it comes to products like EML lasers, the indium phosphide (InP) is hard to source. There is expected to be a new market for co-package optics (CPOs) with the new Rubin architecture – to name just a few of the AI networking opportunities currently in play and also squarely in front of us. 

AI Energy: How Much and How Fast? 

AI energy is all the rage today, yet it was rarely spoken about when we first covered the trend in the article AI Power Consumption Becoming Mission Critical. That article would later grow into lengthier premium thematic coverage, which would spark winning positions such as Bloom Energy, Oklo, NuScale and our first Bitcoin Miner/AI Data Center position Core Scientific in early 2025 (the first Bitcoin miner to retrofit for AI DCs). When we say we work hard to be early to new trends, we mean exactly that. 

While networking can get bogged down in jargon and specs, and suppliers can be dropped quite quickly in the ever-shifting landscape, energy presents an entirely different investing landscape.  

The problem that AI energy stocks seek to solve is simple to conceptualize compared to the intricacies of networking. Once a power solution is confirmed, the chances it is dropped from a qualified supplier list in the same manner as a networking stock is less likely. Think of energy to AI as water to humans – a daily essential that is less about the competitive landscape and more about the sheer necessity for survival.  

Hyperscalers are spending hundreds of billions of dollars annually on AI data center capex, from physical data center space, GPUs and servers, hardware and networking. With these substantial sums flowing towards GPUs that are now being refreshed on an annual cadence, the impetus for hyperscalers, neoclouds and other cloud providers turns to how quickly these GPUs can secure power and be deployed.  

There are three reasons the race is incredibly fierce to power these new systems:  

The first reason is the stock market, as the current capex numbers are significant, and investors will want to see a return on this investment. If a company like Microsoft buys tens of billions of Nvidia’s Blackwell GPUs, the longer the massive investment in GPUs waits for power, the more delayed that revenue and profits become.  

Secondly, for competitive reasons and to keep up with Nvidia’s product road map, the next generation of GPUs will arrive every 1-2 years and Big Tech will want to maximize returns before the next generation comes online. Competitors who can energize the newest generation of GPUs faster will have a critical head start over those that are waiting for power. But there’s a catch, every generation of GPUs requires more power – for example, there will be a 5X increase between the power requirements of the GB200 NVL72 and the Vera Rubin NVL576 “Kyber” rack over a two-year design timeframe. These figures do not include networking, interconnects, cooling and other hardware, which will further boost power draw per rack. 

Third, the AI race is not merely a battle between companies like Google, Amazon and Microsoft. Rather, it is a battle among global powers. While the news has latched onto China-fears such as DeepSeek, tariffs or rare earth materials, the true challenge lies in the fact that China has significantly more power than the United States. In a recent Fortune article, energy experts stated China’s reserve margin has never dipped below 80% to 100% nationwide, meaning it’s at 2X the capacity the country needs. Meanwhile, the United States is at a 15% reserve margin. 

These three reasons are simple in concept, yet the lack of power having vast consequences cannot be overstated if you combine the sheer size of investments being made in AI alongside fierce, heightened competition.  

The push to 600kW racks over the next few years means this is not a transient problem, rather it is one that the industry will continue to face, meaning continuous new construction may be needed to handle surging power demand. For example, Vantage’s upcoming 1.4 GW campus in Texas for Oracle is designed for ultra-high density racks up to 250kW, yet this will not be enough power to able to host NVL576 racks in just two to three years’ time. Additionally, a former Microsoft Azure AI executive reportedly said he estimated that the “requirements in terms of power for the data center would probably at least double every three years and maybe exponentially so over a period of time,” further reinforcing this. 

AI Accelerators: 

AI accelerators such as GPUs and custom silicon need no introduction – raw compute and compute performance has driven the AI market up to this point. The analysis would be remiss to not acknowledge the trend that is so powerful, it is displacing the FAANGs of the last decade with Nvidia firmly the world’s most valuable company now and Broadcom within striking distance of passing up companies like Meta.  

As the market weighs the so-called AI bubble, there are many disparate facts thrown at investors: dot-com fears, China/tariff concerns, stock pullbacks when there are minor announcements, and things like circular investments from OpenAI. 

Forgive me if I sound repetitive, but what truly matters is Big Tech capex. This is the single, most important number as it far outweighs the importance of earnings reports, fiscal year guidance, Nvidia’s networking growth or their product roadmap, if AMD has a new deal from OpenAI, Oracle’s insane RPO, Broadcom’s networking chips and custom silicon announcements – all of the above is being single-handedly driven by Big Tech’s large capital expenditure (capex) budgets.  

Let me throw a few stats at you.  

• Analyst estimates cannot keep up with the capital expenditures being spent on AI infrastructure. This time last year, the expectations were for $250 billion in Big Tech capex. Morgan Stanley later forecast $300 billion in Big Tech capex for 2025. That number stands at $365 billion for 2025 with one quarter left to go.  
• It’s easy to tune out the words “big tech capex” at this point but zoom out for a minute and consider that Big Tech’s TTM capex was $24B at the start of 2015, or up 15X over ten years.  
• In terms of the opportunity looking forward, McKinsey is predicting 3.5X growth in gigawatts for AI data centers between 2025-2030. The costs associated with AI data centers range from $3 trillion to $8 trillion, or about $5 trillion at the midpoint. This correlates to about 3X growth if we assume the current run rate is $1.8 trillion at the current capex of $365 billion. 
• On a more near-term basis, Goldman Sachs sees hyperscaler capex increasing sharply through 2027 – capex is projected to be $1.15 trillion from 2025 through 2027, more than double the $477 billion spent from 2022 through 2024. 
• Going back to the first point, analysts thus far have missed the mark in their estimates. Every quarter, sell side analysts rush to update their models. We are penciling in that 3x is a baseline to work with over a 5-year time frame. 

To be objective, there are analysts calling for a stock market crash based on the risks around the consumer and a GDP that is propped up by capex spending.  

Stifel stated in August: 

“While the capex boom around AI temporarily supports GDP and asset prices, Stifel forecasts this bump will fade as corporate tech spending plateaus. Such a build-out, after all, occurs only once, while consumer spending power is entering a lull that could expose markets to abrupt correction.” 

There is weight to what Stifel is describing, which is why tariffs remained a risk on our last Top 15 report and remain a risk for this report, as well. You can read more here about how the consumer is fairly weak under the hood, and how capex spending is creating a false impression that GDP is stronger than it is. 

Where I disagree with Stifel is the idea that “such a build-out, after all, occurs only once” This is an antiquated opinion where perhaps the parallels between AI and electricity have gone too far, or perhaps it’s leftover from the cloud era where there were digestion periods every few years.  

Portions of the AI buildout will be occurring every 1-2 years with new generations of AI systems. Therefore, AI is less of a static end point that is readily achieved – and rather it is an evolving architecture that enables ambitions to expand each year. Although cloud was also architecture-driven, it reached its end goal rather quickly in terms of driving down costs and improving productivity, allowing companies to quickly scale, and providing pay-as-you-go compute and services rather than significant up-front costs from on-premise servers. The end goal for AI is far more ambitious, as it could take a decade or more before Big Tech accomplishes commercially viable AGI (general artificial intelligence).  

When listening to commentary on earnings calls, in sharp contrast to what macro analysts are saying, what we hear is that Big Tech management teams are nearly in a panic to add more capacity. This one is from AWS’ Andy Jassey: “The faster we grow, the more CapEx we end up spending because we have to procure data center and hardware and chips and networking gear ahead of when we're able to monetize it. We don't procure it unless we see significant signals of demand.”  

Although the tone on capex can temporarily shift from time to time, the risk that capex will dry up from a one-time buildout is low. In many ways, the greatest risk to AI isn’t within the AI economy itself, but in broader macro conditions. We are seeing many macroeconomists attempt to forecast an AI downturn, yet having followed tech cycles for years, I’ve learned that while the macro economy waxes and wanes, technology consistently resurfaces as the best way to participate in the market — and this is especially true for AI.  

For years, there’s been a debate on whether Big Tech’s AI spending will translate to revenue and profits. Meanwhile, during those years, the I/O Fund has been laser focused on where that AI capital is actually being allocated. Rather than thinking of our approach as the picks and shovels for those chasing a gold rush, we think of it as an “AI stack” strategy—investing in the lesser-known layers and components that are driving forward an ecosystem capable of massive GDP.  

With that, I present my current Top 15 AI Stocks List. 

#1: Nvidia is Simultaneously Shipping Two GPU Systems 

Fundamentals: 10/10
Thematic: 10/10
Valuation: 4/10 

Brief Overview: 

When looking at YTD performance, Nvidia has returned 35% compared to SMH at 42%. Admittedly, it’s not great to underperform your industry. Peers within AI have outperformed Nvidia YTD by a wide margin, such as AMD and MU outperforming 2-3X as they’re up 93% and 135% on a YTD basis. 

I was recently asked on Fox if AI chips are due for consolidation. My reply was that any dips should be bought. Although I talk a lot about Nvidia and AI, my process for covering this stock has not changed since the first day I spoke of the company. My process is that we stick close to the GPU releases rather than the earnings reports as we are dealing with the world’s best design company (fact). Therefore, revenue is a step-function of a new design being released. That may seem overly simplistic, but I can assure you, it’s worked quite well for this stock. 

You can find a Case Study on Nvidia and our library of research here.library of research here. 

While AI hardware players must contend with competitive forces and supply chain qualifications that can change their positioning very quickly, that is not the case with the King of Parallel Processing. Rather, Nvidia’s near-monopoly has been built carefully as each GPU release has virtually zero competitive pressure. 

Generally speaking, Blackwell and Blackwell Ultra are shipping simultaneously. There are nuances to this statement, such as the GB200 NVL72 systems began shipping in volume in Q2 2025 and GB300 NVL72 began shipping this quarter and will ship in volume next quarter in Q4 2025.  

I want to keep this really simple as the enormity of what Nvidia is shipping would be easy to miss. The market won’t be caught off guard like it was two years ago – we all know who the best slugger in the game is. However, there are two home runs lining up (dare I say, a grand slam) as Blackwell and Blackwell Ultra ship within 6 months of each other. In this analogy of a baseball game, Nvidia has been in the dugout for a few quarters now with the Blackwell delay. I am still in the front row of the stadium awaiting the number one slugger to return to the plate.  

Overall Revenue Growth: 

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. 

However, its Nvidia’s guide for this upcoming quarter that solidifies the stock as our top pick in AI chips for now. The guide for $54 billion in revenue corresponds to 53.8% YoY growth and a rebound to 15.5% QoQ growth. 

As you’ll see below, Broadcom is expected to report higher QoQ growth yet it’s the scale at which Nvidia is putting up these numbers that separates the company from its peers. 

AI Segment Growth: 

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.  

While compute declined (1%) due to timing of shipments and loss of China revenue, networking was up a whopping 46% QoQ and 78% YoY to $7.25 billion. As stated above under the AI Networking thematic section, this spells good things for what is in the pipeline. 

Earnings: 

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 EPS growth is expected to remain strong through the rest of the fiscal year, at 47.2% and 53.2% in Q3 and Q4. 

Margins: 

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%. 

Cash: 

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. 

Typically, Nvidia has very strong cash flows and this is not a concern, rather is a transient quarter for cash. Operating cash flow margin and free cash flow margin have been in the 60% range in recent quarters.  

Valuation: 

There is not a major takeaway based on valuation. 

Forward PS Ratio: 

Nvidia trades at 20 forward PS and is a strong buy in the 10 forward PS range yet is a strong sell in the 30 forward PS range. We are in the middle of the clear buy/sell indicators for sales valuation.  

Forward PE Ratio: 

Nvidia trades at 40 forward PE ratio and is a strong buy in the 20 forward PE range yet is a strong sell in the 50 forward PE ratio.  

Notable Risks: 

Nvidia has far fewer risks than other stocks in this report. China tariffs can affect peers in the supply chain especially since there are hundreds of components in each AI system.  

#2: Broadcom: Well-Deserved Second Place Contender 

Financials: 8/10
Thematic: 10/10
Valuation: 3/10 

The networking opportunity that Broadcom is positioned to capture has been evolving every quarter to where Hock Tan himself has not been able to correctly anticipate its size. Here is what Tan stated on a recent earnings call: 

“In fact, the increased density in scale up is 5 to 10x more than in scale out. And that's the part that kind of pleasantly surprised us and which is why this past quarter, Q2, the AI networking portion continues at about 40% from what we reported a quarter ago for Q1. And at that time, I said I expect it to drop. It hasn't.” 

This quote illustrates a few things – the strength of the networking market is surprising even to Broadcom, it helps to quantify scale-up versus scale-out in terms of networking components, and it shows that (likely) this is not priced in yet as it’s a relatively new inflection. In fiscal Q2, networking growth was 170% YoY although it’s not expressly broken down in earnings reports. 

Regarding custom silicon, the chances ASICs can keep pace with Nvidia on sheer compute is low (to nearly impossible). When it comes to raw compute density combined with the software ecosystem that Nvidia offers, Big Tech’s side projects may never catch up. The rapid product road map that Nvidia offers deepens the moat the company has firmly established with universal CUDA. Meanwhile, custom silicon programs can take years to fully develop and move into production.  

So then why are Big Tech companies turning to Broadcom for less flexible (yet highly optimized) AI chips with product road maps that are considerably longer than Nvidia’s? Decades ago Jeff Bezos stated “your margin is my opportunity,” referring to the fact that Amazon’s value proposition was to offer goods at a lower cost to consumers. Broadcom is similar, in that Nvidia’s margin is their opportunity to offer AI accelerators at a lower cost. The same can be true for AMD’s value proposition, as well, especially as we enter the inference stage of the AI market. Nvidia’s gross margin of 72% (and up to 78% about a year ago) is attractive to investors who seek a quality stock, yet the margin is also communicating gluttonous pricing power.   

According to a recent article by VentureBeat, industry conversations and analysis suggest that “Google may be obtaining its AI compute power at roughly 20% of the cost incurred by those purchasing high-end Nvidia GPUs. While the exact numbers are internal, the implication is a 4x-6x cost efficiency advantage per unit of compute for Google at the hardware level.” 

Where it becomes attractive to drive down costs is the inference market. Hundreds of millions of users interact daily with AI assistants, causing inference to become the focal point for providers such as OpenAI and Google. Meeting these levels of growing demand, without significant response delays or downtime, requires more and more accelerators, networking and interconnect products.   

Broadcom’s edge goes beyond the fact that custom accelerators are often multiples cheaper than Nvidia’s GPUs for inference tasks – it's that custom silicon is increasingly performant with each generation. By optimizing algorithms (software), Big Tech can drive higher performance from large language models (LLMs) while continuing to use Nvidia’s compute power excellence for training (and also some inference tasks). 

Lastly, the VMWare acquisition has been particularly fun to watch as it’s one of the best execution M&A moments recently. A few quarters back, Tan stated VMWare was the “star of the show” as it’s been reporting accelerating bookings and backlog. Here is why it’s done well post-acquisition: “This allows customers to deploy their AI models on-prem. And wherever they do business without having to compromise on privacy and data — in control of their data. And we are seeing this capability drive strong demand for VCF, from enterprises seeking to run their growing AI workloads on-prem.” 

Overall Revenue Growth: 

Q3’25 revenue was $15.95 billion, beating estimates for $15.82 billion, and reflecting top line growth of 22.0% YoY and 6.3% QoQ. Looking ahead, management provided Q4’25 guidance of $17.4 billion of revenue, implying 24% YoY growth and a slight uptick to 9% QoQ growth. 

AI Segment Growth: 

Semiconductor Solutions accelerated nine points to 26% YoY growth due to a rebound in AI accelerators (+63% YoY). Within this, AI Semiconductor revenue surged 63% YoY to $5.2B, showing re-acceleration after a slower Q2 (+46% YoY). AI now represents 57% of Semiconductor revenue and 32% of total company revenue.   

Management guided Q4 AI revenue to $6.2 billion, which would represent ~19% sequential growth and eleven consecutive quarters of YoY growth. 

Earnings: 

Non-GAAP EPS growth of 38% outpaced revenue growth of 22%. EBITDA margin was 67%. 

Margins: 

GAAP Gross Margin of 67.1%, down 90 bps QoQ from 68.0% in Q2’25, essentially flat from 66.8% in Q3’24. 

GAAP operating margin of 36.9%, down 190 bps QoQ from 38.8% in Q2’25, but up significantly from 30.3% in Q3’24.  

Non-GAAP operating margin of 65.5%, slightly up QoQ from 65.3% in Q2’25 and up 180 bps from 63.7% in Q3’24. 

Cash: 

Free Cash Flow of $7.0B represents a free cash flow margin of 44.0%, compared to 42.7% in Q2’25 and 35.6% in Q3’24. 

Valuation: 

Broadcom’s valuation is in unchartered territory.  

Broadcom trades at a 52 forward PE ratio and has traded as low as 13 forward PE two years ago and as low as 21 forward PE in the April rout.  

Broadcom trades at a 26 forward PS ratio and has traded as low as 10 forward PS in April and was at 6.5 two years ago.  

Notable Risks: 

Valuation is the predominant risk as Broadcom has never traded at these levels in its multi-decade listing history. 

#3: AMD: The Dark Horse is Leaving the Stable 

Financials: 5/10
Thematic: 10/10
Valuation: 5/10 

We are finally seeing evidence that the Dark Horse is leaving the stable.  

The company secured a long-term deal with OpenAI to supply 6GW of GPUs with the first GW to be delivered in H2 2026. We saw a flurry of sell-side activity with one analyst raising their price target from $185 to $310 stating the Open AI deal could generate $80 billion in chip revenue for AMD over the next few years.  

As stated above under the Broadcom section, this is not a matter of AMD offering the best end-to-end performance. That will remain Nvidia for the foreseeable future. Rather, this is about driving down costs for Big Tech (and Open AI) while focusing less on raw compute power for training and more on memory and throughput for inference. 

If we zoom out (as I like to do), you may recall the MI400s are expected to be the moment that AMD tightens the competition with Nvidia. The MI400 series will be the start of rack-scale systems for AMD, starting with Helios, which will connect up to 72 GPUs similar to Nvidia’s NVL72 systems.  

According to AMD, Helios will “deliver up to a 10x generational performance increase for the most advanced Frontier models, and we believe it will be the highest-performance AI system in the world when it launches.” The last part is doubtful, yet the effort to close the gap with Nvidia will likely go a long way when coupled with lower pricing.   

AMD stated in their last earnings report they have an ambitious goal of reaching tens of billions in MI400 sales. Investors should take note that management is specifically calling out the MI400 for this, arriving in H2 2026. The readthrough is that OpenAI is an early validator that the MI400s have serious chops, and where OpenAI goes, the rest of the AI market tends to follow. 

Overall Revenue Growth: 

AMD reported a slight beat on the top line at $7.685B in revenue compared to estimates of $7.43B. This represents growth of 31.6% compared to growth of 27.4% expected. 

