The I/O Fund’s Top 10 New Ideas List for Q1 2026

Since launching the Discovery tier less than a year ago, The I/O Fund’s internal process for identifying new winners has greatly improved. Based on the research we produced from this tier, we added stocks like Bloom Energy, Core Scientific and Oklo to our portfolio, and these new additions became some of our biggest wins in 2025.  

As we continue to build out the Discovery library, we’d like to make it as easy as possible for our readers to follow along. We want to cast a wide net, explore thoroughly, and leave no stone unturned. Therefore, we anticipate our coverage to include dozens of stocks over time. However, we also want to make sure we get down to brass tacks by providing you a clear takeaway by ranking what we’ve dug up every quarter. The ranking will also help clarify which ones we are eyeing an entry for and what setups Knox will cover in his Discovery Tier webinars. This will be called the I/O Fund’s Top 10 New Ideas List.  

The ranking we provide is an estimate, which means all 10 stocks are of interest. Given the nature of momentum stocks, the ranking could shift quickly. Please check back to the Discovery Ranking list provided on the Dashboard for any changes in the interim. 

Access the updated Discovery Ranking list here: Top 10 Watchlist

Themes: 

We have covered the trends below on our Q4 Top 15 AI Stocks Report. Our Discovery list offers names centered in these trends, thus we are repeating some of the information for easy reference, but surfacing several new stocks that stand out this quarter. 

AI Networking: 

Networking is at the heart of the new architecture that Nvidia is shipping now as the increased bandwidth is instrumental in driving higher performance. For example, the NVL72 systems will deliver 4X faster training and 30X faster inference compared to HGX systems. Notably, this is accomplished with many more GPUs from eight to 72 per system. 

To support the new systems, the NVLink domain moves from supporting eight GPUs to 72 GPUs and 36 CPUs with a speed of 1.8 TB/s with 18 NVSwitch ASICs, up from four in the HGX/DGX systems due to increasing the number of GPUs but also due to doubling the per-GPU links. The 5th generation of NVLink supports up to 576 GPUs compared to the fourth generation of up to eight GPUs. 

Scale-up refers to increasing the number of GPUs in an AI system. Proprietary NVLink remains the highest performance option for scale-up interconnects, although PCIe and scale-up Ethernet are also used. For the cabling, copper is used for intra-rack scale-up with up to 5,184 cables per system. Future generations of NVLink are likely to integrate optical I/O so that GPUs can communicate across racks without requiring costly retimers. 

A few parameters around the size of the scale-up opportunity: 

• GB200 NVL72 with 72 GPUs and 36 CPUs has 18 NVSwitch chips and 72 InfiniBand NICs for scale-out networking and 36 Bluefield-3 Ethernet NICs for front-end networking. Compare this to the HGX systems with 8 GPUs and the DGX systems with 8 GPUs and 2 CPUs has 4 NVSwitch chips and 8 InfiniBand NICs. 
• This means the new architecture that Nvidia is shipping now results in 9X more GPUs, 4.5X more NVSwitches, 9X more InfiniBand NICs and 18X more front-end NICs. Each GPU requires its own InfiniBand link for scale-out whereas NVSwitch components grow faster than GPU count as each GPU must talk to every other GPU, therefore, it has more of an exponential growth.  

Although NVLink is proprietary, it acts as a bellwether for the importance of AI networking and lesser-known suppliers. Generally speaking, what we can see from looking more closely at Nvidia’s networking fabric is that networking components are increasing 5X to 9X, and in some cases up to 18X.  

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

Scale-out racks refer to connecting multiple racks across a cluster. InfiniBand switches and Ethernet switches are used for this purpose. As you can see below, Nvidia offers scalable units called SuperPODs that offer tens of thousands of GPUs. For a very large SuperPOD with 16,834 GPUs and 2048 nodes, there would be hundreds of InfiniBand switches required (or a hyperscaler can also use Ethernet switches) and extensive cabling is also required.  

Source: Nvidia DGX SuperPOD technical blog 

Also consider that as the networking and interconnects market matures, there will be new opportunities to participate, for example, co-package optics are expected to be introduced for the Rubin generation of GPUs in 2026-2027. 

Regardless of the exact networking-to-compute ratio, as we scale up AI systems, the architecture becomes a networking and interconnect problem that must continually be solved for, and we want to be correctly positioned within the networking supply chain. Therefore, AI networking will remain a key focus for the I/O Fund’s Top 10 New Ideas in the coming quarters and years. You can expect our team to deliver additional names in this trend and to increase our allocation as needed.  

AI Energy: 

Data center power demand is expected to grow at an accelerated clip through the end of the decade and beyond, with more powerful GPUs and surging growth in inference two main drivers. 

McKinsey projects data center capacity will rise ~2.5x to 219 GW by 2030, up from 82 GW in 2025, with AI contributing 70% of that demand. This corresponds to total capacity growth of 137 GW over the next five years, with 112 GW coming from AI.

Goldman Sachs estimated global data center power usage at 55 GW in early 2025, far below BCG’s 82 GW figure. However, GS projects power usage to reach 84 GW in 2027 and increase further to 122 GW by 2030, corresponding to total growth of just 67 GW. However, considering 2025 and 2026 capex spend could support >20 GW of new capacity, this forecast may understate the pace of capacity growth.

We covered this trend more closely in a lengthy Pro Tier article entitled: “Why Power is Critical for Data Centers and their Hyperscaler Customers” 

As that analysis pointed out, Nvidia’s Blackwell lineup is bringing a significant increase in power consumption, nearly double the H200’s 70 kW at 120 kW for the GB200 NVL72 and 140 kW for the upcoming GB300 racks.   

Beyond Blackwell, Nvidia’s future design lineup shows continual increases in power consumption. Its Rubin generation is expected to boost thermal design power (TDP) by 50% over Blackwell at up to 180 kW per rack, with the upgraded Vera Rubin then doubling this to 360 kW per rack by 2027.  

In its largest configuration, the Vera Rubin NVL576, dubbed the ‘Kyber’ rack, could draw as much as 600 kW (0.6 MW), or 5x that of the GB200 NVL72 in just a two-year design timeframe. These figures do not include networking, interconnects, cooling and other hardware, which will further boost power draw per rack. 

This rapid increase in power consumption per GPU generation is critical, as existing infrastructure is simply unable to meet these escalating power demands. For example, Applied Digital pointed out that nearly 70% of current data centers “contain racks requiring between four and nine kW of power, and less than two percent of data centers have racks with greater than 50kW.”  

For comparison, Super Micro’s GB200 NVL72 SuperCluster requires 132kW, while the upcoming Kyber rack could more than quadruple that to 600kW. Because Blackwell-based servers are now 15x to 30x the power density, cooling and power delivery strategies have to be redesigned, as liquid cooling now becomes a necessity.   

This sharp rise in power density means current infrastructure may be unable to transition from 4-9kW racks to >130kW racks without incurring significant retrofitting costs, while building new infrastructure bypasses that hurdle and allows for optimization for high-powered racks. 

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. 

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.  

In the latest earnings call with CoreWeave, management agreed with the analysis we have presented to Pro Members, stating: “at the end of the day, right now, it's the powered shells that are the choke point that is causing the struggle to get enough infrastructure online for the demand signals that we are seeing […]” 

Takeaway: When building our portfolio, we have to balance many things when it comes to AI energy stocks. Time to power is paramount as some energy infrastructure is 5-10 years out from commencing operations and generating revenue. Secondly, many energy stocks require significant cash to secure energy sources, get government approval and build the underlying infrastructure, which also includes taking into consideration regional differences, transmission capacity and distances from generation sites to metro areas.

AI Data Layer: 

The initial years of AI development were compute intensive to where training created a compute hierarchy. We still see evidence of this hierarchy as companies with access to GPUs, networking and energy have an advantage, and the barrier to entry is high in both costs and by the limited supply preventing widespread access. 

Nvidia has enjoyed a near-monopoly by being the parallel processing leader decades before AI took over as the primary market that demanded massive compute and data throughput for matrix multiplications and vector math. The lack of supply has afforded the world’s largest companies a head start in training and deploying models while startups and enterprises patiently wait for access. As more frontier LLMs are deployed by R&D labs and Big Tech, the emphasis moving forward will be on inference rather than only on training models.  

The inference market is when enterprises and companies sitting on large private data sets will be able to increase the accuracy of open sourced models and licensed models. There will be an important shift to where companies that can offer domain-specific data in various industries, such as finance, healthcare, manufacturing, will do well by optimizing processes to generate more revenue and achieve better margins. It will start with the Fortune 500, the Global Fortune 2000 and well-funded startups. Meanwhile, investors should also not overlook the fact that R&D labs are growing closer to cracking the consumer market, as well, with apps such as OpenAI’s ChatGPT and Sora, or Perplexity’s search.  

While training is benefiting those who sell the compute or own the infrastructure (and we will continue to own these stocks), there will also be a shift toward companies that manage the data pipes by sitting across the many database and software services that enterprises use. Think of all the ERP systems, CRMs, legacy databases, etc, where private data is stored. There will be an emphasis toward combining the data, keeping it private, yet utilizing it to increase the quality of inference.  

Takeaway: Compute will continue to drive the scale for inference; data will drive the quality of inference. Therefore, a key focus for I/O Fund’s Top 10 New Ideas list over the next few quarters (and years ahead) will be AI data stocks that help private enterprises use their valuable data to feed data-hungry reasoning models. We will also, in tandem with AI networking and AI energy, be looking to build our portfolio with exposure to stocks that will participate in the AI inference market, which spans hardware, software, the data layer, and more.  

The stocks below are new ideas and at time of publishing, the I/O Fund does not own these stocks although they are under strong consideration for the portfolio. To find out the stocks the I/O Fund owns, subscribe to our Pro tier for Research or our flagship tier Advanced with additional research, real-time trade alerts, allocations to stocks and weekly webinars.

Palantir: One of the Strongest Reports from Q3 

Thematic: 9/10 
Fundamentals: 10/10  
Valuation: 1/10 

Brief Overview:  Brief Overview:  

The difference between Palantir and other AI-enabled database competitors is that Palantir is able to answer questions a model cannot answer. Traditional business intelligence companies require a complete data set whereas Palantir is able to tackle situations where there is not a complete data set. You can think of the competitive advantage as being actionable depth, which Palantir has described as “the reasoning that goes into decision-making, not just data.”    

