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AI Cloud Service Providers Industry Semiconductors Stocks

Credo Technology (CRDO) $46 Is A Great Pick And Shovels Play On AI

Credo Technology Is Essential For Data Center GPUs

While all eyes and ears are on tariff uncertainties and geopolitical risks, we remain focused on finding good investments for the long term – tuning out the drama and volatility.

Excellent Q3-FY2025 results

Credo Technologies (CRDO) supplies high-quality Active Electric Cables (AECs) to data centers, counting on Amazon, Microsoft, and other hyperscalers as its biggest customers. The stock dropped 14% today to $46.75 in spite of excellent Q3-FY2025 results with a 154% increase in sales to $135Mn Vs $120Mn expected and a sizable improvement in gross and operating margins, which is unusual when you’re ramping up production for a customer like Amazon.

Revenue guidance for the next quarter was even more impressive at 162% growth to a midpoint of $160Mn. For the full year ending in April 2025, Credo is expected to grow revenues to $427Mn – a whopping 121% increase, over the previous year.

Good pick and shovels play in data center and AI

Credo is a pick and shovels AI/GPU/Data center play as data centers ramp up all over the world for accelerated computing. Its key products are essentially AEC replacements for optical cables — a play on back-end networking of high, and reliable bandwidth for data center GPUs and GPU systems like the Nvidia Blackwell N36 and N72, which are expected to start ramping up in the 2nd quarter of 2025.

Data center equipment suppliers have become very crucial parts of the AI/GPU supply chain, and Credo’s results certainly speak volumes of their capacity to scale and scale profitably, which is even more admirable.

Its founders are from Marvell (MRVL), there is a fair amount of credibility and experience.

They are general purpose and custom silicon agnostic, which is good because get business from Nvidia and from ASIC players like Amazon and Google.

The business is also GAAP breaking even in FY2025, another exception for such a small company.

Credo had gross GAAP margins of 63.6%, and GAAP operating margins of 20% and a stunning Adjusted Operating Margin of 31.4%, which is astonishing for a fledgling 400Mn operation with Amazon as its main customer.

Key Risks 

Customer concentration – not likely to change soon, the nature of the industry currently needs high volume from hyperscalers.

AEC cables will become a commodity after 3-5 years, so they’ll need to maintain their growth without dropping prices.

Valuation

Credo’s valuation is not expensive at 11x sales as the revenue growth is easily going to surpass 60% in FY2026 and 30% in FY2027, after growing 120% in FY2025. The P/S to growth ratio drops to a low of 0.2 with such high growth. Furthermore, it has an operating profit margin of 20% easily adding to more than the rule of 40, or 60+20 = 80.

The drop today was ostensibly because of customer concentration – Amazon 68%. But analysts and investors should have known this; I believe the correction is overdone and Credo should resume its upward march again. I bought at 45.75 today, the stock is down almost 50% from its all-time high of $86.69, but still up 187% in the past year.

I’m targeting a return of 24% per year or double in 3.

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Market Outlook

Slumping Consumer Confidence Doesn’t Bode Well For The Market

Consumer Sentiment Soured With Inflation and Layoffs

Market Outlook – Consumer Confidence

Consumer confidence slumps more than consensus in February, with the index coming in at 98.3 vs. 103.0 consensus and 105.3 in January (revised from 104.1), according to data released by The Conference Board this morning,

The drop was severe, and the most since August 2021 on concerns about the outlook for the broader economy – uncertainty over the Trump administration’s policies weighing on households. 

I had posted on Friday, stating that a plethora of weaker economic indicators was likely to lead to a drop in the market and this one added to the market’s woes, which at writing was down about 1% to 5,940 – some 3% lower than its high of 6,147.

The Conference Board’s gauge of confidence decreased by 7 points in February to 98.3, the third straight decline.

The expectations index ( 6 months) sank 9.3 points to 72.9, the most in three-and-a-half years, while a gauge of present conditions declined more modestly 3.4 points to 136.5

Recession woes and worsening outlook: The drop in confidence was broad across age groups and incomes, with consumers more pessimistic about current and future labor-market conditions, as well as the outlook for incomes and business conditions. The DOGE cuts are not helping confidence for sure.

The consumer board report, didn’t mince words about the severity of the decline.

“In February, consumer confidence registered the largest monthly decline since August 2021,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “This is the third consecutive month on month decline, bringing the Index to the bottom of the range that has prevailed since 2022. Of the five components of the Index, only consumers’ assessment of present business conditions improved, albeit slightly. Views of current labor market conditions weakened. Consumers became pessimistic about future business conditions and less optimistic about future income. Pessimism about future employment prospects worsened and reached a ten-month high.”

The dreaded R-word, which had been buried under the AI boom resurfaced, – the share of respondents expecting a recession in the next year rose to a nine-month high.