AI Segment Growth: 

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

Earnings: 

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

Margins: 

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

Cash: 

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

Valuation: 

Forward PS Ratio: 

AMD is trading at 13 current PS with the stock failing to hold 14 current PS two times in the past (precedes a larger selloff). The forward PS ratio of 11.7 is at the stock’s peak forward PS ratio of 12. 

Forward PE Ratio: 

AMD is trading at 61 forward PE ratio, the highest the stock has traded since the AI boom began in early 2023.  

Notable Risks: 

As the contender to the world’s most valuable company, AMD has execution risk. The company’s lead in Data Center CPUs are often at risk due to companies like Nvidia wanting to cut down costs on the instructions side of AI systems.  

The valuation remains the most notable risk. 

#4: Micron Quietly up 120% YTD 

Financials: 8/10
Thematic: 10/10
Valuation: 7/10 

Micron deserves a second look as the company is no longer tied to consumer device cycles. Instead, high bandwidth memory (HBM) had led to higher margins and multi-year supplier agreements, resulting in a leveraged approach to participate in the AI infrastructure buildout.  

As pointed out in our free analysis last week, HBM is seeing a 3.5X increase in per-GPU capacity across the last three years and AI systems are commanding an increase of 34X as the number of GPUs rises and is further compounded by each GPU system requiring more HBM per package. 

• The B200 features 180GB of HBM3e content, more than double the H100 and a 28% increase versus the H200. In an 8-GPU server configuration, the B200 boasted 1.44TB of HBM content.   
• The B300 boasts 288GB of HBM3e content, a 60% increase versus the B200 and over 3.5x more than the H100. In an 8-server configuration, the B300 has 2.3TB of HBM content. This chip is beginning to ship now in Q3-Q4 2025.  
• Putting in context Nvidia’s rack-scale solutions, the GB200 and GB300 NVL72, shows just how rapidly HBM content is increasing. The GB200 supports up to 13.4TB of HBM content, while the GB300 supports up to 21.7TB of HBM, nearly 34X higher than the 640GB of HBM content in the 8-GPU DGX H100 servers. 

The line in the sand for AI hardware companies is the margins and Micron has performed beautifully in that regard. I have to admit, when I saw their last earnings report at end of September, I had to look twice to make sure it was really Micron. 

Overall Revenue Growth: 

Micron reported record FQ4 revenue of $11.32 billion. Revenue growth accelerated 9.4 percentage points sequentially to 46% YoY, and on a sequential basis, growth was 21.7% QoQ, a solid 6.2-point acceleration. 

AI Segment Growth: 

FQ4 DRAM revenue grew by 69% YoY and 27% QoQ to $8.98 billion, a second consecutive quarter of strong sequential growth. 

Earnings: 

In Q4, Micron reported adjusted EPS of $3.03, up 157% YoY and beating estimates by 5.9%. 

For Q1, Micron guided for adjusted EPS to be $3.75, +/- $0.15, more than 23% ahead of consensus and corresponding to YoY growth of 110%. Earnings growth is expected to reaccelerate to 155% in Q2 but then decelerate to 126% in Q3 (but still growing handsomely). 

Margins: 

Micron’s margin turnaround story has been impressive, with gross margin up more than 55 points over the last two years and operating margin up more than 66 points.  

Adjusted gross margin in Q4 was 45.7%, up 6.7 points QoQ and 9.2 points YoY, aided by strong growth in CMBU which carried a 59% gross margin in the quarter, DRAM pricing, favorable product mix, and cost controls. For Q1, adjusted gross margin was guided to be 51.5% at midpoint, a 5.8 points sequential expansion and up by a solid 12 points YoY.   

FQ4 adjusted operating margin was 35%, up 8.2 points QoQ and 12.5 points YoY, driven by operating leverage. 

Cash: 

FQ4 adjusted free cash flow grew by 149% YoY to $803 million or 7.1% of revenue, an improvement of 2.9 percentage points YoY. Management expects adjusted free cash flow to strengthen in FQ1 and to be significantly higher in FY2026. 

Valuation: 

Micron trades at an attractive valuation of 4.2 forward PS. The stock has traded as low as 2 forward PS and as high as 7 forward PS. 

Micron trades at 12 forward PE ratio. The stock has traded as low as 7 yet as high as 124 due to the lumpy bottom line from the previous cyclical low in 2023 timeframe. 

This goes back to the debate on if MU is a cyclical stock that deserves a lower valuation or is it emerging as a major, secular AI player. Should it be the latter, there is quite a bit of room in the valuation.  

Notable Risks: 

If Micron announces set pricing like they did in 2024, the stock could plateau. There are fierce competitors in the space, such as SK Hynix and Samsung. If pricing proves cyclical, the current valuation will not hold. If the pricing proves more of a secular trend, there is ample room in valuation – how the market will view the stock 2026-2027 is not clear although with technicals, some of the risk can be mitigated.  

#5: TSM Report Provides 5-Quarter Runway 

Financials: 5/10 (HPC declining QoQ)
Thematic: 10/10
Valuation: 4/10 

TSM is typically off cycle from AI semiconductors, meaning, we will see a boom in the high-performance computing segment about 5-6 quarters before we see a boom in the AI chip market.  

It would be easy to assume TSM is a quarter or two ahead of shipment times when, in fact, it’s more like three quarters when factoring in HBM and CoWoS packaging. From there, it takes an additional two quarters for system integration and assembly from companies like Dell, Foxconn, and Supermicro before the servers are shipped. 

Perhaps second to capex, TSM can be used as a strong proxy for the health of the AI market as the common denominator across AI chips. The HPC segment is communicating that we have a few quarters of strong growth in the pipeline. From there, we will need to monitor how long the QoQ decline in HPC lasts as a couple of quarters is typical; anything longer would be a concern to monitor further.  

On the topic of timing, the chart below helps to illustrate that even though AI is a secular trend, due to shipping cycles, TSM and even MU can still see cyclical results. When a new generation is ramping, TSM will naturally see the results first as will Micron before the systems are shipped. If we draw a similar parallel to the last QoQ decline in TSM’s shipping cycle, we can see that putting our money in the AI Chips companies makes more sense right now. 

Pictured Above: When TSM’s HPC segment declined for three quarters in the past, the stock underperformed compared to a stock like Nvidia, which was reaping the benefits of the new generation finally shipping in volume (Hopper). 

Overall Revenue Growth: 

Q3 revenue grew by 40.8% YoY and 10.1% QoQ to $33.10 billion, beating the guidance midpoint by 2.2%. TSMC boosted the full year revenue guidance by 5 percentage points for the second consecutive quarter to mid-30% on continued strong AI demand. This is up from the 30% growth provided in Q2.   

For Q4, TSMC guided revenue of $32.2 billion to $33.4 billion. At midpoint of $32.8 billion, this represents a YoY growth of 22% and down (0.9%) sequentially.   

AI Segment Growth: 

TSMC stated that HPC revenue was flat QoQ in NT$ in Q3, though there was more pronounced increase on a US$ basis due to FX. TSMC’s revenue is recognized in US$, so every 1% appreciation of the NT$ adversely impacts NT$ reported revenue by ~1%. Management sounded very optimistic during the Q3 earnings call about long-term AI growth opportunities. 

Earnings: 

The company’s Q3 EPS grew by 50.5% YoY to $2.92, beating estimates by an impressive 12.3% with the strongest beat in the last two years. Analysts expect Q4 EPS to grow 26.8% YoY to $2.84 in Q4 and grow 25.5% in Q1. Looking forward, they expect EPS to grow 19.8% YoY to $12.34 in 2026 and 24.6% YoY to $15.48 in 2027. 

Margins: 

Margins continue to expand due to cost controls, higher capacity utilization rates, economies of scale, and better price negotiation with customers and suppliers.   

The company’s gross margins improved 170 basis points YoY and 90 basis points sequentially to 59.5%. Cost improvements, better capacity utilization, and better price negotiation with customers and suppliers primarily drove the strong margins. 

Q3 operating profits grew by 50% YoY to $16.74 billion, with an operating margin of 50.6%, an improvement of 310 basis points YoY and 100 basis points sequentially, primarily driven by higher gross profits and operating leverage. 

Cash: 

Despite higher capex, cash was also strong with operating cash flow at 43.9% compared to 51.6% in the same period last year. Q3 free cash flows were down (16.1%) YoY to $4.8 billion or 14.6% of revenue compared to 24.4% in the same period last year. The free cash flows were down due to higher capex which grew by 51.6% YoY to $9.7 billion to support strong further growth.   

Valuation: 

Forward PS Ratio: 

TSM is trading at 13 forward PS ratio compared to 6 at the April low and 6 at the start of the year. Regarding the current PS ratio of 17 – I cannot find a higher valuation going back 10 years.  

Forward PE Ratio: 

TSM is trading at 31 forward PE ratio, the highest it’s been going back to early 2023 during the AI boom.  The current PE ratio of 35 is the highest its been going back to ten years except on rare exception briefly at the 2021 top.  

Notable Risks: 

Similar to Broadcom, the predominant risk is valuation.  

AI Networking Stocks: 

My number one ranked trend is AI networking. As discussed in the AI Chips section, stocks such as Nvidia and Broadcom are also the networking leaders. However, the below stocks are networking pureplays, with many on a tear since the April lows.  

As you have likely noticed recently, the networking ecosystem is nuanced as recent announcements from Oracle/AMD and Nvidia/Intel have caused some networking stocks to plunge. To provide the bigger picture, I am revisiting the thesis and rankings for our networking stocks. 

Tied for #1: Astera Labs: Increased ASPs from Scorpio 

Financials: 10/10
Thematic: 10/10
Valuation: 4/10 

When Astera is asked why they stand apart within a crowded networking market, management responds that the drive for low latency PCIe is the primary contributor to the beat/raise across both the Aries and Scorpio products.  

Last March, Astera announced further collaboration with Nvidia by offering NVLink solutions for PCIe/CXL within servers (scale up): “Most recently, Astera Labs demonstrated the industry’s first end-to-end PCIe 6 interoperability with Scorpio P-Series Fabric Switches, Aries 6 Retimers and a NVIDIA Blackwell GPU at NVIDIA GTC 2025. Scorpio P-Series Fabric Switches have also been integrated with the NVIDIA MGX platform for PCIe 6-ready modular designs.”  

Launched only this year, Scorpio now exceeds 10% of total revenue “making it the fastest-ramping product line in Astera Labs’ history.” Keep an eye specifically on Scorpio as a GPU-to-GPU scale-out and scale-up product line. 

On the custom silicon side, it’s widely understood that Astera supplies Amazon as there were disclosures around Amazon having a warrant to buy shares in exchange for guaranteeing $650 million in orders in the SEC filing. As of mid-2025, GuruFocus confirmed Amazon still holds shares in Astera Labs.  

Astera’s agile ability to compete head-on with Broadcom goes beyond only Amazon and Nvidia (though certainly, those two are enough). Management stated they had 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.  

It takes some time for a company like Astera to become a qualified supplier. I would need at a minimum an earnings report to state otherwise or a QoQ decline of some kind to be convinced this has changed. Instead, what I’m seeing is quite the opposite.  

Revenue: 

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. 

AI Segment: 

Same as revenue growth (pureplay) – up 150% YoY and 20% QoQ. 

Earnings: 

Adjusted EPS of $0.44 beat by 36%. Consensus is $0.39 for 69% growth. GAAP EPS was $0.29 

Margins: 

Astera delivered in that regard with a GAAP operating margin of 20.7% compared to 7.9% expected. This operating margin is a major win for ALAB investors as the company is now comfortably GAAP profitable despite stock-based compensation being around 20% of revenue. 

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 flow of $135.4M with $1.07B in cash on the balance sheet and no debt. 

Valuation: 

Astera’s valuation of 35 forward PS is in the mid-range as the company has seen as low as 11 forward PS and as high as 60 forward PS.  

The stock’s forward PE ratio of 103 is steep, yet the company is recently GAAP profitable, thus it’s hard to go by this ratio. 

Typically we use technicals in a situation where a hypergrowth stock is surging on revenue and has strong bottom line results, causing the valuation to send mixed signals. On one hand, stocks like this should be highly valued. On the other hand, how rich of a valuation are buyers willing to pay? Rather than get too stuck in the weeds, technicals can help us participate in the upside while protecting the downside. 

Notable Risks: 

Every stock has risks yet Astera less so than others on my Top 15 list. I can see a scenario where the market softens on AI valuations (temporarily) and a scenario where there are strong earnings and valuations march onward.   

Tied for #1 Credo: Active Electric Cables (AECs) for Miles  

Financials: 10/10
Thematic: 10/10
Valuation: 4/10 

The saying “I can see for miles” implies visibility into the future. The saying makes me think of Credo as there is over two miles of copper cabling for each NVL72 system. We can literally see Credo’s AECs for miles, and figuratively, there is more visibility than usual for this particular stock given the inflection of 274% YoY and 31% QoQ growth last quarter helps to confirm its positioning in Nvidia’s Blackwell systems.  

Credo’s new 800G HiWire ZeroFlap AECs are designed to reach 7 meters with full host-to-switch connectivity, and are especially designed for liquid cooled servers. The over 7 meter distance helps to enable large AI clusters sized into hundreds of thousands of GPUs.  

Credo competes with 800G OSFPs AOCs, yet these are particularly troublesome due to physical constraints that cause the connectors to break. There is also link lapse with AOCs, which are “momentary disruptions in network links.” Credo’s AECs aim to solve these issues, and the results speak for themselves. 

For distances between two meters and seven meters (or about six to 24 feet), active electric cables (AECs) are also seeing heightened demand as servers scale up to eight GPUs to now 36 GPU to 72 GPU per rack-scale AI system.  

In a nutshell, this is why Credo is reporting surging growth in a highly competitive market: “Reliability and power efficiency [leads] to choosing AECs over optical solutions as they are up to 1,000x more reliable and consume half the power. AECs virtually eliminate link fabs, which are intermittent losses of connection, boosting cluster reliability and productivity while reducing power consumption.” 

Regarding “consume half the power” … Credo’s proprietary serializer/deserialzer (Ser/Des) technology, active electric cables and digital signal processing (DSPs) give the company a significant competitive advantage as it enables power-efficient connectivity that is reasonably priced. 

Revenue: 

The company reported growth of 274% YoY and 31% QoQ for revenue of $223.1 million. This beat estimates on the top line by 17% with management raising full-year revenue growth outlook by 35 points, from 85% YoY to 120% YoY. 

AI Segment: 

Product Revenue came in at $217.1 million, up 279% YoY and 31% QoQ. 

Earnings: 

The bottom line also shined with adjusted EPS beating estimates by 44.4%. This represents growth of 1,200% YoY from a thin $0.04 in the prior-year quarter. Triple-digit growth of 425% on the bottom line is expected to follow although flat QoQ. 

Margins: 

GAAP Operating Margin was 27.2%, up from 19.9% in the last quarter and up from (24.2%) in prior-year quarter.  

Adjusted Operating Margin was 43.1%, up from 36.8% last quarter and up from 3.7% in prior-year quarter.  

This is the standout – massive operating leverage as opex grew only ~11% QoQ vs. the 31% pick up in revenue. 

Cash: 

FCF Margin of 23.8%, down from 31.9% last quarter but up more than 45 points from (21.9%) in the prior-year quarter. Debt free. 

Valuation: 

The forward PS ratio is 24 and on the higher range of where Credo trades with the upper region being 33 earlier this year yet has traded as low as 8 at the April low. 

Credo trades at a 65 forward PE Ratio yet similar to Astera Labs, this is hard to put much weight into as the company is newly profitable.  

Notable Risks: 

Every stock has risks yet Credo less so than others on my Top 15 list. I can see a scenario where the market softens on AI valuations (temporarily) and a scenario where there are strong earnings and valuations march onward.   

#3: Small Cap Networking Stock with Strong QoQ 400G Growth and Incoming 800G/1.6T Growth 

This past quarter, the I/O Fund was on the hunt for networking stocks that reported an inflection. Given Nvidia is reporting 46% QoQ growth at scale on their networking segment, we figured there would be some breadcrumbs to follow in the supply chain as to companies that are beneficiaries of the incoming AI networking boom. 

The stock we identified for our Discovery members reported 40% QoQ growth last quarter and is forecasting 17% QoQ growth in the upcoming quarter – some of the highest we’ve seen in the supply chain landscape. Management discussed the ability to grow capacity 8.5X this year before doubling this by mid-2026. 

To learn more, sign up for our Discovery tier here. 

#4 Lumentum: EML Lasers in High Demand 

Financials: 6/10 (not a pureplay)
Thematic: 7/10
Valuation: 7/10 

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.   

Revenue: 

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. 

AI Segment: 

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%. 

Earnings: 

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). 

Margins: 

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%). 

Cash: 

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. 

Valuation: 

Lumentum’s Forward PS ratio is above what it typically trades at 5 forward PS. It’s previous top this year was 4 forward PS and it failed to hold that valuation twice. 

The company’s forward PE Ratio is 33 and is within a reasonable range as the company has traded as high as 50-60 and as low as 18 over the past 12 months. 

Notable Risks: 

Lumentum has many competitors and its supplier agreements are not as clear to our firm as Credo and Astera Labs. However, the fundamentals are communicating that Lumentum’s management commentary is reliable, which is that their EML lasers are in high demand.  

AI Software and AI Data Layer 

As it stands today, there are a handful of AI software companies and AI data layer companies that have set themselves apart in fundamental strength. As the introduction pointed out, the noise in stock investing is often quite loud and the rate at which stock tickers are exuberantly discussed is detached from reality. We do a fairly comprehensive scan and find the list of software stocks that offer concrete proof of participating in the AI trend is far fewer than one would originally imagine. 

I’ve stated below that AI hardware companies will also be some of the best AI software companies (incoming tangent here): 

To illustrate this, Broadcom is preparing to displace a few of the FAANGs at a $1.6T valuation compared to Meta at $1.8T valuation and Amazon at $2.3T valuation. This is on the cusp of Broadcom stating their serviceable addressable market will be $60B to $90B in revenue by fiscal 2027, which is in two years from today as their fiscal year ends in October (roughly 200% at the midpoint given the current $25B run rate).  

One has to wonder, why do the AI software juggernauts not discuss their revenue as openly as the AI hardware companies, especially given software tends to be recurring and easier to model? On the other end of the spectrum, we see up to 100X forward sales valuations in this category.  

Yet, if we look at Nvidia AI systems as an example, it’s easy to see that software is what will accelerate AI over the next few years. There are four layers to Nvidia’s full-stack accelerated computing: hardware, system software, platform software, and applications. When you consider Blackwell, for example, there are transformer engine libraries, integrated with CUDA and cuDNN that determine when to use FP8 versus FP4 during training or inference to maximize speed yet also maintain accuracy. Software determines which precision to use for every layer and every tensor, which helps to deliver a 2X to 4X improvement in training and inference. There are additional revenue segments, such as automotive and robotics, where Nvidia will be able to license its software and gradually add this high-margin revenue to its already profound stock market performance. 

