It is easy to draw on one’s emotional bias and therefore build a believable case for what the market will do next. We think this is a mistake for investors positioning for the remainder of 2025. Instead, we will continue to let the markets tell us what is to come.
“The next move will be a corrective rally that makes a lower high. The targets for this bounce are between 5600 – 6050.”
We further stated that once we see our first larger correction from this region, how the market corrects from there will likely determine the remainder of the year.
Having an unbiased game plan still applies and continues to act as a balance beam in an emotionally charged market. We are seeing mounting evidence that this bounce may be the start of a new push to all-time highs, such as improved breadth, better than expected earnings plus the size of this bounce. However, one can’t ignore the unprecedented levels of uncertainty shown in key indexes, coupled with a growing problem in the U.S. bond market.
In this report, we’ll lay out the unbiased case for each scenario for our 2025 stock market outlook. We do this so that we can be aligned with the developing trend once it is revealed.
Why the S&P 500 Could Reach New All-Time Highs This Year
Fibonacci Retracements
There are several factors that suggest the current rally is not a bear market bounce. One of the most interesting facts is that we’ve never seen a bear market bounce retrace this much (and this quickly) without turning into a new uptrend.
The simplest method for measuring a bounce is to use Fibonacci Retracement levels. For those not familiar with this simple technique, when a market starts to bounce after a period of volatility, you simply divide the drop into key Fibonacci numbers. So, 38.2%, 50%, 61.8%, and 76.4% retracements of the drop are areas of interest.
Using this technique, we can get an idea of the size of the current bounce relative to what history says about bear market bounces. Going back to 1929 there have been 19 bear markets, as defined by a decline of 20% or more in the markets. Once a market dropped into bear market territory, we would usually see a bounce back to the 50% retracement level before starting to trend lower.
For example, the 2000 peak entered an official bear market by declining 20% in February of 2001. In late March, the market staged a 22% rally that just barely made it over the 50% retracement of the entire drop. It then turned lower and resumed the downtrend.
March 2001 saw a bear market rally of 22% that briefly surpassed the 50% retracement level before turning lower. Source: I/O Fund
The above scenario has been the most likely outcome for prior bear market bounces. However, of the 19 bear markets since 1929, there have only been four bear market bounces that made it to the 61.8% retracement – 1938, 1947, 2008, and the most recent bear market in 2022, which is shown below.
August 2022’s bear market rally was one of the rare bear market bounces that touched the 61.8% retracement level and turned lower. Source: I/O Fund
There is no instance, so far, where a bear market rally moved beyond the 61.8% retracement of the entire drop and was not the start of a new uptrend. The current bounce not only exceeded the 61.8% retracement level, but it also went above the 76.4% retracement level.
The rally so far in April and May 2025 has surpassed the 61.8% and 76.4% retracement levels. If it is a bear market rally, it will be the 1st ever to bounce this high. Source: I/O Fund
This shifts the probability that we are in a bear market bounce to being low, based on historic standards. It would not only be the first bear market bounce that exceeded the 61.8% retracement level, but it would be the first bear market to exceed the 76.4% retracement level.
Advance/Decline Line
The Advance-Decline Line (A/D Line) is a widely used indicator that tracks market breadth by showing how many stocks are rising versus falling on a given trading day. How it works is that each trading day, analysts tally the number of stocks that closed higher than the previous day (advancing) and subtract the number of stocks that closed lower (decline). This value is then added to the prior day’s cumulative A/D Line, creating a running total that reveals whether participation in the market is expanding or narrowing over time.
What is particularly interesting about the A/D line is how it tends to lead price coming out of periods of volatility. The chart below shows this phenomenon leading equities to new highs in 2016, 2018, and 2022.
Note how both the S&P 500 and the A/D line topped around the same periods in all four tops. However, the A/D Line has a history of breaking out to new highs months before the S&P 500 – in the case of the 2023 recovery, the Advance Decline line broke to new highs almost a year before the S&P 500.
The Advance Decline Line tends to lead the S&P 500 coming out of periods of volatility. It has been a reliable signal that new highs will follow. Source: I/O Fund
The reason this is important is because every instance the market has had a meaningful correction since the 2008 top, the Advance Decline line would breakout to new highs months before price, signaling that a new high is the broad market is likely to follow.
Today, we are seeing the same phenomenon. The A/D line broke to new highs on April 29th, while the S&P 500 remains below its February 19th high.
The Advance Decline line topped alongside the S&P 500 in February of 2025 but has since broke out to new highs. Will the S&P 500 follow? Source: I/O Fund
If history is a guide, seeing breadth, as measured by the Advance Decline line, break to new highs, suggests price will follow.
Earnings Growth Much Better than Expected in Q1
We usually do not see large and prolonged declines while earnings are growing. We tend to see a consistent pattern of misses in earnings that is accompanied with a clear deceleration. Based on current reports, earnings are coming in better than expected, with earnings growth for the S&P 500 rising as more companies report. The index is also on track to report its second consecutive quarter of double-digit earnings growth and seventh consecutive quarter of growth.
Data from LSEG I/B/E/S as of May 16 placed the S&P 500’s Q1 2025 blended EPS growth rate at 14.3% YoY with 92% of companies reporting. Earnings growth is up more than 4 points since April 25’s 10.1% blended growth rate and up more than 6 points since April 1’s 8.0% blended growth rate.
Q1’s blended earnings growth for the S&P 500 is expected to be 14.3%, up more than 6 points since April 1. Source: I/O Fund, data from LSEG I/B/E/S
Blended earnings growth estimates for the remainder of 2025 have come down rather sharply as the market digested April’s tariff announcement, with growth now expected to be in the mid-single digit range down from the strong double-digit range.
2026 earnings growth is estimated to be rather robust, accelerating to nearly 16% YoY by Q2 before moderating to the 14% range by Q4, per LSEG I/B/E/S data. Though we are not seeing a pattern of earnings misses this quarter, these growth rates could change quickly, as Q1 26’s growth estimate has already come down nearly 8 points in six weeks. There has also been a considerable number of discussions around tariff pull forwards, to where indecisive buyers rush to make purchases before tariffs take effect.
Risks That Cannot Be Ignored: The 30-Year Stock-Bond Correlation is Breaking Amid Record Market Uncertainty
Even though we are seeing some signals that historically precede higher stock prices, one can’t underestimate the backdrop of the unique risks associated with the current stock market. For one, markets do not like uncertainty. When uncertainty is introduced into equity valuations, we tend to see aggressive repricing of perceived risk within the markets. In other words, sell first and ask questions later. This is what happened during COVID, as well as Liberation Day.
Though fear has subsided due to the size of this bounce in the markets, it’s worth noting that we are seeing a record high in the indexes that measure geo-political and economic uncertainty. The Economic Policy Uncertainty Index (EPU), which provides a quantifiable measurement of global uncertainty based on news headlines, global conflicts, tariffs, and changing tax codes, is signaling the highest level of uncertainty seen in more than two decades.
The Economic Policy Uncertainty Index (EPU) is showing the highest level of uncertainty in over a century. Source: Economic Policy UncertaintyEconomic Policy Uncertainty
This is further backed up by the Bloomberg Trade Policy Index, which is also at record levels of uncertainty.
Trade policy uncertainty shot up to a record high in 2025. Source: Bloomberg EconomicsBloomberg Economics
To make matters more unsettling, when the markets enter a period of uncertainty, which increases market volatility, we tend to see a flight into long-duration government bonds – the tried-and-true haven. For over 30 years, when stocks go down, bonds go up, and this has been the pattern investors can count on, making a diversified portfolio of stocks and bonds the ideal instrument for weathering periods of volatility with ease.
Considering that we are seeing historic levels of uncertainty, coupled with heightened volatility, this correlation states that we should have seen a notable increase in government bonds, as investors turn toward safety. However, since the market peaked on February 19th, the ETF that tracks long dated government bonds, TLT, is down nearly 7%.
Some might suggest that the market is forward looking, and that bonds did not go higher because the market may be pricing in a full recovery. Once again, no one knows for sure, but if this is the case, then the same logic should also apply to prior periods of quick volatility – like 2010, 2011, 2015, and 2020. These were periods of uncertainty and heightened volatility that were short lived, yet while uncertainty was high during these periods, we saw investors flee into bonds, quickly pushing TLT up 25% to 53%, as shown in the chart below.
Bonds historically have moved inversely to the stock market during periods of uncertainty, though 2022 and 2025’s market saw bonds falling while stocks fall. Source: I/O Fund
Now, compare this to today’s market. We saw the S&P 500 drop into bear market territory in just over one month, with some of the highest recorded geo-political uncertainty on record. Fear and uncertainty were so elevated during this time that we saw the volatility index (VIX) post a closing price of 45. Since 1990, there have been only three periods where we saw the VIX close over this level – 2008, 2009, and 2020.
This suggests that we are potentially seeing a 30-year correlation between stocks and bonds shift in real-time. And, if this correlation-break persists, it will pose a much bigger risk to financial markets than tariffs or political uncertainty.
Dollar Weakness and Debt Maturity Crisis Could Force U.S. Rates Even Higher
Bonds appear to be setting up for a breakdown, not a breakout. In other words, investors should expect rates to go higher while the U.S. has to refinance $7 trillion (due now) of its $9.2 trillion in maturing debt this year, with another $5 trillion due next year. The $9.2 trillion alone from 2025 is around one-third of the market value of marketable Treasury debt, and nearly 30% of US GDP.
While higher rates loom over the economy and threaten to weigh on growth, as the 10-year and 30-year rise past 4.5% and 5%, there’s also broader implications to consumers and government spending. Higher rates will put upward pressure on borrowing costs, making mortgages, car loans, or variable-rate-based loans including credit cards more expensive.
Net interest payments on debt are surging, with 2025’s estimated payments at $952 billion, up 8% YoY, and more than 175% higher since 2020. Interest payments are expected to surpass $1 trillion as soon as 2026. From 2025 to 2035, net interest payments are currently forecast to total $13.8 trillion cumulatively.
The US’ net interest payments on its $36T in debt are estimated to be $952 billion in 2025, up more than 175% in 5 years. Source: I/O Fund
The massive wall of debt that needs to be refinanced will likely be done now at much higher rates, adding even more to interest costs. For example, say that the $7 trillion in debt is refinanced at an average rate 1.5% to 2% higher, this would add an additional $105 to $140 billion annually in interest expenses simply from the higher rate structure.
Canadian mortgage lender First National says that “analysts reckon that every 30-basis point rise in the ten-year adds roughly $1.8 trillion to ten-year interest costs, sharpening the Treasury’s incentive to fund smoothly.” First National adds that 2025’s gross debt issuance will likely climb above $10 trillion based on the projected deficit and maturities, a volume that a modern market has not absorbed before.
Additionally, the U.S. dollar looks like it is heading lower, as measured by the dollar index (DXY). When this index is moving higher, money is flowing into U.S. markets, and when it is trending lower, there is a flight from U.S. markets. DXY still has, at least, one more drop in order to complete the downtrend pattern in play. This would target around $95 – $93, which is another 4% – 7% drop from current prices.
The US Dollar Index looks to have one more drop to $93-95 to complete its downtrend. Source: I/O Fund
This is a problem because the US needs foreign money flowing into its markets to finance our debt this year. For the first time since 2008, our total debt has meaningfully exceeded total domestic liquidity.
For the first time since 2008, the US’ total debt meaningfully exceeds total liquidity.
The U.S. alone simply does not have the needed liquidity to fund its debt, meaning that we must rely on foreign liquidity flows. Yet, as shown in DXY, foreign investments are fleeing the U.S. markets at the worst possible time.
Without foreign flows, rates have to rise until bonds find buyers – yet the predicament is that the US cannot afford rates to go higher as net interest payments then compound quicker.
A weaker dollar could also have numerous ramifications for the broader market. First, a weaker dollar could provide a tailwind to inflation as imports become more expensive, which in turn could force the Fed to keep rates higher for longer and prolong a rate cut cycle.
Second, approximately 25% of the outstanding debt, or around $9 trillion worth, is held by foreign investors – Japan with the largest holdings of more than $1.1 trillion, followed by the UK at ~$780 billion and China at $765 billion. Whereas higher rates tend to cause the dollar to strengthen by offering attractive returns for dollar-denominated investments, that’s not what we’re seeing after April’s trade policy announcements. From Morningstar:
“Conventional wisdom says new tariffs should have strengthened the dollar, since the import taxes were expected to reduce spending on goods produced overseas and shrink the trade deficit. A smaller trade deficit would mean the US would need to attract less foreign capital to keep the dollar from depreciating.”
Since the dollar is instead weakening, lower foreign appetite for debt could add more upward pressure to yields, and this fear resurfaced on Wednesday, as the weak 20-year auction pushed yields above expectations and sent equities sharply lower.
Subscribe for Full Access to the Article
It is easy to draw on one’s emotional bias and therefore build a believable case for what the market will do next. We think this is a mistake for investors positioning for the remainder of 2025.
Below the Advanced Tier Paywall is the Following information:
The specific game plan for how the I/O Fund plans to navigate the remainder of 2025 including the must-watch levels
The signals we are watching to gauge when the broad market tops and the exact levels where we will resume buying stocks.
Dial-in instructions for a 1-hour webinar on Thursday where I/O Fund Portfolio Manager, Knox Ridley, will discuss live the I/O Fund’s game plan for 2025. If you went into this sell-off fully invested without any risk management plan, we encourage you to attend our upcoming weekly webinar for premium members held this Thursday, May 29th at 4:30 ET.
Our five-year cumulative returns of 210% and 27.6% annualized places us at the top of Wall Street — if we were a hedge fund, we'd rank #2. If we were an ETF, we'd rank #5. We are celebrating our 5-year anniversary with our biggest sale of the year – take advantage with up to $275 off Advanced here. Check out the sale here.
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.
For our Premium Members, we discuss the following:
What AI-Related Suppliers and Competitors are Saying Ahead of Nvidia Earnings, including an important supplier correlation that broke down in November and worsened in April.
The timing of when Big Tech capex will hit peak growth and what this means for Nvidia’s stock
The I/O Fund’s trading plan for Nvidia including never-before published buy targets over a 12 to 18-month time frame.
What AI-Related Suppliers and Competitors are Saying Ahead of Nvidia Earnings:
Unlike software, hardware ramps can take considerable time – in this case, Blackwell will have taken nearly 18 months from its announcement in March of 2024 until it ramps in volume in H2 2025. Given the improving, yet still muted commentary from Nvidia suppliers, the I/O Fund is looking toward Nvidia's August and November earnings calls as being the stronger earnings reports this year.
Here is what you need to know about Q1 and Q2 so far – some of which has been reported on while other notable points are being reported for the first time:
AMD to See $700M Impact in Q2; $1.5B Impact in FY2025
AMD is a solid company to track not only for its unique, underdog ascent in the AI market, but also because the company is similarly impacted with export license restrictions on the MI308 variant from tis MI300 series GPUs. Management stated the export restrictions will lead to a $700 million loss in revenue for AMD in Q2.
Here is a statement by CEO, Lisa Su:
“As a reminder, in April, a new export license requirement was put in place for MI308 shipments to China, the impact of which is included in our guidance. We expect revenue to be approximately $7.4 billion plus or minus $300 million. This includes an estimated $700 million revenue reduction as a result of the new export license requirement. Despite this headwind, the midpoint of our guidance represents 27% year-over-year revenue growth. For the full year 2025, we estimate the revenue impact due to the export license requirement to be approximately $1.5 billion.”
In terms of data center growth, it’s expected that AMD’s data center segment will decline in Q2 due to the loss of MI308 revenue yet will resume growth in Q3 and Q4.
Server Makers: Dell, Super Micro and HPE
When we look at AI server makers, there are signs that supply chain bottlenecks are easing — yet not at the pace originally expected for H1 2025.
Super Micro: the Nvidia Proxy
Super Micro is an obvious place to start when parsing out GPU shipments given the AI server maker led the market during the Hopper generation and grew from $7 billion in annual revenue to an expected $22 billion for the fiscal year ending in June – more than a 3X increase from the Hopper generation. When you look further out to include Ampere GPUs, revenue increased 7X from $3 billion in annual revenue to $22 billion in the current fiscal year ending in June.
Pictured Above: Supermicro’s revenue has correlated to Nvidia’s until only very recently. The disconnect that began in November has worsened in the latest quarter.
Super Micro offered a disappointing report as sales declined 19% QoQ and management lowered guidance for FY2025 revenue from $23.5B to $25B to $26B to $30B. At midpoint, this represents a 13.4% miss compared to previous guidance. Notably, this miss is concentrated in the current quarter as the company’s fiscal year ends in June.
While some are pointing toward a transition from Hopper to Blackwell as the issue, to be clear, it’s more likely the China impact from the H20 restrictions combined with delays for NVL72 volume shipments.
Regarding the NVL72s, Supermicro pointed toward direct liquid cooling as the primary hangup for the delays in the Q&A:
“Michael Ng
Great, thanks Charles, that's very helpful. And just as a follow up, can you talk about whether or not you're seeing differences in demand between HGX versus NVL 72 racks? Any differences there either in customer demand or your ability to fulfill demand on either product? Thank you.
Charles Liang
Yes, we see strong demand for kind of GB200 NVL 72 and B200 liquid cooling. But customer liquid cooling data center basically a little bit dead. So that's why they are waiting there, waiting a little bit more than what we expect. So but however the solution, their data center will be ready very soon and we to see our schedule is getting much more exciting now.”
Regarding the H20 impact, Supermicro’s Asia revenue increased 10 points QoQ, which suggests Supermicro was a beneficiary of an increase in China orders to some degree:
On an annual basis, Supermicro has not reported Asia revenue higher than 21.9% — proving the 29.4% in the latest quarter is certainly an outlier for this company.
Overall, both Supermicro and AMD point toward Nvidia’s Q2 as likely the choppiest quarter the company has faced in some time.
Additional Server Makers:
One data point does not make a trend, therefore, it’s prudent to check if these conclusions are being echoed elsewhere. As you’ll see below, the worst is likely behind us for Blackwell delays yet suppliers are not exactly surging in their AI segments ahead of deliveries in this specific quarter.
Dell:
Dell has not reported since February, which provides another month of visibility into how Q1 may fare yet does not offer much in terms of March or April. The company reported AI orders of $1.7 billion, down (53%) QoQ and shipments of $2.1 billion, down (28%) QoQ with $4.1 billion in backlog as customers work through “technology changes.”
Looking ahead, Dell foresees $15B in AI shipments this year yet the guide for the current quarter missed estimates. Dell’s quarter ends in April and the company guided Q1 revenue in the range of $22.5B to $23.5B, representing YoY growth of 3.4% at the midpoint, missing estimates by 3% yet expects adjusted EPS to grow 25% YoY to $1.65.
Dell is a mixed bag of course as there is significant consumer exposure on the PC side – yet interesting enough, analysts are more bullish on PCs outperforming in the upcoming quarter than AI servers due to a pull forward ahead of tariffs with Raymond James stating: ‘The AI transition between GPU generations has been more disruptive than anticipated, and checks suggest PC purchases have been pulled forward in anticipation of tariffs.”