Tuesday’s report reinforces other surveys that I had cited, showing a doubtful and hesitant populace, waning after an initial surge of animal spirits post-election. Tariffs and higher prices dominate the conversation, as they did in the Michigan sentiment survey,  as inflation pressures pick up again and the labor market suddenly looks shaky. One would wonder if the DOGE leadership thought through their actions and the effects on the economy with all the government layoffs. Clearly, the mood seems to have soured.

I continue to be extremely cautious, and will only buy exceptional bargains, I believe the S&P 500 could correct to 5,780 – the pre-election level, after which I would re assess the market before entering again.

Categories
AI Market Outlook Stocks Technology

Risk Management And Portfolio Strategy

Selling Overpriced Stocks and Moving to cash

I sold 15-25% of several stocks on Friday, 02/21/2025 as a de-risking exercise in the wake of weakening economic indicators, which I wrote about in this article.

Here’s the list and you can see them in the Trade Alerts Section as well.

ARISTA NETWORKS (ANET) $101

ADVANTEST CORP SPON ADR (ATEYY) $63

AMAZON INC (AMZN) $218

APPLIED MATERIALS INC COM (AMAT) $174

APPLOVIN CORP COM CL A (APP) $430

ARM HOLDINGS PLC (ARM) $147

BROADCOM INC COM (AVGO) $222

DOORDASH (DASH) $201.65

DUOLINGO INC CL A COM (DUOL) $410

DUTCH BROS INC CL A (BROS) $80

GITLAB INC CLASS A-COM (GTLB) $65.75

KLAVIYO INC (KVYO) $42.75

MICRON TECHNOLOGY INC (MU) $101

NETFLIX (NFLX) $1,012

SAMSARA INC (IOT) $54.25

SPOTIFY TECHNOLOGY S.A. COM (SPOT) $626

Earnings alone won’t save this market from a correction

Earnings season for Q4-2024 is mostly over except for Nvidia (NVDA), which reports on 02/26.  M-7, and overall earnings were mostly lackluster and while most beat sandbagged estimates as always, the beats were nothing to write home about.

Instead, there was a lot of pressure for Q4 earnings to outperform to trump bearish indicators such as stubborn inflation, high valuations, tariff uncertainty, the likelihood of no interest cuts in 2025, difficult housing markets with 7% mortgage rates, weakening consumer sentiment, and so on….

Analysts, according to FactSet are still forecasting an estimated $268-$275 in 2025 S&P 500 earnings (about 11.5% growth), but this number seems more and more likely to either come in at the lower end or be revised lower as the year progresses. Second – the two-year back-to-back gains of 23% are a historical anomaly so I have to keep that in mind of a likely down year or a flat to 7-8% gain from already high levels.

Against all that is the $320Bn in Capex from the hyperscalers (That’s real money, not an economic survey or estimate  – therefore the strongest catalyst ), which is extremely good for the AI industry and a very strong and vocal belief in the fundamentals – longer term we are on solid footing, and the AI story is just beginning, there are a lot of benefits to reap.

Active Risk Manangment

In short – a balancing act, which means there has to be active risk management. And especially when almost all the economic indicators came worse than expected, with sticky inflation and slower growth – stagflation. The Michigan survey of inflation expectations is followed closely by the Feds, and the weakening PMIs coincide with Walmart’s lower guidance. The reports have a lot of meat and don’t paint a pretty picture.

I’m not selling/trading the index or the stalwarts like Apple (AAPL), and Alphabet (GOOG) – there will be a flight to quality, thus not recommended. Even with a correction I don’t see the S&P 500 falling beyond 5,600-5,780. 5,780 was the Nov 5th election day level, that’s just 3.8% lower, not worth it.

My portfolio is tech-centric, and sometimes the drops in those are between 20% and 30% – AppLovin (APP), Palantir (PLTR), and Duolingo (DUOL) are examples, plus they’ve performed far better than expectations so taking some off is a great de-risking strategy for me.

Categories
Market Outlook

Market Outlook –  Economic Indicators Suggest A Possible Correction

The S&P 500 should drop to 5,782

There has been a spate of economic indicators in the past week or so, which are bearish for the market indicating a possible correction or at the very least a level of caution.

Let’s take a look.

The PMI – The Purchasing Manager’s Index – a 17 Month Low!

S&P Global released its Flash US PMI Composite Output Index, which measures activity in the manufacturing and services sectors. 

The index fell to a 17-month low at 50.4 in February, down from 52.7 in January, indicating that activity had slowed to a virtual standstill. Worse, cost inflation accelerated even with the lower activity, and was absorbed by suppliers who were unable to pass it on – indicating a possible stagflationary spiral.

Economists didn’t see it coming with expectations of 53.

What were the main causes?