If you look below, you’ll also notice that I’ve put Oracle in the software/data layer category for two quarters now. Although it's Oracle Cloud Infrastructure (OCI) driving growth of 55% and expected to accelerate to 77%+ growth and also strong RPO of 359%, it’s the software and data layer that separates Oracle from other cloud infrastructure providers. For example, software-defined remote direct memory access (RDMA) helps to lower latency and increase bandwidth by bypassing the CPU during training and inference tasks. Oracle says it “consistently charges less than Amazon Web Services (AWS) for the equivalent compute capacity.” But we have to look closely at why that is. 

Vectorized data is another area where Oracle sets itself apart using the data layer as it allows both structured and unstructured data to be understood by AI models, which helps to increase the use of private data alongside public data. 

As we approach the AI software/AI data list now and into the future, the following should be kept in mind: 

• Flexibility in what defines an AI software winner (wait until you see my #2 below) 
• It can’t rank until we see real, tangible evidence of a stock participating in the AI trend. Why pre-emptively invest in a company that is not reporting strong AI revenue when there are so many choices on the market? (Looking at you Tesla Optimus fans).  

I believe the stocks listed below fit this criteria. 

#1: Reddit is an AI Data Layer Frontrunner 

Financials: 10/10
Thematic: 7/10
Valuation: 4/10 

If you had asked me a few years back to describe Reddit’s value proposition, descriptions like “front page of the internet,” “world’s largest forum,” “best place to query the crowd” may have come to mind. Yet, there is something far more valuable that Reddit provides in the AI era, which is a continuous supply of human-generated conversations. To some extent, Reddit is transforming into a human data farm for AI models as it provides continuous, conversational data. What was once a forum is now a wealth of opinions and loads of sentiment that AI models desperately need to produce more natural and sentient-sounding responses.  

Therefore, Reddit ranks higher than you might originally guess going into an AI software discussion. The reason for the high-ranking is that Reddit’s forum-based, real-world discussions are at the top of the list of data sets that can help advance AI models. Therefore, this is less about forum users and more about the licensing of data (and what Reddit gets in exchange). 

Google clearly agrees as the company is licensing data from Reddit, and what’s interesting about this partnership is that it’s easy to see Google lacks highly contextual, human sentiment type data that social platforms provide. Meta, for example, has something similar to Reddit – whereas Google does not have this social aspect from search. In exchange, Google is boosting Reddit in search results. 

Although the world’s leading forum site has only 416 million weekly active users compared to Facebook’s 2 billion, it ranks fifth behind Facebook as the most visited site in the United States. In addition, due to a few changes in how Google surfaces content with AI overviews, Reddit is now the second most visible site in the United States – ranking above Facebook for example – and the top line results show the company is reaping the rewards of being in the search giant’s good favor.   

Over the last two years, Reddit has seen an explosion in SEO visibility on Google, with data from Sistrix placing growth from July 2023 to April 2024 at a whopping 1,328%. This moved Reddit from 85th most visible site to the 7th most visible.   

Now, as of October 2025, Reddit has moved to the 3rd most visible site in the US, per Sistrix, behind Wikipedia and YouTube, and ahead of popular sites such as Facebook in 7th and Amazon in 4th. This major improvement in SEO ranking may be a potential contributor to Reddit’s accelerating growth over the past five quarters – yet as stated, the surge in growth is out of Reddit’s control and relies on Google SEO placement, which could change at anytime.  

In terms of user engagement, Reddit notched 3.8 billion visits as of September 2025, according to data from Similarweb, compared to 11.4 billion for Facebook, 6.5 billion for Instagram, and 4.3 billion for X. Users visited an average of 4.77 pages per visit with an average visit duration of nearly 6 minutes, compared to 12.18 pages per visit and an average duration of 10 minutes for Facebook. Similarweb places Reddit as the fifth-most visited site in the US, behind Facebook in fourth place. 

This rise in search ranking has created a fundamentals profile that is hard to ignore. 

Revenue: 

Reddit delivered a rather impressive Q2 on July 31st with revenue beating estimates by more than 17%.  

Q2 marked Reddit’s fastest growth since the start of 2022, and a significant improvement over the past two years from just 12% growth at the start of 2023. What’s even more impressive is that Reddit delivered this 77.7% growth on top of a rather difficult 53.6% comp, yet this may shape up to be the peak growth quarter for the year as comps get tougher. 

AI Segment: 

Behind the substantial revenue beat in Q2 was 84% growth in advertising revenue to $465 million. This marked a sharp 23 point acceleration from 61% growth in Q1. Sequentially, advertising revenue grew almost 30%, with growth of more $106 million QoQ, outpacing Q4 2024’s $79 million sequential increase.  

There was 50% YoY growth in active advertisers as it continued to acquire new advertisers. Additionally, performance ads and brand ads both increased more than 80% YoY, reflecting strong engagement from advertisers on the platform. 

This past quarter marked the highest sequential growth in ARPU in more than three years at 25%, outpacing even Q4 24’s 18% growth. Management believes global ARPU is “still low on an absolute basis and remains an opportunity” for long-term improvement – for example, Meta’s global ARPU is around 3x of Reddit’s at $13.65 as of Q2, and though Meta hasn’t updated regional metrics since the end of 2023, it’s possible that US ARPU is 10x that of Reddit’s. 

Earnings: 

Over the past month, consensus EPS estimates through Q4 2026, or the next six quarters, have been revised 23% to 66% higher; over the past six months, estimates have moved 20% to 57% higher, as margins strengthen. For example, Q2 2026 has seen its estimate move from $0.42 to $0.70 over the past month, and Q3 2026 from $0.55 to $0.83. This now projects three consecutive quarters of triple-digit YoY growth followed by three consecutive quarters of >50% growth. 

Margins: 

Gross margin was 90.8% in Q2, up 1.3 points YoY and marginally higher QoQ.  

Operating margin was 13.6%, up nearly 25 points YoY and 12.6 points QoQ. Notably, this also exceeded Q4 2024’s operating margin of 12.4%. 

Cash: 

Operating cash flow was $111.3 million in Q2, up 292% YoY. OCF margin was 22.3%, down 10 points QoQ but up more than 12 points YoY. Free cash flow and operating cash flow are correlated nearly 1:1. Free cash flow was $110.8 million in Q2 for a 22.2% margin. 

Valuation: 

Reddit has some room at 19 forward PS but not a ton of room before it will test its previous top at 24. After about a 25% move from here, Reddit will be testing a level it has not held two times in the past year. The stock has traded as low as 8.3. 

The bottom line valuation is harder to identify a trend as the company was not GAAP profitable when it went public, although is firmly GAAP profitable now. The stock trades at 52 forward PE yet has traded as high as 70 forward PE and as low as 25 in recent quarters. 

Risks: 

Reddit’s primary risk is the surge in traffic relies on a third-party relationship with Google that could be terminated at anytime. It may not be terminated given the emphasis on contextual data for models, yet the recent success hinges on this data licensing deal. 

#2: CoreWeave: Beating the Big 3 on Utilization Rates  

Financials: 1/10
Thematic: 11/10 (higher than our highest rank)
Valuation: 3/10 

CoreWeave is perhaps the first stock in the history of the market to have short sellers before it was a public listing. While it’s risky and novel to collaterize GPUs, we want to remain open-minded as CoreWeave’s software-defined infrastructure is one of the most advanced in the industry for AI workloads. 

Please note, CoreWeave carries outsized risk as there is high debt leverage, negative free cash flow and is not profitable. The stock’s thematic ranking is quite high, yet we would only approach this stock using technicals for risk management. 

The company’s software stack is specifically designed to maximize GPU utilization, elasticity, and cost efficiency to the point of booking out GPUs like it’s a leading hyperscaler. Remarkably, it’s the first company in almost twenty years to meaningfully disrupt the dominance of the Big Three in cloud infrastructure. 

By focusing only on GPUs and software optimizations, CoreWeave offers bare metal servers at a cost that is up to 20% to 50% cheaper than hyperscalers. Its value proposition is best summarized in its utilization rates for GPUs. CoreWeave has published its MFU rate of 35% to 45%, stating it is 20% higher than competitors, which means other AI data centers have MFU rates more in the 30% range. Due to FLOPs performing an astronomical number of calculations, small percentages translate to an important advantage.   

The company is able to scale quickly with new GPUs due to the Mission Control automation layer that provides automated deployments of systems like the GB300 NVL72s. The company stated: “Mission Control continues to be the cornerstone of CoreWeave's ability to scale at breakneck speed, building a fully automated and rigorous process for cluster life cycle management with unmatched visibility for our customers.” 

CoreWeave also offers a Virtual Private Cloud for a private network space. By combining an isolated virtual private cloud with Nvidia’s Quantum InfiniBand, customers get ultra-low latency with enhanced security. 

The company's Kubernetes Service is an AI-optimized Kubernetes environment for scheduling AI workloads and scaling up/down for the right mix of CPU, GPU, memory and storage (known as elasticity). SUNK, known as Slurm on Kubernetes, combines container orchestration with a job scheduler to manage large batch jobs. AI labs use this service to combine scheduling for high performance computing with a cloud-native environment.   

Local Object Transport Accelerator (LOTA) for AI object storage is another feature that is optimized for AI workloads by focusing on performance and cost efficiency. The company recently added archive tier object storage, which allows data to move between hot and cold storage based on access patterns, which optimizes costs. In the recent earnings call, the company stated they are seeing customers “shifting petabytes of their core storage to CoreWeave in the form of multiyear contracts.”  

CoreWeave recently completed its acquisition of Weights & Biases in May to add observability, which means engineers can quickly diagnose a failure or inefficiency in the software layer and infrastructure layer. For example, if a model is training slowly, the observability platform will help an AI engineer identify and resolve this quickly.   

More recently, CoreWeave integrated W&B for a joint launch of its Inference-as-a-service feature, which allows developers to use APIs to tap into AI models from OpenAI, Meta, DeepSeek, etcetera. Inference is key for CoreWeave to fully monetize its investments in capex-heavy infrastructure. For example, these popular LLMs combined with chain of reasoning inference, which means generating step-by-step reasoning, will become compute-intensive especially at scale. This will lead to CoreWeave monetizing every chatbot response, API calls and applications to easily payback their initial investments plus some (in time).  

The paragraph above is quite important and worth summarizing – essentially, CoreWeave’s path to monetization will become clearer as the inference market takes off in the coming quarters/years. What you see is not what you get, rather what you see could surge should CoreWeave execute well – and find financing.  

This stock comes with outsized risk. Please note the cash/debt section below. Despite being in the Pro tier’s Top 15 due to a strong thematic, this is one we will hold only with close risk management. 

Revenue: 

CoreWeave reached a new milestone of over $1.0 billion in revenue in Q2 2025, growing 206.7% YoY to $1.21 billion. On a sequential basis, the Q2 revenue grew by 23.6%. The company beat analyst consensus estimates by 12.2%, driven by strong demand for the company’s AI cloud infrastructure services. 

Looking forward, revenue is expected to grow by 174% YoY to $5.26 billion in the year 2025 and 129.6% YoY to $12.08 billion in 2026 and 48.3% growth in 2027. Most importantly, management has increased the full-year revenue guidance for the second quarter in a row due to the strong customer demand. Management increased guidance by $250 million at the midpoint to a new range of $5.15 billion to $5.35 billion for the year 2025. 

AI Segment: 

The company’s backlog was $30.1 billion at the end of Q2, up 86% YoY driven by the company’s strategic deal with OpenAI in March 2025 and the signing of subsequent expansion deals with the company. 

The company derived 77% of 2024 revenue from its two largest customers, i.e., Microsoft and Nvidia. While in the recent quarter, Microsoft accounted for 71% of the total revenue. Goldman Sachs estimates that Microsoft’s share is expected to drop to 38% in 2026, followed by OpenAI at 21%, Nvidia at 6%, and the remaining 35% to be attributed to other customers.   

Earnings: 

The company reported GAAP loss per share of (-$0.60) in Q2 compared to the analyst consensus estimate of (-$0.49), missing estimates by –21.7% due to the higher operating expenses, particularly the technology and infrastructure expenses.  

Analysts expect GAAP loss per share of (-$2.67) for this year, followed by (-$0.90) for 2026. They expect a positive GAAP EPS of $1.59 in 2027.

Margins: 

Q2 gross margin was 74%, up 200 basis points YoY and up 100 basis points QoQ. The company is investing heavily in data center and server infrastructure to meet very strong AI demand from its customers. The operating margin was 2%, compared to 20% in the same period last year and (3%) in Q1. Operating expenses increased by 276% YoY, driven by high technology and infrastructure expenses. The management tried to explain in the Q2 earnings call that expenses are front-loaded and have a short-term impact on the margins. 

Cash: 

CoreWeave’s business model is based on aggressive capacity expansion, currently fueled primarily by debt. As a result, cash is rather thin and gets spent quickly, and free cash flow is widely negative.   

CoreWeave reported $1.15 billion in cash and equivalents (excluding $0.56 billion in restricted cash and equivalents), though CoreWeave updated in an 8-K related to its now upsized $1.75 billion raise that total cash will be closer to $5 billion.   

Operating cash flow was ($251.3 million) for a (21%) margin in Q2, widening from ($117.8 million) in the year ago quarter. Free cash flow was ($2.7 billion) for a (223%) margin, widening slightly from ($2.36 billion) in the year ago quarter.  

Debt was reported at $11.05 billion in Q2, with $3.62 billion being current. Current debt is likely closer to $12 billion now, with a majority (~$6.7 billion) tied to its two existing delayed draw term loan facilities; if the new DDTL is drawn upon, debt could rise to $14.6 billion. On the other hand, the company is trying to reduce its cost of capital by raising cash through secured debt, using its highly valuable GPUs as collateral, which is positive.  

As discussed above, capex for the second half of the year is expected to be >$15 billion, with cash on hand only covering one-third of that at maximum. This will place the emphasis on finding alternative funding to finance this spending. 

Valuation: 

CoreWeave’s valuation of 12.4 forward PS is at the higher range for where the stock has traded this year. The stock traded as high as 15 forward PS and as low as 3.4 during April.  

The company is not profitable for a bottom line valuation and is the only stock on our list that is not profitable.  

Risks: 

Cash/Debt is a very high risk with debt at $12 billion and growing with only $1.15 billion in cash and negative free cash flow.

#3: Oracle Inflecting with 8% QoQ Growth, RPO of 359% Soars and The Future is Bright 

Financials: 7/10 (other segments weigh on AI segment)
Thematic: 7/10 (not a pureplay)
Valuation: 2/10 

As stated in the intro, even though bare metal servers are a large part of the story for both CoreWeave and Oracle, it’s also the software-defined optimizations that set these cloud infrastructure players apart from the Big 3. For Oracle, it’s also RDMA, which is a networking fabric that increases performance and density, plus the data layer (of course) as Oracle is able to leverage its deep roots in relational databases. Inference will need a mix of private data sets to augment public data sets to fine-tune reasoning tasks in an effective way for enterprises to use the models internally, and Oracle is positioned to capture this opportunity.  

Oracle offers the widest range of bare metal GPU instances among major cloud providers, and scalability at any size up to 65,536 Hopper GPU clusters and 131,072 B200 GPU clusters, which are expected to come online in 2025. Oracle also offers very flexible VM instances, letting customers pay for only the capacity they need as they need it for any size workload, rather than offering fixed instance sizes. 

With less overhead and fewer CPU cycles, RDMA helps Oracle offer its AI clusters at a lower cost: Oracle says it “consistently charges less than Amazon Web Services (AWS) for the equivalent compute capacity.”   

Oracle says that it can offer less than 10 microseconds of latency between nodes, improving efficiency. In the most recent earnings call, Oracle emphasized how cheap they are compared to the Big 3, stating: “We have gotten the entire Oracle Cloud, the whole thing, every feature, every function of the Oracle Cloud down to something we can put into a handful of racks, 3 racks, we call it Butterfly that costs $6 million. So we can give you a private version of the Oracle Cloud with every feature, every security feature, every function, everything we do for $6 million. I think the cost for the other hyperscalers is more than 100x that.” 

Oracle’s AI vector capabilities also stand out given Oracle’s database roots, offering native AI vector search capabilities with seamless integration to leading AI models from OpenAI, xAI, Meta, Cohere and more. AI vector search lets enterprises search both structured and unstructured data in a variety of manners, enabling intelligent, relevant and accurate AI responses utilizing their data. 

The announcement of Oracle’s AI database is particularly interesting in terms of ways the stock can extend its run. As explained in the earnings call, the combination of vectorizing data to where it can be understood by AI models with the ability to connect private databases to AI reasoning models will result in enterprises unlocking higher value from AI. 

Oracle is teasing a more beefed-up AI database, which management stated will officially launch at Oracle World Cloud, describing a combination of private enterprise data, large reasoning models and automated agents: “Who's offering that to customers? We'll be the first when we deliver it and demonstrate it at AI World next month.”  

Oracle has already made major headway with AI embedded databases with 23ai, which converts vector data into contextual information. By connecting a database to Chat-GPT, there is more reasoning layered into the results.   

The inference market will define by size and quality of data for reasoning purposes, and Oracle sits on arguably the world’s largest enterprise data sets. Although we have grown used to compute driving the AI training market, there will be an important shift toward the data layer driving the inference market.   

With Oracle embedding the AI database, inference will happen inside the database where the data resides. This is distinct from pulling data out of the database into the large language model, which is inefficient. Oracle’s move to embed the database supports a sustained, upward trajectory in the stock price. 

Revenue: 

Oracle delivered Q1 revenue of $14.9 billion, growing 12% YoY but slipping 6% sequentially, coming in just shy of the Street’s $15.0 billion estimate. 

AI Segment: 

Remaining performance obligations (RPO) grew 359% YoY with cloud RPO growing “nearly 500%” on top of 83% growth last year. This compares to RPO growth of 41% YoY last quarter and cloud RPO growth of 83% last year.  

Oracle Cloud Infrastructure (OCI) was forecast to “grow 77% to $18 billion this fiscal year and then increase to $32 billion, $73 billion, $114 billion and $144 billion over the following 4 years.”  

You can think of this as an acceleration from roughly 50% growth on IaaS in recent quarters to up to 128% growth in future years, specifically from the $32B to $73B in the medium-term of two years out. 

OCI (IaaS) revenue grew 55% YoY to $3.3 billion, faster than hyperscaler peers.  

This led to multi-cloud database revenue with Amazon, Google, and Microsoft surging 1,529% YoY. 

Earnings: 

GAAP EPS of $1.01, down (15%) QoQ from $1.19 in Q4’25 and flat YoY vs. $1.03 in Q1’FY25. This figure was also lower than the analyst estimates of $1.04. 

Non-GAAP EPS of $1.37, up 6% YoY from $1.39 in Q1’25 but down (14%) QoQ from $1.70 in Q4’25. 

Margins: 

Q1 figures represent a 29% operating margin, down from 32% in the prior quarter and 30% in the prior year quarter. 

