How this issue works

The method is the same as in Watchlist #002: consensus EPS for 2026, grown for 5 years at the consensus growth rate plus the dividend yield (capped at 20% total), multiplied by three exit P/E multiples, then discounted at 12% per year. Fair price = the Base Case. AppLovin and Credo keep the models from their full analyses. The forward P/E in the text uses NTM EPS, as in the Koyfin charts; the model sheets show price over each year’s EPS, so their P/E differs slightly.

The exit multiples get reset only after a report, so for a name without a new report, they can differ from today’s chart. The Bear Case takes today’s multiple or the -1 standard deviation band (one standard deviation below the 5Y mean P/E), whichever is lower. The Base Case takes the 5Y mean, and the Bull Case takes the +1 band. All three are rounded down to a whole multiple and capped at 30x. When every historical anchor is above 30x, the multiples are 20x/25x/30x, which is a PEG of 1.0/1.25/1.5 at my 20% growth cap.

What changed is the buy zone. It is now the Base Case fair price x 0.7, per my Manifest rule. On the model sheets, it is the Base Case MoS price.

Analyst’s note:

In Watchlist #001 and #002, I used the Bear Case fair price as the buy zone. My Manifest rule is 30% below the Base Case, and I’ve used this since 2021. Portfolio #004 has already returned to it, and from this issue on, the watchlist follows the same rule. For most names, the zone moves by 5-14%; for APP, by 46%. For two of them, the change decides the status: APP is in its zone only under the new rule, and CRDO would be in its zone only under the old one. With both rules, the count is the same: 6 of 10.

The list itself also changed. NFLX was in its buy zone in both earlier issues; the full analysis came out on Oct 27, and the stock moved into the portfolio (the details are in Portfolio #004). Pinterest leaves for a different reason, explained at the end. Expedia and CarGurus are new. I use two screens: quality compounders and emerging growth for younger businesses still building margins.

ADSK

Next earnings: Nov 24 (confirmed)
Fair price: $440
Buy zone: up to $308
Curr Price/Fair Price: 0.59 (41% undervalued)
PEG: 1.23

Autodesk (ADSK) makes design and engineering software (AutoCAD, Revit, Fusion) and sells it as subscriptions. Since #002, the stock has increased 11.3%, from $233.60 to $260.01. At the same time, the estimates barely moved. The 2026 EPS is still $12.61, the 2028 EPS moved from $16.46 to $16.36, and the 5Y estimate stayed at 16.21%. The business is excellent: 92.5% gross margin, 36% FCF margin, and 27% ROIC.

So the fair prices did not change: $288/$440/$455. Autodesk has not reported since #002, so the exit multiples stay at 19x/29x/30x from that issue, not today’s 20.0x and 28.2x. The new rule moves the buy zone from $288 to $308, and at $260.01, the stock is 16% below it. PEG is 1.23, the highest on the list. Autodesk has the slowest expected growth here (16.21%), so even at 20x, I pay more for each point of growth than for any other name.

The stock is at 20.0x forward earnings, against a 28.2x 5Y mean and a 22.5x -1 standard deviation band. It has been below that band for most of 2026; in the 4 years before, it never traded this low. The derating came mostly from expectations: the 5Y growth estimate is 16.21% today, against ~24% on average over the last 5 years. Several times this year, ADSK fell with other software names amid AI fears, for example on Feb 03 and Sep 04 (-8%, along with Adobe, PTC, and Bentley).

The reported numbers held up better: revenue grew 16% in the Q2 report, and the non-GAAP operating margin reached 41%. Still, billings growth slowed from 33% in Q4 to 10% in Q2. In May, with the Q1 report, Autodesk also agreed to buy MaintainX, a maintenance and operations software company, for ~$3.6B in cash (~27x its expected annual recurring revenue of over $135M, which grows above 50%). The next day, ADSK fell 4%. This suggests the market disliked the price; in August, the CFO called MaintainX “a drag on operating margin”.

What I watch: the 5Y growth estimate after the Nov 24 report. It is below my 20% cap, so the model takes it as is, and every percentage point less takes ~$19 (~4%) off the Base Case fair price. Additionally, on the same call, the CFO said that this year’s growth has a benefit from the new transaction model “that will not recur in fiscal 2028”, so the first look at fiscal 2028 (February 2027 to January 2028, the 2027 column of my model) matters as much as the quarter. After the report, the multiples also reset; on today’s chart, they would be 20x/28x/30x, and the zone would move to ~$297, with ADSK still ~13% below it.

Below are the other 9 entries; 5 of them are in their buy zones. The deepest discount on the list is a new name, and the cheapest stock by P/E isn’t in its zone yet. After the entries: what the screens found, why Pinterest leaves, which names I rejected and why, and the whole list in one table.

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Investment Thesis

In August, AppLovin missed the revenue consensus for the first time since 2022, and its adjusted EBITDA came in below its own guidance. By Oct 30, the stock had lost 69% from its December high. Then the Q3 report changed the picture: gaming grew nearly 50%, and consumer grew triple digits, even as the new model generation was only partly rolled out. Meanwhile, APP is still 47% below its high. So the question is simple. After +71% in a week, does the price still undervalue the business, or has the market already priced in the recovery?