Overall, we need to hear Dell’s update following Nvidia’s earnings before any conclusions can be drawn. What we do know is that in February, Dell was not too confident about their next quarter’s guide, hence lowering it by 3%.
HPE:
Hewlett-Packard is smaller in terms of AI revenue yet reported similar results as Dell in the March earnings report with AI systems mix falling 6.2% QoQ from 17.7% to 11.5%. According to the CEO, the headwinds are unlikely to clear up in Q2: “We recognized roughly $900 million of [AI systems] revenue, up from about $400 million last year, but down sequentially as expected due to chip availability and customer readiness. We expect these factors will continue to affect our AI systems business.” HPE has a mix of segments in total revenue, yet the company’s guidance missed Q2 estimates by 6.6%.
Looking forward, HPE’s statements match what others are saying, which is that Blackwell is finally ramping – although at lower levels than originally estimated: " In AI, we continue to see strong demand from model builders and service providers. We booked $1.6 billion in new AI system orders in the quarter, bringing our cumulative AI system orders to $8.3 billion. The Blackwell GPU generation of products represented approximately 70% of our new order intake in Q1.”
Vertiv:
Vertiv is not a server maker, rather provides the power supply and thermal management solutions required for data center infrastructure. The company lowered its guidance last quarter, yet raised guidance in the most recent quarter – pointing toward a successful resolution to thermal management issues for Blackwell rack-level systems. Here is what management stated: “The $150 million increase in organic sales is driven by both the first quarter and higher expectations in the second quarter versus what was implied in our prior guidance.”
On the call, an analyst asked if Vertiv “precedes the chip shipments” to which the CEO answered affirmatively by 3-6 months. Therefore, the encouraging inflection seen in Vertiv’s report is unlikely to result in an immediate correlation to Nvidia.
Note on Foxconn:
Foxconn (Hon Hai) is a crucial part of Nvidia's Blackwell supply chain, with it reportedly having the world’s largest GB200 manufacturing facility in Mexico. Foxconn said in Q1 that AI server revenue rose 50% YoY, and projected that Q2’s AI server revenue would double QoQ and YoY. Management explained that the reason Q1 did not double was “mainly due to the GB series entering mass production at the end of 1Q25,” and that most of those products would be delivered in 2Q25. Foxconn added that “HGX demand will continue to expand.”
For Q2, Foxconn said that AI servers were entering high-volume production, and would account for a larger portion of revenue at 50% of server sales, up from 40-42% in 2024. Foxconn also expects AI server revenue to improve each quarter of the year, and it reaffirmed guidance for AI server revenue to grow more than 50% YoY to surpass NT$1 trillion (US$33.0 billion) on high demand.
JP Morgan believes that Foxconn entered its large-scale ramp of GB200 production in late March, targeting 30,000 rack shipments for the full-year, with 10,000 of those being GB200/300 NVL72. This suggests that the ramp is still in the early stages, though accelerating into the summer months based on recent rack shipment estimates in April.
Obligatory Discussion on Capex
Capex and how it relates to AI spending needs no introduction at this point. Investors have never had it so easy as to track demand openly like we can with Big Tech’s disclosures on their quarterly and fiscal year capex guidance. Here is an overview of just how current guidance from Big Tech:
Amazon has forecast capex of more than $100 billion this year, up from $78 billion in 2024. This represents the largest amount being spent by a single tech company and is a higher mix of custom silicon compared to GPUs.
Alphabet has forecast capex of $75 billion this year, up from $52.5 billion in 2024.
Meta has forecast capex of $68 billion this year, up from $39.2 billion in 2024. This represents the largest growth among the Big Tech companies this calendar year at 74%.
Microsoft has forecast capex of $80 billion this fiscal year ending in June, up from $44.5 billion. Given Microsoft has a mid-year fiscal year, this represents the largest growth among tech companies over the past 12 months at 80%.
I want to caution that peak years for AI capex growth are likely behind us. Collectively, Microsoft, Amazon, Meta and Google are projected to spend more than $330B on capex in 2025, up nearly 34% YoY. According to UBS, estimates for capex will rise less than 10% YoY to $364B, with Amazon’s capex nearly flat and Meta seeing the largest increase at 15% YoY.
Wall Street has consistently placed capex estimates too low, meaning it’s likely we see greater than a 10% YoY increase next year, yet the chances growth rates accelerate beyond this year’s 34% growth is not likely (hence the statement we’ve likely hit peak growth).
Microsoft recently offered a glimpse that the voracious appetite to grow AI infrastructure may eventually come back down to earth. Management said capex in fiscal 2026 (beginning in the second half of calendar 2025) will grow at a slower pace than FY2025, with a higher mix of short-lived assets. Additionally, capex declined sequentially for the first time in 2 years, at $21.4 billion versus $22.6 billion in the prior quarter. Q3’s figure was also slightly lower than expected due to variability in timing of data center leases, though capex is expected to increase sequentially in fiscal Q4.
There are many avenues for Nvidia to continue its AI dominance, which we’ve covered for the past 2-3 years on the premium site to prepare our readers for Nvidia's long runway. Flat capex will likely spook the markets (more likely in January 2026 than in July) yet we would be buyers as we are quite clear Nvidia’s AI thesis goes well beyond AI servers and infrastructure.
I/O Fund’s Buy Plan
By Knox Ridley
Since launching the I/O Fund live portfolio in May of 2020, Nvidia is one of only three positions we have owned without interruption. Since 2021, Nvidia has remained in the top three, which was two years ahead of the AI surge.
On a more granular level, we backed up our research with 9 buy alerts that we sent to our Members when NVDA was under $20 from 2021 – 2022. Being early to the A.I. trend has been one of the primary reasons why the I/O Fund was able to outperform our benchmarks and competition in 2023 – 2025.
However, unlike many, we favor an active approach – i.e., taking gains in positions, and reducing risk, regardless of how bullish our long-term thesis may be. Stocks do not move in a straight line, and although we believe that we are in the early innings of A.I., we think investors should expect periods of volatility that punctuate the larger trend higher.
For this reason, we cut ¼ of our Nvidia position in June of 2024 at $129.49, just before Nvidia saw a greater than 35% drawdown into August. We further cut half of our position at $127 and $140 on February 6th and 20th of this year, just before Nvidia dropped more than 40% into the April 7th lows.
While both technical and fundamental concerns were the reasons behind these decisions to take gains, we were able to follow up these sales with buys at much lower prices. In our January 2025 article, titled, “Where I Plan to Buy Nvidia Stock Next,”we outlined our long-term targets in the $90s and $80s. We were able to execute this plan on April 4th at $94 and at $87 on April 7th. These were prices targets that I had been discussing with our premium members in my weekly Thursday webinar for many months.
Now that we have seen 54% bounce off the April lows, we believe Nvidia, and the markets are at a major inflection point.
Technical Analysis
We’ll begin with the bigger trend that started on the October lows in 2022. You can see how vertical the pattern is. This is a standard 5-wave pattern, which can allow for two general interpretations on where Nvidia is likely heading next:
Blue – This is our primary analysis and suggests that the April low was the end of the larger 4th wave decline. This would mean that Nvidia is setting up for a 5th wave push to new highs, which should target $170 – $195 then $240 – $295. This will complete the larger uptrend pattern and likely give way to a multi-month correction.
Red – This scenario has the August 2024 low as the bottom of the 4th wave, and the weak and messy push higher into the February high as the final 5th wave in this uptrend pattern. The next larger drop should be a more direct pattern that ultimately breaks below $97. This will setup the final drop to the $70s – $60 region.
NVDA is setting up for a reversal. Note the RSI indicator below. It is currently at the same level that the February top occurred, as well as the first major drawdown in late 2022. This is a key region where bounces tend to fail. Also, note how volume continues to drop the higher we go. There are less buyers the higher we go, which is not a good sign.
What will be key is how Nvidia retraces. If we see a messy and overlapping drop that resembles a 3-wave drop, it is signaling that the bullish blue count is likely in play. On the other hand, if we see a more aggressive and direct drop that resembles 5-wave drop, it will support the probability that the red count is what is in play.
If we zoom in on the current 2025 trend, we can get a better idea of what these paths might look like. This is also the chart we will use to establish a risk management plan for any new buys.
Nvidia broke out from the down trend line that started at the February 2025 top. This is historically a bullish signal, and one that favors the bullish scenario. Furthermore, the smaller degree count looks incomplete. As long as $129 holds, I expect NVDA to push to the $143 – $149 region before putting in a local top.
As stated before, if the next drop is a 3-wave move that is messy and overlapping, we will target the $116, $110, $103 region for an additional buy. As long as this drop holds over $97, we expect to see a low, followed by a larger push into the $240 – $294 region in the coming months. If we instead see a more direct drop that resembles a 5-wave drop, we will be on high alert. A break below $97 will setup a final drop into the $76 – $60 region. This will setup a tremendous buying opportunity, if it happens.
The I/O Fund is closely monitoring Nvidia for a potential entry point. Join us Thursdays at 4:30 p.m. in our Advanced Market webinars, where we’ll outline our strategy for initiating a position with maximum upside in mind. Learn more here.
Essentials Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgrade
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in NVDA at the time of writing and may own stocks pictured in the charts.
For our Premium Members, we discuss the following:
What AI-Related Suppliers and Competitors are Saying Ahead of Nvidia Earnings, including an important supplier correlation that broke down in November and worsened in April.
The timing of when Big Tech capex will hit peak growth and what this means for Nvidia’s stock
The I/O Fund’s trading plan for Nvidia including never-before published buy targets over a 12 to 18-month time frame.
What AI-Related Suppliers and Competitors are Saying Ahead of Nvidia Earnings:
Unlike software, hardware ramps can take considerable time – in this case, Blackwell will have taken nearly 18 months from its announcement in March of 2024 until it ramps in volume in H2 2025. Given the improving, yet still muted commentary from Nvidia suppliers, the I/O Fund is looking toward Nvidia's August and November earnings calls as being the stronger earnings reports this year.
Here is what you need to know about Q1 and Q2 so far – some of which has been reported on while other notable points are being reported for the first time:
AMD to See $700M Impact in Q2; $1.5B Impact in FY2025
AMD is a solid company to track not only for its unique, underdog ascent in the AI market, but also because the company is similarly impacted with export license restrictions on the MI308 variant from tis MI300 series GPUs. Management stated the export restrictions will lead to a $700 million loss in revenue for AMD in Q2.
Here is a statement by CEO, Lisa Su:
“As a reminder, in April, a new export license requirement was put in place for MI308 shipments to China, the impact of which is included in our guidance. We expect revenue to be approximately $7.4 billion plus or minus $300 million. This includes an estimated $700 million revenue reduction as a result of the new export license requirement. Despite this headwind, the midpoint of our guidance represents 27% year-over-year revenue growth. For the full year 2025, we estimate the revenue impact due to the export license requirement to be approximately $1.5 billion.”
In terms of data center growth, it’s expected that AMD’s data center segment will decline in Q2 due to the loss of MI308 revenue yet will resume growth in Q3 and Q4.
Server Makers: Dell, Super Micro and HPE
When we look at AI server makers, there are signs that supply chain bottlenecks are easing — yet not at the pace originally expected for H1 2025.
Super Micro: the Nvidia Proxy
Super Micro is an obvious place to start when parsing out GPU shipments given the AI server maker led the market during the Hopper generation and grew from $7 billion in annual revenue to an expected $22 billion for the fiscal year ending in June – more than a 3X increase from the Hopper generation. When you look further out to include Ampere GPUs, revenue increased 7X from $3 billion in annual revenue to $22 billion in the current fiscal year ending in June.
Pictured Above: Supermicro’s revenue has correlated to Nvidia’s until only very recently. The disconnect that began in November has worsened in the latest quarter.
Super Micro offered a disappointing report as sales declined 19% QoQ and management lowered guidance for FY2025 revenue from $23.5B to $25B to $26B to $30B. At midpoint, this represents a 13.4% miss compared to previous guidance. Notably, this miss is concentrated in the current quarter as the company’s fiscal year ends in June.
While some are pointing toward a transition from Hopper to Blackwell as the issue, to be clear, it’s more likely the China impact from the H20 restrictions combined with delays for NVL72 volume shipments.
Regarding the NVL72s, Supermicro pointed toward direct liquid cooling as the primary hangup for the delays in the Q&A:
“Michael Ng
Great, thanks Charles, that's very helpful. And just as a follow up, can you talk about whether or not you're seeing differences in demand between HGX versus NVL 72 racks? Any differences there either in customer demand or your ability to fulfill demand on either product? Thank you.
Charles Liang
Yes, we see strong demand for kind of GB200 NVL 72 and B200 liquid cooling. But customer liquid cooling data center basically a little bit dead. So that's why they are waiting there, waiting a little bit more than what we expect. So but however the solution, their data center will be ready very soon and we to see our schedule is getting much more exciting now.”
Regarding the H20 impact, Supermicro’s Asia revenue increased 10 points QoQ, which suggests Supermicro was a beneficiary of an increase in China orders to some degree:
On an annual basis, Supermicro has not reported Asia revenue higher than 21.9% — proving the 29.4% in the latest quarter is certainly an outlier for this company.
Overall, both Supermicro and AMD point toward Nvidia’s Q2 as likely the choppiest quarter the company has faced in some time.
Additional Server Makers:
One data point does not make a trend, therefore, it’s prudent to check if these conclusions are being echoed elsewhere. As you’ll see below, the worst is likely behind us for Blackwell delays yet suppliers are not exactly surging in their AI segments ahead of deliveries in this specific quarter.
Dell:
Dell has not reported since February, which provides another month of visibility into how Q1 may fare yet does not offer much in terms of March or April. The company reported AI orders of $1.7 billion, down (53%) QoQ and shipments of $2.1 billion, down (28%) QoQ with $4.1 billion in backlog as customers work through “technology changes.”
Looking ahead, Dell foresees $15B in AI shipments this year yet the guide for the current quarter missed estimates. Dell’s quarter ends in April and the company guided Q1 revenue in the range of $22.5B to $23.5B, representing YoY growth of 3.4% at the midpoint, missing estimates by 3% yet expects adjusted EPS to grow 25% YoY to $1.65.
Dell is a mixed bag of course as there is significant consumer exposure on the PC side – yet interesting enough, analysts are more bullish on PCs outperforming in the upcoming quarter than AI servers due to a pull forward ahead of tariffs with Raymond James stating: ‘The AI transition between GPU generations has been more disruptive than anticipated, and checks suggest PC purchases have been pulled forward in anticipation of tariffs.”
Overall, we need to hear Dell’s update following Nvidia’s earnings before any conclusions can be drawn. What we do know is that in February, Dell was not too confident about their next quarter’s guide, hence lowering it by 3%.
HPE:
Hewlett-Packard is smaller in terms of AI revenue yet reported similar results as Dell in the March earnings report with AI systems mix falling 6.2% QoQ from 17.7% to 11.5%. According to the CEO, the headwinds are unlikely to clear up in Q2: “We recognized roughly $900 million of [AI systems] revenue, up from about $400 million last year, but down sequentially as expected due to chip availability and customer readiness. We expect these factors will continue to affect our AI systems business.” HPE has a mix of segments in total revenue, yet the company’s guidance missed Q2 estimates by 6.6%.
Looking forward, HPE’s statements match what others are saying, which is that Blackwell is finally ramping – although at lower levels than originally estimated: " In AI, we continue to see strong demand from model builders and service providers. We booked $1.6 billion in new AI system orders in the quarter, bringing our cumulative AI system orders to $8.3 billion. The Blackwell GPU generation of products represented approximately 70% of our new order intake in Q1.”
Vertiv:
Vertiv is not a server maker, rather provides the power supply and thermal management solutions required for data center infrastructure. The company lowered its guidance last quarter, yet raised guidance in the most recent quarter – pointing toward a successful resolution to thermal management issues for Blackwell rack-level systems. Here is what management stated: “The $150 million increase in organic sales is driven by both the first quarter and higher expectations in the second quarter versus what was implied in our prior guidance.”
On the call, an analyst asked if Vertiv “precedes the chip shipments” to which the CEO answered affirmatively by 3-6 months. Therefore, the encouraging inflection seen in Vertiv’s report is unlikely to result in an immediate correlation to Nvidia.
Note on Foxconn:
Foxconn (Hon Hai) is a crucial part of Nvidia's Blackwell supply chain, with it reportedly having the world’s largest GB200 manufacturing facility in Mexico. Foxconn said in Q1 that AI server revenue rose 50% YoY, and projected that Q2’s AI server revenue would double QoQ and YoY. Management explained that the reason Q1 did not double was “mainly due to the GB series entering mass production at the end of 1Q25,” and that most of those products would be delivered in 2Q25. Foxconn added that “HGX demand will continue to expand.”
For Q2, Foxconn said that AI servers were entering high-volume production, and would account for a larger portion of revenue at 50% of server sales, up from 40-42% in 2024. Foxconn also expects AI server revenue to improve each quarter of the year, and it reaffirmed guidance for AI server revenue to grow more than 50% YoY to surpass NT$1 trillion (US$33.0 billion) on high demand.
JP Morgan believes that Foxconn entered its large-scale ramp of GB200 production in late March, targeting 30,000 rack shipments for the full-year, with 10,000 of those being GB200/300 NVL72. This suggests that the ramp is still in the early stages, though accelerating into the summer months based on recent rack shipment estimates in April.
Obligatory Discussion on Capex
Capex and how it relates to AI spending needs no introduction at this point. Investors have never had it so easy as to track demand openly like we can with Big Tech’s disclosures on their quarterly and fiscal year capex guidance. Here is an overview of just how current guidance from Big Tech:
Amazon has forecast capex of more than $100 billion this year, up from $78 billion in 2024. This represents the largest amount being spent by a single tech company and is a higher mix of custom silicon compared to GPUs.
Alphabet has forecast capex of $75 billion this year, up from $52.5 billion in 2024.
Meta has forecast capex of $68 billion this year, up from $39.2 billion in 2024. This represents the largest growth among the Big Tech companies this calendar year at 74%.
Microsoft has forecast capex of $80 billion this fiscal year ending in June, up from $44.5 billion. Given Microsoft has a mid-year fiscal year, this represents the largest growth among tech companies over the past 12 months at 80%.
I want to caution that peak years for AI capex growth are likely behind us. Collectively, Microsoft, Amazon, Meta and Google are projected to spend more than $330B on capex in 2025, up nearly 34% YoY. According to UBS, estimates for capex will rise less than 10% YoY to $364B, with Amazon’s capex nearly flat and Meta seeing the largest increase at 15% YoY.
Wall Street has consistently placed capex estimates too low, meaning it’s likely we see greater than a 10% YoY increase next year, yet the chances growth rates accelerate beyond this year’s 34% growth is not likely (hence the statement we’ve likely hit peak growth).
Microsoft recently offered a glimpse that the voracious appetite to grow AI infrastructure may eventually come back down to earth. Management said capex in fiscal 2026 (beginning in the second half of calendar 2025) will grow at a slower pace than FY2025, with a higher mix of short-lived assets. Additionally, capex declined sequentially for the first time in 2 years, at $21.4 billion versus $22.6 billion in the prior quarter. Q3’s figure was also slightly lower than expected due to variability in timing of data center leases, though capex is expected to increase sequentially in fiscal Q4.