Cash: 

(39%) FCF and 55% OCF. Highly leveraged cash to debt ratio 

Valuation: 

Oracle’s valuation is at the top range of where the stock has traded this year at 12 forward PS. The stock briefly touched 13 before selling off, and otherwise, has not traded higher than 12 this year (or for decades really, but is transforming into an AI stock) 

The forward PE Ratio of 42 is the highest it’s ever traded this year or in previous years.  

Risks: 

Highly leveraged cash to debt ratio is the predominant risk.  

#4: AppLovin Has the Best Operating Margins Sector-Wide 

Financials: 10/10
Thematic: 7/10
Valuation: 3/10 

APP has many aspects to focus on for the bull story, yet the margins are truly one-of-a-kind. It is hard to take the title of “most impressive margins” in a software category as AppLovin is up against the most operationally efficient, cash loaded companies worldwide.  

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

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

Management also hinted these improvements will lead to “a lot of upside in the numbers we’re able to report.”  

Here is the full quote: 

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

The last earnings report was stellar with all fundamental boxes ticked, a team that has proven to execute, and incoming catalysts that are quite well-timed to where we maybe have two quarters (or less) to wait for an inflection. 

And check out those margins! 

Revenue: 

AppLovin reported revenue of $1.26 billion compared to consensus of $1.28 billion according to some sources yet others reflect the consensus we had of $1.22 billion, thereby it’s debatable if the top line beat. Overall revenue last quarter was $1.48B versus this quarter at $1.26B. As we covered in the past, this is due to AppLovin divesting its mobile gaming “Apps” business, with the sale completed on June 30th. Therefore, if you adjust for this sale, revenue for the ads business in Q1 was $1.15B for QoQ growth of 8.7%. 

AI Segment: 

Same as revenue (AXON ad engine is powered by AI). 

Earnings: 

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

Margins: 

Operating margin of 76% expanded from 44.7% last quarter and more than doubled from the year ago quarter at 36.2%. Wow! 

Cash: 

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

Valuation: 

The company is trading at a PS ratio of 40.3 and a forward PS ratio of 37.6. The company’s forward PS ratio peaked at 46.7 on September 30 and is currently trading about 20% below its peak. While the forward PS ratio above 30 is considered high, the market is giving the company a premium valuation due to a remarkable turnaround in margins. 

Another key catalyst is that the company completed the divestment of its low margin mobile gaming business in Q2 2025. The company’s adjusted EBITDA margin has swiftly moved higher from 68% in Q1 to 80.9% in the recent quarter. It would also make more sense to look at the EV/EBITDA ratio for AppLovin. It currently trades at an EV/EBITDA ratio of 63.4 and a forward EV/EBITDA ratio of 49.1. The company has traded at a peak EV/EBITDA ratio of 110 during June 2021 and around 88 during the tech market bubble in November 2021. With profitability improving post-divestiture, there could be further room for valuation expansion.  

Risks: 

APP is the subject of short reports and has a business model the SEC, short sellers and others find suspicious. However, we think the management team, AI-powered ads business model and strong market presence is worth a shot especially when using technicals alongside any entries or exits. 

#5: Cloudflare is Locked and Loaded for AI Inference Market 

The Workers Platform, known as Act 3, is positioned to take advantage of the massive inference trend. The I/O Fund team recently dug up a stat that inference is expected to account for 60% to 70% of AI workloads by 2030. In particular, Cloudflare emphasizes their position is what will help the company win this market: “The fact that we sit in front of so much of the web and that more than half of our dynamic traffic is already between APIs means that we are strategically positioned to deliver the agentic web of the future.” 

Revenue: 

Cloudflare reported its largest revenue beat in the last six quarters at 2.1% above consensus, with Q2 revenue up 27.8% YoY to $512.3 million. This also marked a slight 1.3 point acceleration on the top-line from 26.5% growth in Q1.   

For Q3, Cloudflare guided for revenue of $543.5 to $544.5 million, ahead of estimates at the time for $538.9 million. This corresponds to a slight deceleration to the mid-to-high 26% YoY growth range, where Cloudflare is expected to remain through Q4. This provides no clear indication yet that the company is able to drive a sustained revenue acceleration aided by AI.   

Current RPO accounted for 66% of total RPO, or ~$1.30 billion, increasing 33% YoY in Q2, a four point acceleration from 29% growth in Q1. This is also a notable uplift from 26% growth in the year ago quarter.   

AI Segment: 

There is no official AI segment yet. 

Earnings: 

Cloudflare topped estimates in Q2 driven by the revenue beat and stronger adjusted margins, and boosted its FY25 adjusted EPS outlook as a result.  

GAAP EPS was ($0.15), missing estimates for ($0.08) as GAAP margins drifted lower.  

Adjusted EPS was $0.21, beating estimates for $0.18, fueled the outperformance in adjusted operating margin in the quarter.   

Margins: 

GAAP gross margin was 74.9% in Q2, down nearly 3 points YoY and 1 point QoQ. Adjusted gross margin was 76.3%, down 2.7 points YoY and 0.8 points QoQ.  

GAAP operating margin was (13.1%), down 4.4 points YoY and 2 points QoQ. Adjusted operating margin was 14.1%, approximately flat YoY and up 2.4 points QoQ; this was also ahead of guidance for 12.6%.  

For Q3, Cloudflare guided for adjusted operating income of $75-76 million, pointing to adjusted operating margin of 13.9%, down nearly 1 point YoY and moderating slightly QoQ. 

Cash: 

Operating cash flow was $99.8 million for a 19% margin, flat YoY but down from a 30% margin in Q1.   

Free cash flow was $33.3 million for a 6% margin, down 4 points YoY and 5 points QoQ.   

Network capex was 11% of revenue in Q2, down from 17% of revenue in Q2. Cloudflare stuck to its guidance for network capex to be 12-13% of revenue for the year, suggesting slight moderation in 2H.   

Valuation: 

Cloudflare is officially trading at its highest forward since the tech bubble popped in late 2021-early 2022. The current PS of 40 and forward PS of 36 does not offer much support in terms of the stock holding well at these levels. 

Cloudflare is trading at a wild forward PE ratio of 255, which is far above any forward PE ratio over the past year (the previous highest forward earnings ratio was 205 where it sharply reversed twice). 

Risks: 

Valuation is the predominant risk coupled with little evidence of real AI revenue right now (more of a future winner that we want a placeholder for).

AI Energy 

#1: Right Place, Right Time for Bloom Energy 

Bloom Energy provides on-site 24/7 power generation using their proprietary solid oxide fuel cells (SOFCs). The SOFCs are stacked up by the hundreds to thousands in Bloom Energy Servers (BES), which enable the conversion of fuels like natural gas, biogas and hydrogen to electricity. 

Bloom Energy is securing data center deals due to fast deployment of about three months. Here is what management described as the competitive advantages regarding time to power for fuel cells: “A big shift in our business today is time to power. We are providing solutions to meet the urgent needs of our customers who cannot fulfill their power needs from the grid. In these cases, we rapidly book, build, ship, install and power sites for our customers in a matter of months, a much faster timeline than a grid connection. Such rapid drill activities will necessarily come with timeline variances, both pull-ins and delays, and will affect our quarterly revenue line. You are seeing this in our Q3 numbers.” 

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

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

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

Revenue: 

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

AI Segment: 

Product revenue increased 31.1% YoY to $296.6 million, slowing from 38% growth in Q1. As the CEO stated on the call, to wait 5-7 years is “untenable.” To compare, Bloom will power Oracle with on-site power solutions in as soon as 90 days. 

Earnings: 

Adjusted EPS of $0.10 beat estimates for $0.02, and represented a notable $0.16 improvement YoY.  

GAAP EPS was ($0.18), missing estimates for ($0.10) as GAAP net margin declined sequentially. 

Margins: 

GAAP operating margin is approaching positive territory at (0.9%) in Q2, up nearly 5 points QoQ and 6 points YoY.  

Adjusted operating margin was 7.1%, up more than 3 points QoQ and 8 points YoY. Adjusted EBITDA was $41.2 million 

Cash: 

Free cash flow was ($220.4 million) in Q2 for a (54.9%) margin. For the first half, FCF was ($345.3 million), just over a 1% improvement YoY.  

Unrestricted cash and equivalents totaled $574.8 million, down from $794.8 million in Q1. This raises the risk that Bloom will turn to financing methods as Bloom likely awaits cash flows meaningfully improving in Q4. 

Valuation: 

If you want to see what AI can do for a valuation, look no further than BE. The stock used to trade in the range of 1.5 forward PS for many years and is now trading at a 14.5 forward PS. I can’t offer much in terms of where the valuation trends as it’s far beyond anything BE has traded at historically.  

However, the forward PE ratio offers a bit more data as the forward PE of 219 is an area the stock has traded at consistently over the past year. With that said, the stock has traded as low as 33 forward PE, as well. 

Risks: 

The valuation is a risk yet we are less concerned with what BE does as an individual stock and would see any selloff being more of a broader catalyst. 

#2: GEV: All Roads Lead to GEV 

GE Vernova is the world’s largest gas turbine supplier at 25% ahead of Schneider at 24%. Even still, GEV nearly tripled its gas turbine equipment in the second quarter – a statement that has us sitting up in our seats. Per the earnings call: “Power orders grew 44%, led by Gas Power equipment nearly tripling year-over-year.”  

Also, consider that we have been covering Bitcoin miners and other energy sources that can quickly help hyperscalers secure powered shells in the 1GW to 3GW range – yet GEV has 62 GW in backlog for gas equipment contracts, already surpassing expectations of reaching 60 GW by the end of this year. In other words, the chances that GEV is not a significant player in supplying energy to data centers for many years to come is nil.   

In a bid to supply options quickly to alleviate bottlenecks, GEV is also shipping aeroderivative gas turbine packages and doing extensive R&D on a small modular reactor (SMR) design. As detailed below, how exactly GEV evolves to solve the crucial bottleneck around AI power consumption is not set in stone, rather the company is experimenting rapidly with how to leverage their deep experience in natural gas, electrification and renewables like wind to meet global demand.   

This year, the company is expected to report $37 billion in revenue with strong earnings growth of 45.3%. The stock is not a hypergrowth profile, rather, it is a quality, defensible position that could do well during any periods of doubt in the broader AI trend.  

The defensibility is particularly attractive when you consider that gas turbines is the crux of the issue for expanding gas power plants. According to Bloomberg’s calculations, more than “$400 billion worth of gas-fired power plants through the end of the decade are in jeopardy of delay or cancellation because of the lack of capacity to meet future turbine orders.” The same article points toward GE Vernova filling orders as far out as 2030. 

Revenue: 

The company’s Q3 revenue grew by 12% to $9.97 billion, beating estimates by 8.8%. Organically, revenue grew by 10% YoY to $9.83 billion, driven by strong electrification and power. Analysts expect revenue to decline (2.3%) YoY in Q4 but rise 3% QoQ, before rebounding to 8.7% in Q1 2026.  

On the back of strong demand for power and equipment, management reiterated full-year revenue guidance and expects 2025 organic revenue to come at the high end of the guidance of $36 billion to $37 billion. The power segment organic revenue guide was maintained at 6-7%, and electrification segment was raised to ~25%, up from 20% previously in Q2. On a side note, the wind segment is expected to be down high-single digits, lowered from down mid-single digits due to the more challenging market conditions.  

Revenue growth is set to accelerate over the next three years. Analysts expect a 6.6% increase in 2025, bringing the total revenue to $37.2 billion. Momentum is projected to build further, with revenue climbing to $41.0 billion in 2026, up 10.2% and to $46.7 billion in 2027, up 13.9% YoY. 

AI Segment: 

In Q3, GEV signed just over 12GW of new gas equipment contracts with ~1GW going directly to orders and ~12GW going into what’s called a slot reservation agreement. During the quarter, the company also converted 7GW of SRAs into orders and shipped 4GW of equipment.  

Management had previously stated they would exit the year with 60GW “at better margins with significant momentum into ‘26.” Here is the breakdown from that comment:  

33GW are in the backlog, up 4GW sequentially.   

Slot Reservation Agreements (SRA) grew from 25GW to 29GW.  

Total backlog including SRAs is 62GW, up from 55GW last quarter. 

There was a discussion in Q2’s call that this represents about 3 years of backlog: “And we've talked about the fact that we'll get to at least 60 gigawatts by the end of the year. So that's directionally 3 years of backlog.” There was mention of eventually seeing 80GW to 100GW in the backlog but no date or other details were discussed, other than that’s the goal over time.   

Earnings: 

Q3 GAAP EPS came at $1.64, missing estimates by a (18.6%) but up from ($0.35) in the year-ago quarter. Despite the miss in Q3, earnings growth is projected to be strong over the next few quarters, with GAAP EPS up 87.3% to $3.24 in Q4 and accelerating to 128.6% to $2.08 in Q1 2026. 

Analysts continue to expect strong EPS growth in the coming years. For 2025, analysts expect GAAP EPS to grow 40.9% YoY to $7.86, and 62.8% and 44.8% YoY in the subsequent two years, reaching $18.53 in 2027. 

Margins: 

Q3 adjusted EBITDA grew by 234% YoY to $811 million, driven by strong growth in the electrification and power segments, and a strong rebound in wind. Adjusted EBITDA margin improved 540 basis points YoY to 8.1% driven by profitable volume, better pricing, and productivity gains. The company is witnessing an annual EBITDA margin expansion, increasing from 2.4% in 2023 to 5.8% in 2024, and management has further guided expansion in the range of 8-9% for 2025.  

Q3 operating margin was 3.7%, down slightly from 4.2% in Q2 but up from (4.0%) in the year ago quarter.  

Cash: 

Most importantly, management has maintained its FY free cash flow guidance from Q2, where it was raised from a range of $2.0 billion to $2.5 billion to a new range of $3.0 billion to $3.5 billion. This was primarily driven by a higher profit outlook and increased down payments due to rising orders. Through Q3, the company has generated $1.9 billion in free cash flow, implying a strong Q4 to finish the year inside its guided range. 

The company generated free cash flows of $732 million in Q3 compared to $968 million in the same quarter last year. On a sequential basis, this was a sharp increase from $194 million in Q2. 

Valuation: 

Similar to other names in this group, GEV’s valuation has reset higher as the company demonstrates clear AI product–market fit. The stock is trading at 4.2 forward PS despite trading as low as 1 earlier this year.  

The forward PE ratio offers room in the valuation. The stock is trading at 83 forward PE ratio yet has traded as high as 130 in the past. 

Risks: 

Of the companies featured here, GEV offers less risk as the sheer GWs it can provide are desperately needed for AI data center buildouts. However, it’s not a hypergrowth stock like the others. It’s included here to say – we are eyeing the stock as one that could outpace the legacy FAANGs for example, as it’s a leader within one of our largest and most timely thematic trends. 

#3 Bitcoin Miners 

Bitcoin Miners offer an exceptional risk/reward as these companies are pivoting from unprofitable Bitcoin mining operations to the high margin business of supplying powered shells for AI data centers. According to CoreWeave, powered shells are the biggest constraint in the AI build out, marking a critical shift to where Nvidia’s GPUs are no longer the primary constraint. With existing power, cooling, and network infrastructure, miners can deploy AI-ready capacity faster than new construction—offering Big Tech a critical shortcut in the race to scale. 

Our Discovery Tier highlights a Bitcoin miner that is expected to report 325% YoY growth in the upcoming quarter with a positive operating margin. Knox sees significant upside and is ranking this Bitcoin miner as his #1 among all Bitcoin Miners.  

Learn more about Discovery here. 

Conclusion: 

The best way to train for a marathon is to run a marathon. You can consider this report a training exercise while the real test is portfolio returns. Hopefully after reading this 43-page report, a few things are evident – we have a strong grasp of where the AI market plans to go next, that our process is nimble enough to capture winners in niche micro-trends, and we are capable of offering a level of conviction rare among AI investors. Consider that Nvidia is not one of our top performers this year (so far) – yet it’s been one of our strongest years to date. 

With one quarter left, we look forward to making it our best of 2025. 

Want to know what the I/O Fund is eyeing next for a new entry? Our Discovery tier surfaces new ideas in an effort to provide a significant edge to AI investors. Last week, we published our Top 10 New Ideas List for our Discovery members that pinpoints the stocks we are most likely to add to our portfolio next. Discovery was first to discover Bloom Energy, Core Scientific and Oklo to our portfolio, and these new additions became some of our biggest wins (thus far) in 2025. Current Pro and Advanced Members: To subscribe to Discovery with 30% off, click here to email us or email premium@io-fund.com and mention code DISCOVERY30.click here to email us or email premium@io-fund.com and mention code DISCOVERY30. 

Advanced Members – stay tuned! This week, you will be receiving technical setups from Knox in his Quarterly Positions Report offering a complete picture of how we plan to enter or layer into the stocks listed above. These setups will also be covered in Knox’s upcoming webinar this Thursday at 4:30 PM Eastern. If you’re a Pro Member wanting information on Advanced or Discovery tiers, please email us at premium@io-fund.compremium@io-fund.com

Damien Robbins and Royston Roche, Equity Analysts 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:

• The I/O Fund’s Top 15 Stocks for Q3 2025
• GE Vernova: All Roads Point to the Nat Gas Behemoth
• Why Power is Critical for Data Centers and their Hyperscaler Customers
• Free Bitcoin & Broad Market Webinar Replay – August 21, 2025

This quarter, I’d like to try something new by providing Members with something more actionable than a 1-hour webinar on key trends. Trends are important to cover, yet I also realize one of my main roles is to provide our Members with stock picks. The stock picks below represent the trends that are in play, and thus, the list answers quite a bit of the questions around how we plan to position and why.  

The analysis tops out at 42 pages and 16,300 words and it took about three weeks to write; there was no stone unturned to come up with this list. 

As you know, we are a portfolio that is managed in real-time. This means that we are constantly evaluating how our content informs a portfolio. Ultimately, we believe taking time to produce the analysis below will make the I/O Fund portfolio stronger, and we hope it does the same for you.  

A few disclaimers: 

This is determined by lagging indicators and incorporates last quarter’s financials. There are many risks each of the stocks face below, and the analysis below is not a substitute for using technicals to guide an entry. For example, it’s very common for great tech stocks to selloff 40% or more about roughly every 12 to 24 months – each investor will need to determine how they plan to handle the tech sector’s inevitable volatility.

In addition, the broad market is currently at all-time highs; with this comes stretched valuations particularly from any stocks that are popular or well-known. We’ve strived to bring you an objective analysis which includes some stocks with admittedly stretched valuations that we hope to buy lower, as well as those that are lesser-known and sitting at lower valuations despite having a 10/10 thematic profile.