• Growth returned when bears expected a slowdown. Q3 revenue increased 55% YoY and 14% QoQ to $2.18B, the largest QoQ dollar increase in AppLovin’s history. Net income grew 72% to $1.44B, and FCF was $1.42B. For Q4, AppLovin guides for revenue of $2.365-2.395B (+43-44% YoY), ~6% above the pre-report consensus.

• Consensus expects ~19% EPS growth next year; APP trades at less than 20x. The S&P Global consensus is $17.35 of EPS for 2026 and $20.70 for 2027, +19.3%. APP is at 19.7x forward earnings on Koyfin, and Koyfin’s PEG is 0.62 on a 32.01% 5Y growth estimate. On next year’s growth alone, PEG is ~1.0. So I see APP as cheap for its quality, but not as cheap as the 5Y PEG suggests.

• The economics are exceptional. On an LTM basis, EBIT margin is 77.78%, FCF margin is 64.44%, and ROIC is 74.08%; each is far above its 5Y mean. Net debt is only $0.34B; AppLovin bought back $3.23B of stock LTM, about 2/3 of its FCF.

• The multiple is below its mean, but the mean says little. APP trades at 19.7x forward earnings against a 25.0x 5Y mean. This mean includes the months after the 2021 IPO (~50-70x) and the 2022-2023 washout (~5-6x), when AppLovin still owned its low-margin games. A better reference, in my view, is the current business: APP traded at ~30-60x in 2025 and at ~12x on Oct 30.

• The bear case is about trust - my model reflects that. Growth depends on model releases that management cannot schedule, AppLovin does not disclose how much revenue comes from e-commerce, and there are lawsuits, founder control, and large insider sales. My model prices the trust part through the Bear Case multiple: 12x, the level of the Oct 30 low. With the growth capped at 20%, the Bear Case fair price is $294 (the top of my accumulation zone) - APP is 33% above it. If growth also slows to 15%, the Bear Case falls to ~$238.

Analyst’s note:

AppLovin sold its own games (the Apps business) to Tripledot on Jun 30, 2025, for $430.6M in cash and ~22% of Tripledot’s shares. Since then, it is a pure advertising company, and I use only continuing operations for the history (the advertising business, which AppLovin called “Software Platform” before). AppLovin reports only GAAP EPS. The S&P Global consensus and the forward P/E use adjusted EPS. The price anchor is the Nov 06 close of $391.22.

Company Overview

Next Earnings Date: mid-February 2027 (estimated)
Market Cap: $129.62B
Sector: Communication Services | Industry: Advertising Technology
Type: Large Growth
Short Interest: 4.26%

AppLovin connects advertisers with the apps that show their ads. Most of these apps are mobile games, and AppLovin says its ads reach over 1 billion daily active users. A typical ad is a full-screen video or a playable mini-game that users watch for a reward or between levels. Adam Foroughi co-founded AppLovin in 2012 and has managed it as the CEO since then; Matt Stumpf is the CFO. In April 2026, Foroughi gave the Chair role to Craig Billings, an independent director, but he still controls 61.6% of the votes. AppLovin is a single segment with four products, according to the Q3 10-Q:

• AppLovin Ads (the demand side): advertisers buy installs, purchases, or other actions, then the AXON models predict which user is most likely to act on which ad. It “comprises the vast majority of revenue”.

• MAX (the supply side): an auction inside the app, where every ad network bids for each ad impression. AppLovin earns “a percentage of winning auction spend”.

• Adjust: ad campaign measurement, sold as a software subscription.

• Wurl: tools for streaming channels on connected TV (CTV).

The years before mid-2025 include the Apps business.

The business model is a share of the ad dollar. AppLovin books revenue net: what advertisers pay minus what AppLovin pays app publishers. The company does not disclose gross spend, but at the All-In Summit in September, the CEO said gross spend through AppLovin’s ecosystem was approaching ~$20B annualized, and management did not correct an analyst who repeated it on the call. Against Q3 revenue times 4 ($8.74B), AppLovin keeps ~44% of every ad dollar (its take rate), by my rough estimate. If the figure also counts MAX spend that other networks win, the real share is higher - I cannot check how much.

The costs are small. Data centers were $194.6M in Q3, 8.9% of revenue, down from 10.0% a year ago. Personnel was only $53.0M, plus $84.2M of SBC, which AppLovin reports separately. This is why 88.78% of revenue becomes gross profit and 77.78% operating profit.

Two businesses use one auction. Gaming is still “the majority of our revenue”, as the company said in August. The second one, consumer (online shops and other non-gaming apps), has had e-commerce advertisers since 2024, first in a pilot; the self-serve platform opened on a referral basis in October 2025 and to all advertisers in June. AppLovin does not split the two: “we do not break out obviously between gaming and consumer”, the company said on the Q3 call. We only know that gaming grew “nearly 50%” in Q3, and consumer spend grew “double digits” QoQ and “triple digits” YoY.

By my rough calculation, consumer is ~8-17% of revenue now. I get this from 55% total growth, with gaming at ~48-50% and consumer at +100-150%. The last share management gave was for Q1 2025: in February, they said e-commerce was “roughly 10%” of the business then. I think this lack of disclosure is one reason for the discount.