There are many avenues for Nvidia to continue its AI dominance, which we’ve covered for the past 2-3 years on the premium site to prepare our readers for Nvidia's long runway. Flat capex will likely spook the markets (more likely in January 2026 than in July) yet we would be buyers as we are quite clear Nvidia’s AI thesis goes well beyond AI servers and infrastructure.
I/O Fund’s Buy Plan
By Knox Ridley
Since launching the I/O Fund live portfolio in May of 2020, Nvidia is one of only three positions we have owned without interruption. Since 2021, Nvidia has remained in the top three, which was two years ahead of the AI surge.
On a more granular level, we backed up our research with 9 buy alerts that we sent to our Members when NVDA was under $20 from 2021 – 2022. Being early to the A.I. trend has been one of the primary reasons why the I/O Fund was able to outperform our benchmarks and competition in 2023 – 2025.
However, unlike many, we favor an active approach – i.e., taking gains in positions, and reducing risk, regardless of how bullish our long-term thesis may be. Stocks do not move in a straight line, and although we believe that we are in the early innings of A.I., we think investors should expect periods of volatility that punctuate the larger trend higher.
For this reason, we cut ¼ of our Nvidia position in June of 2024 at $129.49, just before Nvidia saw a greater than 35% drawdown into August. We further cut half of our position at $127 and $140 on February 6th and 20th of this year, just before Nvidia dropped more than 40% into the April 7th lows.
While both technical and fundamental concerns were the reasons behind these decisions to take gains, we were able to follow up these sales with buys at much lower prices. In our January 2025 article, titled, “Where I Plan to Buy Nvidia Stock Next,”we outlined our long-term targets in the $90s and $80s. We were able to execute this plan on April 4th at $94 and at $87 on April 7th. These were prices targets that I had been discussing with our premium members in my weekly Thursday webinar for many months.
Now that we have seen 54% bounce off the April lows, we believe Nvidia, and the markets are at a major inflection point.
Technical Analysis
We’ll begin with the bigger trend that started on the October lows in 2022. You can see how vertical the pattern is. This is a standard 5-wave pattern, which can allow for two general interpretations on where Nvidia is likely heading next:
Blue – This is our primary analysis and suggests that the April low was the end of the larger 4th wave decline. This would mean that Nvidia is setting up for a 5th wave push to new highs, which should target $170 – $195 then $240 – $295. This will complete the larger uptrend pattern and likely give way to a multi-month correction.
Red – This scenario has the August 2024 low as the bottom of the 4th wave, and the weak and messy push higher into the February high as the final 5th wave in this uptrend pattern. The next larger drop should be a more direct pattern that ultimately breaks below $97. This will setup the final drop to the $70s – $60 region.
NVDA is setting up for a reversal. Note the RSI indicator below. It is currently at the same level that the February top occurred, as well as the first major drawdown in late 2022. This is a key region where bounces tend to fail. Also, note how volume continues to drop the higher we go. There are less buyers the higher we go, which is not a good sign.
What will be key is how Nvidia retraces. If we see a messy and overlapping drop that resembles a 3-wave drop, it is signaling that the bullish blue count is likely in play. On the other hand, if we see a more aggressive and direct drop that resembles 5-wave drop, it will support the probability that the red count is what is in play.
If we zoom in on the current 2025 trend, we can get a better idea of what these paths might look like. This is also the chart we will use to establish a risk management plan for any new buys.
Nvidia broke out from the down trend line that started at the February 2025 top. This is historically a bullish signal, and one that favors the bullish scenario. Furthermore, the smaller degree count looks incomplete. As long as $129 holds, I expect NVDA to push to the $143 – $149 region before putting in a local top.
As stated before, if the next drop is a 3-wave move that is messy and overlapping, we will target the $116, $110, $103 region for an additional buy. As long as this drop holds over $97, we expect to see a low, followed by a larger push into the $240 – $294 region in the coming months. If we instead see a more direct drop that resembles a 5-wave drop, we will be on high alert. A break below $97 will setup a final drop into the $76 – $60 region. This will setup a tremendous buying opportunity, if it happens.
The I/O Fund is closely monitoring Nvidia for a potential entry point. Join us Thursdays at 4:30 p.m. in our Advanced Market webinars, where we’ll outline our strategy for initiating a position with maximum upside in mind. Learn more here.
Pro Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgrade
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in NVDA at the time of writing and may own stocks pictured in the charts.
When you’re Babe Ruth, the crowd expects to see a homerun. Hit a single or a double and the fans go home disappointed. Nvidia has continued to report exceptional earnings results, yet Nvidia stock is competing with itself at this point.
Next week, Nvidia will report fiscal Q1 earnings, and the market has become accustomed to the company reporting a string of homeruns and grand slams. While Q1 results will be propped up by China stockpiling the H20s, the outlook for Q2 is the choppiest the company has faced in two years. This is because Nvidia has a narrower path than usual to impress investors as the Hopper generation demand is waning while Blackwell is (finally) shipping but not at the levels originally expected.
Last quarter, I published the analysis: “Nvidia Suppliers Send Mixed Signals for Delays on GB200 Systems – What it Means for Nvidia Stock.” which stated “Given market jitters around DeepSeek, which turned out to be a non-issue, something more material related to the GB200s, such as growth slowing below expectations at the start of the new fiscal year, could send the stock below $100 — which we would see as a buying opportunity […] ultimately, my firm trimmed our Nvidia position (to a 10% allocation) and will happily buy lower should the assumptions in this analysis materialize. Nvidia remains the stock of the decade; however, stock returns – and product launches — are not perfectly linear.” –February 2025
That analysis played out. We were able to buy Nvidia at $87, issuing a real-time trade alert that has returned 53% on that tranche since early April. We also added several key Nvidia suppliers that have moved sharply higher.
With a strong seven-year track record on this name, I felt it was important to share my perspective as Nvidia Week kicks off on Wall Street.
H20 Export Ban Will Result in $5.5B Inventory Loss and Cost $15B in Revenue
China has dominated the headlines over the past quarter and exactly how Nvidia plans to overcome geopolitical tensions will be a primary focus in the upcoming call. Export controls have been in place for years, hence the H800 and the H20 GPU variants, which were designed to be less powerful GPUs to comply with export restrictions. Yet, the license restrictions were changed in April, resulting in a $5.5 billion inventory loss for Nvidia. More recently, Jensen Huang clarified it would be $15 billion in revenue stating the inventory will have to be discarded.
Here is a brief summary of the USA-China GPU licensing restrictions:
In 2022, the Biden administration placed export controls on the A100s and H100s due to bandwidth, requiring the bandwidth to be lowered to 400GBps This led to the A800s and H800s.
In October of 2023, performance requirements were accounted for in the export controls, limiting sales of Nvidia’s A800, H800, L40, L40S and RTX 4090 chips. This led to Nvidia creating the H20 GPUs.
In April of 2025, the Trump administration has effectively banned the H20s by denying the export license. This is on the grounds that H20s can be used in supercomputers and offers 20% faster inference than the H100s.
While the H20 has reduced compute performance compared to the H100s — including fewer Tensor Cores and lower FP8/FP16 throughput — it retains high-speed interconnect capabilities through its support for NVLink and PCIe Gen4, and features 96GB of HBM3 memory with 4.0 TB/s of memory bandwidth. The 96GB of HBM3 exceeds the H100s, which is large enough for LLM models to run in memory and lower costs. The higher HBM3 also translates to the H20 offering fast communication when clustered with other GPUs for a multi-GPU system supercomputer.
Furthermore, although the H20 performs at roughly 50% of the H100s, it has a power advantage at 400 watts compared to the H100s 700 watts. Partially due to the lower power, while maintaining high-speed bandwidth for inference, means the H20s have remained attractive to Chinese firms especially in the wake of DeepSeek’s R-1 release.
Selling chips to China for use in supercomputers has been prohibited since 2022. Meanwhile, many industry experts believe Chinese firms were stockpiling the H20s to build a large supercomputer. The Institute for Progress, a nonpartisan group, wrote a long-form explanationof the loopholes that were being used, stating: “The United States is about to make another strategic mistake: Allowing three Chinese firms to receive over $16 billion in orders for NVIDIA H20 chips, amounting to over 1.3 million chips. This order is over six times the size of Colossus, the largest compute cluster in the world. It would more than double China’s entire existing stock of H20 chips. If these chips are delivered, they will dramatically increase Chinese firms’ ability to develop frontier AI models and deploy them at scale.”
As far as when the stockpiling began, semiconductor Insights analyst, Claus Aasholm, noted back in December that “The downgraded H20 system, which passes the embargo rules for China, is doing incredibly well. With 50% quarter-over-quarter growth, it is currently Nvidia’s most successful product. The H100 business “only” grew 25% QoQ.”
According to Reuters, analysts had forecast a total of $12 billion in H20 sales for Nvidia's fiscal year ending in January. However, China revenue for the year was significantly higher at $17.1 billion.
However, this pales in comparison to what Q1 and Q2 were about to report in terms of China revenue.
Nvidia Q1 Earnings Preview: Loss of China Revenue Will Sting
In Q1, Chinese tech companies such as Alibaba, ByteDance and Tencent were hurrying to place H20 orders. The Information reported that Chinese Big Tech companies had placed $16 billion worthof H20 chips in the first three months of the year.
This would represent a sudden surge of roughly 3X growth given previous quarters peaked at $5.5 billion:
Nvidia’s China Revenue:
Q1 2025 ending April 2024: $2.49 billion
Q2 2025 ending July 2024: $3.67 billion
Q3 2025 ending October 2024: $5.42 billion
Q4 FY25 ending Jan 2025: $5.52 billion
Pictured Above: Nvidia’s quarterly revenue in China was $5.4 billion for the October quarter and $5.52 in the January quarter (not pictured).for the October quarter and $5.52 in the January quarter (not pictured).
When Nvidia stated they would see a $5.5 billion inventory charge in Q1, it was suggesting a very high monthly run rate given the export restrictions were only in effect for the remaining three weeks of Q1. According to the SEC filing “First quarter results are expected to include up to approximately $5.5 billion of charges associated with H20 products for inventory, purchase commitments, and related reserves.”
If you view China revenue on a fiscal year basis, then The Information is suggesting that the first three months of the year resulted in nearly as much revenue from China as all of last year at $17.1 billion.
This helps to illustrate Nvidia was filling a lot of Chinese orders very suddenly a lot of Chinese orders very suddenly before the government intervened. This is further supported by the $16B figure from The Information as revenue of that magnitude from China is not seen in prior quarters.
Nvidia Q2 Earnings Guide Likely to be Impacted
Nvidia’s beats have become narrower over the past few quarters. Although it’s not clear what the impact will be in Q2, we have some indication from semiconductor peer AMD that the export ban of the MI308 will be mostly felt in Q2. It's logical to assume Nvidia will disclose something similar in their earnings call.
In the most recent quarter, Nvidia beat by $1.2 billion. At the start of the AI surge, Nvidia beat by $2.4 billion, and had initially raised guidance by $2 billion for a total upward surprise of $4.4 billion if you generously combine the May guidance with the August results.
If we look at fiscal year estimates of $200B and we take the $15B at face value — meaning there is no other impact further out into Q2 and Q3 (there very well could be if we assume $16B were rushed orders, yet the quarterly run rate was $5.5B, which is a floor for the other quarters) — then that’s 7.5% of revenue. This is not a reason to run for the hills, but it’s certainly revenue that has to be absorbed by other SKUs with strong potential Q1/Q2 is where the bulk of the impact is felt.
Analysts are preparing for lower QoQ growth with Q2 revenue $2.7B higher than Q1 compared to QoQ increase of $5.6 billion in Q3. Part of this is that Blackwell is (finally) ramping but not at the volume originally expected for this quarter.
Blackwell Revenue May Absorb China Losses
As the Blackwell vs Hopper GPU transition unfolds, investors are watching to see if Blackwell can make up for declining demand for the aging Hopper architecture as the H20 impact dissipates.
Nvidia said in Q4 that it delivered revenue of $11 billion for its Blackwell GPU, marking the fastest product ramp in its history. However, there was not a strong ramp in the GB200 NVL72 racks in Jan-March, with delivery estimates finally increasing in April.
Data from Morgan Stanley places Jan-March GB200 NVL72 rack shipments at ~1,000, while April shipments were estimated to rise sharply to ~1,500, with the majority coming from Foxconn. This aligns with fiscal Q2 GB200 NVL72 rack estimates of 4-5K, up 3-4x sequentially.
At the midpoint of those estimates, GB200 NVL72 rack revenue would calculate out to ~$13.5 billion at a $3 million ASP, complemented by HGX B200 shipments and other Blackwell products, which likely contributed 70%+ of the $11 billion from Q4.
This means even though Q2 could see a bigger impact from China that Blackwell sales may be able to help absorb these losses. The only hitch is that suppliers are not fully in agreement with that takeaway.
Subscribe for Full Access to the Article
Below the Paywall is the Following information
What AI-Related Suppliers and Competitors are Saying Ahead of Nvidia Earnings, including an important supplier correlation that broke down in November and worsened in April.
The timing of when Big Tech capex will hit peak growth and what this means for Nvidia’s stock
The I/O Fund’s trading plan for Nvidia including never-before published buy targets over a 12 to 18-month time frame.
IT’SOUR BIGGEST SALE OF THE YEAR — GET $275 OFF ADVANCEDFORFOURDAYSONLY. Expires May 27th at Midnight. 👉 Claim Offer Here
The last time we published our Nvidia price targets in Where I Plan to Buy Nvidia Stock Next, it was to say the stock would trade below $100. The stock topped five days later at $149. This buy plan was perfectly timed before the DeepSeek selloffs. We then reiterated this price target again the very week when Nvidia’s stock was at $138 and traded below $90 a little over a month later. Real-time trade alerts are sent to Members, including when we snagged shares as low as $87. When you layer these granular details on top of our first entry being $3.15 in 2018 — you will not want to miss the next buy plan our firm is putting into place.you will not want to miss the next buy plan our firm is putting into place.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in NVDA at the time of writing and may own stocks pictured in the charts.
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.
In analysis below, we turn our focus to ways the company can sustain this growth on the top line and bottom line as we look at 2025 and beyond.
Ad Growth of 71% YoY
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.
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.
Management is still looking to explore CTV as a future growth channel, following its recent push into e-commerce, while the upcoming launch of its AI-powered self-service campaign management platform is expected to be both a catalyst for revenue and margins.
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.
Apps revenue declined (14.4%) YoY to $325 million. AppLovin announced that it entered a definitive agreement to sell the segment to Tripledot Studios for $400 million in cash ($150 million at closing and a $250 million promissory note) and a 20% stake in Tripledot’s equity. The transaction is expected to close in Q2. This will transition AppLovin into an advertising pure-play.
Margins Show Continued Strength
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.
Per management on the call: “Total revenue soared 40% from the same period last year to $1.5 billion, and adjusted EBITDA increased a remarkable 83% to an impressive $1 billion, achieving a fantastic 68% adjusted EBITDA margin […] Shifting to the Advertising business, we generated $1.16 billion in revenue and $943 million in adjusted EBITDA, achieving an incredible 81% margin.”
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%.
Post-divestment, AppLovin’s operating margin will look much different, given that Advertising’s current operating margin is likely much closer to 70%. Management talked about the Rule of 150 on the earnings call, reflecting the new fundamental structure of the company, with ~70% revenue growth and 70% operating margins:
“I don't know of any other tech company with the financial profile that we have and scale growing the way we are. I think it's on a Rule of 150 or something. And what we're focused on when we talk about priorities is how's 2026 going to be? How's '27 going to be?”
Net margin in Q1 was 38.8%, up more than 16 points YoY. 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.
Adjusted EBITDA margin was 68%, well ahead of guidance for 63% to 64%, as adjusted EBITDA surpassed $1 billion. Advertising adjusted EBITDA margin expanded 8 points YoY and 3 points QoQ to 81%, with adjusted EBITDA of $943 million coming in nearly 16% ahead of guidance. Apps adjusted EBITDA margin was 19%, flat QoQ but up 4 points YoY.
For Q2, management guided for adjusted EBITDA of $970-990 million for an 81% margin.
EPS Grows Triple-Digits in Q1
AppLovin reported massive 149% YoY growth in GAAP EPS to $1.67, outpacing revenue growth by more than 3x. Looking ahead, EPS estimates have been revised significantly higher since our latest update in February, AppLovin: Expanding from Gaming to E-Commerce (and Beyond)AppLovin: Expanding from Gaming to E-Commerce (and Beyond).
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.
This compares to February’s estimates for 60% growth to $1.43 in Q2, $1.66 in Q3 and $1.78 in Q4. This is a significant >38% increase for Q2 and Q4’s EPS, as AppLovin will benefit from a much leaner business model as an ad-tech pure play, with operating margins set to expand post-divestment to nearly 70%, aided by prudent cost management – sales & marketing expenses were down nearly (20%) YoY, R&D was down nearly (21%), and data center costs rose by just $30 million YoY on a $480 million increase in revenue.
For FY25, analysts now 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.
Cash Flows and Balance Sheet
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.
Cash and cash equivalents decreased to $551 million from $741.4 million in Q4, though the closing of the Apps sale should help restrengthen its cash position. AppLovin also repurchased and withheld 3.4 million shares in Q1 for a total cost of $1.2 billion, funded primarily via free cash flow and a temporary draw on its revolving credit facility, which was already repaid.
Debt totaled $3.71 billion, and debt-to-equity ratio has surged from 3.4x last quarter to nearly 6.5x now, as AppLovin is now more highly levered due to the decrease in cash and increase in total liabilities from $4.78 billion to $5.13 billion.
Analyst Estimates Do Not Represent the Full Picture
Analyst estimates show very low growth because these are taking the combined business of gaming and ads, and basing growth on this whereas organic growth will be much higher.
While Q2 will still have five weeks’ revenue impact from gaming, Q3 and Q4 will be AppLovin’s first two quarters post-divestment, with consensus revenue growth of 20-23%.
However, organic growth for Advertising was guided at just under 70% in Q2, and expected to be 65% YoY in Q3 based on the current estimate for $1.38 billion in revenue, which aligns with trends for 15% QoQ growth from Q2’s guide. Revenue is expected to decelerate to 52% in Q4, though this comes against a 73% growth comp.
Looking at just the Advertising business, full-year revenue growth is projected at ~63.2% YoY to $5.26 billion, based on current guidance and estimates for 2H. This would value AppLovin at a rather pricey 23x PS for 2025, and if revenue grows 30% YoY in 2026 to ~$6.83 billion, AppLovin would be valued at 17.7x forward PS.
If AppLovin can lever strong execution, expansions into web-advertising and further into e-commerce, and better optimizations to its AI ad engine to drive 50% YoY growth in 2026, revenue would project out to $7.89 billion, or ~15.3x forward PS
On the bottom line, AppLovin is currently operating near a 40% net margin with some quarterly fluctuations, and Advertising’s strong operating margin profile will likely pull net margins to the high-50% to 60% range. Looking out to 2026, AppLovin could generate earnings of $11.85 on the 30% growth forecast, assuming a 58% net margin with ~10 million share buybacks. This would value it slightly above 30x forward PE. Based on the 50% growth forecast and similar net margin and buyback assumptions, earnings would project to $13.70, or growth of >72% YoY based on current FY25 estimates, valuing AppLovin at 26.1x forward PE.