From Trading Economics, emphasis mine:

It also marked the slowest pace of business expansion since September 2023, driven by a renewed contraction in services output that partially offset faster manufacturing growth. New order growth weakened significantly, while employment edged lower amid rising uncertainty and cost concerns. On the price front, input cost inflation accelerated to its highest level since last September, while selling prices saw their slowest increase in three months. Finally, business optimism about the coming year slumped to its lowest since December 2022, except for last September, amid concerns over federal government policies related to domestic spending cuts and tariffs, as well as worries over higher prices, and broader geopolitical developments. 

Source: S&P Global

The University of Michigan Sentiment Index

The University of Michigan’s consumer sentiment index fell to 64.7 in February from 71.7 in January. Economists polled by FactSet were expecting a much better 67.5. 

Year-ahead inflation expectations rose to 4.3% from 3.3% in January. This is a worrying sign, high inflation expectations hurt the mass consumer and spending.

Tariffs are scaring consumers as all five index components weakened this month, with durables lower by 19% mostly on ears that tariff-induced price increases were imminent.

From the University of Michigan website:

Year-ahead inflation expectations jumped up from 3.3% last month to 4.3% this month, the highest reading since November 2023 and marking two consecutive months of unusually large increases.

Current Conditions Index: 65.7 vs. 68.7 expected and 75.1 January.

Consumer Expectations Index: 64.0 vs. 67.3 consensus and 69.5 prior.

Housing:

January was no exception, continuing the trend of the past two years, which saw high mortgage rates decimating housing, U.S. existing-home sales declined 4.9% in January from the prior month:

According to the Wall Street Journal,

Existing home sales of 4.08Mn also came in below expectations at 4.11Mn.. Economists surveyed by The Wall Street Journal had estimated a monthly decrease of 2.6%. In 2024, home sales fell to the lowest level since 1995 for the second straight year.

First-time home buyers seemed to be priced out by the double whammy of higher prices and high mortgage rates. I had reported earlier that the brave home buyers from 2022-2024 would feel the pinch of not getting to re-finance their 6-7% mortgage and clearly, few takers are willing to take that risk now.

Cash is at a record low:

According to the BOFA Global Fund Manager survey, cash is at 3.5% – the lowest level since 2010!

That begs the obvious question? With only 3.5% cash what’s left to buy the dip? With over-ownership of the M-7, these stocks aren’t just overbought, a) There’s previous little cash left to buy when the prices get attractive and b) You already own all of them, where’s the room to add more?

Goldman Sachs is advising caution:

Scott Rubner from Goldman believes that the “Buy The Dip” could fade:

We could be in a fading, twilight of a bull run and headed for a correction according to Scott Rubner, managing director for global markets and tactical specialist at Goldman Sachs.

Rubner was categorical in stating the good times from corporate buybacks, retail investors jumping in on every dip, 401k inflows, and beginning of the year investing was waning, and once the corporate buyback period went into the quiet period for Q2, fund flows would move away from equities.

According to Rubner:

“My highest conviction is that this massive ability to buy dip alpha is starting to wane.” Rubner also said that hedge funds have allocated a lot of risk back into the market. Global equities saw the largest net buying in two months last week.

Rubner backed his findings with two key statistics; His assessment that computerized trading desks selling triggers, in the event of a market dip would unload $62Bn worth of equities compared to just $9.55Bn of buying on buying signals – pretty asymmetric towards the downside. Secondly, he also cited “A net retail buy imbalance for the last 22 days, including the top three largest days on record, he said. “This cohort is happy to buy any 2-3% dips for now.”

Q4-24 Earnings weren’t good enough:

The FactSet report on S&P 500 Earnings on 02/14 was just average and for this market to keep rising average won’t do – the valuations The M-7, bellwethers were also sluggish and will have a hard time taking the indices higher.

And while I’m positive about AI, semiconductors, and several fundamentally strong tech companies, valuations have been stretched for a while, thus it would be prudent to take advantage of some of the prices by booking profits, which I have started and posted in the trade alerts section.

While a set of economic indicators doesn’t necessarily doom the market, the downside surprise indicates that we’re not paying enough attention to economic weaknesses, against a backdrop of stretched valuations and interest rates that refuse to fall. The correct de-risking strategy would be to sell and keep cash available for better bargains.

Categories
AI Cloud Service Providers Industry Semiconductors Stocks

Nebius (NBIS) $45 Has Long-Term Potential But May Be Priced To Perfection

Source: The Next Web


While Nebius has shot up 135% in the past year and is approaching fever pitch as a speculative AI infrastructure investment, it does have long-term potential to justify buying on declines.
Nebius was carved out of the Yandex group, an erstwhile Russian company, known as the Yahoo of Russia. After sanctions due to the Ukraine war and the resulting spinoff, this is a European company with US operations with little or no Russian exposure or additional geo-political risks.
Nvidia has a 0.3% stake in the company, and a strategic partnership to expand AI infrastructure to Small and Medium businesses beyond hyperscalers.
Nebius has five revenue segments – Data Center, Toloka, Triple Ten, Clickhouse and AVRide.