Market Overview

The ad market grows ~10% a year; mobile apps are one of its fastest-growing segments. WARC expects global ad spend of $1.34T in 2026 (+11.9%) and $1.46T in 2027 (+8.4%). AppsFlyer reported that spending to acquire app users was $78B in 2025 (+13%). Non-gaming apps were $53B (+18%); shopping apps grew 70%. Gaming was only $25B and grew 3%.

AppLovin’s own estimate is larger. The company calls the game ads market “in the tens of billions”; at the All-In Summit, the CEO put the whole space at more than double AppLovin’s ~$20B in gross spend. The numbers differ because the sources count different things; I use the third-party figure as the floor.

Mobile games themselves are not a growth market. In the first half of 2026, game downloads and in-app purchases decreased (in-app purchases by 2%), while game ad spend grew 8%, according to Sensor Tower. The reason is simple: game publishers spend more on ads to win players from each other - AppLovin earns from this competition. At the same time, it means AppLovin’s gaming growth comes from a larger share and better models, not from a growing pie. In 2025, the company said AppLovin’s penetration of gaming was “materially higher than 70%”; in November, they said, “We have every mobile gaming company live, probably.”

AppLovin gains share in game ads, and the competition grows too. In Tenjin’s Oct 21 benchmark, AppLovin earned 53% of game ad revenue on iOS in Q3 2026, up from 39% in Q1 and 42% a year earlier. On Android, it is first with 29%. AppLovin and Google’s AdMob together have 65% of mobile game ad revenue, according to Sensor Tower. In Tenjin’s sample, Mintegral and AdMob lose share, while Unity is flat. And Unity is not standing still: its Vector ad platform grew 126% YoY in Q3, and Unity guides for 105-107% growth of Strategic Grow (its ad revenue without the ironSource network it closed in Q2) in Q4. The company’s answer is that the market “is not zero sum”.

Additionally, the two companies are in court. Unity’s Ad Quality tool reads data inside MAX (the revenue, creatives, and engagement of the ads AppLovin wins), and AppLovin says Unity may have used this data to train its models. In September, AppLovin asked a court to stop it; on Oct 02, the court refused a temporary order (a quick ban before the full case), and Unity called it “a classic case of a dominant incumbent resorting to litigation and intimidation”. As I see it, this shows the weak spot of owning the auction while being its largest bidder: if Unity bids more inside MAX, AppLovin’s take rate (the share of each ad dollar it keeps) can decline.

E-commerce is the larger market. Social media ads alone will be $394.6B in 2026, according to WARC, so even a small share would be large for AppLovin. The best independent data I found is from Haus, which sells brands tests of whether an ad brought sales that would not have happened anyway. In its tests, AppLovin beat the typical channel in 63-85% of the cases per quarter in 2025, but only 53% in Q1 2026 and 50% in Q2 2026; at 50%, it was no better than the average channel. At the same time, ~66% of the customers AppLovin brought were new to the brand, and the brands that tested it in 2026 raised their AppLovin spend by more than 50%. Wells Fargo counted only ~6,000 e-commerce sites on AppLovin in June, against 118,000 for Snapchat, and does not expect an inflection before 2027. This suggests the channel works, but the early, easy returns are over, and growth now depends on AppLovin’s models and the advertisers’ creatives.

The platform owners set the rules. Apple’s App Tracking Transparency (ATT) limits data about iPhone users; Meta today bids in mobile app auctions only on traffic with a device ID. The company said in February that Meta “might very well bid on no ID traffic in the next couple of quarters”. As far as I found, it has not happened yet. On Android, the company admits it “is more competitive because there’s a very big competitor out there”, Google. In my view, this is the market’s main structural risk: AppLovin builds on platforms it does not control.

Economic Moat

Every margin is far above its 5Y mean. On an LTM basis, gross margin is 88.78% vs. a 74.34% 5Y mean, and EBIT margin is 77.78% vs. 38.38%. Net margin is 65.89% (mean: 27.95%), and FCF margin is 64.44% (mean: 44.14%). Those means are low because they include 2022-2023, when AppLovin owned games with much lower margins.

Still, the FCF margin fell this year from ~72% at the start of 2026 because of the timing of cash taxes. Stumpf now expects FCF of 70-75% of adjusted EBITDA for the full year, against “approximately 75%” in May; the first 9 months were 71%.

The moat is a loop of supply, data, and models. MAX is in most of the top ad-supported games (73% of the top-downloaded ones in March 2025 data), so AppLovin sees a huge number of auctions every day and learns from every ad it wins. Better predictions let advertisers bid more for the same impression; publishers earn more, so they keep MAX, and more supply comes in. A newcomer needs supply and data at the same time, and neither comes without the other. The company described the MoPub purchase in 2022 as the deal that made MAX what it is: “we put it out of business in 90 days. But we got all the customers over to our platform”.