Growth Catalysts for 2025 and Beyond:
In terms of executing a successful pivot, Applovin’s management team does not get enough credit. Mobile games are a business that has plateaued (that’s putting it nicely – it’s actually a market that has tanked). Applovin aggressively acquired mobile games and leveraged their mobile IP portfolio to build a formidable database of 1.4 billion users. By building an ad-tech business and acquiring AI engineering talent, the company was early to AI with its AXON 2.0 platform. The pivot is one of the boldest I’ve seen in a 15-year career in tech; on par with Lisa Su’s move to overtake Intel.
“The ad engine AXON 2.0 offers a monumental advantage to AppLovin as the company is ahead in the race for AI-driven advertising. AppLovin is also an arbitrage advertising platform, which means they can quantify the impact of their reach for advertisers by returning back to the advertiser what was spent or more within 30 days. If an advertiser spends $10,000 (or multiples of this), AppLovin is able to return that or more to the advertiser. The company is also unique in that it offers performance marketing for brands and direct-to-consumer. The Trade Desk primarily works with agencies, whereas AppLovin is attracting smaller and medium sized businesses that rely on performance. Most importantly, AXON 2.0 is an AI-powered advertising engine that is continuously improving. Every quarter and every year, AXON becomes more effective by ingesting more data that improves the model through self-learning.”
Looking into the future, however, the management team cannot rest on their laurels as gaming eventually hits its limit in inventory. Although 1.4 billion daily active users is impressive, at about half of what Meta has with its family of apps at 3 billion users, one could argue that gamers are only worth so much to a marketer as the demographic is narrower and more limited.
Applovin’s next moves are the following:
Branch out to e-commerce — This plays nicely into the restrictions AppLovin has with a cookie window to convert within 24 hours. Meaning, if a user converts beyond 24 hours, it is hard for AppLovin to verify attribution. Therefore, the company is less appealing to an auto advertiser where the buying decision is quite long compared to a T-shirt company.
Web-based advertising – mobile games are an app-based business, hence the name AppLovin. The company came to market in the mobile era, yet the company is not capitalizing on websites at this time.
Self-service Platform – although this goes hand-in-hand with the web-based advertising catalyst, it’s important to look at this feature separately as the onboarding of advertisers can scale more quickly once this feature launches. Given AppLovin’s ideal advertisers convert within 24 hours for products that are less than $250, self-serve platform is the only way forward that makes sense.
Go Global – this is not on the near-term product road map yet is a lever AppLovin can pull when the timing is right. The company is focused on the United States market, which is by far the most lucrative.
E-commerce Apps:
According to the CEO’s response to short sellers in February, the initial launch of the e-commerce platform has seen 600 advertisers with an annual run rate of $1 billion. In terms of increasing TAM (which is also related to the information below in the web-based advertising section), the company stated they are “sub-0.1% penetration in the market,” signifying a long runway.
Where the TAM is a bit constrained is Applovin has 24 hours on the attribution side to convert and this tends to perform best with products priced under $250.
“On web, we built the product to be self-attributing, so our own attribution platform. And it's not high turnover products. I mean, like, most products in the world are not selling something greater than $250. Our product — our models can go deliver something that's a couple hundred dollars within a few minutes of the ad being seen, and it it's happening quite often. I mean, obviously, scaled at the $1 billion run rate that I mentioned.”
The breakdown of mobile versus web-based advertising in terms of ad spend is as follows.
Total Ad Spend in the United States: $309B per year
In-app advertising represents $165.9B per year
Mobile Web advertising represents $36.7B per year
Desktop advertising represents $106.B per year
Applovin is effectively increasing their TAM by 40% by adding web-based advertising. This will take time to scale yet given the strong start we’ve seen on the in-apps ad business, to increase TAM by 40% is certainly something that catches our attention.
In terms of how this plays out, Applovin’s goal is to see 10% of revenue from the web-based business once the self-service platform goes live:
“After we launched the self-serve model, that business could grow quite significantly and outpace that 10% metric that we provided previously. So, it's quite likely that it could represent a larger than 10% portion of the revenue this year.”
Once the self-serve platform goes live, Applovin’s ambition is to see a market penetration in web-based advertising on par with their penetration in mobile games. The following was stated regarding the roll-out happening toward the back half of the year: “And then, even more exciting, I touched on this in the talk script, we're finally going to be releasing our new dashboard to some select advertisers for feedback this quarter. That's a huge catalyzing effect. When we do go to a full self-service state, we're going to open up our platform from a very small amount of advertiser penetration to the entirety of the world being able to come on to our platform.”
The company also clarified that until the self-service platform launches, they will not see meaningful revenue in the web-based business, yet in the meantime, there is “a line out the door.”
“We've got a line out the door of customers that have been waiting to come on to the platform, and then we've onboarded, I think I said, in a blog, hundreds of advertisers, but our team is small. So, when I say we're not looking to push, we're looking to push over time, but we need to get the self-service tools into the market so that we can pair that with the team to automate a lot more of the processes.”
Short Reports:
The CEO responded to the short seller reports here and here. These are worth a read as the CEO makes the explanation quite simple in terms of how their pixel is not unique and is aligned with industry standards.
Conclusion:
There are no guarantees in tech investing. Stick around long enough and you will see a bulletproof company fall flat (pick any high-flying best-of-breed cloud company – Zoom, Snowflake, Datadog, MongoDB), while others surprise the market for a decade or longer (Meta, Google, etc.).
Applovin gushes margins, has many catalysts to continue its growth trajectory and perhaps most importantly, is an underdog of sorts to where the market often (mistakenly)- affords a better entry in time. I won’t get any originality points for writing an analysis on Applovin after an 800% run in the markets in eighteen months, yet perhaps I can help by saying that from what I can see today, this run is not over yet.
The I/O Fund is closely monitoring Microsoft for a potential entry point. Join us Thursdays at 4:30 p.m. in our Advanced Market webinars, where we’ll outline our strategy for initiating a position with maximum upside in mind. Learn more here.Learn more hereLearn more here.
Pro Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgrade.Pro Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgradeEmail us to upgrade.
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.
TSS Inc. is an AI systems integrator partnered with a large U.S.-based OEM generating 99% of their 2024 revenue, presumably Dell Technologies for AI-enabled rack construction and integration.
TSSI’s revenue grew 523% to $99 million and adjusted EBTIDA grew 11X from $0.48 million to $5.2 million. Management's outlook indicates H1 2025 revenue will exceed H2 2024, with projected 50%+ year-over-year growth in Adjusted EBITDA for 2025.
TSSI stock surged from $0.24 to $14.49 in just over a year as it uplisted to the NASDAQ. The stock then cratered to as low as $6.24 during the tariff rout. Following its earnings report last week, the stock popped 70% — helping to illustrate the $300M market cap stock can be a wild ride.
TSSI more than doubled its headcount in 2024 and is doubling the size of its factory and headquarters as it moves into a 212,793-square-foot building in Q1 2025 to handle the extra capacity needed for its multi-year contract with its OEM partner (Dell Technologies) with guaranteed minimums.
There is speculation that TSSI is working on Elon Musk’s xAI Colossus supercomputer project through Dell Technologies, but the company won’t comment for the sake of confidentiality.
RISK: TSSI stock has a tiny 13 million share float and 25 million shares outstanding, which is at a high risk of material dilution as the company filed a $150 million shelf registration on January 7, 2025.
RISK: TSSI has no analyst coverage and 11.08% institutional ownership as of March 27, 2025,
RISK: Similar to crypto, TSSI requires technical analysis to be at the forefront of all buying and selling decisions. This stock is for advanced day traders who are comfortable with managing stocks daily due to high customer concentration and other notable risks.
The name TSS is an acronym for Total Site Solutions, which describes the nature of their business. The Texas-based distributor/reseller provides on-site installation, integration, deployment and confirmation services for data centers. Currently, the company is the partner of choice for Dell’s Integrated Rack Scalable Solutions business (IRSS).
TSS is situated in the sweet spot of the AI boom, helping customers build out their AI infrastructure. As Blackwell begins to ship in 2025, the complexity of the systems means that OEM companies like Dell and large AI companies like xAI will need assistance in integrating server racks, which includes sourcing components, assembling and integrating the racks, making sure the power needs are well balanced between liquid cooling and air cooling, and lastly, testing these systems and providing site surveys. All of this falls right into TSS's wheelhouse.
Company Background and Strategic Transformation (2019–Present)
Historically TSSI provided various data center solutions (integration, facilities management, and procurement of IT hardware), but they struggled to grow in any meaningful way. Gross profits increased from $7.21M in 2016 to $8.91M by 2022. The stock was around $.30 per share starting 2024 and had barely changed price since 2016.
In late 2022, TSSI began a major transition as Darryll Dewan became CEO and immediately focused on the high-value systems integration business. He was formerly a VP of global sales and marketing at Dell. Gross profits surged, with each quarter of 2024 seeing gross profit growth of 58.1%, 40.7%, 178.0%, and 122.9% YoY.
By the end of 2024 revenues reached $148M (up 172% YoY), gross profits reached $22M (up 100% YoY) and net income was $6M (versus essentially breakeven in 2023), all marking record highs for the company.
On November 14th 2024 TSSI announced a record 3Q and a multi-year agreement with their only customer, Dell. To support the multi-year agreement and Dell’s end market demand for AI servers, TSSI doubled its production footprint – relocating from its ~105,000 sq ft Round Rock facility to a new ~212,793 sq ft state-of-the-art integration center in Georgetown, TX (a 103% increase in space). Part of the agreement with Dell effectively guarantees that TSSI will at a minimum break even on the new expansion investment.
The new site offers a massive upgrade in power and cooling infrastructure to handle next-generation racks that will consume up to 6x more power than prior generations. TSSI invested ~$25–30 M in this build-out to future-proof its operations with liquid cooling test stations, heavy-duty flooring and lifts, and redundant power – all aimed at meeting the demands of AI racks at scale.
Management expects initial production in the new Georgetown facility by April 2025 and full production capacity by June 2025. The challenge and opportunity now will be scaling efficiently and executing to maintain their competitive position.
Due to the AI-fueled transformation TSSI underwent last year, the stock surged over 5000% from Jan 1st 2024 at $0.30 per share through its peak on Jan 23rd, 2025 at $15.22 per share before falling to $6.24 in April.
Background on Dell’s Rack Scale Solutions
Dell’s Integrated Rack Scale Solutions (IRSS) multi-year agreement essentially makes TSSI an extension of Dell’s manufacturing operations for AI servers. This is the primary driver to TSSI’s remarkable gross profit inflection in 2024. Thus, it is important to look more closely at TSSI's 99% customer.
Dell customers include tier 2 CSP’s like CoreWeave or Denvr Dataworks, the federal government, and large enterprises looking to build out on-prem data centers. Dell is not exposed to the traditional hyperscalers and so the growth forecast is not as correlated to hyperscale capex – although this could change and likely will given the rumors that Dell is working with xAI and also considering Super Micro may struggle to raise cash to quickly increase capacity (whereas Dell has operated at scale for decades).
Hyperscalers tend to do business for more customized AI server solutions rather than the turnkey solutions that Dell provides. Hyperscale vendors include companies like Taiwanese-based Quanta Computer or Wistron affiliate Wiwynn. However, it is interesting to consider the potential positive impact that tariffs may have on where hyperscalers source their AI servers going forward.
We still think that on-prem, tier-2 CSP’s and the federal government will drive a significant growth inflection for Dell’s AI server business in the near-term and durably grow for the foreseeable future. Dell’s calendar 2025 sales run rate is already trending to 50% YoY growth and 2x’d sequentially throughout FY2025. As such Dell’s AI server revenue could reach $20–30B by 2027, a ~40% CAGR from 2024 ($9B in AI server related sales).
While this multi-year agreement significantly reduces the uncertainty of TSSI’s future profits and revenue, the agreement can be terminated for convenience, meaning any party can opt out provided with 180 days written notice. Furthermore, if Dell terminates, Dell is no longer obligated to provide the minimum monthly volumes after the 180-day notice period, but they remain financially obligated to cover some of the costs associated with the Georgetown facility investment. In our view, the Dell agreement also comes with other limitations.
For one, it is unlikely that TSSI will have much negotiating leverage to increase prices. While they are investing in a new and upgraded facility, the reported $25-$30 million investment is a rounding error for companies like Dell or other large VAR’s/Distributors; hardly considered a barrier to entry given the cost and caliber of labor needed to assemble servers.
At the expiration of the multi-year agreement, there is a chance Dell does not renew or goes with another vendor. The investment provides TSSI some near-term advantages, yet the competitive positioning of TSSI is minimal.
SNX located in Taiwan is a significant competitor, for example, with $58.5 billion in annual revenue. The Hyve business has a large, global footprint that competes with TSSI. Perhaps Dell initiated an investment in TSSI to further localize systems integrations and procurement well ahead of tariffs (time will tell).
Dell to See Calendar Year H2 2025 Ramp:
The IOF Fund article, “Dell Q4: Projects $15 billion in AI shipments this year”, Dell Q4: Projects $15 billion in AI shipments this year”, noted that Dell’s FQ1 2026 (ending May 2, 2025) revenue guidance missed consensus analyst estimates by 3% and EPS guidance of $1.65 missed analyst estimates for $1.78. In its FQ4 2025 (ending January 31, 2025 calendar year), Dell shipped $2.1 billion in AI servers (down 28% QoQ), with orders at $1.7 billion (down 53% QoQ) and a backlog of $4.1 billion.
Management guided AI shipments of $15 billion in FY F2026 as AI server backlog doubled to $9 billion in FQ4, primarily driven by recent deals, including xAI. Management’s $15 billion FY F2026 shipments guidance implies the NVL delays will make it a second-half story for AI ramp-up:
“Where Dell and Super Micro may both be seeing lower growth than expected likely goes back to the delivery of key Nvidia systems, where the larger systems lead to higher revenue (and you’re aware by now these were delayed by “couple months”). It’s also perhaps due to Nvidia’s partnership with Foxconn, who has seen more news lately than peers Dell and Supermicro in terms of shipping Blackwell systems. According to a news report from Economic Daily the GB200 was shipped by Foxconn in small quantities at the end of Dec and is expected to be shipped in large quantities at the end of January.”were delayed by “couple months”). It’s also perhaps due to Nvidia’s partnership with Foxconn, who has seen more news lately than peers Dell and Supermicro in terms of shipping Blackwell systems. According to a news report from Economic Daily the GB200 was shipped by Foxconn in small quantities at the end of Dec and is expected to be shipped in large quantities at the end of January.”
Across the board, key Nvidia suppliers like Dell should see a strong ramp into the second half of the year, with this flowing down to TSSI, especially as projects ramp in size (such as xAI’s Colossus).
Elon Musk’s xAI Supercomputer Project
TSS CEO Darryll Dewan, formerly VP of Global Sales and Field Marketing at Dell from 2012 to 2022, commented in the Q2 2024 conference call, “Demand increased in Q2, and we began delivering complex AI integration solutions on time, and I want to stress, on time, including the first stage of a highly publicized program. That initial program began in June and is being carried out into Q3 [2024]. As a result, we finished a quarter with a record run rate of rack integration revenue.” Dewan stated that the volume ramp they had been anticipating was underway, and its Q2 results were a harbinger of things to come. Dewan also would not confirm during the Q&A session when asked directly if xAI was one of their projects.
The “highly publicized program” is speculated to be Elon Musk’s xAI supercomputer “Colossus” project. The xAI data center houses 100,000 GPUs comprised of over 1,500 racks and received approval for 150MW of power, enabling all GPUs to run concurrently.
Dell Technologies is Involved in Assembling Half of xAI’s Racks
Musk already revealed in June that Dell Technologies is assembling half of the racks going into the supercomputer project and Super Micro Computer would also be involved. It's been speculated Elon Musk shifted $6 billion in AI server orders for xAI to Dell Technologies and away from Super Micro Computer due to their accounting issues. This trickles down to TSS.
Musk had also announced the expansion of Colossus to 200,000 GPUs in October, and there is growing speculation at the moment that xAI is currently exploring a fundraise of tens of billions of dollars for the buildout of “Colossus 2’, which is rumored to include as many as 1 million GPUs, or 10x the size of the original Colossus supercomputer. In February, it was rumored that Dell had won a $5 billion AI server deal with xAI for Nvidia’s GB200 platform, though it is unclear whether this is for Colossus or Colossus 2.
TSS’s Q3 2024 is assumed to have contained a whole quarter’s worth of xAI business, which could be a sign of things to come. As Dell’s AI Factory server business ramps up, so does TSS’s business, as evidenced by Dewan’s statement, “Volume expectations are dependent on sales execution by our OEM partner, but our partner has shown great confidence in TSS by committing to help to smooth what otherwise could be a feast or famine business.”
Upgraded Headquarters to New Site:
Similar to other AI-driven companies, TSS insists it does not have demand issues. Rather, it's a question of how quickly capacity can be added, with TSS upgrading its facilities for AI rack integration services. TSSI expects the new facility to reach full production capacity in June 2025.
On January 5, 2025, TSS announced it signed a long-term lease for a larger facility with 212,793 square feet, essentially doubling its earlier space, which was 105,000 square feet. TSS is moving its headquarters to the new factory located in Georgetown Logistics Park in Georgetown, Texas, which will be online in Q1 2025. In the six months leading up to its August 14, 2024, conference call, CEO Dewan confirmed they have more than doubled their headcount.
The company has stated site plans call for a $25 million to $30 million investment for improvements to bring additional power to the building which will provide greatly expanded cooling capacity for its rack testing and validation stations. It will triple the capacity to test and validate direct liquid-cooled racks in addition to traditional air-cooled racks. There is no doubt the industry is migrating to liquid-cooled rack technology.
CEO Dewan commented, "Continuing our rapid growth trajectory was centered around two key drivers: signing a long-term agreement with our primary customer, which we completed and announced in October, and building capacity to deliver the demand driven by AI infrastructure needs in the market. Our new facility more than doubles our square footage and positions TSS to continue our rapid growth. We are beginning the required fit-out immediately and expect to be operational in the new building in the first quarter of 2025." Management updated in Q1 that the buildout was progressing according to its plan, and that the built-out capacity was higher than current demand, allowing them to scale higher in the future.
When asked if capacity is a limiting factor, the management team stated they “…have the capacity to grow 10X” and “so, the timeline, a couple of years may be before we start to get a little tight.” That is music to an investor’s ears, yet power requirements remain a constraint (and perhaps a tailwind for TSSI).
The Role TSSI Plays in Increased Power Consumption of AI Data Centers
The new facility building was originally planned for 4.5 MW but will now begin with 6 MW and 15 MW by early summer, and 40 MW over time. The 15 MW timeline for early summer was reiterated in Q1, with management noting this would be ~6x their current facility in Red Rock. Just as with upgrading the power, the cooling situation also had to be upgraded. CEO Daryll Dewan said this in their Q4 2024 conference call.