I want to focus on the main data center segment in this article.
Datacenter
The best and most strategic segment is the data center, and the key reason to invest in the company is to take full advantage of AI needs beyond the hyperscalers. I expect at least 100% annual revenue growth in the next two years from the data center, slowing down to 50% in year 3.
Nebius is going all out in creating enough capacity for demand in the next two to three years.
It launched its first data center in the US, in Kansas City to start operations in Q1 2025 with an initial capacity of 5 MW, scalable up to 40 MW.
Further expansion plans – most likely all of that is Nvidia’s B200 GPUs.
• Finland 25MW to 75MB by late 2025 or early 2026.
• France – 5MW Launching in November 2025.
• Kansas City – Second facility with 5MW to expand to 40MW.
• One to two further greenfield data centers in Europe.
Datacenter offerings: Either as computing power or GPU rentals, or the more specialized PaaS (Platform As A Service) with its AI studio, which gives customers choices of OpenAI or DeepSeek models among others. It is priced based on usage and token generation to cater to medium-sized, smaller, and/or specialized domain-specific customers.
Fragmentation likely: As the AI data center industry progresses, I believe, Inferencing and modeling requirements will be fragmented and domain-specific. The DeepSeek software and modeling workarounds do suggest this market could easily be targeted by customized requirements, where brute computing power as the norm will morph into specialized or customized requirements. In which case while customers could contract for larger GPU training clusters, they would also look for cheaper inference solutions, which rely on software enhancements. This is likely to happen over time and may well work to Nebius’ advantage since they want to go beyond pure GPU rentals and provide a full stack – this could be both a challenge and an opportunity and it would be crucial to get more visibility in Nebius’ offerings or services as the year progresses specially compared to competition like CoreWeave.
Lowering training costs: While there remains a huge cloud about what DeepSeek did spend on training, and even as 2025 seems to be secure because of the large Capex of $320 Bn committed by the hyperscalers, it would be remiss to not acknowledge that the trend would seek lower training costs as well – in which case a) data center computing power will be at risk and b) pricing could be the main differentiator. As of now, Goldman Sachs is projecting data center demand to exceed supply by about 2:1, and the gap is unlikely to be filled even with rapid deployment through 2026.
Spend more to earn more: Most of the forecasted growth is based on Capex possibly over $2.5Bn in 2025 with an additional $2.5Bn to $3Bn in 2026. Currently, Nebius is well capitalized with about $2.9Bn in cash, but if data centers don’t generate enough cash, there could be dilution to raise more capital or the sale of stakes in their 4 other businesses. This is very likely to happen in 2026.

Negatives and challenges

Provide value to customers beyond brute computing power: Over time data center rentals will get commoditized and become price-sensitive. The DeepSeek modeling workarounds do suggest that brute computing power will morph into smaller specialized or customized requirements. This could also work to Nebius’ advantage, since they can provide a full stack, i.e. –a challenge and an opportunity.
Pricing could be a challenge: The trend towards seeking lower training costs should continue – as of now Goldman Sachs is projecting data center demand to exceed supply by about 2:1, and the gap is unlikely to be filled even with rapid deployment through 2026, but Nebius needs to stay on top of it, to ensure they generate enough cash to continue spending on growth.
High Capex Needs: Most of the forecasted growth is based on Capex possibly $2.5Bn to $3Bn in 2025 and 2029 each – currently Nebius is well capitalized with over $2.9Bn in cash, but investors will need to be patient with this outlay first and prepared for dilution.

Valuation:

Nebius had forecasted to reach an ARR (Annual Recurring Revenue) Run Rate of – $750Mn to $1Bn for 2025, which is based on about $60-80Mn of ARR in Dec 2025 times 12. It’s not the ARR in February. It would grow from the current $300 Mn to $ 875 Mn by the end of 2025. Normally annual revenues are much lower than ARR – a lot of ARR is deferred revenue because the ARR includes contracted revenues, which are then pro-rated for the year. An ARR of $875Mn at the midpoint could imply 2025 revenue of between $400 and $500Mn. (This is still about 3x the estimated 2024 revenue of $137Mn – so there is tremendous growth. (But at this stage a lot of estimates!)
At a market cap of $10.4Bn, we’re looking at over 20x to 25x, 2025 revenue, so the price may have gotten ahead of itself.
This is a thinly traded company with rampant speculation, and I think the best move would be to sell 25% to 50% before earnings, should the quarterly results and forecasts disappoint. I’m already making a decent profit in a short time and keep the rest for the long term. Nebius reports pre-market on Thursday 20th, Feb.
I would like to see more visibility before committing to invest more.