Palantir’s Artificial Intelligence Platform (AIP) integrates generative AI with operational data and workflows, and when combined with Palantir’s other platforms Foundry and Apollo, it provides an AI service mesh that can run hundreds of microservices, scale compute through its Rubix engine and orchestrate updates through Apollo.  Additionally, Palantir’s knowledge graph referred to as Ontology is a distinct advantage. The graph offers better context than a large language model would on its own – or as Palantir states, it’s “the reasoning that goes into decision-making.”   

In Q3, Palantir delivered one of the most outstanding reports across tech, with revenue accelerating nearly 15 points sequentially to almost 63%, with red-hot growth in key metrics and a 50 point acceleration in US Commercial revenue since the start of the year.  

Overall Revenue Growth Overall Revenue Growth 

Palantir reported $1.18 billion in revenue in Q3, up an impressive 18% QoQ and beating estimates by 8.4%, driven by unwavering momentum in US Commercial. Commercial revenue rose 21.5% QoQ and 73% YoY to $548 million, a 26 point acceleration from 47% YoY growth last quarter. Government revenue rose 14.5% QoQ and 55% YoY to $633 million, a six point acceleration from 49% YoY in Q2; Government remained Palantir’s largest segment at ~53.6% of revenue. 

On a YoY basis, overall revenue growth accelerated 14.8 points to 62.8% YoY, the largest sequential acceleration to date and marking to Palantir’s highest growth rate since going public. Over the last nine quarters, topline growth has accelerated ~50 points, from just 12.7% in Q2 2023, a rare feat to accomplish.  

For Q4, Palantir guided for revenue up 60.6% YoY to $1.327 to $1.331 billion, well ahead of estimates for 44.2% growth to $1.19 billion. While this does represent a marginal deceleration at face value, this sequential deceleration is in line with trends from previous quarters.  

For the full year, Palantir raised its revenue outlook to $4.396 to $4.400 billion, pointing to YoY growth of 53.5% at midpoint, a sharp acceleration from 29% growth in 2024. To put in perspective the strength of this acceleration, Palantir had initially guided for just 30.9% growth to $3.76 billion in revenue back in Q4 2024; growth is now more than 22 points faster.  

AI Segment Growth AI Segment Growth 

Palantir’s US Commercial segment is generally seen as the primary vector for its AIP-driven growth, with robust momentum only accelerating further in Q3.   

US Commercial revenue grew 29% QoQ and 121% YoY to $397 million in Q3, accelerating from 93% YoY growth in Q2. Since the start of the year, US Commercial growth has accelerated 50 points, and since the start of 2024, growth has accelerated 81 points.  

For the full year, Palantir significantly boosted its US Commercial growth outlook to >104% YoY, up from 85% previously. This corresponds to revenue of $1.433 billion, up from $1.302 billion previously.  

Key metrics for the segment were very strong: TCV closed (total contract value) surged 342% YoY to a record $1.31 billion, while remaining deal value (RDV) rose 199% YoY and 30% QoQ to $3.63 billion. US Commercial deals closed of >$1 million were up 2X YoY and deals closed of >$5 million were up 5X YoY. 

Additionally, other key metrics outside US Commercial were very strong — net retention rate (NRR) expanded six points sequentially to 134%, and over the past two years, NRR has risen an impressive 27 points, with Palantir noting that AIP is continuing to drive existing expansions and new customer conversions. Total remaining deal value rose 91% YoY and 21% QoQ to $8.6 billion, and Palantir also closed its highest ever TCV quarter at $2.8 billion. 

Earnings Earnings 

Palantir reported $0.18 in GAAP EPS in the quarter, up 200% YoY, while adjusted EPS was $0.21, beating estimates by 25.5% and rising 110% YoY. Palantir did not provide a specific guide for EPS for Q4, though current estimates are pegged at $0.12 in GAAP EPS and $0.22 in adjusted EPS, up 300% YoY and 57% YoY, respectively. 

For FY25, Palantir is expected to earn $0.72 in adjusted EPS, up nearly 76% YoY, before slowing to 39% growth to $1.01 in FY26. 

Margins Margins 

Margins strengthened considerably in the quarter, with adjusted operating margin surpassing 50% with more expansion guided for Q4. Palantir’s Rule of 40 score (revenue growth + adj operating margin) expanded to a wild 114%, up from 94% last quarter and 68% last Q3.  

Gross margin was 82% in Q3, up one point QoQ and two points YoY, while adjusted gross margin was 84%, up two points YoY and QoQ. 

GAAP operating margin was 33%, an impressive 6 point QoQ and 17 point YoY expansion. Adjusted operating margin was 51%, breaking past 50% for the first time and up 5 points QoQ and 13 points YoY. For Q4, Palantir guided for adjusted operating margin to be 52%, showcasing its ability to drive strong margin expansion alongside swift revenue acceleration. Full year adjusted operating margin guidance was raised from 46% to 49%.  

GAAP net margin was 40%, up 7 points QoQ and 20 points YoY. Adjusted net margin was 45%, up 5 points QoQ and 12 points YoY. Palantir is one of the few, if not only, tech companies to have 40% GAAP net margins with revenue growth accelerating to above 60%. 

Cash Cash 

Cash flows were strong, though cash flow margins dipped on a YoY and QoQ basis. Operating cash flow was $507.7 million for a 43% margin, shrinking from a 54% margin in Q2 and 58% in the year ago quarter.  

Adjusted free cash flow was $539.9 million for a 46% margin, down from 57% in Q2 and 60% in the year ago quarter. Palantir raised its adjusted FCF guidance for the year to $1.9 to $2.1 billion, or a 45.5% margin, up from a 42.8% margin previously. 

Cash and equivalents totaled $6.4 billion and debt remained zero.  

Valuation Valuation 

Valuation is the crux for Palantir as the stock trades at 100x forward revenue, nearly triple its five-year average of 36x and in rather uncharted territory for software stocks. On the bottom line, Palantir trades at 256x forward adjusted EPS despite a >40% margin, more than double its average 109x multiple.  

Notable Risks Notable Risks 

The valuation with Palantir is a gamble as the company is attempting to set a new bar for AI software, with >100x forward sales multiples only achieved for short fashion in 2021 for a handful of prior market darlings, whose stocks have yet to return to those prices. This elevated valuation may also present a risk if/when the company reaches peak revenue growth as comps will quickly get tougher.  

Celestica: 800G Switch Demand Accelerating into FY26 with 1.6T Switches Soon Ramping 

Thematic: 10/10
Fundamentals: 7/10
Valuation: 1/10 

Brief Overview: Brief Overview: 

Celestica is an under-the-radar beneficiary of the AI networking trend, capitalizing on strong demand for 800G and 1.6T Ethernet networking switches and leveraging its deep ties to hyperscalers as an original design manufacturer (ODM). 

Celestica guided for one of the most impressive accelerations seen in this last quarter of earnings, underpinned by its 800G switches accelerating next year with 1.6T ramps on deck. For 2026, Celestica expects revenue growth to accelerate around five points to 31% YoY in 2026, whereas consensus had been pegged at just 17% YoY. This strong upside is being driven by networking and custom AI compute platforms with visibility into 2026-2027. 

In terms of AI revenue, Celestica’s Cloud and Connectivity Solutions (CCS) segment is guided to generate $9 billion in revenue in 2025, up ~40% YoY, accounting for nearly 74% of total revenue. CCS, which includes AI networking, server, storage and rack-scale system solutions, is Celestica’s main growth driver and is also expected to grow ~40% annually in 2026 and 2027. 

Celestica is closely linked to Broadcom’s networking platforms as a key vendor, serving major customers such as Google and Meta, with some of its notable product engagements including Google’s TPU server racks, and Meta’s Minerva ASICs servers, Wedge400 switches and also its next-gen Tomahawk5-based 400G AI fabric switch Minipack3. Additionally, management’s commentary suggests that OpenAI could become a key customer as soon as 2027 – read more on this in our Discovery deep dive. Discovery deep dive.  

Revenue: Revenue: 

Celestica reported Q3 revenue of $3.19 billion, up 28% YoY and 10.4% QoQ, coming in more than 6% ahead of estimates for $3.00 billion. Revenue from the CCS segment rose 43% YoY to $2.41 billion, driven by an 82% YoY increase in Communications revenue to $1.94 billion offsetting a (24%) decline in Enterprise to $477 million on an AI program transition with a hyperscaler. Celestica’s other segment, Advanced Technology Solutions (ATS, serving aerospace, defense, industrial and semicap equipment markets) saw revenue decline (4%) YoY to $781 million.  

For Q4, Celestica guided for revenue of $3.325 billion to $3.575 billion, up 35% YoY at midpoint of $3.45 billion, a seven point acceleration. On a QoQ basis, this correlates to 8% growth sequentially.  

As a result, Celestica raised its fiscal 2025 guidance from $11.55 billion to $12.2 billion, a strong 7% raise with just one quarter to go, signaling the strength of demand the company is witnessing in Q3 and Q4. The updated guide points to 26% YoY growth.  

Perhaps more important was Celestica’s initial guidance for fiscal 2026, with the company laying out an initial forecast for $16 billion, for 31% YoY growth, a five point acceleration. This was $1.86 billion ahead of estimates for $14.14 billion, a large 13.2% beat.  

The impressive fiscal 2026 guide and revisions to consensus estimates for fiscal 2027 have taken Celestica’s forward growth CAGR from FY25 to FY27 to a strong 28%, up from 17% prior to the report. 

AI Segment Growth: AI Segment Growth: 

In terms of AI revenue, Celestica’s Cloud and Connectivity Solutions (CCS) segment is forecast to generate $9 billion in revenue in 2025, up ~40% YoY, and accounting for nearly 74% of total revenue. CCS, which includes AI networking, server, storage and rack-scale system solutions, is Celestica’s main growth driver and is expected to grow ~40% annually in 2026 and 2027. 