We have divided 15 stocks into three sections:  

• Quality AI for longer-term holds: four stocks ranked 
• AI Hardware plays (medium-term hold): six stocks ranked, two honorable mentions 
• AI software: six stocks ranked, two honorable mentions

Combined, we believe these stocks will represent about 60-65% of the I/O Fund portfolio. The remaining 35% to 40% will be allocated to crypto, energy and momentum stocks of any tech sector. These are general guidelines. If crypto were to lead in a meaningful way, we’d allocate more to this sector or if crypto tops, we will lower this allocation and rotate into quality AI, etcetera.

Please also note, the stocks are ranked for their respective categories. It would be nearly impossible to rank these perfectly as market forces are unpredictable. Most importantly, the true rank of stocks is found in our portfolio positioning.  

The goal of this exercise is to more closely align our portfolio with trends in play and with fundamentals that are on fire. As you can see, this is one of the lengthiest reports I have ever compiled weighing in at over 16,000 words – but yet, there’s more. In addition to this fundamentals-driven report, Advanced Members have a lengthy incoming Quarterly Positions Report coming in from Knox where he matches the stocks listed below with technical setups. 

Major themes:

• Nvidia Blackwell: we’ve covered the importance of the upcoming generation of GPUs thoroughly beginning a year ago in the analysis “Blackwell and the $200B Data Center” plus “Here’s Why Nvidia Stock Will Reach $10 Trillion Market Cap.” We’ve then helped to clarify timing around Blackwell arriving with an analysis in February pointing to signals the premiere SKU was delayed and then further analysis in May stating we believe those signals have cleared and Blackwell is now ramping on the premium side.

  Regardless of when the delay finally clears (August call or November call), I continue to believe that Nvidia and related suppliers are the best way to position into the second half of the year. We can see ample evidence that Blackwell is ramping, and what will catch the market off guard, is that Blackwell Ultra is preparing to ramp quickly after over about a 6-month to 9-month time frame. It isn’t confirmed yet when Blackwell Ultra will ship in volume but we do know that CoreWeave was first to market with a Blackwell Ultra deployment in early July. What's important here is the clock has started – while simultaneously Blackwell is ramping in volume.

  You can think of this as a one-two punch that includes the supply chain in terms of Nvidia saying to the doubters: “you haven’t seen anything yet.” Blackwell’s strength against AMD and custom silicon lies in the demand for Nvidia’s NVL72 systems, which combine 72 GPUs using NVLink and NVSwitch to function like one massive accelerator. These systems are particularly attractive to hyperscalers looking for an edge in model training and high-throughput inference.

  As of now, competitors like AMD and custom ASIC providers do not yet offer a comparable system that scales to this degree. Such capabilities may emerge around 2026–2027, but Nvidia currently holds a clear lead in large-scale, multi-GPU system integration. This is key to why 2025 belongs to Nvidia, with the second half backloadedwith the second half backloaded.

• AI is diversifying: As we look further out into 2026, we’ve been preparing our Members for the inference market to cause capex to diversify away from Nvidia toward cheaper GPUs and custom silicon. Yet we also published on why it won’t matter for Nvidia in the long run. Briefly, there is plenty of money pouring into AI use cases for Nvidia to do quite well with a lower percentage of the AI accelerator market. The company has mid-90% of the market today, I believe Nvidia will end the decade in the mid-70% or low-80% of the market based on what we see in other markets such as gaming. Nvidia will make up for the lower market share with AI software and automotive, for example, which has been forecast to be a bigger market than AI hardware once the market matures.
• Quality fundamentals but stretched valuations: Look for many popular stocks to struggle at these valuations to push to the next level. We are looking more broadly at stocks (listed below) that present lower valuations to help offset this risk. There are stocks we plan to aggressively buy while there are others we prefer to wait for a lower valuation. Regardless of valuation, we are listing our Top 15 with the understanding some have buy plans at lower levels while others are entering a buy zone very soon.
• Delayed market reaction to tariffs: we continue to believe tariffs pose a risk to the market and although anything could cause incoming volatility for the tech sector (pick a headline), the fact remains that it’s a tall order for earnings to overcome margin pressures and potentially slowing demand. The first quarter had the benefit of a pull forward; the upcoming quarter will likely show some sectors reporting compressed margins.

Section 1: Quality AI Stocks (Long-term buy and hold) 

There are four stocks in this section ranked from #1 to #4 

1. Nvidia: The AI Leader on the Precipice of Round Two 

Thematic: 10/10
Fundamentals: 10/10
Valuation: 5/10

Brief Overview:

You can view an interview on Fox where I discussed the puts and takes going into last quarter’s earnings report plus the new price target I/O Fund published here. The major takeaway is that Blackwell has enough ammo to push the stock into the mid-to-high $200s or a $6+ trillion market cap.

The second most important update on Nvidia this quarter is the commentary around Blackwell shipping in volume. According to our previous analysis: “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.” 

Third, Jensen Huang is calling for exponential growth in inference. You will hear our firm discuss why this market opens up an opportunity for other players such as AMD and Broadcom, yet I want to make sure that comment is not lost in interpretation as its also quite bullish for Nvidia. 

During the earnings call, 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.”  

He later also stated: 

“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.” 

Overall Revenue Growth: 

Last quarter was mired by the loss of China revenue, yet the company still managed to report 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.  

AI Segment Revenue Growth: 

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. This makes sense considering they are in-between GPU generations. 

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.” 

Earnings: 

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. 

Margins: 

• 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. 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. 

Cash: 

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. OCF margin was 62.2%, up 20 points QoQ and more than 3 points YoY. 

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. 

Valuation: 

Nvidia trades at a 20 forward PS with its minimum sales ratio at 10 and maximum around 30. Therefore, the stock is in the mid-range. The stock trades at a 38 forward PE ratio, which is also right in the middle of its trading history, seeing a minimum of 20 and a maximum of 48 in recent years.  

Where the edge in Nvidia’s valuation lies is the sudden release of Blackwell Ultra following Blackwell. This should create a new, upward trajectory in revenue growth (if we assume supply chains cooperate) since there will be a historic, back-to-back release in two monumental GPU generations. To put it another way, Blackwell’s delay caused a year of flat price action but given Nvidia continued to develop its next generation Blackwell Ultra during that delay, probability favors us seeing a $6 trillion market cap sometime next year. 

Notable Risks: 

Perhaps a $6 trillion market cap sounds fancy yet there will be higher returns in choice Nvidia suppliers as the stock is already at $4 trillion. The risks to Nvidia are low, yet there is opportunity with a quality stock especially when there are many beneficiaries a bit further down the supply chain that will see hypergrowth for Blackwell and Blackwell Ultra. 

2. TSM: The Stock with More Pricing Power than Even Nvidia 

I try to not use the word “moat” too loosely, yet TSM is deserving of this recognition for its deep IP and market lead. TSMC continues to deepen its moat with advanced nodes, such as N2 and A16. The company already powers tens of trillions in market cap on the stock market when you consider Apple, Nvidia, Broadcom, Amazon, AMD and Google are customers of TSMC. Essentially, all mega cap stocks have an AI strategy spanning merchant GPUs and custom silicon, and of course, software – yet the common denominator to these strategies is they all funnel into TSMC. 

The most advanced node shipping today is the 3nm, offering 15% better performance than the 5nm process when power level and transistors are equal. The die sizes are an estimated 42% smaller than the 5nm and TSMC also states the 3nm process can lower power consumption by as much as 30%.   

Power efficiency is a major advantage, helping to deepen TSMC’s moat. Samsung was first to introduce 3nm process chips in 2022 yet has not been as competitive on yield and power efficiency at a roughly 10% to 20% difference compared to TSMC. The moat is visibly seen in TSM’s pricing power with the dominant foundry charging 25% more for its 3nm process compared to its 5nm process, and customers are willing to forego Samsung to pay the higher pricing.   

Last year, companies such as Apple, Nvidia, AMD and Intel committed to working with TSMC for its 3nm process, and eventually Google and Qualcomm left Samsung “after careful consideration” to also secure a partnership with TSMC.   

This was an important moment for TSMC to complete its near-monopoly in advanced nodes as Google had been outsourcing its Tensor processors to Samsung’s foundry for four generations, before moving to TSMC for the fifth generation. Qualcomm also switched to TSMC from Samsung for the Snapdragon 8 Gen 4 series.  

To attract these large customers with different end markets, TSMC offers a few 3nm processes, such as the N3E, N3P and N3X. This allows a company like Apple to customize the 3nm chips differently than AI chips for hyperscalers. N3E is the baseline for IP design with 18% increased performance and 34% power reduction, N3P has higher performance and lower power consumption, whereas the N3X will offer high-performance computing very high performance but with higher power leakage.  

To illustrate the near monopoly that TSMC has over other foundries, consider that its market share stands at 67.1%, up 2.4% QoQ in Q4. Meanwhile, second-place Samsung was at 8.1% down from 9.1% for a lead of 59 points.   

When comparing revenue, TSMC reported $26.85 billion in Q4 for a 14.1% increase compared to Samsung’s $3.26 billion, which declined 100 basis points to 8.1%.  The most recent quarter, TSMC furthered the lead with $30.7 billion in revenue. 

Overall Revenue Growth: 

TSMC offers monthly revenue reports, providing a high level of visibility into the chipmaker’s growth. For example, May revenue rose 39.6% YoY to NT$320.52 billion (~US$10.7 billion), while June revenue rose 26.9% YoY to NT$263.71 billion (~US$9.0 billion). For the first half of the year, revenue rose nearly 40% YoY to NT$1,773.05 billion (~US$55.6 billion). 

Q2 revenue also outperformed the company’s guidance of $28.4 – $29.2 billion, rising 44.4% YoY to $30.07 billion, driven by AI and HPC products with some FX tailwinds. Q3 is expected to remain strong with 37.8% YoY growth to $32.4 billion at midpoint.  

Regardless of which way you dice it, TSMC is guiding for above industry growth, updating its 2025  guidance in the most recent quarter from mid-20% YoY growth to close to 30% YoY growth. 

Of this, AI accelerator revenue is expected to double in 2025 and management also forecasts AI to grow at a mid-40% CAGR for five years from 2024: “Based on our planning framework, we are confident that our revenue growth from AI accelerators will approach a mid-40s percentage CAGR for the next five years period starting from 2024.” 

AI Segment Revenue Growth: 

TSMC continues to ride AI accelerator tailwinds, evident in its rising HPC revenue and mix. HPC revenue continued to accelerate in Q2, now reaching $18 billion, marking its largest QoQ increase of nearly $3 billion. HPC accounted for 60% of TSMC’s revenue, expanding slightly from 59% of revenue last quarter. Management stated that they are continuing to observe robust AI-related demand from customers with no change in behavior, despite lingering tariff-related concerns. 

In the latest quarter, advanced nodes below 7nm drove 74% of wafer revenue with 3nm contributing 24% of revenue and 5nm representing 36% of revenue. Nvidia is not on the 3nm process yet for its Blackwell shipments, thus 5nm is outsized in terms of its market share. 

Earnings: 

TSMC delivered record profit in Q2, rising 61% YoY to NT$398.3 billion, or ~$12.8 billion. Adjusted EPS of $2.47 beat estimates for $2.31 and increased nearly 67% YoY, accelerating from recent growth in the 50% range. This EPS growth also reflects TSMC’s operating leverage, outpacing revenue growth by 23 points.  

For Q3, EPS growth is expected to increase 27% to $2.46, before decelerating rather sharply to barely in the double-digits by Q4 as it begins to lap these more difficult 50% growth comps.  

For 2025, adjusted EPS is expected to increase 35.2% YoY to $9.52, up from 31.5% growth two months ago. Growth is forecast to decelerate to 14.4% in FY26 to $10.89.  

Margins: 

Similar to Nvidia and Broadcom, TSM has excellent margins: 

• Gross margin was 58.6% in Q2, at the high end of the guided range for 57% to 59%. Gross margin declined sequentially from 58.8%, with a 2.2 point headwind from FX and a 1 point headwind ramping overseas fabs offset by higher capacity utilization. 
• Operating margin was 49.6%, increasing 1.1 points sequentially from operating leverage, and above guidance for 47% to 49%. Operating margin was up more than 7 points YoY. 
• Net margin was 42.7%, down slightly from 43.1% in the prior quarter but up nearly 6 points YoY.

Over the next five years, management sees the dilutive impact from ramping its overseas fabs widening, projecting it to start at 2-3% each year in the early ramp stages before widening to 3-4% each year. Despite this, TSMC remains confident in its ability to keep long-term gross margins at 53% or higher.   

Cash: 

Free cash flow was $6.5 billion in Q2 for a 21.7% margin, down from a 35.1% margin in Q1 and a 25.5% margin in the year ago quarter. This is at the lower end of the typical range for TSMC, which tends to track between 20% to 30%.

Valuation: 

TSM is trading at the high end of the range on the bottom line at 24 forward PE ratio, with its highest being 30 over the past year before it saw a sharp adjustment to 15 forward PE Ratio, which marked a bottom. Forward PE Ratio of 20 is mid-range and more comfortable for this stock. 

On the top line, TSM is trading at 10 forward PS with 12 marking a top over the past year and 6 marking a bottom. This leaves very limited upside. 

Risks: 

Valuation tops the list as the primary risk given the stock is rather insulated from competition, and is also insulated from any tariff drama as it has the best pricing power in the industry. Onshoring its fabs with continued stimulus helps to create a more durable stock. 

3. Broadcom: Quietly Reached $1 Trillion, Will Displace the FAANGs 

Thematic: 10/10
Fundamentals: 10/10
Valuation: 1/10 

Similar to Nvidia and TSM, Broadcom will likely remain on the Top 15 list for years to come and will at times outrank Nvidia. 

Broadcom stock joined Nvidia, Alphabet and Microsoft in calling out surging AI inference demand, noting that this rapid growth could drive increased demand for custom silicon in the second half of 2026, and with it, higher AI revenue.  

Despite an in-line print and guide, Broadcom’s AI revenue is tracking above Street estimates for next year towards the $30 billion mark, up nearly 150% in two years, with growing tailwinds from inference and networking as clusters increase in size. AI revenue growth is also tracking Broadcom’s addressable market forecast of a 60% CAGR.   

Broadcom is cementing itself as the clear second in AI with key ingredients for success as inference demand rises. However, its premium valuation to Nvidia looks to be pricing in above-expected AI revenue growth into 2027, likely closer to a 70%+ CAGR, as there exists a $160 billion gap in AI-driven revenue between the two. 

HSBC estimates that Broadcom’s ASIC revenue could rise as much as 128% YoY next year to $28.3 billion, fueled by Google’s TPU ramp driving a 92% YoY increase in ASIC ASPs. – xAI Beth_Kindig xAI Beth_Kindig 

Overall Revenue Growth: 

Broadcom reported $15 billion in revenue versus $14.99 billion expected, up 20%. Management expects about $15.8 billion in third-quarter revenue, versus $15.7 billion. 

AI’s strength is masking persisting softness in non-AI revenue, which could continue to be pressured due to Broadcom’s high consumer exposure. Broadcom noted that non-AI revenue “is close to the bottom” but it “has been relatively slow to recover” with revenue down (5%) YoY to $4 billion in Q2.   

AI Segment Growth: 

Broadcom has cemented itself in second place in AI revenue as it closes in on $20 billion this fiscal year in AI revenue — with a line of sight toward $30 billion by the end of fiscal 2026. AI revenue accounted for more than 50% of Semiconductor revenue for two quarters in a row and nearly 32% of total revenue in Q2.  

AI semiconductor revenue rose 46% YoY to $4.4 billion, in line with management’s guidance. Although this was a deceleration from 77% YoY growth in Q1, Broadcom forecast $5.1 billion in AI revenue in Q3, pointing to a rebound to 60% YoY growth – marking ten consecutive quarters of growth.   

In the current quarter, the 46% AI semiconductor growth was driven by networking, which was up 170% YoY and represented 40% of AI revenue. In the opening remarks, the CEO stated the following regarding this outsized growth: “As a standard-based open protocol, Ethernet enables one single fabric for both scale out and scale up and remains the preferred choice by our hyperscale customers. Our networking portfolio of Tomahawk switches, Jericho routers and NICs is what's driving our success within AI clusters in hyperscalers.” 

CEO Hock Tan said that Broadcom’s hyperscale clients are “doubling down on inference in order to monetize their platforms,” and as a result, he expects Broadcom could “actually see an acceleration of XPU demand into the back half of 2026 to meet urgent demand for inference on top of the demand we have indicated from training.” This new dynamic is what is driving Tan’s confidence in stronger growth in FY26, saying that he now anticipates the “fiscal 2025 growth rate of AI semiconductor revenue to sustain into fiscal 2026.”  

This commentary plus potential demand acceleration in 2H 26 suggests that Broadcom has visibility into $30 billion AI revenue potential next year. Broadcom has not provided a full FY25 AI revenue guide yet, but it is on track to deliver approximately $19 to $20 billion in AI revenue in FY25, up ~60% YoY assuming 60% growth to $5.9 billion in Q4.   

Maintaining 60% growth through FY26 would project AI revenue to $30 to $32 billion. This trajectory indicates Broadcom is likely driving AI revenue ahead of expectations over the next four to six quarters, with Morgan Stanley saying that $26 to $30 billion in AI revenue is “higher than what is in Street models.” Evercore is modeling 58% AI revenue growth in FY25 and 50% in FY26, implying $28.9 billion.   

Earnings: 

Broadcom reported $1.58 adjusted versus $1.56 expected. 

Margins: 

Broadcom has excellent margins especially given its scale as primarily a hardware company: 

GAAP Gross Margin: 68% and adjusted gross margin of 79.4%  

GAAP Operating Margin of 38.8% and Adjusted operating margin of 65.3% 

Net Margin of 33% and Adjusted net margin of 51.9% for adjusted net profit of $7.8 billion.

Cash: 

Broadcom has seen expanding cash flows with operating cash flow margin of 43.7% up from 36.7% last year. Free cash flow of 42.7% compares to 36.7% last year for free cash flow of $6.4 billion. The company had $9.48  billion at quarter-end 

Valuation: 

Broadcom has a cringe-worthy valuation at 42 forward PE ratio and 21 forward PS. You can argue it’s worth as much as Nvidia given its AI growth, yet there is a whopping $160B delta between Nvidia and Broadcom’s AI sales. Broadcom is traditionally a 6 forward PS company and a 2 current PS ratio. Keep in mind, Broadcom supplied Apple during the mobile boom and outperformed most FAANGs, therefore, even with being in the center of a microtrend the stock is overvalued according to most standards. 

Notable Risks: 

The valuation on Broadcom stands out as one of the most egregious on our list, second only to Palantir and perhaps tied with Cloudflare. Some investors buy stretched stocks successfully for a period of time and believe they’ve outsmarted the market; however, I do not see these valuations sustaining, and in fact, these three point more toward a bubble of sorts.  

You can read more in the analysis: “This AI Stock is Set to Surge from Inference Demand” on the free side including a follow-up with information on the premium side.