The best evidence is revenue that grows faster than the cost of serving it. In Q3, revenue increased 55%, while data center costs grew 38%. Personnel costs are the exception. With SBC, they grew 64%, from $83.8M to $137.2M, faster than revenue; without SBC, only 6%. Even with SBC, personnel is only 6.3% of revenue. AppLovin trained bigger models this quarter, and still “data center costs declined as a percentage of revenue.” Of the extra revenue QoQ, 87% reached adjusted EBITDA (which excludes SBC). This suggests the advantage is in the models, not in spending.

The moat’s weak point is that it must be renewed every year. The company explains the risk in plain terms: “If we innovate at the rate of the market, the market pricing stays consistent... If we fall way behind... our take rate will contract”. Q2 2026 showed what a lighter quarter looks like: “Our pace of meaningful model improvement was lighter than normal”, and revenue came in below the midpoint of the guidance. So the moat is not a network that protects itself, like Visa’s; it is a lead in technology and data that AppLovin has to maintain.

The returns are extreme. ROIC is 74.08% against a 30.73% 5Y mean. ROE is 210.09% (mean: 103.86%), and ROA is 49.57% (mean: 18.14%). Of the three, ROE looks inflated, since buybacks keep equity low ($3.30B against $5.01B of LTM net income). ROIC and ROA do not have this problem; both have increased every quarter since 2023. In my opinion, AppLovin has a narrow moat: the returns prove a real advantage today, but it depends on staying ahead in models and on platforms that Apple and Google own.

Business Strategy

A new model generation, rolled out in parts. In Q3, AppLovin “partially rolled out the next generation of our models”, and the company compares its technical complexity with Axon 2.0, the 2023 upgrade that started the current growth. The new architecture lets AppLovin train bigger models on more compute, and it works better “where data is sparser”, which is where consumer advertisers are. Management does not promise a date: “We cannot tell you or commit to when we can actually see a full rollout”. From my perspective, this is the main source of upside and of risk at once, since the Q2 miss had the same cause in the other direction.

Consumer: from games to every app advertiser. In June, AppLovin opened its self-serve platform, AppLovin Ads Manager, to all advertisers. The plan is “mid-market advertisers first”, then the long tail. It works “really well for the customers that we either handhold or they come in and are sophisticated”, the company said, but a small business with little data is “still further into the future”. Partnerships with agencies and platforms are now the main channel for new customers. Worth noting that e-commerce changes the seasonality: “we should see bigger Q4s followed by tougher Q1s”.

Creative is the bottleneck. An AppLovin ad is watched for over 35 seconds on average, so an online shop needs much more video than on social media. In May, management said the video generation tool was “days away” from rollout; in August, the company said a good 30-60 second video “out of the box” is “still work in progress”. On the Q3 call, he described the answer as “both”: better AI video models and new ad formats such as dynamic product ads. The securities lawsuit filed in September is built largely on this gap between May and August.

CTV, a long option. AppLovin has pilot campaigns on connected TV, and the company sees it as “what mobile looked like to us 10, 15 years ago”. At the same time, he said, “I wouldn’t bank on it at all for being accretive to numbers anytime soon”. I agree, and my model does not include anything for it.

Buying data instead of waiting for it. The new models are “going to be starved for data”, and AppLovin is open to “some sort of data acquisition”: buying customer relationships, as with MoPub. As I see it, the logic is sound, but a large acquisition would also use the cash that now goes to buybacks.

Capital Allocation

Net debt is almost gone. At the end of Q3, AppLovin had $3.17B of cash and $3.52B of debt, so net debt was $0.34B, ~0.07x of LTM FCF. The debt is four notes with coupons of 5.125-5.950%, and nothing matures before December 2029.

Based on my calculations from the quarterly balance sheets, Debt/Equity is 106.6% vs. a 248.2% 5Y mean; Debt/Capital is 51.6% vs. 68.0%. In 2023-2024, net debt was ~$2.6-2.8B on a much smaller business.

There is room to borrow. Management targets net leverage of ~1x adjusted EBITDA; in that case, AppLovin could borrow ~$6B more for a large deal or buyback, by my estimate.

FCF is close to net income, but not above it this year. LTM FCF is $4.90B on Koyfin ($4.88B on AppLovin’s definition, which also subtracts finance lease payments), against a $1.92B 5Y mean. In Q2, FCF was only $863M because of the timing of cash taxes, and Q3 came back to $1.42B, 77% of adjusted EBITDA. Over the first 9 months, operating cash flow was $3.59B, below net income of $3.91B. Receivables increased $571M with the growth, and AppLovin paid $926M in cash taxes against a $770M tax expense. Capex is almost zero, under $10M LTM.

In Q3, the buybacks were well timed. The company bought back 7.3M shares for $2.9B in the first 9 months, ~$396 per share. Q3 alone was 4.1M shares for $1.4B, ~$339 on average, after the stock fell; AppLovin called it “opportunistically ramping up the buyback”. Then, in October, the board added $3.2B, bringing the remaining authorization to $3.6B (2.8% of the market cap).

The longer record is strong too. Since the program started in 2022, AppLovin has bought back 104M shares for $9.4B, ~$90 per share. The share count decreased from 338.5M to 331.3M in a year, and by 11.3% over 5 years; the LTM buyback yield is 2.57% (5Y mean: 2.00%). The company pays no dividend.