In Q3, revenue from CCS segment rose 43% YoY to $2.41 billion, driven by an 82% YoY increase in Communications revenue to $1.94 billion offsetting a (24%) decline in Enterprise to $477 million on an AI program transition with a hyperscaler. Communications revenue notably accelerated to 18% QoQ from 15% QoQ in Q2, on strong demand for 800G switch products and solid demand for optical products.   

For Q4, CCS revenue is implied to accelerate nine points to 52% YoY, with Communications growth guided in the high-60s YoY on strong switch demand, and Enterprise guided in the low-20s as the new AI program is set to ramp. Despite the seemingly strong guide in Communications, QoQ growth would be just 1% QoQ, a sharp deceleration from Q3’s 18% QoQ growth. 

For 2026, Celestica guided for approximately 40% YoY growth in CCS to ~$12.6 billion, up from $9 billion guided for 2025, supported by views for accelerating 800G demand, early 1.6T ramps and the ramp of its next-gen AI compute platform to full-volume. Management also hinted that they have visibility and confidence in maintaining at least 40% growth for CCS in 2027 – more on this in our deep dive.  

Earnings Earnings 

Celestica reported GAAP EPS of $2.31 in Q3, beating the $1.38 estimate by 67.6%. Adjusted EPS was $1.58, beating the $1.49 estimate by just 6% and representing growth of 52% YoY.  

For Q4, Celestica guided adjusted EPS to be in the range of $1.65 to $1.81, which, at the $1.73 midpoint, is only marginally ahead of estimates for $1.71. This also corresponds to a slight acceleration to 56% growth. 

For fiscal 2025, Celestica boosted its adjusted EPS outlook by 7.3% to $5.90, from its previous forecast for $5.50 and pointing to 51% YoY growth. For fiscal 2026, Celestica outlined an initial guide for $8.20 in adjusted EPS, up 39% YoY and well ahead of estimates for $7.22.  

Margins Margins 

Margins continued to expand in Q3, with some signs of operating leverage arising from strong Communications growth as operating margin expanded by 4.7 points YoY versus a 2.6 point YoY expansion for gross margin.  

• GAAP gross margin was 13.0% in Q3, up 0.2 points QoQ and 2.6 points YoY. 
• GAAP operating margin of 10.2%, up 0.8 points QoQ and 4.7 points YoY. Adjusted operating margin was 7.6%, up 0.2 points QoQ and 0.8 points YoY. 
• GAAP net margin of 8.4%, up 1.1 points QoQ and 4.8 points YoY. However, adjusted net margin was just 5.7%, up just 0.1 points QoQ and 0.7 points YoY due to a $113 million impact from gains on total return swaps.  

For fiscal 2025, Celestica guided for adjusted operating margin to be 7.4%, and for 2026, only a slight increase to 7.8% despite the 31% growth on the top-line. This suggests that its positioning primarily as an ODM may limit future upside to operating margins.  

Cash Cash 

On the other hand, cash flows are rather thin and fell to the lowest level in a year.  

Operating cash flow was $126.2 million, or a 4% margin, down from 5.3% in Q2 and 4.9% in the year ago quarter. OCF growth was just 2.4% YoY and was also the lowest cash flow since the year ago quarter.  

Adjusted FCF was $89 million for a 2.8% margin in Q3, up 15.6% YoY but also the lowest level since the year ago quarter. Adjusted FCF margin was down from 4.1% in Q2 and 3% in the year ago quarter.  

For fiscal 2025, Celestica raised its adjusted FCF guidance slightly to $425 million, from $400 million prior, for a 3.5% margin, while capex is guided to $200 million, or 1.6% of revenue. Fiscal 2026 adjusted FCF was guided at $500 million, up 18% YoY and for a 3.1% margin, with the margin decline driven by higher capex, guided to rise 50-100% YoY to $300 to $400 million, or 2.2-2.5% of revenue.  

Cash and equivalents totaled $305 million while debt totaled $728 million in term loans. Including an undrawn revolver, total liquidity is approximately $1.1 billion. Celestica’s gross debt to TTM adjusted EBITDA was 0.8x, improving by 0.1 points sequentially and 0.3 points from last year. 

Valuation Valuation 

Celestica is trading close to peak multiples on the top and bottom line. Forward PS is currently at 2.8x, well above the five-year average of 0.75x and 40% above the 2x multiple it commanded at the start of September. Even on the fiscal 2026 guide, shares are at an elevated 2.1x multiple, just below peaks at 2.5x. 

On a forward PE basis, shares are trading at 51x fiscal 2025 adjusted EPS and 41.3x fiscal 2026, well above the five-year average of 15.4x and prior resistance at 25x in late 2024 and early 2025. This is slightly below current peaks around the 60x level from October and November.  

Notable Risks Notable Risks 

Valuation is the primary risk, and while it could be argued that the company is deserving of a material re-rating higher on strong AI-driven growth and a shift to higher-margin, custom rack solutions come 2027, margins remain thin with operating margin only just crossing into double-digit territory. Additionally, its ODM positioning also presents a risk as even a shift to higher complexity, higher value products may be unable to produce continuous margin expansion into the low-teens. 

Celestica’s Communications growth within CCS also presents another key risk for Q4, as the high-60s YoY growth guide would imply QoQ growth of around 1% next quarter. This would mark Communications’ lowest sequential growth in the last two years, and its first time reporting single-digit sequential growth in the last seven quarters, raising a potential red flag considering Communications is primarily driven by networking/800G switches. However, a likely explanation of this could be the strong outperformance in Communications in Q3 – guidance was for low-60s YoY growth, which Celestica beat by ~20 points. As a result, QoQ growth was likely expected to be ~4%, but came in at 18%, possibly representing a much stronger-than-expected ramp of 800G platforms in the quarter.  

Arm: Data Center Royalties Double YoY, Targeting 50% Data Center CPU Share 

Thematic: 9/10
Fundamentals: 9/10 
Valuation: 3/10 

Brief Overview Brief Overview 

AI’s need for high-performance, energy-efficient chips creates a long-term tailwind for Arm, as the company’s heterogenous CPU architectures are seeing rapid adoption in data center applications. This is coming from both next-gen merchant GPU platforms and custom silicon deployments from hyperscalers, with Arm now forecasting its server CPU share to reach 50% in 2025, up from 15% in 2024.  

The company’s license and royalty revenue model had centered around its v9 architecture, as it commanded double the royalty of v8, featuring in “virtually all high-end data center chips” and commanded a majority share in smartphones. For example, Arm’s Neoverse V2 (based on v9) powers Nvidia’s Grace CPU on its Grace Hopper and Grace Blackwell platforms, along with Amazon’s Graviton4 CPUs, Google’s Axion CPUs, and more.  

Arm is now pushing ahead with its Compute Subsystems (CSS) platform to help accelerate time to market for complex chip designs, such as Microsoft’s newest Azure Cobalt 200 CPU rolling out through 2026. CSS notably carries double the royalty rate as v9, which management placed at roughly 10%. Arm also signed three new CSS licenses this quarter, bringing its total CSS licenses up to 19 across 11 companies; five of these companies are already shipping CSS-based chips.  

Revenue Revenue 

Arm’s revenue growth accelerated more than 22 points from 12.1% YoY in fiscal Q1 to 34.5% YoY in fiscal Q2 to $1.13 billion, while QoQ growth rebounded from (15.1%) to 7.8% QoQ. 

Royalty revenue increased 21% to a record $620 million, driven by growth in smartphones, auto and data center, along with increased v9 penetration and the ramp of CSS platforms. However, this was a slight deceleration from 25% growth in the prior quarter. 

Licensing revenue rose 56% YoY to $515 million on normal timing fluctuations, accelerating from (1%) growth in the prior quarter.  

For Q3, Arm guided for revenue of $1.225 billion at midpoint, though this represents a deceleration to 24.6% YoY and 7.9% QoQ growth. 

AI Segment Growth AI Segment Growth 

Arm does not provide specifics into its data center revenue contributions, but noted that data center royalties doubled YoY on continued deployment of Arm-based chips at hyperscalers. Data center Neoverse royalties more than doubled YoY, and Arm expects to reach 50% share in of CPUs deployed by hyperscalers by the end of 2025.  

For another view, Arm’s management explained that it is reasonable to assume cloud and networking would reach 15% to 20% share of royalty revenue for the fiscal year, up from ~10% last year. Assuming Q3 and Q4 see royalty revenue rise ~20% YoY, this could project cloud and networking’s contribution between $394 to $525 million. 

Earnings  Earnings  

Arm delivered strong GAAP EPS growth in Q1 as margins expanded down the line, while adjusted EPS growth was more muted but solid nonetheless.  

GAAP EPS was $0.22 in Q1, up 120% YoY and more than 66% ahead of estimates for $0.13. Adjusted EPS was $0.39, nearly 18% ahead of estimates for $0.33 and representing growth of 30% YoY.  

For Q3, Arm guided for adjusted EPS to be $0.41, +/- $0.04, for YoY growth of just 5%. Q4 is estimated to see growth of just 2.7% YoY to $0.56, before reaccelerating to >29% YoY growth in each quarter of fiscal 2027. 

Margins Margins 

Arm saw strong margin expansion down the line, with operating and net margin expanding at a much larger degree than gross margin in Q2, signaling that adoption of its higher margin v9 and CSS platforms is translating to bottom line strength. 

• GAAP gross margin was 97.4% in Q2, up 1.2 points YoY and 0.2 points QoQ.  
• GAAP operating margin was 14.4%, up 6.8 points YoY and 3.6 points QoQ. Adjusted operating margin was 41.1%, up 2.5 points YoY and 2 points QoQ; for Q3, adjusted operating margin is implied to be ~39.4% at midpoint assuming gross margin is flat QoQ.
• GAAP net margin was 21%, up 8.3 points YoY and 8.7 points QoQ. 

Cash Cash 

Cash flows improved substantially on a YoY basis, and Arm’s balance sheet remains robust and debt-free. 

• Operating cash flow was $567 million for a 50% margin, up from a 0.7% margin in the year ago quarter and a 31.5% margin in the prior quarter. 
• Adjusted free cash flow was $411 million for a 36.2% margin, a significant increase from (7.7%) in the year ago quarter and 14.2% in the prior quarter.  

Cash and equivalents totaled $3.26 billion and debt was zero. 