“Cooling is in a similar situation. When we began the fit-out of our facility, it was anticipated we would integrate a mix of chilled air and direct liquid-cooled technology. However, the adoption of emerging chip families so quickly has resulted in an accelerated shift to direct liquid-cooled. This impacts everything from our chiller capacity to the diameter of the pipes coming into the facility and distributing water within the facility. And again, this rethinking has all occurred in weeks.”
AI is causing an unprecedented surge in power density at data centers with current AI racks pushing 80 kW, moving to 120 to 150 kW, and eventually 200 kW in the next few years. The I/O Fund has covered the generational leap in power consumption in our blog article, ”AI Power Consumption: Rapidly Becoming Mission-CriticalAI Power Consumption: Rapidly Becoming Mission-Critical.”
Rapid increases in power requirements not only create potential failures and raise costs but there is also the challenge of increasing compute density in data centers. TSS is positioned to help customers make nimble, on-the-fly architecture changes, including cooling options, thanks to its rapid testing capabilities, which can narrow configuration options. CEO Dewan stated in its Q2 2024 conference call, “But importantly, the next generation of racks will consume up to 6x more power than those being produced today.”
Note on Modular Data Centers:
Modular data center revenue grew 13% in 2024. In addition to integrating a combination of air-cooled and liquid-cooled racks, TSS has also configured and deployed over 350 modular data centers (MDCs), which are pre-fabricated and scalable portable data centers. Due to the long lead times to build and deliver specialized data centers, the demand for MDCs is expected to grow as AI adoption grows. These carry gross margins north of 50% and grew 13% YoY in 2024, as it’s a predictable revenue stream.
Here is what was stated in the earnings call:
“We're also very excited about some of the conversations we're having about different design points on the modular unit. I'd like to go into a little bit more detail, but I don't think it'd be appropriate. But I think where we can provide an AI solution to an enterprise to deploy a certain amount of power cheaper, better, faster than their alternative. And that alternative could be a co-lo, could be a hyperscaler, could be expanding their own existing data center space.”
Financials Overview: Revenues Accelerate in Q1
Q1 revenue nearly broke into the triple-digits as it accelerated significantly from Q4’s 105% YoY growth to 523% YoY growth. This was driven primarily by Procurement revenue, which rose nearly 7x YoY, while management stated that there was incremental contributions from AI rack integration services. This is only the third full quarter of contribution from AI rack integration services after commencing this in June 2024.
While TSSI did not provide a guide for Q2, management stated that they expected 1H 2025 revenue to outpace 2H 2024, where they generated just over $120 million in revenue. As it stands, Q2 would need to have just $22 million in revenue to meet that forecast, though underlying business momentum suggests that is far too low.
Key Segments
Here’s how TSSI’s revenue by segment looks, with the AI rack-driven System Integration segment beginning to perk up though Procurement revenues drive the bulk of TSSI’s revenue.
Procurement Services Revenue Surges 676%
This segment consists of sourcing and selling third-party hardware, software, and services to customers – effectively acting as a value-added reseller (VAR) or distributor. It is TSSI’s largest segment by revenue but lowest by margin. It is a very lumpy business due to seasonal spending trends by the federal government being 2H weighted, and not expected to be a major profitability driver for TSSI due to its thin margin profile. Management sees Procurement as a strategically important complement to Systems Integrations, as deals “often bundle or precede integration projects.”
Procurement is uniquely impacted by how deals are recognized, either as gross or net: a gross deal occurs when TSS takes ownership of the hardware as they transform the product and record the gross value of the transactions as well as the gross cost of the goods, resulting in higher gross revenue but lower gross margins between 3% to 4%. A net deal is when TSS acts only as an agent in buying and selling the product, as they only record the agency fee, resulting in a 100% margin. TSSI added that there was also a higher mix of gross deals in the quarter, which weighed on margins.
Procurement revenue accounted for more than 91% of revenue in Q1, as it surged 676% YoY to $90.2 million, aligning with management’s Q4 projection that revenue would remain elevated for 1 to 3 quarters. This was driven by increased purchases by the federal government, as well as a few individually large sales to commercial enterprises in the quarter to support AI workloads. Additionally, some, not all, of Procurement revenue flows through to Systems Integration as it relates to components needed for AI and non-AI server racks.
Systems Integration Revenue Ramping
Systems Integration (SI): This is TSSI’s flagship segment and growth engine, encompassing the design, assembly, and testing of integrated technology solutions – most notably high-performance computing racks for AI and other advanced workloads. This business involves taking servers, GPUs, networking gear, power/cooling components, and software, and building turnkey rack systems to customer specifications. It is a project-based, engineering-intensive service and carries higher margins. This segment functions similarly to a company like Super Micro in that TSS assembles servers and server racks as a vendor.
The higher-margin, AI rack focused System Integration segment is beginning to see growth ramp in the third quarter of AI rack integrations, operating currently at a ~$30 million annual run rate. This builds on strong growth from 2024, which saw segment gross profit rise 480% YoY on a 157% YoY increase in revenue.
Q1 revenue increased 252% YoY to $7.5 million, its third consecutive quarter of >200% YoY growth driven by AI rack integrations. TSSI says that it receives both fixed monthly fees as agreed upon in the multi-year agreement, as well as “payments that scale depending on the volume of AI racks integrated and for which we are prepared to integrate.” TSSI’s order pipeline from Dell remains “extremely robust.”
For the non-AI rack integration side, TSSI noted in the 10-Q that it may be impacted by supply chain issues or lulls in demand, impacting revenue as it waits for delivery of certain required components. TSSI said that its vendors and partners expect “supply-chain issues to continue for at least the next several quarters, though they appear to be improving in general.”
Management said in Q1’s call that they “expect sustained high growth in this area as customers ramp-up investments to meet evolving compute demands over the coming quarters and years,” with this segment expected to become the primary growth driver.
According to an internal model, by the end of 2027, SI could be roughly 63% of total gross profits, up from 15% of total gross profits in 2023. As a precaution, we’ve modeled 62M in revenue and 30M in gross profits in 2027 for the SI segment. This is at the low end of the 2-4x capacity comment and assuming a 1:1 relationship between volume and sales, but this forecast could have significant variability due to high customer concentration.
In this internal forecast, there is a degree of conservatism given the project-based nature of this business and the range management provided of 2-4x 2024 peak volume capacity. Dell is guaranteeing at least as much volume as TSSI’s peak quarterly run-rate in 2024 for the SI segment. For context, TSSI’s peak in 2024 was around Q4 when SI revenue hit $7.9M. Assuming that there is a 1:1 relationship between volumes and revenues, this could translate to a baseline of $31M in annual systems integration sales and $13M gross profits which is based on the 2H2024 run-rate.
As such, the incremental sales potential for SI is $62M–$124M in sales and $26M–$52M gross profits. Again, this is with what we know today, yet carries significant variability due to reliance on one OEM.
Facility Management Revenue Declines
This segment involves data center facilities services – including maintenance contracts, on-site support, and deploying modular data centers. It provides a steady, recurring revenue stream, and while it has high gross margins, it is not going to be the real driver of TSSI’s profitability inflection, which squarely falls onto the SI segment. It has grown in the 10% revenue range over the last several years. Modular data centers are important and they will grow in volume, but this segment is more of an indirect beneficiary of the AI boom. Furthermore. TSSI is not constructing these data centers, but rather maintaining them, fixing them, and monitoring them.
Facility management revenue declined (40%) YoY to $1.3 million, with management noting they are currently optimizing this unit to focus on high-growth opportunities. Facility management had grown just 13% YoY in FY24, a far cry from System Integrations’ 157% growth and Procurement’s 205% growth.
Management added that they “anticipate more robust growth over the next 12 to 18 months” as medium and large enterprise customers “increasingly adopt modular data centers as a cost-effective solution to leverage AI technologies.” For 2025, we estimate $8.7 M (+9% YoY), assuming TSSI continues to win small expansions or projects. Management mentioned a couple of projects drove 46% growth in Q2 2024 facilities revenue, but on a normalized basis, mid-single digits is more in-line with their historical multi-year rate of growth.
Margins Weighed Down by Procurement Growth
TSSI has noted previously that margins are likely to fluctuate quarter-to-quarter as revenue mix shifts, and Q1’s heavy concentration of Procurement revenue with higher mix of gross deals weighed on gross margin, though operating margin felt less of an impact. This is because a portion of Procurement revenue flows through to the Integration segment, which carries far higher margins.
Q1’s gross margin was 9.3% as a result of this mix shift, down more than 5 points sequentially and nearly 8 points YoY.
Procurement GAAP gross margin was 7.8%, flat YoY; on a non-GAAP basis, which strips out gross vs net deals, gross margin was 6.6%, up 2 points YoY.
Systems Integration gross margin was 22%, down 6 points YoY due to a $0.8 million rent expense for the new Georgetown facility; stripping out this noncash rent impact, gross margin was 32%. Management said that they expect gross margins in the segment to improve in the last three quarters in FY25.
Facility management gross margin was 41%, down 15 points YoY on lower revenue.
Q1’s operating margin was 4.2%, down only 1.3 points QoQ and up 2.6 points YoY. Should Systems Integration begin to grow its share of revenue with margins growing, TSSI should theoretically see some gross and operating margin expansion as the year progresses.
GAAP EPS Expanding
Q1’s GAAP earnings were $0.12 per share, surpassing Q3’s earnings of $0.10 despite a thinner margin profile this quarter. This was a notable improvement from the break-even quarter last Q1.
There’s also a notable inflection in earnings power since the start of AI rack integrations in June 2024, with EPS over the past three quarters of $0.30, up 10x from $0.03 in the comparable period last year.
Cash and Balance Sheet
Cash flows have been quite variable, with Q3 2024 and Q1 2025 seeing large positive operating cash flow while Q4 saw a large outflow.
Operating cash flow was $20.6 million in Q1, up nearly 8x YoY and a stark contrast to the ($21.6) million outflow in Q4 2024. OCF margin was 20.9%, up more than 4 points from 16.7% a year ago.
Free cash flow was $5.8 million, up ~2.2x YoY and again a stark contrast to the ($28.4) million from Q4. FCF margin was 5.9%, down from 16.4% a year ago due to the rapid revenue growth.
Adjusted EBITDA was $5.2 million for a 5.3% margin in Q1, up from $0.5 million for a 3% margin in the year ago quarter. Management reiterated its view for >50% growth in adjusted EBITDA for 2025, signaling they expect at least $15.3 million this year.
Cash and equivalents totaled $27.3 million, while debt was $8.2 million. Debt is likely to be higher next quarter as TSSI said it drew down the remaining $11.3 million on its construction loan just prior to Q1’s call.
Factoring Receivables is an Expensive Payday Loan Approach to Stabilize Cash Flow
TSSI sells Dell’s invoices/receivables to a third-party factoring company at a slight discount and interest in exchange for immediate cash, similar to a payday loan. This is a common strategy to improve cash flow with large clients, the largest client in this case, with longer payment terms. It’s an expensive way to get paid sooner. TSSI sells Dell’s invoices to the factoring company at a small discount, and the factoring company immediately wires over cash to TSSI. Interest is applied to the wired funds until Dell pays off the invoice with the factoring company, which then wires the remaining balance back to TSSI.
In Q3, the net interest expense was exclusively the cost of factoring Dell’s accounts receivables, which has an effective interest rate of 6%, a lower rate than a bank loan. In Q4, factoring interest expense was $721,000, before more than doubling QoQ to $1.5 million in Q1. This continues to illustrate how vital Dell is to TSS’s future and the leverage it holds.
Conclusion
TSSI’s tie-ins with Dell and ramping AI server rack integrations as more production capacity comes online support strong revenue growth, and the company remains profitable despite high Procurement mix weighing on margins. While AI servers have the potential to drive meaningful growth for TSSI, the small float and market cap lead to increased volatility, requiring active management.
The I/O Fund has a high allocation to other prominent data center infrastructure beneficiaries, sharing its research and real-time trade alerts with our Pro and Advanced subscribers, while discussing potential setups and trading plans in our weekly webinars with Portfolio Manager Knox Ridley. Our cumulative returns of 210% and annualized returns of 27.6% place us as one of the top performing tech portfolios, beating Wall Street’s very best. Take advantage of a limited-time offer for $275 off our Advanced tier herehere. To upgrade, email us at premium@io-fund.compremium@io-fund.com.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Vertiv posted a double-beat in Q1 with organic revenue up 25% YoY. The primary key metric of backlog was up $1.6 billion YoY and up 10% since Q4. Perhaps most importantly, backlog of $7.9 billion up from $7.2 billion last quarter hints toward Vertiv reaching an inflection point as Q4 backlog had declined QoQ. The trailing twelve month (TTM) organic orders growth was up 20% YoY and up 21% sequentially from Q4. This is down from 30% YoY growth last quarter, yet the QoQ growth seems to also hint Vertiv could be ramping from here on supplying thermal management for AI systems. Book-to-bill ratio of 1.4X is another key metric that hints Vertiv is resuming AI orders as it indicates the company’s backlog is growing with more orders coming in.
As a reminder, Vertiv reported a muted earnings report last quarter with nearly all of these key metrics declining QoQ. For example, book-to-bill ratio was 1X whereas it had been 1.4X during the busier AI quarters in early 2024. Therefore, it’s encouraging to see these key metrics come in stronger this past quarter.
Vertiv’s importance as a supplier 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, Vertiv's power solutions include uninterruptable power systems and lithium-ion battery cabinets that supply up to 1500KW and 263KW in a single cabinet.
Vertiv is closely watched as a lead supplier to Nvidia with management stating they have a 3-6 month lead time before systems are delivered. The current quarter was encouraging especially as management raised FY25 revenue forecast by $250M at the midpoint. However, it’s also odd that analysts expect Vertiv’s growth to decelerate as we go into the second half of the year. Despite raising full year guidance with next quarter expected to report 20.6%, the company is expected to exit the year with growth of 13.8%. Given what we’ve described in terms of the increasing importance of Vertiv’s solutions, there’s a disconnect in terms of H2 weakness.
As of this report, EPS growth is expected to outpace revenue growth although adjusted operating margins are quite slim at 16.5% this quarter and are expected to be 18.5% at the midpoint next quarter. Vertiv also provided a few alternative operating margin scenarios based on tariff policy changes, with two scenarios pointing to margin headwinds ahead. However, the bright spot is that Vertiv stated they could maintain
Looking for an Inflection in Revenue
Despite a solid revenue beat in Q1, management’s Q2 guide and updated FY25 guide still point to pockets of weakness in the back half of the year on a year-over-year basis due to tough comps.
However, looking beyond Q1, Vertiv will be accelerating QoQ through the rest of the year, which points to an important inflection. Although Q2’s guidance points to a 4 point deceleration in organic growth from 25% in Q1 to 21% at midpoint, revenue will grow QoQ by 15%. Similarly, FY25 is currently guided at 18% at midpoint, well below growth rates for the first half of the year yet Vertiv is expected to grow QoQ through the rest of the year.
The sequential growth is to be watched closely as further acceleration is needed to solidify the 2025 growth story (as opposed to the 2026 growth story).
Q1 revenue rose 24.2% YoY to $2.036 billion, easily beating the guided range of $1.90 to $1.95 billion, or 17.4% YoY at midpoint.
Organic revenue increased 25.3% in Q1, marking a slight deceleration from 27.1% organic growth in Q4. Growth was driven by colocation and hyperscale markets in the Americas and APAC, with “strong contribution from switchgear, power solutions, liquid cooling and services.”
For Q2, Vertiv guided for revenue between $2.325 billion and $2.375 billion, or 19% to 23% organic growth. At midpoint, this points to 21% organic growth to $2.35 billion in revenue.
Vertiv Raises Guidance by $250M with $150M Organic Growth
The company raised its FY25 outlook by $250 million to a wide range of $9.325 billion to $9.575 billion, or $9.45 billion at midpoint. However, of this $150M is organic growth with $100M being from FX tailwinds: “First, we are increasing full year sales guidance by $250 million, including approximately $150 million organically and approximately $100 million from favorable foreign exchange. The $150 million increase in organic sales is driven by both the first quarter and higher expectations in the second quarter versus what was implied in our prior guidance.”
Management expects full-year revenue growth to be sub-20%. The new outlook points to 16.5% to 19.5% organic growth, or 18% at midpoint, up from its prior view for 16% growth at midpoint. Given that revenue growth is expected to decelerate further in the back half of the year, at less than 17% in Q3 and less than 14% in Q4, this suggests there may be less room for upside in the FY guide.
Backlog Increases on Strong Order Growth
Vertiv’s backlog rebounded in Q1, up 10% QoQ and 25% YoY to a new high at $7.9 billion. However, this was the slowest quarterly growth in the past five quarters.
Orders growth was strong, with TTM orders up 20% in Q1, while Q1’s orders increased 13% YoY and 21% QoQ. Vertiv believes that TTM orders is the best key metric to focus on, although typically growth investors prefer indication sales are improving on more of a forward basis – which is why backlog is the better one for our purposes. Regarding TTM orders, management stated the lower growth was due to strong comps: “Yes, I want to underline that Q1 orders were up 21% sequentially and a healthy 13% year-over-year against very challenging comps. The strength of these numbers reflects not just market growth but our ability to expand our market position.” Even with strong comps, one has to wonder why a bigger ramp that requires thermal and power management is not showing up in an acceleration of the key metrics.
As stated in the introduction, perhaps Q1 is the inflection point and we see a stronger beat/raise as we move along given Vertiv’s book-to-bill ratio returned to a healthy 1.4x, up from 1.0x in Q4 and 1.1x in Q3, indicating demand remains healthy despite fears of AI spending slowing down. Inventories also jumped more than 11% QoQ to over $1.38 billion, accelerating from a (1%) QoQ decline last quarter.
Americas and APAC Drive Growth (incl China):
The Americas and APAC drove Q1 growth, with both regions showing strong growth in the quarter. On the other hand, EMEA growth slowed more than expected, missing an already-lowered forecast due to project timing.
Americas has a significantly higher margin at 25.6% compared to APAC with 12.6% margin in the current quarter.
Americas revenue increased to 28.8% organic to $1.185 billion, accelerating from 24.7% organic growth in Q4.
APAC revenue increased to 36.4% organic to $447.2 million, accelerating sharply from 27.1% organic growth in Q4 on colocation and hyperscale growth in China.
EMEA growth slowed sharply, with revenue growing just mid-single digits versus expectations for high-single digits, on lagging AI infrastructure buildouts. EMEA increased 7.2% organic to $403.5 million, slowing from >30% growth in Q4.
For Q2, Vertiv forecast Americas to grow mid-20%, APAC low-20%, and EMEA low single-digit, pointing to sequential decelerations for both Americas and APAC as it stands.
Margins to be Resilient in Face of Tariffs
Vertiv’s margins are guided to be resilient in the face of tariffs, with management guiding very minimal impact despite the earnings call being held at the height of the effective tariff rate.
Adjusted operating margin came in at 16.5% in Q1, down 5 points sequentially and below management’s guidance for 16.7% to 17.1%. However, adjusted operating profit was $336.7 million, slightly above the upper end of the guided $315 to $335 million range.
Management said the below-guide margin print was primarily due to the impact of Q1 tariffs, though the sizable revenue beat was also a factor.