4. AMD: The Dark Horse in our Stable; Patience is a Virtue 

Last month, AMD introduced its Instinct MI350 series GPUs, including MI355X with up to 4X performance over the previous MI300X generation and up to 40% more tokens per dollar compared to Nvidia’s B200 accelerators. The company also previewed its Helios rack-scale server architecture featuring the MI400s for 2026 deployments.  

According to Tom's Hardware AMD is claiming the eight-GPU MI355X system is 1.3X faster than Nvidia’s DGX GB200s systems with Llama 3.1 and up to 1.2X faster than the B200 HGX systems in inference for DeepSeek R1 with equivalent performance as Llama 3.1 when tested at FP4. 

Perhaps what matters most to investors is what the GPUs will cost. The team has been digging around and found the following this week: 

HSBC last week upgraded AMD to Buy and doubled its price target to $200, saying that it expects the MI355 GPUs [and MI400s] to command a $25K ASP, up materially from prior assumptions for $15K, potentially driving upside to FY26 AI revenue – xAI Beth_Kindig xAI Beth_Kindig 

Overall Revenue Growth: 

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.  

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, although as of now, this is expected to be the peak growth quarter for the year.  

On one hand, it is quite impressive AMD can overcome the impact from China last quarter 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. 

Arguably, the news that Nvidia can resume sales of H20s may be bigger news from AMD if we assume the $1.5B impact is removed from AI revenue, as it's 30% of AI revenue as it stands for this company versus less than 10% for Nvidia (at $15B versus somewhere around $150B for rest of year in AI revenue). 

However, if we look at the facts on the table, AMD is a weaker stock overall than Nvidia, TSM and Broadcom as it stands today. It is my speculation this changes and AMD shows its full potential in 2026-2027 aligned with the inference market and the shift in priority where Big Tech becomes more cost conscious. 

AI Segment Growth: 

Data Center revenue grew 57% YoY but declined (5%) QoQ to $3.67 billion, driven by sales of EPYC CPUs and Instinct GPUs, 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.  

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. 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.” 

To put it plainly, on the AI accelerator front, this will be the first time that AMD will overlap Nvidia in terms of benchmarks on GPUs. Please do note, the amount of time that AMD’s current generation of GPUs and Nvidia’s GPUs overlap will be brief – and will only be at the single GPU and 8-GPU system level. AMD was originally expected to ship the MI350s at the end of this year yet are moving the shipments up – which fits with AMD’s tradition of underpromising and overdelivering.   

However, the accomplishment is noteworthy as it’s setting the tone as the inference market begins to ramp. In other words, AMD ceded the training market to Nvidia – but I do not expect that to be the case with the inference market.  

When Blackwell Ultra ships, the B300s will offer FP4 TFLOP/s that is 1.3X faster than AMD’s current MI350X and MI355X. With that said, because AMD has prioritized competing on memory — its bandwidth and capacity is expected to be on par with Blackwell Ultra. 

The market is forward-looking, which means investors should be too. AMD is closing the gap on single GPUs and 8-GPU systems, yet the MI400s will mark a pivotal moment as AMD will attempt to compete on rack-scale systems with Helios, its 72-GPU systems. If things go as planned, AMD will be competitive with Nvidia on GPU, memory and interconnect performance — while potentially taking the lead on memory capacity and bandwidth. 

Earnings: 

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.” 

Margins: 

AMD’s margins are not nearly as strong as Nvidia or Broadcom’s, and this is ultimately reflected in the valuation. However, should the HSBC analyst quoted above be correct (and general consensus that AMD has some kind of pricing power), the margins will improve over time as GPU sales ramp at higher ASPs. 

• 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.

Cash: 

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. 

Expect these to improve once the AI story ramps. 

Valuation: 

AMD is trading mid-range at forward PS of 7. The stock can trade as low as 4 or high as 12. The stock is trading at a 40 forward PE Ratio, which is also mid-range given it’s traded as low as 25 and as high as 55 in the past year. 

Notable Risks: 

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

My current prediction is that AMD will offer higher stock returns than Nvidia by 2028, which you can read more about here in the analysis: AMD vs Nvidia: The AI Stock that Could Win by 2028. 

Section 2: AI Hardware Plays (Medium-term hold) 

This section has six stocks ranked #1 to #6 with two honorable mentions 

1. Astera Labs: AI Networking Pureplay Serving Two Enormous TAMs (total addressable markets)

Thematic: 10/10
Fundamentals: 10/10
Valuation: 5/10 

Astera Labs reported an impressive beat and raise in Q1, with GAAP margins strengthening as revenue continues to grow at a triple-digit rate. On top of this impressive beat, the growth story for Astera Labs is only beginning. The commentary regarding their product diversification and higher dollar content going into the second half of the year was quite clear as to the growing opportunity this company is poised to capture.

Primarily, Astera offers unique positioning that allows them to capture both the merchant GPU market and custom silicon market across its three products lines Astera, Taurus and Scorpio. This widens the TAM and allows for steady revenue growth despite hiccups or delays from a single AI system (which we’ve seen plenty of disruption recently across those with high customer concentration with Nvidia).

In addition to being a strong custom silicon vendor for hyperscalers, Astera will participate in Blackwell once it (finally) ships in volume as the company offers PCIe scale-out and Ethernet scale-up. Their new products Scorpio P-Series and Scorpio X-Series are fabric switches that are particularly well-suited for the immense demand that is expected for customization of racks as architectures scale-up in the second half of the year and beyond.

Notably, Aries PCIe retimers and Taurus Ethernet smart cable modules are driving the revenue today with the Scorpio P-Series beginning to ramp. However, there are many catalysts on the horizon for Astera which adds to the trifecta of a strong growth story:  

• Serving both ASICs and GPUs greatly increases TAM and diversifies revenue; rare in the AI systems ecosystem  
• Preparing to serve the scale-out demand with increasing higher dollar content; specifically on Scorpio but also on Aries  
• Offering strong cross-sell opportunities as it aims to be the first to solve unique challenges for both GPU and custom silicon utilization – and is solving these issues in a way that avoids vendor lock-in for the large hyperscalers who want a mix of both custom silicon and merchant GPUs (Nvidia or AMD).

Astera Labs Fundamentals Update: 

Overall Revenue Growth:  

Astera Labs reported an impressive 144.3% YoY revenue growth in Q1 to $159.4 million, topping analyst estimates for $151.5 million in the quarter.  

For Q2, Astera delivered a solid raise at $170 to $175 million, more than 7% ahead of the $160 million estimate. This points to YoY growth of 124.5% at midpoint, ahead of estimates for just 108% YoY. What’s impressive about this ramp is that Astera is guiding to deliver this 125% growth in Q2 against its 619% YoY comp (against a small base), for its seventh-straight triple-digit growth quarter. 

Astera has seen revenue growth decelerate over the past few quarters, with growth expected to continue decelerating as Astera laps its rapid ramp quarters. What’s impressive about this ramp is that Astera is guiding to deliver this 125% growth in Q2 against its 619% YoY comp (against a small base), for its seventh-straight triple-digit growth quarter.   

For the full-year, Astera did not provide a guide, though estimates heading into Q1’s report were pointing to 70.4% YoY growth to $675.2 million in revenue. However, given that Q1 and Q2 have combined for a $20 million beat compared to current estimates, it’s likely that full-year revenue estimates will likely move closer to (or above) $700 million in the coming days. This would correspond to YoY growth of nearly 77%. 

Key AI Segment: 

The Scorpio P-Series is shipping this quarter and are qualified for Nvidia systems, yet the X-Series will ship in H2 with a bigger opportunity for custom silicon clusters. The Scorpio P-Series is a small chip that connects the CPU, GPU, NIC and NVMe storage. Rather than building a large switch, the company built a smaller device that is more efficient for high-speed signals to help feed GPUs with data. The fewer ports and smaller switch decrease complexity in a bid to compete against Broadcom with twice the lane count. 

• Inventories rose 18.2% QoQ to $51.1 million, likely driven by the ramp of Astera’s Aries 6 and Scorpio P-series products.  
• Accounts receivable surged 100.5% QoQ to $69.8 million, driven by Astera’s largest customers.  
• Astera’s receivable balance from its top customer in the quarter rose 363% QoQ to $20.9 million, while its balances from its second and third largest customers rose 75% and 90% QoQ to $14.7 million each.  
• Days sales outstanding also increased from 20-ish days in the past to 40 days this quarter. This is likely foreshadowing Astera is preparing for larger shipments in the next 1-2 quarters 

Latest report can be found here: Astera Labs: Product Differentiation is Set to Soar in H2 and Beyond 

Earnings: 

Astera delivered an impressive 350% beat to GAAP EPS estimates in Q1, driven by its operating margin expansion, while forecasting EPS above estimates for Q2.  

Adjusted EPS of $0.33 beat estimates by $0.05, representing YoY growth of 230%.  

GAAP EPS of $0.18 beat estimates by $0.14, improving from $0.14 in Q4 and marking its second straight quarter of GAAP profitability on the bottom line.  

For Q3, Astera guided for adjusted EPS between $0.32 and $0.33, approximately flat QoQ but up 150% YoY at midpoint. 

Margins: 

Gross Margin = 75%
GAAP operating margin = 7%
Net margin = 20% 

Astera is guiding for margins to remain strong in Q2, with GAAP operating margin expanding. Gross margin was guided at 74% once again, while GAAP operating margin is forecast at 7.9%, up 0.8 points sequentially. Adjusted operating margin is forecast to contract 2.6 points QoQ to 31.1%.   

Cash: 

Operating cash flow was $10.5 million for a 6.6% margin, expanding slightly from a 5.6% margin in the year ago quarter.  

Free cash flow was $6.0 million, for a 3.7% margin, improving from a 0.3% margin in the year ago quarter.

Valuation: 

Astera’s valuation is trading mid-range of its historic trends at 21 forward PS and could trade as low as 40% lower from here or could have up to a 200% upward move from the current valuation. There is no guidance from valuation on where the stock will go next whereas others are more visibly overstretched.

Notable Risks: 

Coming up on tough comps, high SBC weighs on operating margin but gross margin is one of the highest in AI semis. Cash has a weak margin, but scale will likely resolve any cash flow margin issues

2. Credo: AEC Networking Tailwinds

Thematic: 10/10
Fundamentals: 10/10
Valuation: 5/10 

Credo continues to report outstanding revenue growth, up 180% YoY in Q4 and guided to accelerate further in Q1 as management touted growing traction with hyperscalers, new design wins in qualification and strong customer forecasts driving sustained AEC growth.

GAAP margins have expanded significantly down the line with operating margin quickly approaching 20% as signs of operating leverage emerge. Cash flow margins were robust in Q4 on strong collections, while inventories surged over the past two quarters, indicating that Credo’s hypergrowth phase will likely continue for a few quarters.

Management hinted that a new DSP deal with a hyperscaler represents its largest revenue opportunity to date, with two new hyperscaler customers ramping up in FY26. Backed by these arising revenue streams, Credo guided for revenue growth of 85%+ next year, or over $800 million.

Latest report can be found here: Credo Reports 180% YoY Growth and 20% GAAP Operating Margin.

Overall Revenue Growth:  

Note: Upcoming earnings is Q1 Fiscal Year 2026

Credo reported 179.7% YoY and 25.9% QoQ growth to $170.0 million in revenue in Q4, beating the consensus estimate for $159.6 million. Revenue growth has sharply accelerated throughout the fiscal year, up from the 60% to 70% level in 1H to high triple digits in 2H.

For Q1, Credo guided to $185 million to $195 million in revenue, pointing to a nearly 40 point sequential acceleration to 218% YoY growth at midpoint. This was also 17% above consensus estimates for $162.4 million heading into the report. Revenue growth estimates have moved sharply higher since February. Q1’s growth estimate just four months ago was 133.4%, and is now nearly 85 points higher, while Q2’s growth estimate has risen 74 points from 100.9%.

For fiscal 2025, Credo reported a 122 point acceleration to 126.3% YoY growth, with revenue of $436.8 million. For fiscal 2026, Credo guided for revenue to exceed $800 million, for growth in excess of 85% YoY, while analysts are now expecting $804.1 million.

Key AI Segment:

Credo reported a significant 80-point sequential acceleration in product revenue growth to 303.3% YoY in Q4, with revenue of $164.5 million. Credo said AEC products are gaining traction in rack-to-rack distances up to 7 meters, with xAI being the most successful customer at that distance with a second customer ramping this year.

For optics, Credo noted that it reached its revenue targets and ended FY on strong momentum with an expanding customer base. As previously mentioned, Credo is targeting 100%+ optics revenue growth in FY26. Moving forward, Credo expects to diversify its customer base, eyeing up to five >10% customers in FY26, up from three in FY25. Credo’s largest customer, rumored to be Microsoft, accounted for 61% of revenue in Q4.

Earnings:

Credo’s fiscal 2025 adjusted EPS of $0.70 increased from $0.08 in the prior year. Credo generated the bulk of this EPS in H2 as revenue and margins surged.

Adjusted EPS of $0.35 in Q4 beat estimates by 29.6%, representing growth of 400% YoY. Growth is forecast to accelerate to 782% in Q1 to $0.35 on a low comp, before slowing to 17% YoY by Q4 FY26 against a much tougher comp.

Margins: 

Credo is GAAP Profitable.

• Gross Margin = 60% 
• GAAP OM = 8.5%  
• GAAP Net Margin = 12%

Cash:  

The company has expanding cash flows.

• OCF margin was 34% in the quarter, compared to 3.1% last quarter and 6.8% a year ago. Operating cash flow was $57.8 million up from $53 million QoQ. 
• Free cash flow was $54.2 million in Q4, for a 31.9% margin.  
• For FY25, free cash flow was $29 million, for a 6.6% margin, down from an 8.9% margin last year on higher capex.  

Valuation:

Credo’s valuation is trading mid-range of its historic trends at 21 forward PS and could trade as low as 40% lower from here or has another 50% upward move. There is no guidance from valuation on where the stock will go next whereas others are more visibly overstretched.

Notable Risks:

Coming up on tough comps, 75% exposure to Hong Kong, copper recently undercame new tariff laws and where Credo sources copper is unlikely to be of public record. GAAP OM could be better but gross margin is impressive for AI semi 

3. Supermicro: Key Nvidia Supplier Sitting in Plain Sight 

Thematic: 10/10
Fundamentals: 4/10
Valuation: 10/10

Super Micro, also known as Supermicro, is sandwiched in the AI trend between hyperscalers and major chip design companies. The company is a server maker that started off by making motherboards and other components before it began making complete systems. The company is unique in that it sits between being an equipment manufacturer (Dell, HP) and being a design manufacturer (Foxconn). 

To give you an idea as to the company’s sudden ascent off the Hopper generation of GPUs from Nvidia, consider that SMCI had revenue of $2.5B in 2021 and reported $22 billion in the fiscal year ending in June – or about 9X in four years. Given AI servers are increasing in complexity, and will require thermal management including direct liquid cooling, this is a baseline of what SMCI will be capable of over the next few years. There may not be the sudden 9X trajectory we saw off small numbers, but there will likely be ample growth.  

The company is not without risks. There was a high-profile accounting issues recently, and Supermicro also struggles with cash (potentially diluting shareholders down the line) and has slim operating margins.  

I’m calling this one “sitting in plain sight” because its valuation is low relative to the opportunity. It's also apparent the market has overlooked not only Supermicro but is overlooking Nvidia’s Blackwell since it took much longer to arrive than originally anticipated. 

Overall Revenue Growth: 

Fiscal Q3 net sales were $4.6 billion, up ~19% year over year. However, this was 19% lower than the prior quarter and below management’s forecast due to delayed customer commitments (some clients postponed orders while awaiting new AI platforms) 

AI Segment Revenue Growth: 

AI-focused products drove the majority of sales. Management noted that AI GPU platforms accounted for over 70% of Q3 revenue. Supermicro achieved volume shipments of new AI server platforms. 

Earnings: 

Super Micro's EPS for the most recent quarter (Q3 FY2025) was $0.31. This figure represents the non-GAAP diluted net income per share. The company also reported a GAAP EPS of $0.17 

Margins: 

Profitability declined sharply. Gross margin fell to ~9.6% (versus ~15.5% in Q3 last year). Pressured by higher inventory reserves and lower volumes 

• Gross Margin (GAAP): 9.6%, down from 11.8% in the prior quarter and 15.5% year-over-year   
• GAAP operating expenses were $293 million, generating GAAP operating income of approximately $147 million (net income before taxes and interest), which equates to roughly 3.2% operating margin on $4.60 billion revenue 
• Net income of $109 million on $4.60 billion in sales yields a 2.4% net margin 

Cash: 

The company generated $627 million in operating cash flow during the quarter. It ended Q3 with $2.54 billion in cash (against $2.49 billion in debt), yielding a slight net cash position of about $44 million 

Valuation: 

Valuation is what makes this stock attractive. I believe the last earnings report was a “red herring” of sorts, meaning it does not represent the bull story, which is the incoming shipments from Blackwell. This means the fundamentals were depressed last quarter, further depressing the valuation.  

Trading at 1 fwd PS is worth the risk, in my opinion. This stock should always have a trailing stop due to weak margins and weak cash (overall weak FA profile). However, the growth story should also not be ignored. Look for this stock to comfortably go to 2-3 fwd PS on the upper end, and as low as 0.5 fwd PS which would be a layered buy in addition to 1 fwd PS. Overall, I expect fundamentals and valuation to resume Hopper-generation status sometime in the next 6 months – which means max’ing out between 2-3 fwd PS and GAAP operating margins that are in the 10%+ range up from 3% operating margin now.

Notable Risks: 

Supermicro has very poor fundamentals as it must raise cash to scale. Being a commoditized AI server/hardware company, the margins are slim to none. It’s not clear if domesticating supply chains will help SMCI’s margins (it could). SMCI offered a red herring type earnings report as the company’s results got slammed by previous generation GPUs (Hopper, Chinese servers) yet will likely do quite well from incoming Blackwell.  

Note: there is no recent analysis on Supermicro as we are looking to add this stock to our portfolio after taking a pause for about a year on the stock. You can find our previous thesis from 2023 on Supermicro here.on Supermicro here.

4. Dell: Strong Initial Sales from Blackwell with 612% Growth in Backlog 

Thematic: 8/10
Fundamentals: 7/10
Valuation: 5/10 

There are a few key catalysts to keep an eye on for Dell’s growth story. First off, will Dell move from primarily enterprise servers to also supply hyperscalers with AI servers? The current margin profile suggests this may already be happening as Tier 1 hyperscalers demand lower margins than enterprise servers. Meta, xAI and Coreweave are confirmed customers; the question is if the Big 3 follow. 

AI factories are a major growth story for Dell – defined as complete systems that bundle PowerEdge AI servers, high-performance storage, intelligent networking, and integrated software/services. There is higher dollar content and higher margins on the storage and networking side for Dell as NVIDIA’s Blackwell GPUs and Dell’s cooling and integration expertise are combined to offer on-site (on-premise) AI servers. 