Stock-based compensation is growing again. SBC was $84.2M in Q3, up 2.5x from $33.8M in Q3 2025, and $333M LTM, or 4.4% of revenue. In addition, R&D expense, which includes most of the SBC, increased 132% YoY in Q3. LTM, it was $378M. Buybacks still reduce the share count, so dilution is covered for now.

The timing of the new grants is worth noting. On Oct 29, at a $254.91 close and 4 trading days before the report, the board granted new awards to executives: 128,055 RSUs to Foroughi (Form 4), and 91,467 RSUs plus 182,224 performance units tied to the market cap to Giovanni Ge, the new CTO. A week later, the stock was 53% higher.

Governance is the weak part of capital allocation. Foroughi has 61.6% of the votes with 9.0% of the shares, and all directors and officers together have 64.0% of the votes, according to the 2026 proxy. On Oct 29, Foroughi, Herald Chen (a director), and related holders approved the move from Delaware to Nevada by written consent, so the other shareholders have no real vote; AppLovin has not stated a reason. In 2026, insiders sold $372.5M of stock on the open market, all between March and July at $447-600, and nobody bought below $300, according to their Form 4 filings. As I see it, this doesn’t change the business, but it is one reason the market pays less for it.

In my opinion, management allocates the cash well, and the guidance is credible. AppLovin beat revenue consensus in 13 of the last 14 quarters, and the Q3 buybacks were made at ~$339, 13% below today’s price. The H1 buybacks were less well timed: ~$1.5B at ~$466 per share, while insiders sold at $447-600 between March and July. Still, the governance record is weaker than its capital-return record.

Advantages

• The leader in mobile game ads. 53% of game ad revenue on iOS and 29% on Android in Tenjin’s Q3 benchmark; MAX in most of the top ad-supported games.

• Economics that few companies have. An EBIT margin of 77.78%, an FCF margin of 64.44%, ROIC of 74.08%, and almost no capex.

• A second growth market. Consumer spend grows triple digits YoY, and the ad market outside games is many times larger than the game ad market.

• Strong cash returns. $3.23B of buybacks LTM and 11.3% fewer shares in 5 years, while net debt is only $0.34B.

• A record of beating its own guidance. Revenue above the consensus in 13 of the last 14 quarters, and Q3 ~$100M above the top of the guidance.

Disadvantages

• Growth depends on model releases that nobody can schedule. Q2 2026 missed the revenue consensus because model improvement was “lighter than normal”, and management “cannot... commit to when” the new generation is fully rolled out.

• The consumer business is unproven and undisclosed. No revenue split, Haus’s win rate down from 63-85% in 2025 to 50% in Q2 2026, and tougher Q1s ahead as e-commerce grows.

• Competition and the platforms. Unity’s Vector grew 126% YoY in Q3; Meta may start bidding on iPhone traffic without an ID; Apple and Google control the data AppLovin depends on.

• Lawsuits and governance. Two securities class actions (2025 and September 2026), derivative suits (shareholders suing the directors on the company’s behalf), a San Diego County suit over ads in children’s games, a Dutch privacy class action, as well as a founder with 61.6% of the votes and $372.5M of insider sales in 2026.

• Lower-quality earnings. SBC 2.5x YoY in Q3, ~$0.12 of Q3 EPS from an unrealized gain on private equity funds, and operating cash flow below net income in the first 9 months.

What the bears get right: Gaming is close to its ceiling. AppLovin already works with almost every mobile game company, game downloads are declining, and Wells Fargo argued in August that AppLovin has ~50% of the money mobile games spend on user acquisition and is near a “plateau” in wallet share. So the 30% long-term growth that management targets needs consumer to become a large business, and the independent data on consumer weakened in 2026.

The history adds to the doubt. In 10 months, the stock fell 69% on a short-seller attack, an SEC inquiry that, according to AppLovin, ended with no action, one weak quarter, and doubts about e-commerce. The market already paid 12x for this business on Oct 30, and it can do so again. If EPS grows only 15% per year and APP trades at 12x in 2031, the fair price is ~$238, 39% below today’s price; with 20% growth and 12x, it is my Bear Case, $294.

One risk is outside the multiple. San Diego County claims that AppLovin used fingerprinting (identifying a device by its technical traits, without an ad ID) to collect children’s data, and short sellers made similar claims in 2025, which AppLovin called false. If Apple found this true and acted against AppLovin, the iOS economics would change, and no exit multiple in my model covers that.

Competitors

I compare AppLovin with 5 companies. Unity (U) is the closest competitor: an ad network (Vector) and a mediation platform (LevelPlay) for mobile games. Liftoff (LFTO) is also a mobile ad network. Meta (META) and Alphabet (GOOGL) are the largest performance advertising platforms, and Google’s AdMob competes directly in game ads. The Trade Desk (TTD) is the largest independent ad platform outside mobile apps. XLC, the Communication Services ETF (APP is 5.8% of it), is the benchmark.

