The I/O Fund’s Top 15 Stocks for Q3 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.

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• Can AMD’s MI350X and MI355X GPUs Close the Gap with Nvidia?
• Taiwan Semiconductor: Building a Moat under Geopolitical Tensions