Management is expecting an impact on a YoY basis to their Q2 adjusted operating margin, stating: “If tariff rates in effect today remain in effect for the entire second quarter, we expect adjusted operating margin to be 18.5%, about 110 basis points lower than last year's second quarter. However, excluding the estimated net tariff impact, adjusted operating margin would show good expansion, which implies that tariffs more than explain the year-over-year reduction and underlying margin expansion drivers, including operational leverage, productivity and commercial execution remains strong, and we believe we continue to be on track for our long-term margin targets.”
The guide for next quarter of adjusted operating margin of 18.5% marks a 2-point expansion QoQ. However, management also lowered fiscal year guidance, stating: “We are reducing our full year guidance for adjusted operating margin to 20.5% at the midpoint, approximately 50 basis points lower than prior guidance, of course, primarily driven by the estimated net impact of tariffs offset by favorable operating leverage on higher expected sales. This all translates into maintaining our adjusted diluted EPS at $3.55 at the midpoint, which is consistent with prior guidance and 25% higher than prior year despite the impact of tariffs.” This translates to adjusted operating profit of $1.935 billion at the midpoint.
Vertiv reported at the height of the tariff impacts when the effective tariff rate was 27%, largely due to China’s tariffs of 145%. As it stands today, the effective tariff rate is 17.8% which would imply a better outcome for Vertiv’s bottom line than stated on the earnings call on April 22nd.
Despite the 50 bp reduction, this guidance suggests margins are expected to strengthen through the back half of the year to the low-20% range given Q1 and Q2 are both sub-20%.
Vertiv also provided more color on adjusted operating margin, with upside and downside scenarios based on how the tariff situation evolves over the next quarter. Vertiv’s upside scenario assumes tariff rates on April 22 remain the same, while the company recognizes tailwinds from incremental sales growth, projecting $2.015 billion in adjusted operating income for a ~21.3% margin.
Vertiv also provided two downside scenarios:
The first scenario assumes supply chain hiccups or other risks to customer spending, projecting adjusted operating income at $1.85 billion, or a margin of ~19.6% for the year.
The second scenario assumes that the reciprocal tariff rates announced on April 2, that were subsequently paused for 90 days on April 9, are reinstated in July. Under this scenario, Vertiv expects a larger hit, projecting adjusted operating margin of $1.80 billion, or ~19.0%, effectively eliminating much of the margin upside guided this quarter.
Commentary on China:
According to Vertiv, they have low exposure to China: “In the U.S., we have strong local capacity and we continue expanding it. We have capacity in Mexico. Most of our Mexico capacity and production is already USMCA qualified, and we are driving towards 100% of qualification goal. Single digits portion of our demand is sourced from China, and we are deploying or have already deployed lower tariff or no tariff alternatives.”
Although sourcing may be limited from China, there’s indication that China is a major customer per the geographic breakdown above where we stated: “APAC revenue increased to 36.4% organic to $447.2 million, accelerating sharply from 27.1% organic growth in Q4 on colocation and hyperscale growth in China.”
Quarterly EPS Growth Lumpy Through FY25
Similar to its margin outlook, Vertiv maintained its FY25 EPS outlook but widened its range to account for tariff uncertainties. EPS growth is expected to be quite lumpy through the rest of the year as Q1 saw some one-time benefits from a better interest rate on the nearly $3B in debt Vertiv has on the balance sheet: “The increase in EPS was primarily driven by higher adjusted operating profit, but also positively influenced by lower interest expense, in part due to the term loan repricing last year.” Q2 is expected to grow 20.9% and Q3 is also expected to outpace revenue growth at 26%.
Q1 adjusted EPS of $0.64 beat by $0.02, representing YoY growth of 48.8%. The strong growth was notable although lower than the 76.8% growth seen in the prior quarter.
For Q2, Vertiv guided for adjusted EPS of $0.77 to $0.85, or $0.81 midpoint. This corresponds to YoY growth of 20.9%.
Growth is expected to rebound slightly in Q3 to 26% YoY with 15.6% growth expected toward year end.
Management was quite clear the impact of tariffs would be primarily felt in Q2 before normalizing by Q4: “Tariff costs will certainly accelerate in the second quarter from the first quarter. And with limited time to mitigate with either supply chain or commercial countermeasures, our adjusted operating margin will be negatively influenced.”
For the full year, Vertiv still expects $3.55 in adjusted EPS, up 24.6% YoY, though it has widened its forecast range, now seeing $3.45 to $3.65 versus its prior view for $3.50 to $3.60.
Cash Flow Margins Dip, Net Leverage Improves Sequentially
Cash flows dipped sequentially with operating cash flow of $303.3 million in Q1, for a 14.9% margin. This is down from $425.2 million in Q4 with OCF margin of 15.4% but more than double the $137.5 million a year ago with OCF margin of 8.4%.
Adjusted free cash flow was $264.5 million for a 13% margin, down from $361.8 million in Q4 but up more than 161% YoY. Management said that they “experienced strong collections at the end of the quarter with a good portion of that accelerated a few weeks from Q2, which does create a potential headwind for next quarter.”
Based on comments for 1H ’25 free cash flow to be roughly consistent YoY, Q2 adjusted FCF could be near $170 million. This would correlate to a 7.2% margin. Inventories are increasing from $1.25B last quarter to $1.38B this quarter, and this implies inventories will increase again next quarter.
Vertiv also maintained its outlook for $1.3 billion in adjusted FCF for the full year, though it widened its range by $25 million on each end to $1.25 billion to $1.35 billion.
Cash and equivalents increased more than $200 million to $1.47 billion, while debt remained steady at $2.93 billion. Net leverage improved sequentially to 0.8x, down from 1x in Q4 and 2.2x at the start of FY24.
Earnings Call Q&A:
Modular AI Infrastructure (AI Factories) – Catalyst for Vertiv
By now, the Blackwell delays have been fully discussed. However, investors should look deeply at what caused those delays and what solutions providers and component suppliers are solving the issues. When there is this much demand, a delay like this provides a critical opportunity for suppliers to step up and take market share if their products help to resolve the issue.
Prefabricated infrastructure where the thermal management and power specialists assemble the infrastructure could become a path to faster, more successful deployments. Per Vertiv’s comments: “Now let me share some exciting news about our projects with iGenius. Here, NVIDIA and Vertiv are delivering a fully prefabricated AI factory. This is a very important sovereign AI supercomputer and we provide everything infrastructure from liquid cooling to heat rejection, grid to chip power in a very rapidly deployable modular infrastructure. All leveraging our NVIDIA codeveloped AI reference designs. What makes this truly special is how it brings together all our core Vertiv strengths. Our ability to deliver complex solutions at scale, our deep technical expertise and our commitment to innovation. We're not just providing infrastructure, we are enabling iGenius to deploy advanced AI models in a highly regulated industry.”
Often times, CEOs use earnings calls as a marketing tactic and it can be difficult to sort through dozens of product releases to identify which ones are important catalysts. I believe the iGenius deployment will (in time) prove to be an important deployment for Vertiv – perhaps the largest catalyst ever for the company — as it transitions Vertiv from being a solutions supplier to building end-to-end modular infrastructure with substantial cross-sell opportunities.
These modular AI factories also serve the massive market of sovereign AI by reducing the dependency on cloud providers such as Amazon, Google or Microsoft.
Timing for the Next AI Splash
Vertiv’s report can provide hints as to when the next AI splash may occur. Analysts certainly did not miss the opportunity to try and identify timing from Vertiv. We’ve covered in the past our takeawayswhere Vertiv hinted toward Blackwell delays. What’s being described is the Q2 QoQ inflection should translate in about 3-6 months for Nvidia’s deliveries. Notably, there are many proxies to track and thus isn’t not a perfect signal, yet we are quite clear Q1 is not going to be a blowout quarter for Nvidia and it’s likely not going to be Q2 either if you assume 3-6 months out. We’ve stated this many timesmany times in the past – for Nvidia investors to look for H2 as the bigger splash (and next leg up) in AI.
Here is the current update from Vertiv (as far as they can disclose):
Chris Snyder:
Maybe just a high-level one here. What do you guys think is the best way for all of us to track liquid cooling demand in the market? Is it Blackwell shipments? And if that is what we should be looking at? My understanding is you guys do would lead the chip shipments by some period of time. But just any color on that relationship?
Giordano Albertazzi:
Well, certainly Blackwell is a good — Blackwell shipments is a good proxy. But as you were saying, we proceed that deployment or anyway, the demand for liquid cooling proceeds the deployment, especially when it's liquid cooling that is not in rack with the cool and distribution units that are not in back, in which case pretty much the CDU demand and the Blackwell demand coincide.
But it's not just Blackwell shipments. There are other chips, some prior chip ASIC silicon that is more and more requiring liquid cooling or able to work with liquid cooling. So it's a little bit multifaceted. But certainly, Blackwell is a good place. Blackwell shipments are a good place to start and think in terms of probably 6 to 3 months before that happens is when we see our demand turn into deliveries. Yes, I think we are pretty happy about the trajectory of this technology and this product line. I'm actually very happy the way it's unfolding right now.”
Reiterating 2029 Goals
Five year goals are irrelevant to a growth investor as quite a bit can change in that time period. However, management brought up their 2024 goals a few times to assure analysts on the call that their working toward margin expansion. Specifically, the following was stated in the November 2024 Investor’s Day:
Top line growth of 14.4% from $7.8B in 2024 to $14.4B in 2029
Adjusted operating margin of 25% up from 19% in 2024 — you can see where the company took a step back this last quarter with adjusted operating margin of 16.5%
Conclusion:
Vertiv’s report was not a blowout, yet it hints toward the next AI splash occurring in the coming quarters. While many are focused on the effective tariff rate, what we know is that if you count China as a major customer or major sourcing partner, then sales will be lower and margins will be lower compared to last year. Vertiv echoed this in their commentary. Plus, analyst consensus does not point to Vertiv growing meaningfully in the second half (right now).
Our take is a bit different than analyst consensus. According to what we parsed from Q1, Vertiv saw outsized growth in APAC and this growth from APAC is likely to wane given global tensions. Perhaps Vertiv even saw a pull forward ahead of tariffs in Q1 given APAC sharply accelerated and China was named as the region contributing to APAC’s growth. However, my take is that by the time we exit the year, Vertiv’s AI story will have driven a surprise or two as there is a dislocation between what the management team is describing and analyst consensus (in our favor).
With that said, it’s unlikely we buy Nvidia suppliers ahead of Nvidia’s report given the weakness in Super Micro’s report, the lackluster inflection for Vertiv and more muted commentary we’ve been tracking thus far for Q1 from other suppliers. We think August/November will be the bigger AI splash in terms of Nvidia’s earnings call and will align any Vertiv entries accordingly.
The I/O Fund has a high allocation to other prominent data center infrastructure beneficiaries, sharing its research and real-time trade alerts with our Pro and Advanced subscribers, while discussing potential setups and trading plans in our weekly webinars with Portfolio Manager Knox Ridley. Our cumulative returns of 210% and annualized returns of 27.6% place us as one of the top performing tech portfolios, beating Wall Street’s very best. Take advantage of Biggest Sale of the Year $275 off our Advanced tier here. To upgrade, email us at premium@io-fund.com.here. To upgrade, email us at premium@io-fund.compremium@io-fund.com.
Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Jabil has surfaced as an oft-overlooked cloud and data center beneficiary, as the company’s strong growth in AI-related segments is mired behind multiple low-growth segments.
Simply put, Jabil’s 37% guided growth in Cloud & Data Center Infrastructure — to account for nearly 23% of fiscal 2025 revenue — would be impossible to see by looking at just top-line growth as revenue is expected to decline (3.4%) YoY in FY25.
However, it is this exact reason that Jabil likely faces growing headwinds throughout the rest of 2025, as a myriad of weak segments such as Auto and high consumer exposure via Apple present it to tariff-related demand and supply chain risks. These weak segments are more than offsetting AI growth, while thin margins mean tariff costs must be passed on to preserve the bottom line, which is already far below management’s FY23-stated target for this year.
Below, we discuss Jabil’s positioning in the AI supply chain, data center-driven growth and a penchant for M&A, consumer-exposed tariff risks, and lingering weakness in key segments.
Jabil’s Unique Positioning in the AI Supply Chain
Jabil is uniquely positioned in the AI supply chain, as it provides custom-designed, turnkey HPC/AI server platforms, rack enclosures, and optical networking components. Jabil is also increasingly vertically integrated across its AI portfolio with recent acquisitions, now offering complete GPU-agnostic servers featuring custom power and cooling solutions and in-house optical components.
Jabil offers both 1U and 2U (single, double rack unit) servers based on AMD’s latest 5th-gen EPYC processors and Intel’s 5th and 6th-gen Xeon processors. The 2U servers are optimized for low-latency, AI GPU accelerated workloads, while its 1U servers can be optimized for compute-storage or memory density. Jabil’s 2U ‘Eagle Stream’ server is Nvidia-certified for its L4 GPUs, which focus on video processing, deep learning and graphics use cases.
Jabil takes its full-system integration capabilities one step further with its Design-to-Dust lifecycle management support. This spans complete server rack development, tailored to customers’ exact needs, moving to volume manufacturing and then customer delivery, and circling back to decommissioning for end-of-life products. Thus, hyperscaler customers can come to Jabil for fully-designed, custom-manufactured servers from the ground up, minimizing supply chain diversification with Jabil’s vertical integration capabilities, further expanded with recent acquisitions.
However, the main risks with this strategy serving primarily in a ‘contract manufacturing’ model is that Jabil’s margins may remain thinner than other AI server manufacturers (at ~5% versus high single/low double-digits for Super Micro or HPE), hyperscale customers could shift spending, switch to other suppliers that can better meet needs with leading-edge GPUs, such as Blackwell or soon Rubin, or decide to internalize builds.
M&A Aiding Vertical Integration Capabilities
Jabil has taken steps over the past few years to strengthen its AI data center stack and enhance its vertical integration capabilities with two primary acquisitions, first with Intel’s silicon photonics-based pluggable optics transceivers unit in late 2023, and with liquid cooling manufacturer Mikros Technologies in late 2024.
Jabil is also said to be an interested party in acquiring ZT Systems’ US-based AI server manufacturing plants, with AMD reportedly looking to offload the assets in the second quarter to avoid competing with its customers Dell and HPE. Per Bloomberg, AMD is looking for a deal valued between $3 to $4 billion for the plants, with Taiwanese firms Wiwynn and Compal Electronics other interested parties.
Deal for Intel’s Silicon Photonics Unit
Financial terms for the silicon photonics deal with Intel were not disclosed, though Jabil acquired Intel’s silicon photonics IP, current and future product designs, R&D and technical teams. The deal brought Intel’s existing 400G optical transceiver module products, 800G products in development, and future 1.6T designs to Jabil’s data center portfolio. Neither Intel nor Jabil commented on the revenue of the unit, with Jabil’s management simply stating that it had “baked some of the revenues into our guide through 2024 into 2025.”
Interestingly, Jabil’s management said the idea of the deal arose from discussions from cloud customers who wanted to “disaggregate supply chains” and for Jabil to be more vertical in its server offerings. This raises a somewhat concerning point in that Jabil may have undertaken the deal due to pressure from customers who wanted to minimize extensive supply chain exposure, highlighting that these cloud customers likely have low switching costs and were willing (and able) to switch to new rack suppliers easily if such demands were not met.
Jabil’s management stated in late 2024 that within the first 12 months of the deal, the company had landed two new hyperscale accounts, with shipments already commencing. The hyperscale customers were not named, though Jabil has had a long-standing relationship with Amazon as one of its largest customers at 11% of revenue back in 2020, in both Cloud and Connected Devices segments, along with a pre-existing relationship with Meta in Connected Devices (now Connected Living).
As of fiscal Q2, Jabil is currently engaged in the 100G, 200G and 400G PAM4 optical transceiver module lines, while quoting 800G PAM4 modules in the first half of 2025 and moving towards 1.6T PAM4 modules by the end of the year. Jabil recently showcased its 1.6T pluggable transceiver module at the start of April, supporting dual 800G Ethernet or Infiniband connections, or single 1.6T connections while offering “among the lowest power consumption in the market.”
Jabil’s positioning in the 800G and 1.6T transceiver lines opens to door to growth over the next few years as these ultra-high speed products emerge at the forefront of the optical transceiver market. According to leading manufacturer Mitsubishi Electric, the optical transceiver market is expected to nearly triple from $4 billion in 2023 to almost $12 billion by 2029, with 800G and 1.6T solutions accounting for more than 80% of the market by then. This would correspond to ~$10 billion share, up 10x from ~$1 billion in 2023.
However, given that Mitsubishi commands ~50% global market share, the absolute opportunity in terms of revenue for Jabil may be quite low given that the market is quite saturated and competitive. Based on management’s current guidance for FY25, Networking and Communications revenue is expected to remain flat YoY at $2.3 billion when backing out the $0.7 billion associated with the exit of its legacy networking unit in FY24. Thus, it’s likely that related transceiver driven growth will be minimal even as Jabil begins to quote 800G and 1.6T products this year. Even if the new products generate ramp quickly to a few hundred million in revenue, that will only account for 1% of Jabil’s total revenue, which could easily be overshadowed by lingering auto or consumer weakness.
Jabil also expects the photonics deal will position them well for the upcoming push to co-packaged optics, believing their capabilities align better with networking switches, which is where CPO is first expected to be utilized after Nvidia unveiled two CPO networking switches at GTC. However, the growth story for CPO is much more long-term, arising more in 2027 and 2028, and as result CPO is unlikely to be a material driver over the next few years for Jabil.
To enhance its thermal management solutions, Jabil acquired little-known liquid cooling manufacturer Mikros Technologies for $63 million, with the company’s revenue being estimated between $4 million and $7 million in 2023, non-accretive to Jabil’s $28.8 billion last year. The deal had $40 million in intangible assets, including $31 million assigned to contractual agreements and customer relationships.
Mikros specializes in custom microchannel cold plate and liquid cooling designs with ultra-low thermal resistance and high cooling capabilities of 1kW per square centimeter. These solutions are primarily direct-to-chip liquid cooling methods. The primary benefit of this is that these solutions can feature in a wide range of server racks, but are not as efficient as immersion-cooled servers, which are more tailored to >50kW racks, such as those featuring Blackwell GPUs, according to Super Micro.
Mikros has designed multiple different cold plate designs, with its AX-NV1 being designed primarily for Nvidia’s H100 GPU, and its AX-NV2 designed specifically for Blackwell series GPUs. Mikros says the NV2 fits easily in 1U rack designs, a primary rack size that Jabil offers.
The acquisition is helping Jabil begin to ramp its ability to help customers retrofit existing facilities from air cooling to liquid and soon liquid to liquid, through Mikros’ cold plate tech that easily will integrate into Jabil’s rack solutions. This acquisition further expanded Jabil’s full-system capabilities to now span server racks, cooling and optical networking tech.
Financials: AI Growth Overshadowed by Many Weak Segments
Jabil is by no means a hypergrowth stock, with revenue expected to decline this year and rebound to low-single digits in the next two. Despite the slow growth and thinner margins, the company has a strong bottom line, with EPS currently forecast to be nearly $9 this year.