Valuation Valuation 

Unlike many of the other names on this list, Arm is trading more than 20% below its average multiples on the topline, though the company still commands a premium multiple to many of its semiconductor customers. Arm trades at 24.3x forward PS, below its 31.6x average since IPO and well below its peaks at 50x, though it has traded as low as 16x. 

On the bottom line, Arm trades at 64.5x forward PE, below its average of 79.5x, though shares have traded as low as 40x and as high as 125x.  

Notable Risks Notable Risks 

Despite increasing royalty rates by 2X with each new architecture, from 2.5% under v8 to 5% with v9 and 10% with CSS, Arm’s growth may continue to lag that of peers – the company may need to take the leap into design as IP licensing did not move the needle enough from the mobile era. 

Fabrinet: Key Nvidia Partner with Revenue Accelerating to 30% YoY  

Thematic: 8/10
Fundamentals: 4/10 
Valuation: 4/10 

Brief Overview Brief Overview 

Fabrinet provides advanced optical packaging, high-precision optical and electro-optical manufacturing services to OEMs, with revenue primarily stemming from transceivers, active optical cables, optical subsystems for high-speed networking, and data center interconnect. 

Fabrinet is also a key optical partner for Nvidia, with its contributions said to be for short-reach active optical cables with 800G transceivers for Nvidia’s InfiniBand platforms, and optical engine packaging. Fabrinet was also stated as key partner for Nvidia’s upcoming silicon photonics CPO switch platforms during GTC 2025.  

Nvidia accounted for 27.6% of Fabrinet’s revenue in fiscal 2025, or ~$943.7 million; however, this was down nearly (7%) YoY, potentially due to the Blackwell delays from early 2025. Cisco is Fabrinet’s second largest customer, said to be for optical transceivers, accounting for 18.2% of revenue in fiscal 2025, or $622.3 million, up 61% YoY. 

However, like peers positioned similarly in the contract manufacturing space, margins are quite thin and did not show any expansion in the past quarter, and Fabrinet may be unable to produce substantial margin expansion moving forward.  

Revenue Revenue 

Fabrinet reported record fiscal Q1 revenue of $978.1 million, up 7.5% QoQ and 21.6% YoY. This marked a slight acceleration from 20.7% YoY and 4.3% QoQ growth in FQ4.  

Fabrinet’s Optical Communications (OC) business remained the key driver, accounting for 76.4% of revenue. OC revenue rose 8.4% QoQ and 19.3% YoY to $747 million in Q1, accelerating 15.5% YoY and 4.8% QoQ in Q4. Non-optical Communications revenue, or auto, industrial laser and other end markets, was $231.2 million, up 4.6% QoQ and 30% YoY. 

For fiscal Q2, Fabrinet guided for revenue of $1.05 to $1.10 billion, accelerating more than seven points to 29% YoY at midpoint, while QoQ growth would accelerate 2.4 points to 9.9%. Revenue is expected to accelerate to 30-31% YoY in both Q3 and Q4 to $1.13 billion and $1.19 billion respectively.  

For fiscal 2026, Fabrinet has not provided a set guide, though analysts expect revenue to rise 28% YoY to $4.39 billion, accelerating from 18.6% in fiscal 2025. 

AI Segment Growth AI Segment Growth 

Fabrinet offers a few distinct breakdowns within Optical Communications revenue, highlighting datacom and telecom, and within telecom, data center interconnect (DCI).  

Datacom revenue was $273.1 million in Q1, down (17%) YoY and (1%) QoQ, which was a smaller decline than expected due to a smaller QoQ decline at Fabrinet’s largest datacom customer and larger contributions from other datacom customers.  

DCI revenue was $138.1 million, up 92.3% YoY and 29% QoQ, marking a sharp acceleration from 44.8% YoY and 3.5% QoQ growth in the prior quarter. DCI now accounts for ~14% of total revenue. 

Fabrinet also introduced HPC as a reportable segment under Non-optical Communications in Q1, as the company qualified and started to ramp its first HPC program for AWS, which contributed $15.4 million in revenue. Management believes HPC “will scale considerably over the coming quarters and become a significant driver to our overall growth.” 

Fabrinet did not provide a breakdown on OC revenue by data rate in Q1, though in Q4 (the Aug quarter), revenue from >800G data rates was $312.7 million, up 20.7% YoY and 32.5% QoQ and accounting for 34.4% of total revenue. 

Earnings  Earnings  

Despite a lack of margin expansion, Fabrinet has a rather defensible bottom line and delivered solid EPS growth in Q1. GAAP EPS was $2.66, up 24.9% YoY, while adjusted EPS was a record $2.92, up 22.2% YoY and beating estimates by 3.5%. 

For Q2, Fabrinet guided for GAAP EPS of $2.91 to $3.06, up 25.4% YoY at midpoint, while adjusted EPS was guided to be $3.15 to $3.30, up 23.6% at midpoint. The growth rates here lagging revenue by four to five points suggests that margins may feel a bit of pressure next quarter. 

Adjusted EPS growth is forecast to accelerate into the end of the fiscal year, however, suggesting margins may rebound quickly if there is softness in Q2. Q3 and Q4 are both forecast to see adjusted EPS growth of 36% to 37% YoY, or six to seven points faster than revenue growth. 

For fiscal 2026, Fabrinet is currently expected to generate GAAP EPS of $12.25, up 33.6% YoY, and adjusted EPS of $13.25, up 30.3% YoY. 

Margins Margins 

As noted above, Fabrinet did not deliver much on the margin front in Q1, with gross margin contracting slightly, and operating margin remaining flat YoY but dipping slightly sequentially. Additionally, its contract manufacturing position may not be able to drive meaningful margin upside over the coming quarters. 

• Q1 GAAP gross margin was 11.9%, down 0.4 points YoY and 0.3 points QoQ. Adjusted gross margin was 12.3%, down 0.4 points YoY and 0.2 points QoQ. 
• GAAP operating margin was 9.6%, flat YoY but down 0.2 points QoQ. Adjusted operating margin was 10.6%, down 0.1 points YoY and QoQ, 
• GAAP net margin was 9.8%, up 0.2 points YoY and QoQ. Adjusted net margin was 10.8%, flat YoY but up 0.3 points QoQ. 

Cash Cash 

Fabrinet’s cash flow generation was solid in Q1, with operating cash flow margin expanding and free cash flow rebounding after a soft Q4. Fabrinet also has a healthy balance sheet with nearly $1 billion in cash and no debt. 

• Operating cash flow was $102.6 million in Q1 for a 10.5% margin, up from a 10.3% margin in the year ago quarter and a 6.1% margin in Q4. 
• Free cash flow was $57.3 million for a 5.9% margin, down from a 7.8% margin in the year ago quarter, but up from 0.5% in Q4. The YoY contraction in FCF margin was primarily due to capex, which was $45.3 million, up 123.5% YoY. 

Cash and equivalents totaled $968.8 million and debt was zero. 

Valuation Valuation 

Fabrinet is trading close to peak multiples on the top and bottom line. On a forward PS basis, Fabrinet trades at a 3.8x multiple, below its 4.3x peak from early December and notably well above its five-year average multiple of 2.5x; to note, Fabrinet has spent much of the last two and a half years trading between 2x to 3x, with the re-rating above 3x taking place since October 2025. 

On the bottom line, Fabrinet trades at a 35x forward PE, slightly below its peak of 40x and again well above its five-year average of 23x. Similar to forward PS, Fabrinet has spent the last two and a half years primarily between 18x and 28x forward PE.  

Notable Risks Notable Risks 

The main risks to Fabrinet relate to its positioning as a contract manufacturer for Nvidia, Cisco and other key clients, as the company may be unable to produce substantial margin expansion beyond its current profile, meaning EPS growth will likely be closely correlated with revenue growth rates. Fabrinet is also quite highly exposed to Israel, which accounted for 29% of revenue in fiscal 2025, and continuation of global conflicts could potentially impact growth.  

Fabrinet’s strategic positioning with Nvidia as its key customer may present a risk – while it could see tailwinds from the ramp of the silicon photonics CPO switches in 2026, any delay in Rubin’s ramp could adversely affect shipments and revenue. Analysts have also raised concerns in the past that Fabrinet could face headwinds if hyperscalers ‘unbundle’ from Nvidia’s ecosystem and shift away from Nvidia’s InfiniBand or Ethernet switch options.  

Vertiv: Orders Surge 60% YoY, 20% QoQ in Q3, FY25 Guidance Raised 

Thematic: 8/10
Fundamentals: 8/10
Valuation: 3/10 

Brief Overview Brief Overview 

Vertiv will not win any hypergrowth stock awards, especially as management has previously offered CAGR guidance of 15% to 17% through 2029. Rather, it’s where Vertiv is positioned as an AI infrastructure partner especially as the trend turns toward modular infrastructure that makes this a stock to watch.  Essentially, all roads point toward Vertiv’s power and thermal solutions becoming increasingly important for future generations of rack scale solutions, with the company already preparing 800V DC solutions for Nvidia’s Rubin Ultra platform due in 2027. 

Revenue Revenue 

Vertiv reported revenue up 29% YoY and 1% QoQ to $2.676 billion, well ahead of its original guidance for 23% growth in the third quarter. This was driven by 43% YoY growth in the Americas on accelerated AI demand and 20% growth in APAC.  

For Q4, Vertiv guided for revenue to be $2.81 billion to $2.89 billion, up 6.5% QoQ and 18-22% YoY at the $2.85 billion midpoint. While this was ahead of previous guidance for $2.735 to $2.815 billion, this would still represent a nine point deceleration on the topline at midpoint. Management expects Americas revenue to be up high-30s, APAC up mid-single digits and EMEA down high single digits but up mid-teens QoQ. 

The strong outperformance in Q3 also led to Vertiv hiking its FY25 revenue guidance from $10 billion at midpoint to $10.2 billion at midpoint, pointing to organic growth of 26-28% YoY. Management did not provide any direct insight into FY26, though they did say that based on the “substantial backlog and clear visibility of pipeline, we anticipate continued significant organic sales growth in 2026,” with EMEA potentially reaccelerating in 2H 2026. 