On forward P/E, APP is in the upper half of the table: META, LFTO, TTD, and XLC are cheaper. S&P Global data puts APP at 19.9x forward earnings (19.7x on Koyfin), against 18.5x for META, 20.7x for GOOGL, and 14.3x for XLC. TTD is cheaper at 13.9x, but its EPS is expected to decline 12% next year. Unity trades at 26.3x on adjusted EPS from a low base and an LTM GAAP loss, though in Q3 it earned $101M of GAAP operating income, up from a $126M loss a year ago.

The 3Y forecast gives APP PEG of 0.59 versus 1.48 for META, but this comparison flatters APP: the 3Y window starts in 2025, so it includes the +63% EPS growth in 2026, which is mostly already reported. For next year’s growth, APP and META are almost the same: +19.3% against +19.7%, so PEG is 1.03 against 0.94.

On margins and cash, AppLovin is far ahead of everyone. Its LTM operating margin is 77.78%, against 37.78% for Meta, 33.32% for Alphabet, and 35.74% for Liftoff. The FCF margin is 64.44%, against 11.86% for Meta and 4.19% for Alphabet, since both spend heavily on AI data centers.

As a result, APP is at 26.4x FCF in the first table, against 54.4x for META and 177x for GOOGL. ROA is 49.57%, more than 3x Meta’s. AppLovin’s Debt/Equity of 107% looks high only because buybacks keep its equity low; net debt is $0.3B.

The latest quarter is strong across the sector, and AppLovin still grew fastest at its size. Meta’s ad revenue grew 26%, Alphabet’s revenue 25% (Google Network, where AdMob reports, only ~1%), and Unity’s 32%. Liftoff grew 35% in Q2. The Trade Desk guides for a ~12% decline in Q3. Stumpf put it this way: the largest platforms grew “between roughly 10% and the mid-20%s”, and AppLovin 55%.

LFTO is cheaper on every multiple, but it has debt and slower growth ahead. It is at 19.3x forward earnings, but it has $1.1B of net debt and negative equity, and its growth is expected to slow to ~16% in 2027.

In my view, Meta is the next-best alternative. It has almost the same forward multiple and the same expected EPS growth next year, a much more diversified business, and its own first-party data, with less exposure to ad-network auctions. AppLovin’s advantages are its margins and FCF (26x FCF vs. 54x), and faster revenue growth (2027 consensus: +25% vs. +22% for Meta). As I see it, an investor in APP is paid for the higher risk with more FCF per dollar of the price, not with a lower P/E.

Worth noting that Meta’s EPS is flat in 2026 ($29.73 against $29.68), so part of its +19.7% in 2027 is a rebound. At $391, I see no clear reason to prefer APP over META on price; at the top of my accumulation zone ($294), APP would trade at ~15x NTM EPS (the consensus for the next 12 months), ~20% below META.

Analyst’s note:

I wrote this analysis before The Trade Desk reported Q3 on Nov 09, so the TTD numbers here (the comparison table and its Q3 guidance) are from before that report. The TTD report itself gets its own short note with a one-pager.

Past

Q3 2026 (ended Sep 30, all USD, YoY):

• Revenue +55% to $2.18B, against the $2.08B Zacks consensus; the top of the guidance was $2.085B

• Diluted EPS +76% to $4.30, against the $3.94 Zacks consensus; ~$0.12 of it came from an unrealized gain on private equity funds, a third of the $0.36 beat

• Net income +72% to $1.44B; adjusted EBITDA +59% to $1.84B, an 84% margin

• FCF $1.42B; buybacks $1.4B (4.1M shares)

• Revenue in the US +60% to $1.10B, outside the US +52% to $1.09B

• Q4 guidance: revenue $2.365-2.395B (+43-44%), against ~$2.25B of pre-report consensus; adjusted EBITDA $1.995-2.025B

• LTM: revenue $7.61B, net income $5.01B ($5.11B on Koyfin), diluted EPS $14.85, FCF $4.88B, ROIC 74.08%

Why did APP gain 31% after the report? In my view, there are four reasons:

• The beat was large where it mattered. Revenue was 5.2% above consensus, and gaming, which the bears saw as saturated, grew nearly 50%.

• The guidance confirmed it. At the midpoint, the Q4 revenue guidance was ~6% above the consensus, and it includes only “the model updates that we’ve already launched”.

• The Q2 explanation proved true. In August, management said the miss was about timing and “already been addressed”. Q3 showed it, and Foroughi repeated that the Q2 problem was “our own foot fault”, not competition.

• The stock was priced for a broken story. At $228.50 on Oct 30, APP traded at ~12x forward earnings, the lowest multiple since the Apps sale in June 2025.

Most of the rally is a higher multiple, not higher estimates. From Oct 30 to Nov 06, APP gained 71%. In the same period, the NTM EPS consensus on Koyfin increased only ~4%, to $19.87, and the forward P/E rose from ~12x to 19.7x.

On Zacks, the 2027 consensus had fallen from $20.72 to $19.63 in the 3 months before the report. In the week after it, 8 analysts raised their 2027 estimate and 1 cut it, and the consensus rose 5.7% to $20.75. So the report mostly reversed the summer estimate cuts.

In my opinion, the reaction makes sense, since the price had assumed that the Q2 problem was permanent, but the next leg needs growth in estimates, not in the multiple.