AI-related revenue growth is strong at a guided +40% YoY as Jabil captures rising data center infrastructure demand. However, forward revenue growth rates through 2027 are multiple points lower than pre-pandemic growth and lagging management’s long-term growth targets, signaling risk ahead as multiple segments remain weak.
In Q2, Jabil reported revenue of $6.73 billion, down (0.6%) YoY, with a growth rate rebounding from a (16.6%) decline in Q1.
For Q3, Jabil guided for a return to topline growth at 3.4% YoY at midpoint, offering a wide revenue range of $6.7 billion to $7.3 billion. To note, comps after fiscal Q1 2024 are slightly impacted by the $2.2 billion divestment of its Mobility business in FY24 — Mobility contributed $1.7 billion in revenue in FY24 before divestment, down from $4.2 billion in 2023.
On the back of AI-related strength, Jabil raised its FY25 forecast in Q2, now seeing revenue of $27.9 billion, a $600 million increase from the $27.3 billion guided in fiscal Q1. This has brought its guidance up $900 million from its initial $27 billion guide from Q4 2024. The primary driver for FY25 is Intelligent Infrastructure (discussed below in Segment Breakdown), riding AI tailwinds to a forecast of 17% YoY growth for the full year to $10.8 billion in revenue. This was increased from Q1’s forecast for 9% growth to $10 billion in revenue.
Jabil’s updated outlook would correspond to a YoY decline of (3.4%) for revenue, as it works through weakness outside of Intelligent Infrastructure. This builds on top of a (16.8%) YoY decline in FY24, as swift pullbacks in customer demand and excess inventory buildup in multiple key markets including auto, 5G and renewables dented revenue growth significantly. Jabil had initially guided for a (2%) to (5%) YoY decline including the Mobility divestiture, but ended the year at nearly (17%). This overshadowed strong momentum in AI, with Jabil noting that “AI GPU volume in the first half of 2024 [was] 200 times that of the level of 2023.”
Looking forward through FY27, Jabil’s growth is expected to return to positive territory in the mid to high-4% range, estimated to rise 4.6% YoY in FY26 to $29.3 billion and 4.9% YoY in FY27 to $30.7 billion.
Accelerating AI-driven growth is not appearing in higher revenue growth over the next few years, and more importantly, current estimates show Jabil operating through FY27 below its long-term growth targets – management previously outlined expectations to grow revenue at 5% to 7% YoY in the long-term.
Segment Breakdown
Jabil recently reorganized its reportable segments at the end of fiscal 2024, shifting from two segments, Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS), to three: Intelligent Infrastructure, Regulated Industries, and Connected Living & Digital Commerce. Regulated Industries accounted for 41% of revenue, followed by Intelligent Infrastructure at 39% and Connected Living & Digital Commerce at 20% of revenue in Q2.
Intelligent Infrastructure is arising as a core driver of revenue growth in fiscal 2025, with the segment focused on high-value data center and cloud computing needs for hyperscalers. Regulated Industries segment focuses primarily on auto and transportation, healthcare, renewable energy infrastructure and packaging end markets, while Connected Living & Digital Commerce segment focuses on retail digitization, smart home, warehouse automation and robotics.
Here's how each segment fared in Q2:
Intelligent Infrastructure revenue rose 18% YoY to $2.6 billion, accelerating from 5% YoY growth in Q1. This was driven by strong AI-related demand in cloud, data center and capital equipment. Growth was 37% YoY when backing out the ~$300M in revenue in Q2 ‘24 from the legacy networking business it exited.
Regulated Industries revenue declined (8%) YoY to $2.7 billion in Q2, decelerating slightly from (7%) YoY growth in Q1, on expected EV and renewable energy weakness.
Connected Living & Digital Commerce revenue declined (13%) YoY to $1.3 billion; excluding the Mobility divestiture, growth was 4% YoY. This was driven by strong warehouse automation and digital commerce growth, offset by weakness in consumer-oriented connected devices.
For Q3:
Intelligent Infrastructure revenue was guided to accelerate to 22% YoY to $2.8 billion, driven by “broad-based growth across our capital equipment, advanced networking, cloud, and data center infrastructure markets,” slightly offset by 5G weakness.
Regulated Industries revenue guided to rebound to a (1%) YoY decline to $3.0 billion, on continuing caution in the EV market.
Connected Living & Digital Commerce revenue guided to decline (16%) YoY to $1.2 billion, due to weaker growth in connected living, offset by some growth in digital commerce.
Q3’s guide would point to a 17 point acceleration in growth for Intelligent Infrastructure in just 2 quarters. QoQ growth is also accelerating from 4% QoQ in Q2 to 7.7% QoQ in Q3, assuming Jabil meets it guide at $2.8 billion.
Jabil laid the groundwork for this forthcoming acceleration in Q1, noting that it deepened its relationship with its largest hyperscaler customer (presumed to be Amazon but not named), seeing continued strength in custom AI-driven GPU rack integrations, and winning new programs with a new hyperscaler customer in silicon photonics. The ramp of Jabil’s 800G optical transceivers in the first part of calendar 2025 is also another likely factor behind this acceleration.
Intra-Segment View for FY25
Jabil also provides an intra-segment view into each of three reportable segments, breaking down growth by end market. This provides further clarity into the separate growth drivers for Jabil and what segments are struggling to grow.
Within Intelligent Infrastructure, Jabil is projecting 37% YoY growth in Cloud and Data Center revenue to $6.3 billion, or nearly 23% of total revenue, a significant acceleration from Q1’s outlook for 20% YoY growth to $5.5 billion in revenue (an $800 million sequential increase). This would be primarily driven by server racks and related data center products, as photonics revenue appears in Networking.
Capital Equipment growth is forecast at 38% YoY to $2.2 billion, while Networking and Communications revenue is expected to decline (23%) YoY to $2.3 billion, in part due to the exit of legacy networking which contributed $700 million in revenue last year. Stripping that out, Networking growth would be flat YoY.
For Regulated Industries, FY25 revenue growth was revised down from (2%) in Q1 to (5%) in Q2, on prolonged weakness in Auto & Transportation revenue, with growth expected to slow further to (11%) YoY. Renewables & Energy remain flat, while Healthcare growth was revised from 2% to flat as well.
Connected Living & Digital Commerce was maintained around (27%) YoY, impacted in part by the Mobility divestiture, but also more broadly by weak demand in Connected Living.
Most importantly, this segment breakdown reveals one key risk ahead for Jabil — the fact that Data Center growing at 38% YoY at nearly one-quarter of total revenue is not appearing in top-line growth suggests this strong AI momentum will remain overshadowed by weak growth and demand issues in other consumer-exposed and rate sensitive segments.
AI-Related Revenue Forecast Increased to $7.5 Billion, up 40%+ YoY
Based on its strengths within Intelligent Infrastructure and more specifically within Cloud and Data Center Infrastructure, Jabil boosted its AI-related revenue outlook for FY25 to $7.5 billion.
This represented a $1 billion increase in its AI-related revenue forecast and points to YoY growth of 40%+. Jabil said that last year’s AI-related revenue “was in the region of $5 billion,” and they had then increased it to $6 billion, then $6.5 billion and now to $7.5 billion. Management said the increase comes “as demand for servers, racks, photonics, advanced networking gear, storage, and testing equipment all continued to climb higher during the quarter.”
Barclays’ George Wang questioned Interim CEO Mike Dastoor about what was driving the raised AI guidance and $800 million increase in Cloud & DCI guidance:
Q, Wang: “Just kind of glad to see you guys raised the guidance by $800 million around the server rack. Was it likely driven by your biggest hyperscale customer? Just curious about timing for the ramp. Earlier, you guys talked about it will be more FY '26 in terms of the ramp with the sort of custom rack with your biggest customer in the DCI side. Just curious if there's any pull in into the back half of FY 25 kind of evidenced by the strong growth in the segment and the kind of guidance you raised. Just curious if you have any refreshed thoughts in terms of nuance just on the cadence for the ramp.”
A, Dastoor: “So I think the increase is driven mainly in 2 parts. I think if you look at our market share, we are growing our market share. So there's definitely some level of consolidation going on there, and we're winning more than our fair share of the market. And then the end market growth, again, we're not seeing any slowdown there in the end market. That continues to move upward.”
Dastoor’s answer beat around the bush, as he did not provide any clues or clarity as to whether this growth was driven by its largest hyperscaler. Comments around the custom rack ramp being more towards FY26 implies that Jabil’s AI-related revenue growth next fiscal year could remain strong if there is no pull in into this fiscal year.
Margins
Though Jabil has thin margins, it is seeing some slight margin expansion arise with its Intelligent Infrastructure operating at a higher margin and higher growth rate than its other segments. This can provide longer-term margin tailwinds should AI continue to drive more favorable margins in the segment over the next few years.
Gross margin in Q2 was 8.6%, down from 8.7% in Q1 and 9.3% in the year ago quarter.
GAAP operating margin was 3.6% in Q2, up from 3.8% in Q1 (not comparable to Q2 24’s 16.7% due to divestiture gains). Adjusted operating margin was 5.0%, flat QoQ and YoY. For Q3, adjusted operating margin is implied to be ~5.4% at the midpoint of management’s guidance for $348 million to $408 million in operating income.
GAAP net margin was 1.7%, up from 1.4% in Q1. Adjusted net margin was 3.2%, down slightly from 3.3% in Q1 but up slightly from 3.1% in the year ago quarter.
Breaking down adjusted operating margin by segment in Q2 shows Intelligent Infrastructure becoming the quiet margin and visible growth driver:
Intelligent Infrastructure adjusted operating margin was 5.3% in Q2, expanded half a point from 4.8% in Q1.
Regulated Industries adjusted operating margin was 4.8% in Q2, up slightly from 4.7% in Q1.
Connected Living & Digital Commerce adjusted operating margin was 4.5% in Q2, down 1.3 points from 5.8% in Q1.
EPS
Jabil reported strong 15.5% growth in adjusted EPS to $1.94, while it guided for a wide range of $2.08 to $2.48 for Q3. At midpoint of $2.28, this implies adjusted EPS growth will accelerate to 20.6% YoY. Jabil had noted at the time of its Mobility divestiture that it expects EPS seasonality similar to its old EMS business, with 40% in the first half and the remaining 60% coming in the second half.
The wide revenue and EPS range likely stems in part from uncertainties around tariffs, given that the guidance was given in March before specifics were announced. Yet it’s notable that management is forecasting sequential improvement in margins and accelerating EPS (aided by seasonality), as it suggests that they are quite confident in their ability to navigate tariffs and benefit from accelerating AI demand.
In Q2, Jabil also boosted its FY25 EPS forecast, seeing earnings of $8.95, up 5.4% YoY. This was a $0.20 increase from its original $8.75 forecast. To see EPS growth while revenue is declining, albeit at single digits, suggests Jabil is managing costs well and recognizing some slight operating leverage benefits.
Over the medium-term, EPS growth is expected to accelerate to the mid-teens in FY26 and FY27, with growth currently estimated at 15% and 14% to $10.30 and $11.75, respectively.
However, the broad slowdown in demand across multiple end markets and ensuing revenue weakness in FY24 has put Jabil behind its FY25 EPS target given at the end of FY23. At the time, management forecast EPS of at least $10.65 in FY25, but is now nearly (16%) below that target for this year, and still below it next year.
Cash and Balance Sheet
Cash flows remain solid, with Jabil reporting a sequential improvement in cash flows in Q2.
Operating cash flow was $334 million in Q2, up more than 53% YoY and 7% QoQ. Operating cash flow margin was 5.0%, expanding from 4.5% in Q1 and 3.2% in the year ago quarter.
Adjusted free cash flow was $261 million, up more than 443% YoY and 15% QoQ. Adjusted free cash flow margin was 3.9%, up from 3.2% in Q1 and 0.7% in the year ago quarter. Jabil forecast for adjusted free cash flow generation of more than $1.2 billion for FY25, implying a slight expansion in adjusted FCF margin from 3.7% in FY24 to 4.3% in FY25. While these are thin margins, it’s likely sufficient to cover upcoming debt maturities.
Core EBITDA was $488 million in Q2, down (3.4%) YoY. For the first half of 2025, core EBITDA was $987 million, down (15.9%) YoY due to Q1’s YoY decrease in operating income.
Net inventories rose 2.7% QoQ to $4.44 billion. Net inventory days increased 5 days QoQ to 61, above management’s targeted range of 55 to 60 days, which Jabil attributed to timing in the Intelligent Infrastructure segment.
Cash and equivalents totaled $1.59 billion, while debt remained steady at $2.88 billion. While Jabil is upside-down on debt, having nearly 2x debt as cash and debt-to-equity at 2.12x, available revolver capacity and evenly spaced maturities suggest that Jabil’s indebtedness should not elevate risk.
Jabil has approximately $500 million in senior debt due in 2026, 2027, 2028 and 2030, with $300 million due in 2029 and its largest tranche of $600 million due in 2031. While Jabil is currently focused on maximizing shareholder returns via share buybacks, its cash flow generation annually would be sufficient to cover its upcoming maturities. Jabil also has $4 billion in revolving credit facilities available as a backup to its Commercial Paper program, which also has $3.2 billion in available borrowing capacity.
However, a larger acquisition such as for AMD’s ZT Systems’ manufacturing plants where Jabil is a rumored bidder, would likely place more significant strain on its balance sheet given its expected price tag of $3-4 billion.
Jabil Believes it is Well Insulated from Tariffs, but Supply Chain Risks Remain
We recently discussed The Impact of Tariffs on the Stock Market as Q1 earnings kicks off, highlighting that early commentary from executive teams and analysts point to growing uncertainty on customer behavior and demand, amidst broader supply chain challenges. We explained that analysts are revising estimates under the hood with cautious notes that these issues will not disappear overnight.
For Jabil’s case, management believes it is well insulated from direct tariff impacts due to its global manufacturing footprint and majority of localized sales, though indirect, trickle-down impacts present a larger risk as numerous end markets remain weak.
Tariffs were a central part of Q2’s earnings call at the beginning of March, well in advance of April’s tariff announcements and subsequent market selloff, given uncertainties around scope, duration and impact of tariffs. Jabil’s management fielded several questions from analysts about this and the impacts they expect given their global manufacturing and sales footprint.
CEO Mike Dastoor said the majority of Jabil’s China business is “local to regional” in nature with only a small portion being US-bound, while he thinks the company’s global footprint and ability to manufacture locally to domestic customers worldwide means tariffs would be a “net positive.” However, this could potentially be an incorrect assumption as tariffs could possibly impact industry-wide growth in key markets such as automotive and smartphones.
To note, Jabil’s foreign revenue exposure is elevated at 77% in Q2, down from 82.5% a year ago, with the decrease primarily due to the Mobility divestiture. Jabil does not break down individual geographic exposure beyond that, but this high foreign revenue concentration increases geopolitical risk due to the sweeping implementation of tariffs worldwide, as well as broader macroeconomic risk should tariffs weigh on global growth and numerous foreign economies where Jabil operates in.
Jabil said that tariffs will be a “pass-through cost”, which makes sense to protect its bottom line given that its thin margin profile would be unlikely to safely absorb rising tariff-related expenses without severely impacting EPS. Yet, this does not truly insulate Jabil from tariffs, and neither does its global footprint — as we have seen with multiple other major tech firms from semis to autos, there is the growing uncertainty that tariffs “could lead to some level of demand reduction by the end customer” in the upcoming quarters. Jabil would likely feel tariff-related impacts if core customers such as Apple, Tesla and other auto and renewable customers face demand weakening through the end of 2025.
As we explained in our free newsletter, tariffs could quickly complicate the global supply chain and have trickle-down effects to consumers, as it’s impossible to onshore complex supply chains to the US overnight, or in short order, without facing major increases in costs. Tariffs are also expected to weigh on consumer demand, and for Jabil, analysts are cutting price targets and estimates. JPMorgan is now embedding “broader macro slowdown and associated demand moderation across most customer verticals into its estimates,” while Goldman cut its view on the auto market and sees softening consumer demand.
Consumer Exposure, Apple Concentration
Tariff impacts are already appearing in the consumer electronics industry, where both PC and smartphone industry growth forecasts are being revised lower, with industry tracking groups noting that growth rates in Q1 were driven by vendor stockpiling rather than healthy demand.
For the smartphone market, IDC said vendor stockpiling “effectively inflated Q1 shipment figures beyond levels anticipated based on underlying consumer demand trends alone.” IDC added that heightened US-China tensions and growing tariff uncertainties were a “strong reason for concern” for 2025 growth. TrendForce estimated that the “best case scenario will see the smartphone market flat at best” in 2025, while the “worst case scenario is a production decline by as much as 5% YoY.”
Jabil’s top customer Apple is expected to face quite significant tariff impacts, either culminating in much higher prices for consumers, with analysts forecasting 7% up to 43% price hikes, or higher costs, up to $9 to $10 billion to COGS. Apple also rushed to ship in 600 tons, or ~1.5 million iPhones worth $2 billion, in March in an effort to avoid tariffs.
While Jabil may not be affected by directly supplying Apple, if its sales occur locally in India for example, demand shocks from higher prices theoretically would impact Jabil’s revenue if Apple cuts shipments to manage inventories as a result. Jabil’s management is well aware of the fact that overall volumes are likely to be negatively impacted by tariffs in the future, expecting “some level of pullback towards the holiday season, especially from the consumer's perspective.”
In FY24, Apple’s share of Jabil’s revenue was 11%, or ~$3.2 billion, abating from the 19% to 22% revenue share from FY19 to FY22 (in part due to the Mobility divesture). During those years, Apple had driven revenue of at least $5.4 billion to Jabil. In 2023, Jabil also took steps to limit its Apple-China exposure, shifting its AirPod production to India.
EVs, Renewables Also Present Risks
Jabil has already seen persisting weakness in Automotive weigh on revenue growth, especially in FY24, and tariffs could further exacerbate demand issues in this and other markets such as renewable energy.
The solar and renewable energy industries have been plagued by high rates affecting solar rollouts throughout 2023 and 2024, and high rates combined with tariffs will likely remain a dark cloud over global demand. Enphase last week stated that while tariff impacts would be felt more on batteries as opposed to solar, it expects the US solar market to remain pressured by high interest rates while Europe remains challenging from regulatory changes and seasonal demand softness.
When it comes to automotive, the current consensus is that the industry will be hit quite hard by tariffs. A CNBC report from early April noted that analysts and executives are “expecting to see a drop in vehicle sales in the millions, higher new and used vehicle prices, and increased costs of more than $100 billion for the industry.”
When it comes to EVs, Tesla is typically seen as the bellwether for the industry given its presence and market share. Now, Tesla sits at the crossroads of consumer demand and China tensions, and is witnessing large cuts to growth expectations on top of weak demand. Q1 deliveries slumped (13%) YoY to the lowest level in two years, while revenue estimates for the full year have been slashed by $20 billion since the start of 2025.
Jabil is definitely not immune to demand headwinds in auto and solar — Auto and Transportation weakness was a core factor in FY24’s revenue decline, while Renewable Energy Infrastructure remains nearly (20%) below 2023’s revenue level, at $2.4 billion guided for FY25 versus $3.1 billion in FY23.