AI Revenue Metrics AI Revenue Metrics 

Vertiv’s backlog rose ~30% YoY and 12% QoQ to $9.5 billion, reaccelerating from 21% YoY growth last quarter. More importantly, the $1 billion sequential increase in backlog was the largest in more than two years. However, one of the stronger metrics was order growth, with Vertiv reporting organic orders up 60% YoY and 20% QoQ in Q3. This drove a ten point rebound in TTM organic order growth to 21% YoY, from 11% in Q2. 

However, starting in Q4, Vertiv will no longer report on quarterly orders and backlog information, and instead will report a new metric “projected full year orders.”  

The following was stated in Q2: “Beginning on our Q4 and full year 2025 earnings call, we will provide projected full year orders rather than quarterly orders and backlog information. We believe this better aligns with how we run our business. We will provide updates on the full year projections quarterly as we progress through the year and as we deem necessary.”  This could create a boost to Vertiv’s stock to remove the lumpiness from quarterly reports and to also be more forward looking in terms of visibility offered to investors.  

Earnings Earnings 

Vertiv reported adjusted EPS up 63% YoY to $1.25 in the quarter, beating the $0.99 estimate by 25%. GAAP EPS of $1.02 beat estimates by 16.7%. For Q4, adjusted EPS was guided to decelerate to 27% growth to $1.26 at midpoint.  

For the full year, Vertiv raised its adjusted EPS forecast to $4.07 to $4.13, up from its prior view for $3.75 to $3.85. At midpoint, this represented a nearly 8% hike, now pointing to 44% YoY growth versus 33% previously.  

Margins Margins 

Vertiv reported expanding margins across the board in Q3, though Q4 is expected to be approximately flat for adjusted operating margin.  

• Gross margin was 37.8%, up 1.3 points YoY and 3.8 points QoQ. 
• GAAP operating margin was 19.3%, up 1.4 points YoY and 2.5 points QoQ. Adjusted operating margin was 22.3%, up 2.2 points YoY and 3.8 points QoQ, driven by tariff mitigation efforts and strong execution addressing operational inefficiencies.  
• Net margin was 14.9%, up 6.4 points YoY and 2.6 points QoQ. 

For Q4, adjusted operating margin was guided to be up 0.9 points YoY and approximately flat QoQ at 22.4%, as “progress addressing operational inefficiencies [is] offset by acceleration in growth investments and negative impact from new tariffs.” This is a rather steep decrease from Q2’s guidance for 23.6%, which would’ve been its best adjusted operating margin print since going public in 2020.  

For FY25, Vertiv slightly raised its adjusted operating margin forecast by 0.2 points at midpoint to 20.2%, representing YoY expansion of 0.8 points. This is strong as it comes in the face of “significant headwinds from tariffs and operational inefficiencies driven by supply chain actions to mitigate tariffs.” Tariff impacts are expected to be materially offset exiting Q1 ’26. 

Cash Cash 

Vertiv reported strong cash flows in Q3, with operating cash flow of $508.7 million, up nearly 36% YoY. OCF margin was 19%, up 1.8 points YoY and 6.8 points QoQ. 

Q3 adjusted free cash flow was $462 million, up 32% YoY. Adjusted FCF margin was 17.3%, up 1.1 points YoY and 6.8 points QoQ. Q4 adjusted FCF was guided to be $496 million for a 17.4% margin, up marginally from Q3. Vertiv boosted its adjusted FCF guidance by $100 million, now forecasting $1.5 billion for the year, up from $1.4 billion previously. This corresponds to a 14.7% margin.  

Accounts receivable dipped (1%) QoQ to $2.81 billion, while inventories rose less than 2% QoQ to $1.43 billion. 

Cash, equivalents and investments totaled $1.94 billion, while debt totaled $2.90 billion. 

Valuation Valuation 

Vertiv is trading around 15% below peak multiples on the top line, and more than 23% below peak on the bottom line. Vertiv’s forward PS is 6.2x, below its recent peak valuation at 7.2x at the end of October and substantially higher than its April low at 2.2x forward PS. 

On the bottom line, Vertiv is trading at 40x forward earnings, slightly below its late October peak at 47x and more than 23% below its late 2024 peaks at 52x. 

Notable Risks Notable Risks 

Vertiv’s extended valuation is a primary risk as the company contends with a sharper deceleration on the top line heading into Q4, as well as a sharp deceleration in EPS growth from 63% in Q3 to 27% in Q4. Margins are also a line item to watch, considering management had guided for a Q4 adjusted operating margin of 23.6% back in Q2 but then subsequently cut that guide to 22.4% in Q3. 

Talen: Q3 Revenue Up 29% QoQ, Operating Margin Strengthens 

Thematic: 9/10 
Fundamentals: 6/10  
Valuation: 2/10 

Brief Overview: Brief Overview: 

Talen is an independent power producer with more than 10GW of generation capacity with 2.2GW of that being nuclear. The company’s assets are primarily located in Pennsylvania, Maryland and now Ohio, yet data center regions and capacity are growing including a long-term power purchase agreement with Amazon to fuel data centers in Pennsylvania. 

Talen is expanding its power production portfolio with recent acquisitions of two combined-cycle gas turbine (CCGT) plants, Freedom Energy Center and Guernsey Power Station, for ~$3.8 billion. The two plants will add 2.8 GW to Talen’s energy assets in the PJM region – both are suitable for hyperscale data center power supply. This comes at a time when data center construction is surging in PJM’s region as its grid faces increasing strain, meaning the plants could be more valuable for meeting near-term hyperscaler power needs. 

Revenue Growth Revenue Growth 

Talen reported revenue of $812 million in Q3, up 28.9% QoQ and 24.9% YoY, with the quarter including the higher 2025/26 capacity pricing of ~$270/MW-day.  Revenue from contracts with customers rose 51.9% YoY to $697 million. 

Looking ahead, revenue is expected to accelerate to 43.2% YoY in Q4 and 170.2% in Q1, though these estimates have been revised lower from 53.4% YoY and 184.5% YoY at the start of November. Talen said that for Q4, “things are a bit better given the market move-up, but we are still projecting to be at the lower end of our guidance range as we previously stated at that September Investor Day.” 

For 2026, Talen said it is “forwards tick up. Gas is up, sparks are expanding and load continues to be strong, all factors that continue to impact commercial positioning on long-term transactions.” However, 2026’s estimated capacity revenue is now $733 million, down $14 million from an estimated $747 million as of Q2.  

AI Revenue AI Revenue 

Talen’s deal with Amazon is contributing minimally so far, with just $0.70 in adjusted FCF per share expected in FY25. By mid-2026, Talen expects to deliver 240MW, and expects adjusted FCF to rise ~121% to $1.55 per share, before rising at a ~27% annually to $2.50 per share by FY28 as capacity scales to 480MW. 

Margins Margins 

Gross margin (operating revenue minus energy expense) improved to 64% in Q3 from 60% in Q2 and 62.3% in the year ago quarter. 

Operating margin was 32.3% in Q3, a strong improvement from 10.5% in Q2 and 24.3% in the year ago quarter. This was likely driven by the $116 million increase in capacity revenue and, to a lesser extent, the $99 million increase in energy revenue, as operating expenses were up only marginally YoY. 

Net margin was 25.5% in Q3, improving from 11.4% in Q2 but down marginally from 25.8% in the year ago quarter. 

Earnings  Earnings  

Talen reported $4.25 in GAAP EPS in the quarter, up 34.5% YoY. Talen did not provide guidance for Q4, yet current estimates point to a (25.9%) QoQ decline to $3.15 in GAAP EPS. For 2025, Talen is expected to report GAAP EPS of $5.13, before rising nearly 290% to $20.00 in 2026. 

Talen also reported adjusted EBITDA of $363 million in Q3, representing a 44.7% margin, and improving substantially from $90 million for a 14.3% margin in Q2. Despite the strong increase, Talen narrowed its adjusted EBITDA guidance for fiscal 2025 to $975 million to $1,000 million, down from $975 million to $1,125 million previously. Management said this was because they are towards the lower end of guidance, due to a lack of price volatility in Q3 and the Susquehanna outage. 

For 2026, Talen reaffirmed its adjusted EBITDA guidance for $1,750 million to $2,050 million, representing 75% to 110% YoY growth.  

Cash and Balance Sheet  Cash and Balance Sheet  

Talen’s cash flow generation improved in Q3, with adjusted FCF margin rising to the high-20% level. Talen also improved its balance sheet, though cash to debt remains upside-down for the moment. 

Operating cash flow was $359 million for a 44.2% margin, a sharp improvement from a (22.9%) margin in Q2 and 14.8% in the year ago quarter. 

Adjusted free cash flow was $223 million for a 27.5% margin, up from (12.4%) in Q2 and 14.9% in the year ago quarter. Talen said Q3’s adjusted FCF also included higher capex related to the extended Susquehanna refueling outage. For fiscal 2025, adjusted FCF is tracking near the middle of Talen’s guided range of $470 million to $490 million (narrowed from $450 million to $540 million). For fiscal 2026, Talen is guiding adjusted free cash flow in the range of $980 million to $1.18 billion, more than doubling YoY. 

Cash and equivalents totaled $497 million, a solid improvement from $135 million in Q2. Long-term debt totaled $2.99 billion as of quarter end, though this does not include recent debt associated with Talen’s acquisition financing. Management also shared that they expect the balance sheet to get stronger over time as the AWS deal ramps, and as more contracts get added, it is expected to “further strengthen the balance sheet and provide for visibility to those cash flows.” 

Management provided an update on total liquidity including revolvers:  

“Our liquidity remains substantial with $1.2 billion of liquidity available for working capital, including approximately $490 million of cash available. Once we close on the Freedom and Guernsey acquisitions, we'll have $200 million more of liquidity as our revolver capacity will increase to $900 million. Excluding the acquisition financing, our leverage ratio is still within our 3.5x net debt to adjusted EBITDA target.” Talen’s current year-end forecast for net leverage ratio is 2.6x, well within its target, though it stands at ~5.7x based on current pro-forma debt (incl acquisition financing). Talen is focusing on debt paydown post-closing to reach its 3.5x target by year-end 2026.  

Valuation Valuation 

Talen’s valuation is trading close to peak levels, though the company has seen substantial multiple expansion over the past two years. Talen is currently valued at 7.2x forward sales, below its peak at 8.5x but well above its 3.4x multiple from March 2025 and its 1.9x valuation from early 2024. 