2026 had two legs down: the first on outside news, the second on AppLovin’s own execution. From the $733.60 high on Dec 22, 2025, APP fell to $366.91 by Feb 12. The causes included a short-seller report on money laundering (CapitalWatch retracted part of it in February), Google’s Project Genie AI game tool, the launch of CloudX (a new ad platform led by a MoPub co-founder), and the Q4 report.

By Jun 01, APP had recovered to $613.70. Then the second leg was about AppLovin itself: on Jul 13, a Bank of America note on slow e-commerce sign-ups cut the stock 12.6%, and on Aug 06, after the Q2 miss, it fell 19.7%, as analysts cut their ratings and targets. By Oct 30, APP was 69% below its high. The last step, -10.4% on Oct 30, came with no company news that I could find.

The longer history is one of the strongest in the market. Advertising revenue rose from $1.05B in 2022 to $5.48B in 2025, up 73.5% per year, and to $7.61B LTM. Diluted EPS from continuing operations increased from $1.26 in 2023 to $10.04 in 2025, and LTM EPS is $14.85 ($14.91 on Koyfin). Total company FCF increased from $345M in 2021 to $4.88B LTM. AppLovin lost money in 2022, so EPS did not grow in each of the last 5 years.

The EPS consensus barely paused, while the price fell 69%. From ~$13 at the start of 2026, the NTM EPS consensus increased to $19.87 today, with only a small dip after the Q2 report. The price peaked twice, in late 2025 and in June, and both times fell much faster than the estimates. We can see the same gap as in early 2025, after the short reports: the price moves on doubts about the story, while the earnings keep growing.

APP beat the S&P 500 by a wide margin, even after the falls. Over 5 years, APP returned 31.65% per year against 11.37% for VOO with dividends, and since the IPO in April 2021 at $80, 33.0% per year against 12.3%. 2026 is a different story: APP is down 41.9% YTD, while VOO is up 8.7%. A beta of ~2.5 works in both directions. The APP line on the chart starts in 2026, when the stock first had 5 years of history; for reference, VOO returned 15.06% a year over 10 years.

Future

• Consensus revenue: 2026 $8.34B (+52.1%), 2027 $10.43B (+25.1%) and 2028 $12.82B (+22.9%). The 2026 number implies Q4 revenue of ~$2.39B, the top of the guidance

• Consensus EPS (adjusted): 2026 $17.35 (+63.1%), 2027 $20.70 (+19.3%) and 2028 $25.32 (+22.3%). Zacks: $16.18 for 2026 and $20.75 for 2027, on its own EPS basis. In the week after the report, 9 analysts raised their 2026 estimate, and none cut it

• 5Y forward EPS growth estimate (Koyfin): 32.01%, against a 37.47% mean and a 20.13% -1 standard deviation band. To compare, revenue of the advertising business grew 73.5% per year in 2022-2025

• Analysts (Koyfin): 6 Strong Buy and 21 Buy ratings out of 33, 6 Hold, no Sell; the average target is $459.79 (+17.5% from $391.22), range $345-625

• Company guidance: Q4 revenue $2.365-2.395B, which gives more than 50% growth for 2026; FCF of ~70-75% of adjusted EBITDA for the year; over the long term, revenue growth of “roughly 30% annually”

What must go right. The model asks for 20% EPS growth per year for 5 years (the cap of my rules), starting from the 2026 consensus of $17.35. For the first years, the consensus agrees with the model: +19.3% for 2027, and $25.32 for 2028 against $24.98 on my path. By my estimate, it works if revenue grows ~17-18% a year, the EBIT margin stays at ~75-78%, and buybacks reduce the share count ~2% per year. This is well below management’s 30% target. So the model doesn’t need 30%; it needs gaming to grow ~10-15% and consumer to keep growing fast enough to reach ~20-37% of revenue by 2031. With gaming growing 15%, consumer needs to reach ~20%; with gaming at 10%, ~37%.

The part I trust least is consumer. If consumer stays a small business, and gaming slows to ~10%, revenue grows ~12-13%, and EPS ~15% with the buybacks. Then, at 25x, the Base Case falls to $495, still 27% above today’s price, and the Bear Case to $238. The strong 2026 is already in the starting EPS, and the model never grows faster than 20%, so there is no extra cushion.

Q4 and Q1 2027 will tell more than any model. The Q4 report (mid-February) shows the first holiday season with an open self-serve platform; revenue at the top of the guidance ($2.395B) is a pass, since the 2026 consensus already assumes it.

Then Q1 2027 shows how much consumer spend AppLovin keeps after it, since “the same advertiser, like-for-like, will have a huge Q4 and follow it up with a weak Q1”. For Q1 2027, Zacks expects EPS of $4.77 (+34% YoY) and revenue of $2.41B, almost flat vs. $2.39B for Q4, so a flat Q1 is already priced in. Even so, that is +31% YoY, against +44% for Q4 at the top of the guidance, so the estimates already expect growth to slow. Revenue above that number, with consumer still growing triple digits YoY, is a pass. A QoQ decline with no update on the model rollout is a warning. Other checkpoints include Unity’s Vector growth, any sign that Meta bids on iPhone traffic without an ID, the share count against the SBC, and the class actions.