Dell shows a lower thematic rating than peer Supermicro because it has a large Client segment. Dell has a higher rating on fundamentals due to its strong cash flows (a pain point for SMCI) and for its reliable management team, who are experienced at running a profitable company at scale. 

Overall Revenue: 

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. 

AI Segment Revenue: 

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. 

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 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.  

Earnings: 

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 of $7.85 for 23% growth. 

Margins: 

GM = 21.1%
GAAP Operating Margin = 5%
Net Margin = 4.1%

Margins are decel'ing which is an issue since AI servers weigh on margins. However, management expects to see ISG improve by $0.5 billion in operating income this quarter on an additional $5.3 billion in revenue – meaning management is sensitive to the importance of operating efficiency.  

Cash flow: 

Dell is reporting strong cash flow growth – setting itself apart from Supermicro: 

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. 

Valuation:

Dell trades at 0.82 fwd PS and 13.4 fwd PE Ratio. This is at the medium-range of the company’s recent stock history since the AI boom began.

Notable Risks:

Dell is exposed to lower-performing Client markets, which equal higher revenue than its AI segment (ISG). Notably, ISG will likely overtake Client sometime this year in total revenue. Dell’s margins are very low  

5. Amphenol: Leading AI Supplier with 134% Growth 

Amphenol plays an important role in Nvidia’s NVL72 racks that are shipping now, as the company supplies high-speed copper cables and interconnects. Nvidia’s choice to use copper cabling over optical transceivers resulted in both lower costs and power savings for the NVL72, providing a growth opportunity for Amphenol. Specifically, Amphenol's 12VHPWR PCIe 5.0 power connector was able to eliminate the need for three power connectors with a single power connector.  

Unlike other GPU-agnostic players who can realize growth and tailwinds as long as AI capex remains strong, Amphenol is more closely correlated to Nvidia’s NVL72, and its opportunity thus arises squarely from the ramp of the platform and overall shipment volumes. Signs that Nvidia is now quickly ramping NVL72 shipments far ahead of analyst expectations support more growth ahead for Amphenol in the upcoming quarters.   

Amphenol’s dollar content per NVL72 rack is expected to be quite high — Evercore ISI estimated last year that Amphenol’s BOM content was in the range of $100,000 to $120,000 per NVL72, or around 3-4% of the server’s value. This represents a fairly large opportunity for Amphenol, especially if Nvidia is scaling shipments to a much larger degree than currently anticipated. 

However, Amphenol remains quite highly exposed to slower-moving sectors such as the industrial and automotive sectors, and cash to debt is upside-down due to its focus on M&A to complement growth. 

Overall Revenue: 

Accelerating AI demand drove Q1’s outperformance, with revenue coming in “much stronger than expected” at 47.7% YoY to $4.81 billion in revenue, accelerating 18 points sequentially.  

Organic revenue growth was 33%, accelerating 13 points sequentially. Q2’s growth is now expected to be 38.8%, more than 21 points higher than January’s 17.5% estimate.  

Q3’s growth is expected to be 27.0%, approximately 16.5 points higher than in January.  

Q4’s growth is expected to be 21.5%, nearly 10 points higher than in January. 

AI Related Revenue: 

134% in Datacom IT. Amphenol’s orders have grown at 58% YoY for a second consecutive quarter, with growth accelerating sharply over the last few quarters. Putting this together, the nature of Q1’s beat and the strength in datacom at 134% YoY has driven estimates for the next three quarters up by more than $2 billion combined. 

Earnings: 

Amphenol reported a quite large 21.2% beat on adjusted EPS in Q1, posting $0.63 versus the $0.52 estimate. This represented growth of 57.5% YoY, accelerating from 34.1% growth last quarter.  

However, similar to revenue, growth is currently expected to peak in Q1 and decelerate after, though remaining quite strong. For 2025, Amphenol is expected to report 40.8% growth to $2.66 in adjusted EPS, with growth forecast to slow dramatically to the 9% range for both 2026 and 2027, in an indication that 2025 is expected to be the sole strong growth year for the company due to Blackwell’s initial ramp phase 

Margins: 

Gross Margin = 34%
Operating margin = 21.3%
Net Margin of 15.3%  

Amphenol’s margins have been relatively stable over the past four quarters, but the strong growth and increasing contribution from Communications, which is accretive to operating margin, provides some margin tailwinds. 

Cash: 

Operating cash flow was $764.9 million for a 15.9% margin, down from 18.4% margin in the year ago quarter. OCF margin over the past three years has hovered between the 17% to 20% range, with Q1’s cash flow slightly weaker.  

Free cash flow was $580.4 million for a 12.1% margin, down from a 15.5% margin in the year ago quarter. Management expects to have elevated capex again in Q2 to support datacom growth, weighing on FCF. 

Valuation: 

Amphenol’s valuation is stretched at 6 forward PS and 37 forward PE Ratio, some of the highest in the company’s history. 

Risks: 

Valuation is the primary risk as the company has a strong AI story yet overall revenue is low given the other, low-growth segments. 

Read more in our analysis Amphenol Reports 134% Growth in Datacom IT SegmentAmphenol Reports 134% Growth in Datacom IT Segment 

6. Coherent: Lesser-Known Supplier Reporting Inflection in AI-Related Revenue 

Coherent is reporting Q4 fiscal year 2025 this quarter 

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. 

Overall Revenue: 

Coherent reported a double beat in Q3 with revenue growth of 24% and EPS growth of 141% YoY. 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. 

AI Segment Revenue Growth: 

The top line beat was driven by Data Center and Communications revenue growing 46% YoY. Networking revenue increased 46% YoY and 10% QoQ to $897 million, or ~60% of revenue.  

Notably, growth continues to decelerate from Q1’s 61% print, yet 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. 

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. 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.”  

Earnings: 

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. 

Margins: 

• Q3 GAAP gross margin was 35.2%, expanding nearly 5 points YoY. 
• GAAP operating margin was 4.8%, up 3 points YoY. 

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.   

Note: Coherent is expected to divest low-margin segments soon which would quickly change its margin profile.  

Per our previous writeup: 

“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.” 

Cash: 

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 

Valuation: 

Similar to Lumentum, Coherent shows room in its bottom line valuation whereas there is less room in the top line valuation. At 21 forward PE ratio, the company is trading at its lowest in two years. At a 2.3 forward PS ratio, it’s closer to the top valuation its traded at in two years at 3 – which seems to be a firm ceiling unless there is a re-rating on the AI story.  

Notable Risks: 

There are a few competitors Coherent must contend with, its lower-growth segments weigh on the stock. The margins leave a lot to be desired. 

Honorable Mentions: 

• Lesser-known supplier at inflection point, covered on Discovery tier April 29th 

We covered a lesser-known supplier that offers components for datacom transceivers and optical interconnects on April 29th. This small-cap company offers differentiated technology that has caught the attention of heavyweight NVIDIA. We’ve been patiently waiting for this company’s EML lasers for 200G to ship, enabling 800G and 1.6T bandwidths. Any progress here will continue into 2026-2027 for 400G data lanes and 3.2T bandwidths. 

Read more about our Discovery tier here. 

• Thermal Management Solutions Provider, covered on Discovery on May 15th 

We recently covered a supplier whose importance is expected to increase with each new generation of GPUs and AI accelerators. The company provides thermal management solutions, such as cold plate cooling and immersion cooling to lower the power requirements to AI systems. They also offer high density solutions such as rear door heat exchangers and coolant distribution units (CDUs).  

Direct liquid cooling systems, including hybrid versions that combine air and DLC, can result in 40% less power management space and 20% lower cooling costs. When you’re spending nearly $100 billion per year on capex like many Big Tech companies, this matters quite a bit. In addition to thermal management, this company's power solutions include uninterruptable power systems and lithium-ion battery cabinets that supply up to 1500KW and 263KW in a single cabinet.   

Read more about our Discovery tier here. 

Section 3: AI Software – Strong Fundamentals Yet Valuations are Stretched 

There are six stocks in this section ranked #1 to #6 and two honorable mentions 

AI software valuations are pointing toward a bubble within a larger, quality trend. We are simply too early for AI software to carry the valuations some are commanding and the evidence is quite clear in the financials when you compare valuations to AI hardware.  

• AI hardware segments are often growing triple-digits+ and are likely to continue to do so for some time  
• AI software segments have either dipped below 100% (with major hurdles to resume this growth) or have not surpassed 100% — and yet the valuations are in some cases Covid-era like. 

The stocks below make the list but will only make the final cut (added to the portfolio) if we can get the stocks at a reasonable valuation – which is true for the entire list, but there is nothing quite like getting a solid software stock at a reasonable valuation. That is the trade that rules all trades in the tech sector.

1. AppLovin has a Rule of 140 (not a typo) 

Thematic: 10/10
Fundamentals: 10/10
Valuation: 2/10

AppLovin easily topped revenue and EPS estimates in Q1, but more importantly, the company is setting up for an additional under-reported catalyst with its web-based ad platform expected to launch its self-serve feature and scale with a wider pool of advertisers as the year progresses.   

In addition, the company divested its App segment, which is the gaming assets portfolio, and is now a pureplay ad-tech stock. The high-growth and high-margin advertising business that ignited AppLovin’s strong returns over the past few years is now the company’s sole focus.   

You’d be hard pressed to find a stronger stock in terms of fundamentals on the market today. There is plenty of runway left for this stock should the growth of 30%+ coupled with 80%+ gross margins and nearly 40% net margin continue. Consider that EPS grew triple digits this quarter and FY2026 EPS estimates are being revised higher by an astonishing $3.50 in incremental EPS. 

Overall Revenue Growth: 

AppLovin reported 40.3% YoY revenue growth to $1.48 billion in the first quarter, beating consensus estimates by $100 million. This was AppLovin’s sixth consecutive quarter with revenue growth >35% YoY.   

Given the Apps business is being divested, AppLovin will be reporting headline growth in the 60% range that is aligned with its Ads business rather than a mix of both. Consensus revenue growth estimates are much lower and show a sharp deceleration, as these comps still take into account revenue from the Apps segment. Thus, growth rates such as 20% in Q3 do not reflect the true performance of the business.   

AI Segment Growth: 

Advertising revenue increased 70.9% YoY to $1.16 billion, slowing slightly from 91% in the year-ago quarter. Management said growth was driven by continued enhancements in its AI ad engine, as well as the full quarter impact of its web-based ad solution even coming off the seasonally high e-commerce quarter in Q4.   

For Q2, management guided Advertising revenue of $1.195 to $1.215 billion, pointing to 69.5% YoY growth at midpoint, maintaining its hypergrowth phase.    

Earnings: 

AppLovin’s business model sees a high percentage of its operating income flow through to the bottom line, driving tremendous EPS growth as margins expand.   

AppLovin reported massive 149% YoY growth in GAAP EPS to $1.67, outpacing revenue growth by more than 3x.  

Q2 EPS is now seen growing 125% YoY to $2.00, before rising to $2.16 in Q3 and exiting the year at $2.46.  For FY25, analysts estimate AppLovin will generate $7.80 in EPS, up 72.3% YoY, with FY26 EPS rising 42% to $11.80. This is more than a $3.50 increase for FY26 since February’s $8.27 estimate.   

Margins: 

Though AppLovin’s top-line growth is quite impressive, margins are where it shines, with gross margin surpassing 80% and operating margin reaching a new high. This combination of strong revenue growth and strong margins is driving exceptional operating leverage with triple-digit earnings growth. 

• Gross margin expanded 5 points sequentially and more than 9 points YoY to 81.7%. Notably, AppLovin cut its cost of revenue by nearly (9%) YoY, from $294.1 million to $272.2 million, while still driving 40% total revenue growth and 70% advertising growth. 
• Operating margin remained above 44% for a third straight quarter at 44.7%.  To put in perspective how strong these margins are, AppLovin would have a Rule of 40 score of 85% based on Palantir’s definition of revenue growth + operating margin, while Palantir had a score of 83%.   
• Net margin in Q1 was 38.8%, up more than 16 points YoY.  

However, now that the Apps business is divested, the operating margin will skyrocket to 70% range for a Rule of 140 if you assume 70% revenue growth on the Ads business and 70% operating margin. This is unheard of; I do not think we’ve seen this combination before of such high growth and such high profitability. Typically, software startups and public companies are seeking a Rule of 40 and yet AppLovin offers 100-points higher following divesture of the Apps segment.  

Cash: 

AppLovin’s cash flows are exceptional, with operating and free cash flow margins expanding to new records in Q1. Per the opening remarks: “In the first quarter, we generated $826 million in free cash flow, up a staggering 113% year-over-year. Quarter-over-quarter, our free cash flow grew 19%, representing an impressive 82% flow-through from adjusted EBITDA to free cash flow.”  

• Operating cash flow rose 112% YoY to $831.7 million for a 56% margin, expanding from a 51.1% margin in Q4 and nearly 19 points higher than 37.1% in the year ago quarter.  
• Free cash flow rose 113% YoY to $825.7 million for a 55.6% margin, expanding from 50.6% in Q4 and 36.6% in the year ago quarter. 

Valuation: 

Applovin is trading at 22 forward PS which is at the upper range for this stock, topping at 30 two times (briefly) in the past before retreating as low as 15. The PE Ratio of 40 is similar as it’s well above 3-year and 5-year medians while seeing a brief top at 60-70 before quickly retreating to a low of 27. 

Risks: 

Of the software stocks, Applovin has fewer risks than the other stocks given its valuation is in typical range. The divesting of the Apps business is bullish but results in tough comps for headline numbers. Investors will want to focus on organic growth the ads business. 

You can read more about Applovin in the analysis: “AppLovin Q1: Web-Based Catalyst 2025-2026; App Segment Divested is a Major Plus”AppLovin Q1: Web-Based Catalyst 2025-2026; App Segment Divested is a Major Plus” 

2. Oracle: The AI Software Stock No One Saw Coming 

Oracle laid out some impressive growth forecasts for fiscal 2026 earlier in June, setting the stage for a significant acceleration in its cloud segment backed by robust AI demand. The recent 4.5 gigawatt agreement with OpenAI for expanded Stargate capacity is a testament to Oracle's aggressive push in the AI cloud market, strengthened by its focus on low-latency, high performance AI.  

This massive deal, requiring significant data center expansion, underscores just how elevated demand is for high-performance infrastructure to power advanced AI models. Analysts are closely watching how this mega-deal impacts Oracle's capex strategy and its overall AI growth outlook for the coming fiscal years. 

Notably, Cloud IaaS (OCI) growth was guided to accelerate to >70% in FY26 from 50% in FY25. Oracle said this acceleration was supported by “exceptional demand infrastructure services” and non-cancelable RPO bookings. 

Overall Revenue Growth: 

As a result of the strong forecasted growth in cloud and in RPO, Oracle slightly raised its FY26 revenue target, while management stated they have increased confidence in meeting and possibly exceeding FY27 and FY29 targets.  

For FY26, Oracle now expects revenue to be $67 billion for YoY growth of 16.7%, up just $1 billion from its prior guidance for $66 billion. This slight raise corresponds to a 1.7 point topline acceleration, from barely 15% YoY in its original forecast to 16.7% now with the potential for cloud-driven upside now that GPUs are no longer a constraint.  

However, the small increase raises some questions about the durability of Oracle’s non-cloud growth given the magnitude of acceleration management sees in the cloud.  

Put it this way – if cloud was previously expected to accelerate nine points to 33% YoY ($32.4 billion) in FY26, the new 16 point-plus acceleration guide would raise cloud revenue $1.8 billion higher to $34.2 billion. Thus, the $1 billion full-year hike suggests that Oracle’s non-cloud segments may be flat at best, or decline low-single digits YoY. 

AI Revenue Growth: 

One of the more impressive forecasts Oracle stated in Q4 was its RPO growth target for FY26. Management stated that RPO was expected to increase more than 100% in the upcoming fiscal year, which would place RPO at well over one-quarter trillion.   

During its Q4 report in early June, Oracle projected substantial acceleration in its cloud business in fiscal 2026, fueled by strong AI demand and cloud consumption: 

• Total cloud growth (IaaS & SaaS) guided to accelerate to >40% in FY26 from 24% in FY25. 
• Cloud IaaS (OCI) growth guided to accelerate to >70% in FY26 from 50% in FY25. Oracle said this acceleration was supported by “exceptional demand infrastructure services” and non-cancelable RPO bookings. 
• Oracle Cloud Infrastructure consumption revenue to grow faster than the 62% YoY increase reported in Q4. 

In terms of revenue, these growth rates project total cloud revenue rising to at least $34.2 billion, up from $24.4 billion in FY25. Cloud IaaS is projected to rise to at least $17.5 billion increasing from $10.2 billion in FY25. In terms of revenue mix, IaaS would see its share rise quite sharply, from 41% of cloud revenue in FY25 to >50% in FY26. 

Oracle’s IaaS growth segment is expected to increase 4.5x by FY28, with the $30 billion deal then kicking in.   

As stated above, consensus currently models in $46 billion in IaaS revenue in FY28. For the IaaS segment to increase 4.5x from FY25’s $10.2 billion in revenue, this requires growth at a 65.2% CAGR, or a slight deceleration from >70% YoY in FY26 to >60% YoY in both FY27 and FY28.   

Though Oracle is growing off a much smaller cloud base than, say Azure, this represents potentially a 30 point faster growth rate than its hyperscaler peers over the next few years. It’s also representative of a significant reshaping of Oracle’s business model, as this implies IaaS will grow its share of cloud revenue from <18% to nearly 50% in just three years.   

The $30 billion annual revenue deal unlocks further upside in FY28 and into FY29, depending on how capacity and revenue ramp. It’s likely to take a couple years for Oracle to scale into the full run rate of the deal, but an additional $5B+ by FY29 could help Oracle easily exceed its targets on persistent cloud momentum.   

Earnings: 

Oracle reported a nearly 4% beat on the bottom-line, reporting $1.70 in adjusted EPS, rising just 5% YoY. For fiscal 2025, adjusted EPS rose 8% YoY to $6.03.  

Adjusted EPS growth is projected to accelerate in fiscal 2026, driven by the top-line acceleration. Q1 EPS is estimated to increase 6.3% YoY and gradually accelerate to 17% YoY by Q4. However, full-year EPS growth estimates of 12.3% lag revenue growth by nearly 4 points, suggesting some margin headwinds may be present throughout the year. 

Margins: 

Oracle’s margins are solid and have remained quite steady, with only marginal expansion down the line. 

• FY25 GAAP gross margin was 71%, flat YoY, though gross margin in Q4 was down 3 points YoY to 70%. 
• FY25 GAAP operating margin expanded 2 points YoY to 41%, strengthening slightly throughout the year from 30% in Q1 to 32% by Q4. 
• FY25 adjusted operating margin was flat YoY at 44%. 
• FY25 GAAP net margin followed operating margin, expanding 2 points YoY to 22%. 
• FY25 adjusted net margin was flat YoY at 30%. 

Cash: 

Oracle’s liquidity profile suggests that funding aggressive expansion plans, notably for Stargate, will pressure free cash flow through 2026 and potentially into 2027 as well. Capex outpaced operating cash flow for the first time in FY25, sending FCF negative. 