On the bottom line, Talen trades at 74x forward EPS for FY25, more than double its 34x average, though the strong earnings growth in FY26 to the $20 range brings this down to 19x for next year, well below 2024’s peaks of 38x and in line with its five-year average. 

Notable Risks Notable Risks 

Though Talen looks to prioritize rapid debt deleveraging following the closing of the Freedom and Guernsey acquisitions, debt to cash remains stretched very thin. The valuation does appear stretched when looking at FY25 multiples, though Talen is expected to grow into its multiples on the bottom line quickly next year. 

SanDisk: Shares Up 559% In 2025 On NAND Flash, Enterprise SSD Tailwinds 

Thematic: 9/10
Fundamentals: 6/10 
Valuation: 3/10 

Brief Overview Brief Overview 

NAND flash-based data center (enterprise) solid state drives (SSDs) are an often overlooked but equally important memory component when it comes to AI training and inference. This is because data center SSDs offer higher read-write speeds critical for accessing and transferring data rapidly, along with higher performance and energy efficiency, making them vital for larger-scale AI training and inference workloads.   

NVMe (Non-Volatile Memory Express) is a protocol designed specifically for NAND-flash based SSDs that optimizes performance by reducing latency and increasing data transfer speeds by utilizing the PCIe bus. This helps provide the high throughput and fast data transfer speeds necessary for AI workloads – NVMe SSDs can increase performance by more than 2X versus SATA SSDs.  

Now operating independently after being spun out of Western Digital in February 2025, SanDisk is eyeing growth in the enterprise SSD market with its ‘Stargate’ NVMe SSD products, based on its BiCS8 3D NAND architecture jointly-developed with Kioxia, offering industry-leading capacity, energy efficiency and performance. SanDisk’s Stargate line debuted this year with 64TB and 128TB capacity, but will scale to 512TB by 2027, suitable for managing massive AI datasets and workloads. Data center remains a smaller portion of SanDisk’s revenue, with client (PC/smartphones) and consumer products (SD cards/USB) remaining core to its business.  

Revenue Revenue 

SanDisk reported a strong sequential revenue acceleration in its fiscal Q1, driven by NAND demand outpacing supply and increasing demand in its data center, edge and consumer end markets. Q1 revenue increased 22.6% YoY and 21.4% QoQ to $2.31 billion, accelerating from 8% YoY and 12.2% QoQ growth in fiscal Q4. Higher-than-expected bit growth drove the outperformance in the quarter relative to guidance of $2.1-2.2 billion.  

SanDisk’s Edge segment was the primary growth driver in Q1 with revenue up 30% YoY and 26% QoQ to $1.39 billion, driven by increasing NAND content in PCs and smartphones and a positive PC refresh cycle. Consumer revenue rose 27% YoY and 11% QoQ to $652 million, while data ce3nter revenue was down (10%) YoY but up 26% QoQ to $269 million. 

Q2 revenue was guided to be $2.55 to $2.65 billion, up 38.6% YoY and 12.6% QoQ at midpoint. Revenue growth is expected to accelerate further to 53% YoY in fiscal Q3 and then decelerate slightly to 49% in Q4.  

For fiscal 2026, SanDisk is currently expected to generate revenue of $10.53 billion, up 43.2% YoY. Management expects demand to outpace supply through 2026, creating stronger tailwinds for pricing and growth through the year. 

AI Segment Growth AI Segment Growth 

SanDisk’s data center revenue, as mentioned above, declined (10%) YoY but rose 26% QoQ to $269 million, driven by increasing demand for its ‘Stargate’ enterprise SSD product line. However, revenue contribution remains small, at less than 12% of revenue. 

SanDisk did not provide a numerical guide for Q2 for data center, but management noted that they are expecting sequential growth in the segment throughout fiscal 2026, with two hyperscaler qualifications underway and qualifications with an additional hyperscaler and major storage OEM planned for calendar 2026.  

Management also increased their forecast for data center exabyte growth, explaining that last quarter, exabyte growth expectations were in the mid-20% range, but now are in the mid-40% range. As a result, data center Is expected to be the largest market in NAND on an exabyte basis in 2026, surpassing mobile. 

Earnings  Earnings  

SanDisk stands out for its strong expected earnings growth through fiscal 2026 and fiscal 2027, with adjusted EPS expected to reach almost $21 by then, nearly 7X higher than the $2.99 it earned in fiscal 2025. 

Q1 GAAP EPS was $0.75, a strong improvement from a ($0.16) loss in Q4, though this was down (49%) YoY from $1.46 in the year ago quarter as margins remained lower YoY. Adjusted EPS was $1.22, up 321% QoQ but down (33%) YoY. 

For Q2, SanDisk guided for adjusted EPS of $3.00 to $3.40, up more than 162% QoQ. Adjusted EPS is expected to further increase to $3.67 in fiscal Q3 and $4.67 in fiscal Q4.  

For fiscal 2026, SanDisk is expected to generate $13.02 in adjusted EPS, up almost 336% YoY, while GAAP EPS is projected to be $11.49, up from ($11.32) in FY25 due to the spin off. Fiscal 2027 is expected to see earnings power surpass $20, with GAAP EPS estimated to be up nearly 76% to $20.20 and adjusted EPS up nearly 59% to $20.68. 

Margins Margins 

Margins are lower YoY compared to pre-spinoff margins, but Q1 saw strong sequential margin expansion that is expected to accelerate in Q2.  

• Q1 GAAP gross margin was 29.8%, down 8.8 points YoY but up 3.6 points QoQ. Adjusted gross margin was 29.9%, down 9 points YoY but up 3.5 points QoQ. 
• GAAP operating margin was 8.3%, down 8.3 points YoY but up 5.6 points QoQ. Adjusted operating margin was 10.6%, down 8.2 points YoY but up 5.3 points QoQ. 
• GAAP net margin was 4.9%, down 6.3 points YoY but up 2.7 points QoQ, and adjusted net margin was 7.8%. 

For Q2, SanDisk guided adjusted gross margin to be 41-43%, or up just over 12 points QoQ at midpoint, while adjusted operating margin is implied to be 24.2% at the midpoint of opex guidance, or up 13.6 points QoQ.  

Cash Cash 

SanDisk noted that in Q1 it reached a net cash position, six months ahead of schedule, though debt is still almost equivalent to its cash on hand. Cash flows were quite strong, and adjusted FCF margin showed strong expansion. 

• Operating cash flow was $488 million in Q1 for a 21.1% margin, up from a (7%) margin in the year ago quarter and a 4.9% margin in Q4. 
• Adjusted free cash flow was $438 million in Q1 for a 19% margin, up from a (10.5%) margin in the year ago quarter and 2.6% in Q4. 

Cash and equivalents totaled $1.44 billion while debt totaled $1.35 billion. 

Valuation Valuation 

SanDisk’s valuation is somewhat hard to pin down given the company’s limited history on the public markets after its February spinoff, and its rapid 362% ascent since the end of August. 

SanDisk trades at 3.3x forward PS, having peaked at 4x in November and having traded as low as 0.6x in the summer, prior to its sharp rally. For comparison, this is a lower multiple than its former parent Western Digital at 5.1x forward PS, though the two are focused on different memory market segments with WDC primarily in hard disk drives.  

For forward PE, SanDisk currently trades at an 18.4x multiple, slightly above its 15.8x average from the second half of fiscal 2025 prior to its fiscal year readjustment in June. Since then, shares have traded as high as 21.7x and as low as 3x due to the sharp earnings increase expected in fiscal 2026.   

Notable Risks Notable Risks 

The NAND flash market has historically been quite volatile, and is shifting from significant oversupply in 2023 to expectations for substantial supply shortages through 2026. However, if NAND capacity begins to come online quickly through next year, or if demand for PCs and smartphones falters due to rising memory prices,  the NAND cycle could reverse and lead to pricing pressures cutting into revenue growth and margins. 

Teradyne: Quiet Beneficiary of Growing AI Compute, Memory Demand 

Thematic: 8/10
Fundamentals: 6/10 
Valuation: 1/10 

Brief Overview Brief Overview 

Surging demand for AI compute and memory chips is most obvious in the reports of leading chipmakers such as Nvidia and Micron, yet there are numerous behind-the-scenes beneficiaries of this powerful trend, such as Teradyne. Teradyne primarily provides automated test equipment (ATE) for the semiconductor industry, spanning high-performance processors and networking devices, as well as DRAM/HBM and SSD manufacturing.  

For example, Teradyne’s UltraFLEXplus test system was architected specifically for high-performance AI processors and networking devices, enabling high-efficiency volume production and reducing time to market by up to 20%. Its Magnum 7H is a multi-generational HBM test platform, serving HBM3e and HBM4 needs with upgradability to service HBM4e and HBM5 when these products arrive.  

Teradyne sees strong tailwinds from AI compute and memory through the end of the year, while its robotics revenue remains challenged. Management explained in Q3 that its view for 2H 2025 compute revenue is >50% higher than its expectations just three months prior, while memory test sales more than doubled QoQ in the quarter.  

Over the longer term, the increasing complexity of chips, shift to chiplet or multi-chip modules, and increasing die sizes all increase test intensity. For example, the cost of scrapping racks escalates from the NVL72 to the upcoming NVL144 and NVL576 platforms due to the increase in complexity and size, creating long-term tailwinds for Teradyne’s high-performance SoC and memory test products.  

Revenue Revenue 

Teradyne reported revenue up 4% YoY in Q3 to $769.2 million, accelerating from an (11%) decline in Q2. Sequential growth was quite strong at 18% QoQ, though this was against a slightly soft comp of (5%) from Q2.  

The primary driver of growth was Semiconductor Test Equipment, which saw revenue rise 7% YoY and 23% QoQ to $606 million, or nearly 79% of total revenue. This accelerated from a (12%) YoY decline in Q2. 

Product Test Equipment revenue was $88 million, up 10% YoY and 4% QoQ, while Robotics revenue was $75 million, down (15%) YoY and flat QoQ. 

For Q4, Teradyne guided for revenue to be $920 million to $1 billion, a strong acceleration to 28% YoY and 25% QoQ growth at midpoint. Analysts currently estimate revenue growth to continue accelerating to 41% YoY by fiscal Q2 (June 2026).  