Competition

CoreWeave (which is private) and also an Nvidia strategic partner had estimated revenue of $2.4Bn in 2024, and with the addition of 9 new data centers to 23 very likely to have around $8Bn of sales in 2025.
CoreWeave was last valued at around $23Bn but is targeting an IPO valuation of $35Bn thus giving it an estimated sales multiple of anywhere between just 4-9x for 2025, way below Nebius.
Even if we assume that the other businesses contribute an additional 25% or $125Mn in 2025 revenues we’re still valuing Nebius much higher than CoreWeave – a larger and more established competitor with Nvidia as a partner, and Microsoft as a customer.

That makes me wary; I’d be happy if my sales estimates are too low, but if they are not, then I would rather wait for dips.

Categories
Industry Stocks Technology

Confluent’s Excellent Quarter Is A Major Inflection Point

Confluent Data Streaming

02/11/2025

Confluent (CFLT) $37 – Still worth buying.

I’ve owned it for over two years but will pyramid (add smaller quantities on a large base) it further.

Why is this company still worth investing in after a 20% post-earning bump?

Four important catalysts

Databricks partnership: The partnership with Databricka, which is much better known and valued increases brand awareness and opens a lot of new opportunities and doors.

This could accelerate growth from the current 22-23%.

Strong customer base: 90% of its revenues are coming from 100K + ARR clients.

The $1Mn+cohort saw the highest growth, and Confluent managed a net ARR of 117%, indicating strong upselling.

A changing data processing market: The entire batch processing model could be up for grabs – customers moving at the speed of light and willing to pay for the latest technology could be a huge TAM. 

This is a paradigm shift, which Confluent has been trying to build into for a decade. 2025 might be that inflection year, with all the AI build-outs and use cases that are likely to need live processing – Confluent is the leader in that field. To be sure it’s not going to throw data processing models into obsolescence, why would you spend money on data that doesn’t need to be processed in real-time, but could take a large chunk of that market?

Snowflake acquiring RedPanda: Snowflake is reportedly trying to buy streaming competitor RedPanda for about 40x sales: While it’s not an obvious comparison, Red Panda is supposedly less than 10% of Confluent’s revenues but growing at 200-300%. But it’s the synergy with the larger data provider that’s getting it a massive price tag – Snowflake would love to have this arrow in its quiver of data tools.

Confluent is best positioned to take advantage of the possible shift from batch processing to processing in data streaming; its founders invented Apache Kafka, the open-source model for data streaming. And while its own invention is available for free – managing and maintaining it at scale needs the paid version. Over the years with the focus on Confluent Cloud, Confluent gets 90% of its $1Bn revenue from customers over $100K in annual revenue. 

Confluent has the cash the tech chops and the focus – sure Apache Kafka is open source and many cloud service providers like AWS and Microsoft also provide enough competition, but no one has the product breadth that Confluent does.

I would not be surprised if Confluent’s multiple expands from the current 8x sales after this earnings call.

Here are the details of the December 2024, 4th quarter earnings:

  • Q4 Non-GAAP EPS of $0.09 beat by $0.03.
  • Revenue of $261.2Mn (+22.5% Y/Y) beat by $4.32Mn.
  • Q4 subscription revenue of $251Mn up 24% YoY
  • Confluent Cloud revenue of $138Mn up 38% YoY
  • 2024 subscription revenue of $922Mn up 26% YoY
  • Confluent Cloud revenue of $492Mn up 41%YoY
  • 1,381 customers with $100,000 or greater in ARR, up 12% YoY.
  • 194 customers with $1Mn or greater in ARR, 23% YoY.

Financial Outlook

Q1 2025 OutlookFY 2025 Outlook
Subscription Revenue$253-$254 million$1.117-$1.121 billion
Non-GAAP Operating Margin~3%~6%
Non-GAAP Net Income Per Diluted Share$0.06-$0.07 vs. consensus of $0.06~$0.35 vs. consensus of $0.35

Categories
AI Industry Semiconductors Stocks

ASML – An Excellent Company That’s Still A Bargain

ASML- EUV

The Monopoly

As the source of all things AI and related, ASML is (and has been for the past decade) the monopoly for EUV lithography machines that power the most advanced GPUs from Nvidia and others. There’s no other manufacturer that can do this at scale.

Around October 2024, on their earnings call, they disappointed the market with a 10-15% lower than forecast revenue for 2025-2026, as one of their customers (very likely Intel) did not place orders for a large order of EUV machines as expected. Intel’s troubles are well known and this order is unlikely to come back. They also feared export controls to China and/or weakness in Chinese demand after 3-4 years of rapid growth.

I bought and recommended buying on 10/27/2024 at $690, with the following comments

Sure it could stay sluggish, range-bound, or fall till there’s some improvement in bookings, export controls to China, etc. Perhaps, that may not even happen for a while.

I think that’s an acceptable risk, now I’m getting a monopoly at a 37% drop from its 52-week high of $1,110, still growing revenue at 12% and EPS at 22%, selling for 8x sales and 25x earnings.

With TSM’s results, we saw how strong AI semiconductor demand still is and there was absolutely no let-up in their guidance.