• Cash, equivalents and short-term investments totaled $10.2 billion, though debt was 9x this at $92.6 billion. 
• Operating cash flow in Q4 was nearly $6.2 billion for a 39% margin, though free cash flow was more than ($2.9 billion), or an (18%) margin. This is because capex rose 55% QoQ to $9.1 billion. 
• For FY25, operating cash flow was $20.8 billion for a 36% margin, up 1 point YoY. Free cash flow was ($0.4 billion), for a (1%) margin, down from a 22% margin in FY24 due to Oracle spending $21.2 billion in capex. 
• For FY26, Oracle guided for capex of >$25 billion, and hinted that actual requirements could be higher, suggesting FCF may be negative again unless operating cash flow growth accelerates from 12% to >25%. 

Valuation: 

Oracle is trading at 10 forward PS, which is not a valuation we’ve seen from this stock. Typically, it trades in the 5X forward range. It’s anyone’s guess if the company will join AI peers at higher valuations or retreat back to its typical valuation.  

The PE Ratio is the same – its 2X higher compared to historic levels at 35 forward PE and we will need more AI-related trading history to determine where the stock eventually settles. 

Risks: 

No major risks. Valuation could go either way therefore less of a risk and more of a trial period. 

You can read more about Oracle in the analysis: “Can Oracle Become the Next $1 Trillion AI Stock?”Can Oracle Become the Next $1 Trillion AI Stock?” 

3. Palantir is the AI Bubble Stock 

Thematic: 7/10
Fundamentals: 10/10
Valuation: 0/10 

Palantir is at an eye-watering valuation – causing many investors with no risk management to come out of the woodwork and cheer the stock at these levels. That may work in many sectors, but it does not work in the tech sector. It would take a significant selloff for our firm to buy Palantir right now as we simply refuse to gamble with our hard-earned money. Don’t hate me, but I actually like Oracle better here than I do Palantir. 

If you give me Palantir at a drastically better valuation that matches what best-of-breed cloud stocks can sustain, then I’d happily buy. Until then, we have our attention on other stocks for now. 

Overall Revenue Growth: 

In Q1, the company reported $884 million in revenue for growth of 39%, up from growth of 36% last quarter and 21% last year. This represents QoQ growth of 7%.  

Palantir reported $883.9 million in revenue in Q1, beating estimates by more than $21 million. As stated above, this represents growth of 39%, up from growth of 36% last quarter and up from 21% last year. 

On a QoQ basis, Q1 accelerated 7% from Q4. This is an impressive performance given Q1 is typically one of the slowest quarters seasonally. 

AI Related Revenue Growth: 

Perhaps most importantly, US commercial revenue drove the results, with 71% YoY growth and QoQ growth of 19% for the segment’s first-ever $1 billion annual run rate.  

US commercial revenue accelerated from 64% last quarter to 71% YoY this quarter to $255 million, surpassing a $1 billion annualized run rate for the first time on elevated AI demand. 

However, the guide for next quarter does indicate Q1 could be the peak with fiscal year growth of 68% guided. Palantir raised its FY25 US commercial growth guidance from 54% YoY to 68% YoY, projecting revenue of $1.178 billion, compared to $457 million in 2023. The raise represents about $100M more than previously expected. 

Earnings: 

Despite the top-line beat, Palantir met adjusted EPS estimates in the quarter at $0.13, up 68% YoY. GAAP EPS was $0.08, up 100% YoY.   

Looking ahead through the rest of FY25, adjusted EPS growth is expected to decelerate, from Q1’s 68% YoY to 20% YoY by Q4. However, estimates have risen over the past three months – Q2’s growth rate has come up 11 points and Q3’s up by 9 points. 

For FY25, Palantir is expected to see adjusted EPS growth of nearly 43% YoY to $0.58, before decelerating to 25% growth to $0.73 in FY26. 

Margins: 

Across the board, Palantir has been expanding its margins. Adjusted EBITDA margin was 45% — which is one of the highest in the tech universe. 

• GAAP gross margin was 80.4% in Q1, down 1.3 points YoY.  
• Adjusted gross margin was 82.1%, down more than 1 point YoY.  
• GAAP operating margin expanded to 19.9%, up more than 7 points YoY.   
• Adjusted operating margin was 44.2%, up 8.5 points YoY. For Q2, Palantir guided its adjusted operating margin to 43.1%, which would represent a third consecutive quarter above 40% and up nearly 6 points YoY.  
• GAAP net margin was 24.2%, up more than 7.5 points YoY.   
• Adjusted net margin was 37.8%, up nearly 8 points YoY. 

Cash: 

Palantir stands out for its ridiculously strong cash flows, though operating and free cash flow margins moderated quite substantially in Q1 relative to 2H 2024.   

• Operating cash flow was $310.3 million in Q1 for a margin of 35%, down from 56% in Q4.   
• Adjusted free cash flow was $370.4 million for a 42% margin, down from a 63% margin in Q4. Palantir raised its adjusted FCF guidance for FY25 from $1.5-1.7 billion to $1.6-1.8 billion, implying an FCF margin of 43.7%.  

Cash and equivalents totaled $5.43 billion, while debt was zero. 

Valuation: 

90 forward PS is a valuation we have not seen since Snowflake traded after its IPO. Today, Snowflake trades at 15 forward PS. Yes, AI deserves a premium. However, at 90X sales means Palantir will not pay back the valuation in revenue in this lifetime as you’re paying a valuation worth 90 years of revenue – and that’s assuming Palantir maintains its current growth rate. 

Notable risks: 

Valuation, valuation, valuation 

You can read more about Palantir in the analysis: “Palantir Stock: Strong Sequential Growth and Strong Underlying Key Metrics.”Palantir Stock: Strong Sequential Growth and Strong Underlying Key Metrics.” 

4. Cloudflare: The Upcoming AI Inference Darling 

Act 3 refers to the Workers platform, which is the company’s attempt to compete with hyperscalers – but most importantly, it sets up the company well for AI inference at the edge.   

When it comes to AI inference-driven revenue, it’s still relatively early in the growth curve. Hyperscalers and model providers only recently began to disclose rapid AI token growth over the last three to four months. However, Q1’s earnings report shows signs of surging AI inference demand filtering into Cloudflare’s platform. For example, Q1 witnessed nearly 4,000% YoY growth in Workers AI inference requests, and more than 1,200% YoY growth in AI Gateway requests.   

These growth numbers are off a small base (which is true for all inference statistics for now), yet when you take a company with product-market like Cloudflare and combine it with a massive trend on the verge of taking off – what you get is an irresistible stock that the I/O Fund has a high probability of entering and holding for an extended period of time. 

Overall Revenue Growth: 

Cloudflare reported a 2% beat in Q1 with revenue increasing 26.5% YoY to $479.1 million. This growth was attributed to the strength of Cloudflare’s largest >$1M and >$5M ARR customer cohorts, which saw record customer additions in the quarter. 

Looking ahead to Q2, Cloudflare guided for 24.8% YoY growth to $500 million to $501 million in revenue, representing a 1.7 point sequential deceleration. Analysts are much more optimistic on the quarter, projecting growth above the top end of the range at $501.8 million, or up 25.1% YoY.   

Through the rest of fiscal 2025, growth is expected to be essentially flat around 25% YoY. However, management expressed confidence in driving a reacceleration through 2025, opening the door for potential upward surprises driven by AI inference. 

However, by maintaining guidance despite the $10M beat in Q1, Cloudflare is essentially saying Q2 could be softer than expected. With that said, Cloudflare tends to be conservative during macro events such as what we saw in April, and thus it could also be a non-issue.   

AI Segment Growth: 

Cloudflare does not break out its AI segment too closely, rather they share initial growth numbers on the Workers platform. Per our intro: “Q1’s earnings report shows signs of surging AI inference demand filtering into Cloudflare’s platform. For example, Q1 witnessed nearly 4,000% YoY growth in Workers AI inference requests, and more than 1,200% YoY growth in AI Gateway requests.” 

Additionally, there are some key metrics that seem to have bottomed and are finding a tiny inflection point: 

In Q1, paid customer growth accelerated 2 points sequentially to over 27% YoY, with Cloudflare reporting 250,819 paid customers. Growth has doubled from 13% two years ago, an impressive acceleration given the scale is now reaching a quarter-million paid customers. 

Cloudflare also noted it had driven record customer additions in its >$1M and >$5M ARR cohorts in Q1, with growth in both metrics up 48% and 54% YoY, respectively. 

Billings growth also accelerated 1 point to 32.8% YoY in Q1, recovering from the 20% range in 2024. Billings activity likely benefitted from QoQ improvements in sales cycles as noted in Q1, as well as stronger deal activity and larger contracts.   

Cloudflare’s DBNRR stabilized at 111%, though it has yet to see a strong acceleration like Palantir. Compared to last year, DBNRR is 4 points lower. 

RPO also reaccelerated in Q1 to nearly 39% YoY to $1.86 billion, though there has been consistent quarterly variability in growth over the last two years. Current RPO accounted for 66% of total RPO, down from 70% in Q4. 

Earnings: 

Cloudflare reported adjusted EPS in line with estimates at $0.16 in Q1, for flat YoY growth. Q2 is expected to see adjusted EPS decline mid-single digits YoY, with the full-year on track for just mid-single digit growth with an acceleration expected in Q4. 

For Q2, Cloudflare guided for adjusted EPS of $0.18, down from $0.20 in the year ago quarter. Adjusted EPS growth is expected to resume in 2H, with EPS seen exiting the year at $0.23, up 22.6% YoY.   

For FY25, Cloudflare maintained its guidance for $0.79 to $0.80, corresponding to growth of approximately 6% YoY. For FY26, analysts are projecting EPS growth to accelerate sharply to 30.3% YoY to $1.04, which likely would require solid improvement in adjusted margins given the topline acceleration is minimal. 

Margins: 

Margins are the one real blemish for Cloudflare, as the company has regressed on its path to reach GAAP profitability in Q1. Gross margins have been compressing slightly, due to an increase in paid versus free traffic, while operating margins slipped sequentially in Q1. 

• GAAP gross margin was 75.9% in Q1, down 0.5 points sequentially and 1.6 points YoY. Adjusted gross margin was 77.1%, down 0.5 points sequentially and 2.4 points YoY. 
• GAAP operating margin was (11.1%) in Q1, down 3.6 points sequentially and a setback from three consecutive quarters of progress towards profitability in the (7%) to (8%) range. 
• Adjusted operating margin was 11.7%, marginally above guidance for 11.6% and down 2.9 points sequentially. For Q2, Cloudflare guided for adjusted operating margin to improve one point to 12.6%. 
• GAAP net margin was (8.0%) in Q1, a rather substantial decline from (2.8%) last quarter, driven by the QoQ decline in operating margin. Adjusted net margin was 12.2%, the lowest reported level since Q2 2023. 

There is nearly a 23 point gap between GAAP and operating margins. This is driven primarily by high SBC at ~20% of revenue, and it highlights that either SBC would need to move much lower, or costs much lower, in order to drive Cloudflare to a sustainable path to GAAP profitability. 

Cash: 

Operating cash flow continues to improve, touching a 30% margin in Q1, though free cash flows remain pressured by heightened network capex at 17% of revenue. Cloudflare also raised a substantial amount of capital on June 13, an interesting move given the company still has nearly $2 billion in cash on hand. 

• Operating cash flow rose more than 98% YoY to $145.8 million, for a 30% margin. This marked a substantial 11 point improvement from a 19% margin a year ago and a 2 point sequential improvement. 
• However, free cash flow rose 48.6% YoY to $52.6 million, for an 11% margin, up only 2 points YoY. 
• Cash and investments totaled $1.92 billion, while Cloudflare reported $1.29 billion in convertible debt still outstanding, due in 2026 

Valuation: 

Cloudflare’s Forward PE ratio is wild at 234 compared and its forward PS ratio of 31 is also a bit steep.  

Notable Risks: 

GAAP operating margin is weak. Keep an eye on capex costs.  

This stock also carries execution risk in both directions as trying to time Cloudflare’s big moment will take immense skill. An investor could buy now and wait … or put that money to work elsewhere and return when there’s more indication that startups, SMBs and enterprises are willing to pay for edge inference. With what we know today, the AI market is primarily driven by Big Tech (i.e., not customers of Cloudflare). Palantir is a great example, it’s finally at a $1B annual run rate and is considered by many the leading AI software stock. Therefore, paying 31 forward PS and risking Cloudflare returns to 15 forward PS (it’s typical range) is not only a valuation risk, but also an execution risk in terms of how long you’d have to hold the stock to return to previous levels, as unlike Palantir, Cloudflare is not showing material AI revenue (yet).  

For more information on connecting the dots for Cloudflare’s AI inference thesis, reference our analysis: “Cloudflare: Entering Act 3 to Become A Leader in AI Inference at the Edge.”Cloudflare: Entering Act 3 to Become A Leader in AI Inference at the Edge.” 

5. Small Cap Stock with up to 135% Growth, Undervalued Relative to Opportunity 

Our team has recently covered a small cap stock on the Discovery tier that we believe could ultimately become a sizable winner. Find more details on our Discovery tier here. 

Our team works hard to dig up new ideas, which we publish on the Discovery tier, and this is one of the team’s favorites over the past 2-3 months. Knox has two setups outlined, and they both indicate this stock will see a drop before (potentially) becoming one of our highest performers. Our plan is to enter on any weakness or on a meaningful breakout. 

General Synopsis: 

Complex reasoning models require an expanded data set, such as dozens of foreign languages or multi-step problems within math and chemistry, for example. This is in contrast to a static data set, which often produces too many hallucinations and can be inaccurate at times. For example, if a Big Tech company only used its proprietary social data to train LLMs, this may not be broad enough to prevent hallucinations since social data is limited in its context and scope. In many cases, additional data points are sought out to improve the accuracy of the model.  

In order to move toward general artificial intelligence (AGI), which is defined as AI models that think for themselves similar to a human, companies like Innodata are also tapped for their ability to augment accuracy through reinforcement learning and direct preference optimization, which utilizes subject matter experts to annotate data and to also stress-test the models for accuracy.   

This company's competitor is valued at $29 billion compared to the I/O Fund's stock pick having a market cap at $1.5 billion on last year’s reported revenue of $870 million last year. If we assume the competitor is at $1 billion revenue now, that would be a 29X compared to our pick's 6X forward sales. 

Speaking of said competitor, there is a potential exodus from the competitor as they received a large funding round from a Big Tech company and this is seen as potential IP risk by other Big Tech companies that previously used the competitor for labeling data sets. This could become a windfall for the I/O Fund’s stock pick. Sign up for Discovery to get our stock trades on this small cap in addition to ongoing coverage. 

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.

Discovery is aimed at surfacing new ideas. Rather than being confined to the I/O Fund’s portfolio coverage, Discovery unleashes new ideas to be early with the goal of providing significant edge to tech investors. 

Honorable Mentions: 

I’m calling these two honorable mentions not for lack of a strong thesis but because it’s a bit lame to include very well-known Mag 7 and FAANG stocks in a Top 15 list. You know these names well, and from here, we will do what we can to help you get a good entry. As of now, valuations are pretty stretched with Meta at the highest levels in the stock’s history. 

• Microsoft: The Undeniable AI Enterprise Juggernaut

  If Nvidia holds the crown in the AI hardware arena, then Microsoft holds the crown in the AI enterprise arena.

  Last quarter, Microsoft Azure was the only cloud provider of the three platforms to see growth accelerate, highlighting Microsoft’s impressive earnings for Q3 2025. Not only did Azure separate itself with this 4-point sequential growth acceleration, but it also grew at more than 2x the rate of AWS and 7 points faster than Google Cloud, reaffirming the company’s momentum in the Azure vs AWS vs Google Cloud battle.

  Azure benefited as Microsoft brought capacity online faster than expected last quarter, to meet high demand for AI services. AI contributed 16 points of growth in the quarter, compared to 13 points last quarter and 10 points of growth a year ago. Microsoft did not provide an update on AI’s run rate yet said last quarter it had surpassed $13 billion, up 175% YoY.

  Valuation:

  After Microsoft’s fiscal year adjustment on July 1st, the stock is now trading at 33 forward PE implying at most a 10% move and its forward PS ratio is at 12. The stock typically tops at 13.5 max on Fwd PS and Fwd PE of 37 is a brief top before the stock retreats backward to as low as 23 to 27.

  To read more about Microsoft’s recent quarter, including a few key points that are overlooked in terms of how the AI Enterprise juggernaut can extend its lead, reference our free article “What Separates Azure from AWS from Google Cloud” that is then continued on the premium side here.

• Meta: Bottom Line Shines; Top Line Taking a Breather

  Meta is supposedly no longer in the year of efficiency and is now in the year of AI, according to management. However, the efficiency was remarkable yet again last quarter. Although the company is decelerating from high growth in the past, the company has a big year ahead with ad improvements resulting in higher ad pricing, Meta AI standalone app recently launched (to be monetized next year), and its Llama 4 models, which are open source yet driving important productivity gains internally. Undoubtedly, the company has a lot of data for personalization and a highly engaged audience, marking two competitive advantages over other AI chatbots.

  With that said, advertising key metrics decelerated sequentially, supporting further revenue growth deceleration for Q2. Ad impressions increased just 5% YoY, slowing considerably from 2023’s peaks and facing a tougher comp at 20% YoY last Q1. Ad pricing increased 10% YoY, a 4 point acceleration from 6% a year ago.

  Valuation:

  Meta is flashing warning signals with a Fwd PE ratio of 28 and a Fwd PS Ratio of 9.5. Two years ago, the stock traded at a forward PS ratio of 3 and a forward PE Ratio of 10. On a trailing twelve months basis, the stock is in line with historic trends, yet when a forward is decoupled from historic trends, it means investors are paying dearly for a stock with slowing growth.

Conclusion: 

If you made it this far, congratulations! You must take your portfolio as seriously as we do. We have been heads-down attempting to squeak out higher returns this year and every inch of progress can make a big difference when it comes to positioning correctly.  

Next up, Advanced Members will get technical setups from Knox in his Quarterly Positions Report with a complete picture of how we plan to enter the stocks listed above. Discovery Members will exclusively get updated technical setups on the three Discovery stocks that made the list. 

Our results speak for themselves in terms of how we stack up, yet we continue to strive to move the needle on presenting to you the world’s best AI portfolio. Given the sheer ease in which the market moved off the April lows, we do foresee some volatility in the upcoming quarter. It’s nothing our team won’t be able to handle. Tech earnings officially kick off tomorrow – to say we are ready is an understatement. Let’s go!

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:

• Oracle Cloud May Grow Much Faster than Big 3
• Cloudflare: Entering Act 3 to Become a Leader in AI Inference at the Edge
• Can AMD’s MI350X and MI355X GPUs Close the Gap with Nvidia?
• Taiwan Semiconductor: Building a Moat under Geopolitical Tensions