AI Segment Growth AI Segment Growth 

Teradyne’s strongest AI-driven growth came from Memory Test Equipment (MTE), which rose more than 110% QoQ to $128 million, or ~16.6% of total revenue. However, this was down (15%) YoY. MTE revenue was driven primarily by DRAM (LPDDR and HBM performance test demand), which accounted for roughly 75% of revenue, with the remaining 25% coming from flash, primarily SSDs. As mentioned above, Teradyne’s Magnum 7H product for HBM3e, HBM4/4e and HBM5, began volume shipments in Q3.  

System-on-Chip (SOC) revenue saw growth driven by AI compute and networking products, with revenue up 11% QoQ and 12% YoY to $440 million, or more than 57% of total revenue.  

Management did not break out Q4’s guidance for these two segments, noting that AI-driven test demand remains robust across compute, memory and networking. Analysts from UBS placed the QoQ growth in Semi Test Equipment at ~$200 million as a whole, with management explaining that the growth will likely be 2/3 compute and networking-driven and 1/3 memory-driven, primarily by HBM. 

Earnings  Earnings  

Teradyne reported strong sequential EPS growth in Q3 that will continue in Q4, though EPS was lower YoY as margins were a couple of points lower compared to last year.  

In Q3, Teradyne reported GAAP EPS up 53% QoQ but down (16%) YoY to $0.75. Adjusted EPS was $0.85, up 49% QoQ but down (6%) YoY, and beating estimates by 7.5%. 

For Q4, Teradyne guided for GAAP EPS to be $1.12 to $1.39, pointing to QoQ growth of 67% and YoY growth of 39% at midpoint. Adjusted EPS was guided to be $1.20 to $1.46, up more than 56% QoQ and 40% YoY at midpoint. Analysts expected adjusted EPS growth to accelerate sharply over the next two quarters, with current consensus estimates calling for growth of 61% in fiscal Q1 and 112% YoY in fiscal Q2. 

Adjusted EPS for fiscal 2025 is projected to be $3.52 for 9.3% YoY growth, before accelerating to nearly 46% growth to $5.13 in fiscal 2026. 

Margins Margins 

While margins were down YoY, Teradyne reported strong sequential growth and improving operating leverage versus Q2, with the expansion in operating margin at 4X the rate of gross margin. Operating margins are guided to continue expanding at a similar rate in Q4.  

• GAAP gross margin was down 0.8 points YoY but up 1.2 points QoQ to 58.4%. Adjusted gross margin was down 1.2 points YoY but up 1.2 points QoQ to 58.5% 
• GAAP operating margin was down 1.7 points YoY but up 5 points QoQ to 18.9%. Adjusted operating margin was down 2 points YoY but up 5.3 points QoQ to 20.4%.  
• GAAP net margin was down 4.2 points YoY but up 3.5 points QoQ to 15.5%. Adjusted net margin was down 2.3 points YoY but up 3.6 points QoQ to 17.7%.  

For Q4, Teradyne guided for adjusted gross margin to be 57-58%, down 1 point at midpoint on onetime supply costs to meet accelerated demand. Adjusted operating margin was guided to be 24-27%, up 3.6 to 6.6 points at midpoint on a much lower opex run rate at 31-33% of revenue, versus 38.1% in Q3. 

Cash Cash 

Cash flow margins contracted sharply Q3, though this was primarily driven by a large QoQ increase in accounts receivable, providing an extra layer of confidence in the upcoming revenue acceleration in the next couple of quarters.  

• Operating cash flow was $49.1 million for a 6.4% margin, though OCF margin had been >22% for the past five quarters. The sharp contraction was primarily due to a $161 million sequential increase in accounts receivable.  
• Free cash flow was $2.4 million for a 0.3% margin, down from 20.2% in the prior quarter due to the jump in AR.  

Cash and equivalents were $297.7 million in Q3, down from $367.9 million in Q2, while Teradyne took on new debt of $200 million in the quarter (with this being its only debt). 

Valuation Valuation 

Teradyne is trading at peak multiples, with shares currently at 9.9x forward PS, well above its five-year average of 6.6x and just shy of its 10.4x peak. 

On a forward PE basis, Teradyne trades at 55x forward earnings, more than 50% above its five-year average of 35.7x and just off its peak of 58x. Even looking ahead to fiscal 2026, with the ~36 point acceleration for adjusted EPS, Teradyne is trading at a 38x multiple, still above its average. 

Notable Risks Notable Risks 

It is still early in this AI-driven inflection in growth for Teradyne, and management has pointed out that SoC test growth in Q3 and Q4 should not be extrapolated into the early part of next year, as timing for Q1 and Q2 remains uncertain and growth may be lumpy. The thin cash flows are not necessarily a red flag yet, but if margins remain depressed, this could be more of a risk to watch moving forward. 

Dell: FY25 AI Server Revenue Raised to $25 Billion, Up 150% YoY 

Thematic: 8/10
Fundamentals: 6/10 
Valuation: 7/10 

Brief Overview Brief Overview 

Dell’s story is primarily centered around its AI server growth opportunities, benefiting from the ramp of Nvidia’s Blackwell and Blackwell Ultra GPUs, though the company does have other outlets into storage, networking, and commercials PCs and workstations. Dell is working closely with Nvidia to help accelerate enterprise AI adoption via the Dell AI Factory, and notably was the first to deliver Nvidia’s GB300 NVL72 racks to CoreWeave back in July. 

Riding Nvidia’s coattails this past quarter, Dell reported strong AI server metrics in Q3, booking record orders and reaching a new record for backlog, while guiding for record shipments next quarter. Dell also raised its AI server revenue forecast by another $5 billion, now seeing $25 billion this year, up 150% YoY and up $10 billion from its initial $15 billion forecast at the start of the year. Nvidia’s strong visibility into Blackwell and Rubin sales through 2026 also hints that this AI server momentum may persist through next year.  

However, growth in Dell’s consumer and commercial PC business remains low, and the company must battle rather thin AI server margins in a competitive market. Dell did note that AI server margins improved sequentially and helped drive some margin expansion, but the company must prove that this dynamic can be maintained. 

Revenue Revenue 

Dell reported a solid Q3 with revenue of $27.0 billion, though this was around 1.1% shy of consensus estimates for $27.3 billion. Revenue was up 10.7% YoY but down (9.7%) QoQ, as Q2 was positively impacted by a sharp ~356% QoQ increase in AI server shipments to $8.2 billion due to timing of fulfillment.  

Dell’s Infrastructure Solutions Group (ISG) revenue increased by double-digits YoY for a sixth consecutive quarter, up 24% YoY in Q3 to $14.1 billion. This slowed from 44% growth in Q2 to $16.8 billion, though again this was impacted by the strong QoQ growth on shipment timing. Within ISG, Server and Networking revenue was up 37% YoY to a record $10.1 billion, while Storage revenue was down (1%) YoY to $4 billion. 

Dell’s Client Solutions Group (CSG) revenue increased 3% YoY to $12.5 billion, a slight acceleration from 1% YoY growth in Q2, as Dell noted robust international demand and continued growth in Commercial demand. Commercial revenue was up 5% YoY to $10.6 billion, acceleration from 2% YoY in Q2, while Consumer revenue was down (7%) YoY to $1.9 billion.  

For Q4, Dell guided for $31-32 billion in revenue, marking a sharp acceleration to 32% YoY at midpoint and 16.7% QoQ, with nearly 30% of this revenue coming from AI servers. Full-year fiscal 2026 revenue was guided to be $111.2-112.2 billion, up 17% YoY at midpoint. This was a solid $4.7 billion raise from prior guidance for 12% growth to $107 billion at midpoint.  

AI Segment Growth AI Segment Growth 

Dell’s AI server momentum was robust in Q3, with the company reporting record orders and backlog, with a strong QoQ increase in revenue guided for Q4. Dell also raised its full-year AI server revenue forecast to $25 billion, up ~150% YoY.  

AI server revenue was $5.6 billion in Q3, up 93% YoY but down nearly (32%) QoQ as Dell fulfilled some larger orders in Q2. For Q4, Dell guided for $9.4 billion in AI server revenue, a fresh record, and representing YoY growth of 348% and QoQ growth of 68%. 

AI server orders reached a record $12.3 billion, up ~120% QoQ and also surpassing Q1’s $12.1 billion. Fiscal 2026 YTD orders reached $30 billion, more than 3X higher than the $9.4 billion recorded in the same period last year. 

AI server ending backlog rose ~57% QoQ to a record $18.4 billion with a significant shift to the GB300 in the quarter. Dell added that its five-quarter pipeline remains multiples of its backlog and grew sequentially across neoclouds, sovereigns and enterprises.  

Earnings  Earnings  

Dell reported a strong GAAP EPS beat in Q3, with earnings of $2.28, up 39% YoY and 15.7% ahead of estimates for $1.97. Adjusted EPS also beat by 4.5%, rising 17% YoY to $2.59, driven by improved profitability in AI servers and storage.  

For Q4, Dell guided for GAAP EPS growth to accelerate to 42% YoY to $3.05 at midpoint, while adjusted EPS was guided to accelerate to 31% YoY to $3.50 at midpoint. This accelerate is poised to continue into Q1, with adjusted EPS forecast to rise 52.4% YoY to $2.36. 

For fiscal 2026, Dell guided GAAP EPS to be $8.38 at midpoint, up 31% YoY, a $0.40 raise from its Q2 guide of $7.98 for 25% growth. Adjusted EPS was guided to be $9.92 for 22% YoY growth, also a $0.37 raise from its prior guide for $9.55.  

Margins Margins 

Margins were mixed for Dell in Q3, with gross margin rebounding QoQ but remaining down YoY, and operating margin expanding on both a YoY and QoQ basis.  

• Q3 GAAP gross margin was 20.7%, down 1.3 points YoY but up 1.4 points QoQ. Adjusted gross margin was 21.1%, down 1.4 points YoY but up 2.4 points QoQ. 
• Q3 GAAP operating margin was 7.8%, up 0.7 points YoY and 1.8 points QoQ. Adjusted operating margin was 9.3%, up 0.1 points YoY and 1.6 points QoQ. 
• Q3 GAAP net margin was 5.7%, up 0.9 points YoY and 1.8 points QoQ. Adjusted net margin was 6.5%, flat YoY and up 1.2 points QoQ. 