A monopoly for AI chip production – an essential cog, without which AI is not possible – is definitely worth the risk

Fast Forward to the next quarter, the dynamic is much better and the price hasn’t shot beyond affordable.  

Bottom line: A must-have, it’s always going to be priced at a premium given its monopoly status and the strength of the AI market, so returns are likely not going to be like a fast grower tech but I’m confident of getting 14-16% annualized return in the next 5-10 years.

ASML’s Q4-2024 results on 01/29/2025 were excellent:

ASML beats expectations as bookings soared.

The EUV, machines leader grew Q4 revenues 28% YoYr to €9.26B, and 24% QoQ, beating estimates.

Bookings: ASML’s Q4 bookings came in huge at €7.09B, way ahead of estimates of €3.53B., with net new adds of €3B.

On the earnings call, CEO Christophe Fouquet had this to say about AI and sales to China:

AI is the clear driver. I think we started to see that last year. In fact, at this point, we really believe that AI is creating a shift in the market and we have seen customers benefiting from it very strongly. Others maybe a bit less.

We had a lot of discussion about China in 2023-2024 because our revenue in China was extremely high. We have explained that this was caused by the fact that we are still working on some backlog created in 2022, when our capacity was not big enough to fulfil the whole market. 2025 will be a year where we see China going back to a more normal ratio in our business. We are going to see numbers people used to see before 2023.

USA led sales with with 28% share in the fourth quarter of 2024, edging China’s 27% of about €7.12Bn

Challenges remain as the AI arms race gets hotter:

ASML has not been able to sell its EUV machines to China because of U.S.-led export curbs to restrict China from getting advanced lithography equipment to manufacture cutting-edge chips like the H100s from Nvidia, or the new generation Blackwells.

From 2025, ASML will provide a backlog of orders on an annual basis instead of bookings to more accurately reflect its business.

Guidance: 2025 total net sales remain the same, between €30B and €35B. Q1-2025 is slightly higher with total net sales to be between €7.5B and €8.0B versus consensus of €7.24B.

ASML remains an excellent opportunity and I plan to add it on declines.

Categories
AI Enterprise Software Industry Market Outlook Stocks

AI And The Multiplier Effect From Software

The AI Software Revolution

02/11/2025

The Software Multiplier Effect: An interesting note from Wedbush’s Dan Ives on Artificial Intelligence, who believes that software AI players will likely get 8 times the revenue of hardware sellers. I.e., a multiplier effect of 8:1 from software.

He is directionally right, and I do agree with him about the multiplier effect of software, services, and platforms on top of hardware sales. I had done a primary study several years ago with companies like Oracle, IBM, and Salesforce among others, and we saw similar feedback of about 6 to 1 for software spend to hardware spend, over time. People naturally cost more.

Nonetheless, regardless of whether it is 6 to 1 or 8 to 1, both numbers are huge and extremely likely in my opinion in the next 5 to 10 years and Palantir’s (PLTR) Dec quarter earnings hit it out of the park.

Dan Ives said:

Palantir Technologies (NASDAQ:PLTR) and Salesforce (NYSE:CRM) remain the two best software plays on the AI Revolution for 2025.

The firm also recommended other software vendors such as Oracle (ORCL) IBM (IBM), Innodata (INOD) Snowflake (SNOW), MongoDB (MDB), Elastic (ESTC), and Pegasystems (PEGA) enjoying the AI spoils.

Analysts led by Daniel Ives said:

Palantir has been a major focus during the AI Revolution with expanding use cases for its marquee products leading to a larger partner ecosystem with rapidly rising demand across the landscape for enterprise-scale and enterprise-ready generative AI.

Major Growth Expected: The analysts added that this will be a major growth driver for the U.S. Commercial business over the next 12 to 18 months as more enterprises take the AI path with Palantir. They believe “Palantir has a credible path to morph into the next Oracle over the coming decade” with Artificial Intelligence Platform, or AIP, leading the way.

Wedbush’s feedback about budget allocations is very helpful and even if one discounted Dan Ives’ perpetual optimism and bullishness by some, it’s a great indicator that this will be a favored sector in 2025-2028.

Ives and his team have been tracking several large companies that are or are planning to use AI path in 2025 to gauge enterprise AI spending, use cases, and which vendors are separating from the pack in the AI Revolution.

The numbers are gratifying:

Analysts expect that AI now consists of about 10% of many IT budgets for 2025 they are tracking and in some cases up to 15%, as many chief information officers, or CIOs, have accelerated their AI strategy over the next six to nine months as monetization of this key theme is starting to become a reality across many industries.

“While the first steps in AI deployments are around Nvidia (NVDA) chips and the cloud stalwarts, importantly we estimate that for every $1 spent on Nvidia, there is an $8-$10 multiplier across the rest of the tech ecosystem,” said Ives and his team.

What’s more important?