At the end of FY23, Jabil had projected 20% YoY growth in FY24 for Auto and Transportation revenue, forecasting a rise from $4.4 billion to $5.3 billion. Jabil then cut the segment’s guidance each quarter, with actual FY24 revenue for the segment coming in flat at $4.4 billion.
For FY25, Jabil had initially guided for $4.2 billion in revenue, down just (5%) YoY, but now has cut this guide each quarter to project just $3.9 billion in revenue for the segment, down (11%) YoY. This is before the full effect of tariffs has hit the auto industry, and a rather substantial erosion of revenue growth for Jabil, considering that at $5.3 billion, Auto & Transportation would’ve accounted for more than 15% of revenue in FY24 and nearly 19% in FY25.
Due to this weakness in Automotive as well as lingering headwinds in other segments including Renewable Energy and Healthcare, Jabil faces a murky outlook and weak top-line growth until these segments begin to meaningfully recover, which at the moment seems to be much more prolonged as tariffs weigh.
Valuation
Jabil has not been left out of tech’s rout in 2025, with shares at one point falling more than 30% from January’s highs at nearly $175. This has brought valuation multiples down to more reasonable levels, though tariffs could still result in a negative impact to the bottom line over the coming quarters due to thin margins.
Currently, Jabil is trading at 16.2x forward PE, a fair bit below its 18-19.5x peak multiples in January 2025 and early 2024, though well above its April low at 13x. This has brought it back above its 5-year average forward PE multiple of 12.8x, presenting more room to the downside should earnings estimates get revised lower through the rest of the year should tariffs impact customer demand and revenue growth.
On a top-line basis, Jabil is trading at 0.56x FY25’s estimated revenue of $27.9 billion at its current $13.3 billion valuation. This is above its 5-year historical forward PS average of 0.45x, as Jabil is likely seeing a slight re-rating higher due to optimism around its strong data center and AI related revenue growth forecasts.
If you strip it down to look at just the AI-related revenue, Jabil is trading at just above 2x its $7.5 billion AI revenue forecast, which is growing 40%+ YoY. It’s also trading at 2.5x its Cloud and Data Center Infrastructure segment with 37% YoY growth, approaching AI hardware pure-plays such as Super Micro which have been valued at 3-4x revenue at peak.
Conclusion
Jabil is intriguing as its strong growth in Cloud and Data Center Infrastructure is shrouded by a myriad of weaker segments, and it has substantially raised the segment’s forecast by $800M QoQ in Q2. This would represent a substantial acceleration from its prior 20% growth guide to 37% growth.
Despite this strong growth, Jabil’s top-line growth is rather subpar, with revenue forecast to decline YoY in FY25 as Jabil continues to digest end market weakness in a handful of consumer-exposed segments. This exposure to Apple, automotive clients and other industries such as healthcare has the potential to weigh on revenue and earnings growth through the rest of 2025, and risks completely overshadowing AI growth.
The I/O Fund has a high allocation to other prominent data center infrastructure beneficiaries, sharing its research and real-time trade alerts with our Pro and Advanced subscribers, while discussing potential setups and trading plans in our weekly webinars with Portfolio Manager Knox Ridley. Our cumulative returns of 210% and annualized returns of 27.6% place us as one of the top performing tech portfolios, beating Wall Street’s very best. Take advantage of a limited-time offer for $275 off our Advanced tier here. To upgrade, email us at premium@io-fund.compremium@io-fund.com.
Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
For our Premium Members, we discuss the following:
Microsoft’s nearly 900M user AI catalyst for both enterprises and consumers
The one key metric we are watching to help time when Microsoft’s stock will rally again after being flat for nearly a year
The hidden clue in Microsoft’s earnings report that hints a new AI trend is about to start, and a few key beneficiaries of the explosive trend management is confirming is about to begin.
900M Users on Windows 10 Incentivized to Upgrade to Windows 11
While the Windows 10 end of life support is well-known by now, the reason that we believe it will be a catalyst for Microsoft is that the upgrade cycle will help Microsoft to force many enterprise users to adopt its AI features. Windows 11 devices (Copilot+ PCs) were designed with on-device AI in mind utilizing powerful NPUs, and enterprise use cases for AI require the enhanced security and compliance support no longer provided under Windows 10 after its sundown. The upgrade cycle will place integrated AI features and Copilot directly and instantly to enterprises and consumers, potentially driving higher consumption for 365 services, Copilot Pro, or tokens and API calls.
Microsoft will end Windows 10 support on October 14, 2025, though it is offering extended security update (ESU) licenses to allow for some extension and support past the deadline. Consumers have the ability to purchase a one-year license through October 2026 and enterprises up to 3 years through October 28; however, a lack of support means Windows 10 is likely to be mostly unusable especially for enterprises that require said security.
This is likely to force many upgrades to Windows 11 as license prices for enterprises double from $61 to $122 to $244 per device, quickly adding up each year; Microsoft says organizations have the option to enroll their PCs into a paid ESU subscription after support ends, with the ability to renew each year thereafter for an increasing price. This provides extra time for organizations to plan and commence upgrades, while encouraging them to do so sooner rather than later. Assuming 10 million enterprise devices choose to stay on Windows 10 for the full three year license, that would generate nearly $4.3 billion in license revenue.
Microsoft noted that they are seeing “increased commercial traction as we approach end of support for Windows 10,” and “Windows 11 commercial deployments increased nearly 75% year-over-year.” When it comes to AI-capable PCs, enterprise adoption is expected to drive growth, and this is where Windows 11 makes its mark with Copilot as default on the OS. Canalys says that “Windows AI-capable PC shipments grew 26% sequentially, accounting for 15% of all Windows PCs shipped” in the December quarter, with more enterprises expected to upgrade as the deadline nears.
Microsoft Sees Strong Bookings, RPO Growth
We wanted to point out for Premium members that while bookings are lumpy, Commercial RPO growth above 30% suggests that Microsoft’s stock could (finally) resume strength again.
The last time we saw RPO in the 30%+ growth range was in late 2022-mid 2023 correlating to stronger price action than what we saw in 2024, for example.
Pictured above: Microsoft’s stock rallied up to 68% during quarters when RPO was above 30%.
Microsoft has now reported two quarters with RPO above 30%. Per the most recent earnings call: “Commercial RPO increased to $315 billion, up 34% and 33% in CC. Roughly 40% will be recognized in revenue in the next 12 months, up 17% year-over-year. The remaining portion recognized beyond the next 12 months increased 47%.”
Commercial RPO recorded a second straight quarter with >33% YoY growth in Q3 .
It should also be pointed out that Microsoft’s RPO is monstrous at $315 billion. This is almost double the RPO the company saw in the 2022-2023 period in the mid-$100B range. Growth this high on such a large number should not be overlooked.
Furthermore, when Microsoft’s stock was flat in 2024, the company was reporting RPO growth in the 20% range. Not only is RPO up 15 points in the most recent quarter, but RPO had doubled in the prior quarter from 17.5% to 34% and 36% in constant currency.
Commercial RPO also helps to further separate Microsoft from its Big Tech peers, as its growth is quicker and at a larger scale than both AWS and GCP — Amazon noted that its backlog rose nearly 20% YoY to $189 billion, while Alphabet said GCP’s RPO rose nearly 28% YoY to $92.5 billion. This strong RPO growth at scale helps cement Azure’s leading growth profile through 2026, at an estimated >10 points faster than AWS this year and next and faster than GCP even on a larger revenue base.
What we want to see as investors is not only was the current earnings report strong, but we also want hints that growth can sustain. While bookings are lumpy, RPO is communicating that Microsoft has what it takes to lead the Mag 7 again.
Microsoft CEO Slips They are “Short Power” in Earnings Call
Perhaps one of the more peculiar points of Q3’s report was the fact that Microsoft’s capex declined sequentially despite management noting that they expect to be capacity constrained through at least the June quarter – this begs the question, why slow capex if there are capacity constraints?
Capex declined sequentially for the first time in 2 years, at $21.4 billion versus $22.6 billion in the prior quarter. Q3’s figure was also slightly lower than expected due to variability in timing of data center leases, though capex is expected to increase sequentially in fiscal Q4.
CEO Satya Nadella mentioned that Microsoft would be “short power” in the earnings call and then tried to walk it back later in what was kind of an awkward moment: “And that's what you see reflected, and I feel very, very good about the pace. In fact, Amy just mentioned, we will be short power. And so therefore — but it's not power, but it's not a blanket statement. I need power in specific places so that we can either lease or build at the pace at which we want.”
CFO Amy Hood also tried to clarify that “when Satya talks about being short power, he's really talking about data center space. And so we've continued through the second half to put things in place.”
Our takeaway: The CEO of Microsoft is one of the most knowledgeable and polished speakers on the planet. I do not think he said “short power” to mean data center space — although there is a correlation between higher data center density needing better power solutions and data center density – rather, he clearly stated Microsoft needs power “in specific places.”
We’ve been tracking this closely for over a year, starting with a thematic deep dive on the free side and identifying several stocks positioned to deliver rapid time-to-power—a critical bottleneck for deploying Nvidia’s next-gen, power-hungry AI systems. The key point, especially when paired with Microsoft’s lower capex guidance, is this: AI cannot scale without new power infrastructure. The Next Platform wrote on this topic, which you can read here.
Although Microsoft’s Q3 results showed some unusual quarterly variability due to capacity constraints, the bigger signal came from its forward-looking capex commentary. Management said capex in fiscal 2026 (beginning in the second half of calendar 2025) will grow at a slower pace than FY2025, with a higher mix of short-lived assets. While that suggests more spending on servers, GPUs, and networking gear, it also raises a concern: Microsoft may be pulling back on long-lead infrastructure because they simply can’t get power fast enough.
This doesn’t point to weak demand. Instead, it highlights an industry choke point: without access to sufficient power, Microsoft may be unable to deploy new GPUs or build data center capacity at the pace AI demand requires.
Conclusion
When it comes to Microsoft’s trajectory over the next few years – where do we begin? The media loves to cover the OpenAI partnership for good reason; it shows Nadella had a vision as to the early winner in the space and the fortitude to lock-in Azure’s positioning with early investments. This is not only the usage seen in Chat-GPT but rather from millions of developers who use OpenAI’s APIs and Azure platforms like Foundry.
That is only part of the outlook for Microsoft, there are dozens of AI enterprise integrations that make it hard to compete in the enterprise space. GitHub comes to mind, Teams, Office 365 and the many CoPilot features.
From there, Microsoft will be converting 900 million users from Windows 10 to Windows 11 over the next few years, helping to boost usage across the many AI apps that Microsoft has released over the past decade.
Lastly, we are seeing important key metrics suggest Microsoft could lead the Mag 7 stocks again. Commercial RPO has not only resumed growth rates above 30% but has done so on a revenue base that is hard to fathom at these RPO growth levels. Should Commercial RPO continue, it’s a strong hint that Microsoft’s lead in AI will be hard for AWS and Google Cloud to shake.
The I/O Fund is closely monitoring Microsoft for a potential entry point. Join us Thursdays at 4:30 p.m. in our Advanced Market webinars, where we’ll outline our strategy for initiating a position with maximum upside in mind. Learn more here.Learn more here.
Essentials Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgrade.Essentials Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgradeEmail us to upgrade.
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.
For our Premium Members, we discuss the following:
Microsoft’s nearly 900M user AI catalyst for both enterprises and consumers
The one key metric we are watching to help time when Microsoft’s stock will rally again after being flat for nearly a year
The hidden clue in Microsoft’s earnings report that hints a new AI trend is about to start, and a few key beneficiaries of the explosive trend management is confirming is about to begin.
900M Users on Windows 10 Incentivized to Upgrade to Windows 11
While the Windows 10 end of life support is well-known by now, the reason that we believe it will be a catalyst for Microsoft is that the upgrade cycle will help Microsoft to force many enterprise users to adopt its AI features. Windows 11 devices (Copilot+ PCs) were designed with on-device AI in mind utilizing powerful NPUs, and enterprise use cases for AI require the enhanced security and compliance support no longer provided under Windows 10 after its sundown. The upgrade cycle will place integrated AI features and Copilot directly and instantly to enterprises and consumers, potentially driving higher consumption for 365 services, Copilot Pro, or tokens and API calls.
Microsoft will end Windows 10 support on October 14, 2025, though it is offering extended security update (ESU) licenses to allow for some extension and support past the deadline. Consumers have the ability to purchase a one-year license through October 2026 and enterprises up to 3 years through October 28; however, a lack of support means Windows 10 is likely to be mostly unusable especially for enterprises that require said security.
This is likely to force many upgrades to Windows 11 as license prices for enterprises double from $61 to $122 to $244 per device, quickly adding up each year; Microsoft says organizations have the option to enroll their PCs into a paid ESU subscription after support ends, with the ability to renew each year thereafter for an increasing price. This provides extra time for organizations to plan and commence upgrades, while encouraging them to do so sooner rather than later. Assuming 10 million enterprise devices choose to stay on Windows 10 for the full three year license, that would generate nearly $4.3 billion in license revenue.
Microsoft noted that they are seeing “increased commercial traction as we approach end of support for Windows 10,” and “Windows 11 commercial deployments increased nearly 75% year-over-year.” When it comes to AI-capable PCs, enterprise adoption is expected to drive growth, and this is where Windows 11 makes its mark with Copilot as default on the OS. Canalys says that “Windows AI-capable PC shipments grew 26% sequentially, accounting for 15% of all Windows PCs shipped” in the December quarter, with more enterprises expected to upgrade as the deadline nears.
Microsoft Sees Strong Bookings, RPO Growth
We wanted to point out for Premium members that while bookings are lumpy, Commercial RPO growth above 30% suggests that Microsoft’s stock could (finally) resume strength again.
The last time we saw RPO in the 30%+ growth range was in late 2022-mid 2023 correlating to stronger price action than what we saw in 2024, for example.
Pictured above: Microsoft’s stock rallied up to 68% during quarters when RPO was above 30%.
Microsoft has now reported two quarters with RPO above 30%. Per the most recent earnings call: “Commercial RPO increased to $315 billion, up 34% and 33% in CC. Roughly 40% will be recognized in revenue in the next 12 months, up 17% year-over-year. The remaining portion recognized beyond the next 12 months increased 47%.”
Commercial RPO recorded a second straight quarter with >33% YoY growth in Q3 .
It should also be pointed out that Microsoft’s RPO is monstrous at $315 billion. This is almost double the RPO the company saw in the 2022-2023 period in the mid-$100B range. Growth this high on such a large number should not be overlooked.
Furthermore, when Microsoft’s stock was flat in 2024, the company was reporting RPO growth in the 20% range. Not only is RPO up 15 points in the most recent quarter, but RPO had doubled in the prior quarter from 17.5% to 34% and 36% in constant currency.
Commercial RPO also helps to further separate Microsoft from its Big Tech peers, as its growth is quicker and at a larger scale than both AWS and GCP — Amazon noted that its backlog rose nearly 20% YoY to $189 billion, while Alphabet said GCP’s RPO rose nearly 28% YoY to $92.5 billion. This strong RPO growth at scale helps cement Azure’s leading growth profile through 2026, at an estimated >10 points faster than AWS this year and next and faster than GCP even on a larger revenue base.
What we want to see as investors is not only was the current earnings report strong, but we also want hints that growth can sustain. While bookings are lumpy, RPO is communicating that Microsoft has what it takes to lead the Mag 7 again.
Microsoft CEO Slips They are “Short Power” in Earnings Call
Perhaps one of the more peculiar points of Q3’s report was the fact that Microsoft’s capex declined sequentially despite management noting that they expect to be capacity constrained through at least the June quarter – this begs the question, why slow capex if there are capacity constraints?
Capex declined sequentially for the first time in 2 years, at $21.4 billion versus $22.6 billion in the prior quarter. Q3’s figure was also slightly lower than expected due to variability in timing of data center leases, though capex is expected to increase sequentially in fiscal Q4.
CEO Satya Nadella mentioned that Microsoft would be “short power” in the earnings call and then tried to walk it back later in what was kind of an awkward moment: “And that's what you see reflected, and I feel very, very good about the pace. In fact, Amy just mentioned, we will be short power. And so therefore — but it's not power, but it's not a blanket statement. I need power in specific places so that we can either lease or build at the pace at which we want.”
CFO Amy Hood also tried to clarify that “when Satya talks about being short power, he's really talking about data center space. And so we've continued through the second half to put things in place.”
Our takeaway: The CEO of Microsoft is one of the most knowledgeable and polished speakers on the planet. I do not think he said “short power” to mean data center space — although there is a correlation between higher data center density needing better power solutions and data center density – rather, he clearly stated Microsoft needs power “in specific places.”
We’ve been tracking this closely for over a year, starting with a thematic deep dive on the free side and identifying several stocks positioned to deliver rapid time-to-power—a critical bottleneck for deploying Nvidia’s next-gen, power-hungry AI systems. The key point, especially when paired with Microsoft’s lower capex guidance, is this: AI cannot scale without new power infrastructure. The Next Platform wrote on this topic, which you can read here.
Although Microsoft’s Q3 results showed some unusual quarterly variability due to capacity constraints, the bigger signal came from its forward-looking capex commentary. Management said capex in fiscal 2026 (beginning in the second half of calendar 2025) will grow at a slower pace than FY2025, with a higher mix of short-lived assets. While that suggests more spending on servers, GPUs, and networking gear, it also raises a concern: Microsoft may be pulling back on long-lead infrastructure because they simply can’t get power fast enough.
This doesn’t point to weak demand. Instead, it highlights an industry choke point: without access to sufficient power, Microsoft may be unable to deploy new GPUs or build data center capacity at the pace AI demand requires.
Conclusion
When it comes to Microsoft’s trajectory over the next few years – where do we begin? The media loves to cover the OpenAI partnership for good reason; it shows Nadella had a vision as to the early winner in the space and the fortitude to lock-in Azure’s positioning with early investments. This is not only the usage seen in Chat-GPT but rather from millions of developers who use OpenAI’s APIs and Azure platforms like Foundry.
That is only part of the outlook for Microsoft, there are dozens of AI enterprise integrations that make it hard to compete in the enterprise space. GitHub comes to mind, Teams, Office 365 and the many CoPilot features.
From there, Microsoft will be converting 900 million users from Windows 10 to Windows 11 over the next few years, helping to boost usage across the many AI apps that Microsoft has released over the past decade.
Lastly, we are seeing important key metrics suggest Microsoft could lead the Mag 7 stocks again. Commercial RPO has not only resumed growth rates above 30% but has done so on a revenue base that is hard to fathom at these RPO growth levels. Should Commercial RPO continue, it’s a strong hint that Microsoft’s lead in AI will be hard for AWS and Google Cloud to shake.
The I/O Fund is closely monitoring Microsoft for a potential entry point. Join us Thursdays at 4:30 p.m. in our Advanced Market webinars, where we’ll outline our strategy for initiating a position with maximum upside in mind. Learn more here.Learn more here.
Pro Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgrade.Pro Members: Don’t miss our biggest sale of the year — save $275 on an annual Advanced Market Signals plan. Email us to upgrade.
Please note: The I/O Fund conducts research and draws conclusions for the 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.