By segment:  

• ISG adjusted operating margin was 12.4%, down 0.9 points YoY but up 3.6 points QoQ. This was driven by storage and sequential improvement AI server profitability, with management saying AI server margins were mid-single-digit, up from an implied 2.5% last quarter.  
• CSG operating margin was 6.0%, down 0.2 points YoY and 0.4 points QoQ.  

Cash Cash 

Operating and free cash flow both declined YoY and QoQ, though adjusted FCF more than doubled YoY due to financing receivables.  

• Operating cash flow was $1.17 billion, down (25%) YoY. OCF margin was 4.3%, down from 6.4% in the year ago quarter and 8.5% in Q2.  
• Free cash flow was $506 million, down (45%) YoY. FCF margin was 1.9%, down from 3.8% in the year ago quarter and 6.3% in the prior quarter. Adjusted FCF, however, was up 133% YoY to $1.67 billion for a 6.2% margin, up from 2.9% in the year ago quarter. 

Cash and equivalents totaled $9.57 billion, while debt totaled $31.24 billion, with $7.39 billion being current.  

Valuation Valuation 

Dell trades slightly above its average forward PS multiple at 0.76x currently versus its five-year average of 0.69x, though the company has rarely traded above 1x over the past two years. 

On the bottom line, Dell trades at 12.9x forward PE, also slightly above its five-year average of 12x, but well below its October high at 16.6x and previous resistance around the 18x level.  

Notable Risks Notable Risks 

The main risk to watch for Dell is AI server margins, and whether or not the company can maintain mid-single-digit margins moving through 2026, considering the competitiveness of the industry between Super Micro and Taiwanese ODMs such as Foxconn and Quanta. 

Additionally, the sharp surge in memory prices is expected to cause substantial PC price hikes to preserve margins – Dell is said to be raising commercial PC prices by as much as 30% as a result. These price hikes could weigh on demand and cause PC growth to slow next year, with IDC forecasting the industry to decline (5%) in a conservative scenario and as much as (9%).  

Micron: HBM, LP Server DRAM Driving Strong Growth, FQ2 to Accelerate to 37% QoQ 

Thematic: 9/10
Fundamentals: 10/10 
Valuation: 6/10 

Brief Overview: Brief Overview: 

Micron is a primary beneficiary of rapidly increasing dollar content of high-bandwidth memory (HBM) chips with each new generation of GPUs. AI training and inference rely heavily on HBM for the massive memory bandwidth that complex models require. AI servers also use more DRAM and NAND than a traditional server. These are reasons that Micron’s cyclical fundamentals could become more secular as the AI economy is built out.  

In fiscal 2025, Micron’s HBM, high-capacity dual in-line memory modules (DIMMs) and low-power (LP) server DRAM revenue reached $10 billion, up more than fivefold from the prior year, while HBM alone reached $2 billion in revenue in Q4.  

Management expects robust AI server demand, the shift to HBM4 and tight DRAM supply to drive substantial records for revenue, gross margin, EPS and free cash flow for fiscal 2026 with business strengthening throughout the year. Micron also expects these tight market conditions to persist beyond 2026. 

What Micron will need to answer is if the cyclical nature of the memory market will smooth out as the dollar content of memory is rapidly increasing. Data center is already proving to be a strong driver of growth for Micron, accounting for 56% of sales in FY25, up from 35% in FY24. On a dollar basis, data center revenue surged 137% YoY to $20.75 billion for the year.  

Overall Revenue Growth Overall Revenue Growth 

Micron reported record Q1 revenue of $13.64 billion, beating estimates by 5.9% and accelerating 10.7 points to 56.7% YoY growth. Sequentially, growth was 20.6% QoQ, just one point slower than Q4’s 21.7% QoQ growth. DRAM products (within that HBM and LPDDR5X) were the primary driver of Q1’s results, with revenue up 69% YoY and 20% QoQ to $10.8 billion, or 79% of revenue. 

Micron also delivered one of the largest beats in AI semiconductors outside of Nvidia’s May 2023 report with its Q2 guidance. Management forecast revenue of $18.7 billion, +/- $0.4 billion for next quarter, more than 31% above estimates for $14.23 billion. This corresponds to a very sharp 75.5 point acceleration to 132.2% YoY growth, while QoQ growth would accelerate to 37.1% at the midpoint of the guide.  

Micron has not provided a full-year guide for revenue, but current consensus estimates call for 98% growth to $73.98 billion in revenue. 

AI Revenue Growth AI Revenue Growth 

In Q1, Micron's data center revenue rose 55% YoY to $7.66 billion (56% of company revenue), with growth primarily driven by DRAM (HBM/LPDDR5X) products and aided by data center SSDs and NAND components.  

Micron’s Cloud Memory Business Unit (CMBU), which consists of its HBM, high-capacity dual in-line memory modules (DIMMs), and low-power server DRAM solutions, saw Q1 revenue of $5.28 billion, up 99.5% YoY. 

Micron’s other data center unit, its Core Data Center Business Unit (CDBU), consists primarily of data center SSDs and NAND components. This unit saw Q1 revenue grow just 4% YoY to $2.38 billion.  

Earnings Earnings 

Micron is expected to see robust earnings growth this fiscal year as margins are rapidly expanding on surging prices. In Q1, Micron reported GAAP EPS of $4.60, up 175% YoY; this also is a sharp uptick from $2.83 in Q4.  

For Q2, Micron guided for GAAP EPS to be $8.19, +/- $0.20, nearly 74% ahead of estimates for $4.71 and corresponding to YoY growth of almost 481%, a 306 point acceleration. GAAP EPS growth is expected to remain >250% for both Q3 and Q4 to $9.37 and $10.04. 

For the full year, Micron is expected to deliver GAAP EPS of $31.17, more than quadrupling from $7.59 in fiscal 2025. Earnings estimates also moved more than 60% higher following Q1’s report and Q2’s blowout guide, moving from $19.42 to the now $31.17 estimate.  

Margins Margins 

Micron’s margin turnaround story has been impressive, with gross margin up nearly 57 points over the last two years and operating margin up 69 points. Micron also guided for substantial records for gross and operating margin in Q2, on the backs of strong pricing. 

GAAP gross margin in Q1 was 56%, up 17.6 points YoY, aided by the strong growth in CMBU which carried a 66% gross margin in the quarter. For Q2, GAAP gross margin was guided to be 67% at midpoint, an 11 point sequential expansion and up 31.2 points YoY.  

GAAP operating margin was 45%, up 12.7 points QoQ and 20 points YoY, again aided by CMBU which carried a 55% margin in the quarter. For Q2, Micron implied operating margin to be 58.7%, up 12.7 points QoQ and 36.7 points YoY, signaling strong tailwinds from surging DRAM prices. 

GAAP net margin was 38.4% in Q1, up 10.1 points QoQ and nearly 17 points YoY.  

Cash Cash 

Operating cash flow was $8.41 billion in Q1, up more than 159% YoY and nearly 47% QoQ. OCF margin was 61.7%, up 10 points QoQ and up 24.4 points YoY.  

Adjusted free cash flow was $3.91 billion in Q1, up sharply from $803 million in Q4 and $112 million in the year ago quarter. Adjusted FCF margin was 28.6%, up from 7.1% in the prior quarter and 1.3% in the year ago quarter. 

Micron reported total cash and equivalents of $12.0 billion and total debt of $11.76 billion. 

Valuation Valuation 

Despite its recent rally, Micron trades at somewhat reasonable multiples, well below its peak from 2024. On the top line, Micron trades at 4.4x forward revenue, 22% above its average 3.6x multiple and far below its peak of 6.8x from mid 2024. 

On the bottom line, Micron trades at 9x forward earnings, though its 40.9x average is skewed higher by 2024’s >100x multiples when margins were razor-thin. Since the start of 2025, Micron has traded as high as 16x forward earnings, and as low as 3x on its fiscal-year reset in September. 

Notable Risks Notable Risks 

Micron’s growth to this point and beyond has been centered around HBM and data center DRAM products, both on the top and bottom lines. Rising HBM demand in 2026 as next-gen GPU systems ramp and content growth in LP server DRAM are strong tailwinds for growth, yet sharply rising DRAM prices from tight supply could cut into demand for consumer electronics products. This is Micron’s second largest segment and growth driver (Mobile and Client), with nearly $4.3 billion in revenue and a 47% operating margin in Q1, and any demand softness from price hikes could be felt more acutely in 2026.

Conclusion: 

We are thrilled about our new tier Discovery as we’ve seen immediate results in 2025 after delivering a separate tier for new ideas. We quickly spotted the limitations around running an active portfolio that does not dedicate a separate effort to new idea generation as the market moves fast with new winners emerging every year. It would be easy to miss up-and-coming momentum stocks without this tier – especially for enthusiastic AI investors, such as ourselves.  

We believe pointing out names that are not often spoken of (yet) while also reiterating those that are well-known yet remain strong quarter-after-quarter allows us to go beyond the I/O Fund portfolio to offer maximum value from our research efforts. 

As we look at Q4 and beyond, we believe this quarterly analysis combined with an actively managed Top 10 list will become a strong offering in 2026. Our cumulative record proves we are one of the strongest teams in the world on AI stocks and 2025 was no exception. Moving forward, our goal is to use our proven methodology to deliver additional value add as we participate heavily in the once-in-a-lifetime trend of AI.  

In the coming weeks, we expect things to shift rapidly as new information is published daily during earnings season. Please reference our Top 10 Watchlist spreadsheet and incoming analysis as critical tools for staying on top of the Must Know stocks in the space. We will also cover these stocks in a Discovery webinar hosted by Knox Ridley early next month. 

Stay tuned for frequent updates!

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

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock and crypto entries and exits. Beth Kindig offers weekly deep dives including lesser-known cryptocurrencies and AI stocks, plus the team offers trade alerts. The I/O Fund team is one of the only audited portfolios available to individual investors. If you’d like to subscribe to the Advanced Market Signals plan, email us at premium@io-fund.compremium@io-fund.com.

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

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