Analysts noted that about 70% of customers they have talked to have accelerated their AI budget dollars and initiatives over the last six months. The analysts added that herein is the huge spending that is now going on in the tech world, with $2T of AI capital expenditure over the next three years fueling this generational tech spending wave.

Hyperscalers indicated supreme confidence in their AI strategy committing in excess of $300Bn in Capex for 2025, which is historic. Amazon’s CEO Any Jassy was categorical in stating AWS doesn’t spend till they’re certain of demand.

Ives had this to add, underscoring Amazon’s confidence.

In addition, Ives and his team said that they are seeing many IT departments focused on foundational hyperscale deployments for AI around Microsoft (MSFT) Amazon (AMZN), and Google (GOOG) (GOOGL) with a focus on software-driven use cases currently underway.

“The AI Software era is now here in our view,” said Ives and his team. Wedbush’s team strongly believes that the broader software space will expand the AI revolution further, cementing what I saw at the CES last month. There is so much computing power available and so many possibilities of use cases exploding that this space could see a major inflection point in 2025-2026.

Large language models, or LLM, and the adoption of generative AI should be a major catalyst for the software sector.

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Cloud Service Providers Industry Semiconductors Stocks Technology

Marvell’s Investment Case Got Stronger With Hyperscaler Capex

Marvell Custom Silicon

Marvell Technology (MRVL) $114

I missed buying this in the low 90s, waiting to see if their transformation to an AI chip company was complete. Having a cyclical past, with non-performing business segments made me hesitate, besides far too many promises have been made in the AI space only for investors to be disappointed.

Marvel has been walking the talk, Q3 results in Dec 2024 were exemplary, and guidance even better.

Hyperscaler demand

With a planned Capex of $105Bn for 2025, Amazon confirmed on their earnings call that the focus will continue on custom silicon and inferencing. Amazon and Marvell have a five-year, “multi-generational” agreement for Marvell to provide Amazon Web Services with the Trainium and Inferentia chips and other data center equipment. Since the deal is “multi-generational,” Marvell will continue to supply the released Trainium2 5nm (Trn2) while also supplying the newly-announced Trainium3 (Trn3) on the 3nm process node expected to ship at the end of 2025. Amazon is an investor in Anthropic with plans to build a supercomputing system with “hundreds of thousands” of Trainium2 chips called Project Rainier. The DeepSeek aftermath does suggest a further democratization of AI, as inference starts gaining prominence from 2026.

Critically, like other hyperscalers Microsoft, Meta, and Alphabet, Amazon announced a high Capex (Capital Expenditure) plan of $105Bn for 2025, 27% higher than 2024, which itself was 57% higher than the previous year, for AI cloud and datacenter buildout. It was the last of the big four to confirm that massive AI spending was very much on the cards for 2025.

Here’s the scorecard for 2025 Capex, totaling over $320Bn. A few months back, estimates were swirling for $250 to $275. Goldman had circulated $300Bn in total Capex for the year, and these four have already planned more.

Amazon $105Bn
Microsoft $80Bn
Alphabet $75Bn
Meta $60 to $65Bn
Total $320Bn

The earnings call discussed DeepSeek R1 and the lower AI cost structure that it may presage, with the possibility of lower revenue for AI cloud services.

“We have never seen that to be the case,” Amazon CEO Andy Jassy said on the call. “What happens is companies will spend a lot less per unit of infrastructure, and that is very, very useful for their businesses. But then they get excited about what else they could build that they always thought was cost prohibitive before, and they usually end up spending a lot more in total on technology once you make the per unit cost less.”
Amazon plans to spend heavily on custom silicon and focus on inference as well besides buying Blackwells by the truckload.

Q3-FY2025

Marvell reported impressive Q3 results that beat revenue estimates by 4% and adjusted EPS estimates by 5.5%, led by strong AI demand. FQ3 revenue accelerated to 6.9% YoY and 19.1% QoQ growth to $1.52 billion, helped by a stronger-than-expected ramp of the AI custom silicon business.

For the next quarter, management expects revenue to grow to 26.2% YoY and 18.7% QoQ to $1.8 billion at the midpoint. The Q4 guide beats revenue estimates by 9.1% and adjusted EPS estimates by 13.5%. Management expects to significantly exceed the full-year AI revenue target of $1.5 billion and indicated that it could easily beat the FY2026 AI revenue target of $2.5 billion.

Marvell has other segments, which account for 27% of the business that are not performing as well, but they’re going full steam ahead to focus on the custom silicon business and expect total data center to exceed 73% of revenue in the future.

  • Adjusted operating margin – 29.7% V 29.8% last year, and better than the management guide of 28.9%.
  • Management guidance for Q4 is even higher at 33%.
  • Adjusted net income – $373 Mn or 24.6% of revenue compared to $354.1 Mn or 25% of revenue last year.
  • Management has also committed to GAAP profitability in Q4, and continued improvements.

Custom Silicon – There are estimates of a TAM (Total Addressable Market) of $42 billion for custom silicon by CY2028, of which Marvell could take 20% market share or $8Bn of the custom silicon AI opportunity, I suspect we will see a new forecast when the company can more openly talk about an official announcement. On the networking side, the TAM is another $31 billion.

“Oppenheimer analyst Rick Schafer thinks that each of Marvell’s four custom chips could achieve $1 billion in sales next year. Production is already ramping up on the Trainium chip for Amazon, along with the Axion chip for the Google unit of Alphabet. Another Amazon chip, the Inferentia, should start production in 2025. Toward the end of next year, deliveries will begin on Microsoft’s Maia-2, which Schafer hopes will achieve the largest sales of all.”

Key weaknesses and challenges

Marvell carries $4Bn in legacy debt, which will weigh on its valuation.

The stock is already up 70% in the past year, and is volatile – it dropped $26 from $126 after the DeepSeek and tariffs scare.

Custom silicon, ASICs (Application Specific Integrated Circuits) have strong competition from the likes of Broadcom and everyone is chasing market leader Nvidia. Custom silicon as the name suggests is not widely used like an Nvidia GPU and will encounter more difficult sales cycles and buying programs.

Drops in AI buying from data center giants will hurt Marvell.

Over 50% of Marvell’s revenue comes from China, and it could become a victim of a trade war.

Valuation: The stock is selling for a P/E of 43, with earnings growth of 80% in FY2025 and 30% after that for the next two years – that is reasonable. It has a P/S ratio of 12.6, with growth of 25%. It’s a bit expensive on the sales metric, but with AI taking an even larger share of the revenue pie, this multiple could increase.

Categories
Consumer Discretionary Industrials Industry Stocks

Ferrari: An Iconic But Overpriced Brand

Ferrari

Ferrari (RACE) $464

Positives

Unlike other auto companies, Ferrari’s brand strength and exclusivity provide it with a deep moat, leading to stable cash flows and high profit margins. In its high-priced ultra-luxury segment it doesn’t have any competitors. There are notables such as Maserati and Porsche, but Ferrari’s roars and soars above them.

The upcoming all-electric Ferrari model, while a significant shift, is expected to maintain the brand’s iconic status and appeal to wealthy customers.

Excellent operating leverage – sales growth of 7% has been consistently providing earnings growth of 15%

Massive pricing power – unit sales hardly grow 2-3% the rest is all pricing.

Operating margins of 26-28%, no one else in auto is even close to that.

There are a lot of growth opportunities, it plans to launch 15 new models by 2026, anticipating 12% revenue growth from FY25 onwards, supported by high personalization and a positive country mix. This could change the growth trajectory from the usual 7%.

Negatives

Valuation doesn’t leave much room for appreciation: Because it’s such an excellent premium brand without serious competition and stable growth, conventional pricing/valuation hardly applies to it –  but Ferrari’s current valuation with a P/E Ratio of 50x and 0.60% dividend yield begs the question, how much more can you get from it?

The stock has already returned 25% in the past year and 174% in the past five years, these are way above its historical averages.

Key risks include product concentration, dependency on Formula 1 sponsorships, and potential US tariffs on European manufacturers impacting costs.

Current Earnings

Q4 results were great: Led by growing demand for personalized vehicles, a strong product mix, and limited exposure to China.

Ferrari managed a strong 14% revenue with just a 2% improvement in shipments – everything else was price increases, leveraging its enormous brand, which has no price elasticity. As a result, profits swelled by 31%, leading to earnings of €2.14 ($2.21), which beat Wall Street’s expectations of €1.84 ($1.90).

“On these solid foundations, we expect further robust growth in 2025, that will allow us to reach one year in advance the high-end of most of our profitability targets for 2026,” said CEO Benedetto Vigna.

Guidance: A little more caution, due to higher supply chain costs and a higher tax rate in Italy. Accordingly, net revenue is expected to increase by ~5% to €7.0B ($7.23B), contributing to a profit of €8.60 ($8.89) per share. This is below the consensus estimates of €7.12B ($7.36B) and €9.07 (9.37), respectively. So far the stock has taken it well. (I guess that’s inelastic too!)

Regionally, sales were strongest in the Americas with shipments up 8% – (it looks like some of our stock trading profits have gone to Ferrari), followed by a 6% gain in APAC (excluding Mainland China, Hong Kong, and Taiwan). Sales in China, Hong Kong, and Taiwan fell 21%, but that’s less than 1% of total Ferrari sales.

FY2024 sales included ten internal combustion engine models and six hybrid engine models, which represented 49% and 51% of total shipments, respectively.

Given the focus on EVs, I expect that trend to continue. If Ferrari’s expansion drive to grow sales 12-15% a year with a stronger lineup of new models starts showing success, I could just end up buying it – if you can’t buy the car, it would be fun to make money off the stock.