Current Valuation

Current vs 5Y mean:
Price/Fwd Earnings: 19.7x vs 25.0x
Price/Fwd Sales: 13.0x vs 11.1x
Price/FCF: 26.4x vs 37.5x
PEG: 0.62 vs 0.81
Forward Earnings Yield: 4.4% (2026 EPS of $17.35; the 19.7x above uses NTM EPS)

On earnings, APP is between its mean and the low end of its range. Forward P/E is 19.7x, versus a 25.0x mean, a 40.5x (+1 standard deviation) band, and a 9.5x (-1 standard deviation) band. Since mid-2024, the range was ~12-60x: ~12x in mid-2024 and again at the end of October, ~30-60x in 2025. P/S is 13.0x, above its 11.1x mean. On 2027 consensus EPS ($20.70), the P/E is 18.9x.

Analyst’s note:

The 5Y means of APP are distorted in both directions. They include the months after the 2021 IPO (P/E of 50-70x) and the 2022-2023 washout (5-6x), when AppLovin’s own low-margin games were 63% of its revenue in 2022 and 44% in 2023. P/S is above its mean for the same reason: the old revenue was worth much less per dollar, so a higher P/S today does not mean the stock is expensive. P/B says nothing here, since buybacks keep equity low, and its -1 standard deviation band is negative. I use the forward P/E, P/FCF and the PEG, and I do not use the P/E mean for the Bear Case.

On FCF, APP is at 26.4x, about halfway between the 37.5x mean and the 15.5x -1 standard deviation band. The LTM FCF yield is 3.8%.

The growth estimate decreased less than the multiple. At 32.01%, the 5Y EPS growth estimate is below its 37.47% mean but far above the 20.13% -1 standard deviation band. PEG is 0.62 against a 0.81 mean. In my view, 32% for 5 years is too high to rely on, since it would mean EPS of ~$70 in 2031. That is why my model caps the growth at 20%.

So what is priced in at $391? Here, I use today’s NTM EPS ($19.87), not my model. With the forward multiple unchanged at 19.7x, APP needs ~12% EPS growth per year for a 12% annual return (my model’s discount rate), less than the 19% consensus expects for 2027.

If the multiple falls to ~15x in 5 years, it needs ~18%; a return to ~12x as of Oct 30 needs ~24%, more than consensus. So the price includes a lower multiple, but not a return to the October low. At the ~19% consensus growth, the multiple can fall to ~14x on today’s NTM EPS, and the investment still earns 12% a year.

One chart frames this whole section. It shows the NTM EPS consensus times my exit multiples (12x, 25x and 30x) against the APP price. On Oct 30, the price touched the 12x line; today, it is between the 12x and 25x lines. The lines use today’s NTM EPS, so they are not my fair prices, which use 2031 EPS discounted at 12%. At $238, the 12x line matches my 15%-growth Bear Case only by chance.

Fair Price

My model grows EPS for 5 years at the consensus rate. Consensus can be too optimistic, so my model accounts for this by capping future growth at 20%. For AppLovin, the cap matters a lot: the 5Y EPS growth estimate is 32.01%, and AppLovin pays no dividend, so the model uses 20%, starting from the 2026 consensus of $17.35. This gives EPS of $43.17 in 2031. For 2027, my path ($20.82) is almost the same as the consensus ($20.70).

The starting EPS matters. Mine is S&P Global’s adjusted number. Zacks, whose basis matched GAAP EPS in 2025, has $16.18 for 2026, ~7% less. From that base, the fair prices would be $274/$571/$685 and the accumulation zone $192-274; so APP is above the zone on either basis. The gap is a 2026 effect: for 2027, both sources expect ~$20.7.

The discount rate is 12%; the margin of safety is 30%. My exit multiples are 12x, 25x, and 30x. 12x is the multiple of the Oct 30 low, the lowest since AppLovin became a pure advertising company in June 2025; so the Bear Case assumes the market never trusts AppLovin more than it did at the worst point of 2026.

I do not use the 9.5x -1 standard deviation band because it comes from 2022-2023, when AppLovin was a different company: its own low-margin games were 44-63% of revenue, and net debt was ~$2.1-2.6B. APP also traded near 10x at the start of 2024, when Axon 2.0 was already live, but AppLovin still owned its games then.

As for the 5Y mean of 25.0x, it is distorted too, so for the Base Case I use PEG 1.25 at the 20% cap, which also gives 25x. 30x, the Bull Case, is the ceiling of my rules (PEG 1.5 at 20%), well below the 40.5x +1 standard deviation band.

Bear Case (exit P/E 12x): fair price $294 - MoS price $206
Base Case (exit P/E 25x): fair price $612 - MoS price $429
Bull Case (exit P/E 30x): fair price $735 - MoS price $514

As I see it, the wide gap between the Bear Case and the Base Case is the honest measure of the uncertainty here. The Base Case is a business that keeps its lead and a market that pays a normal multiple for it; the Bear Case is the same growth with the distrust of Oct 30. In dollars, today’s price is $97 above the Bear Case and $221 below the Base Case, so it is closer to the Bear Case.

Here, the multiple matters more than anything else. On my model’s basis (2026 EPS of $17.35 growing at 20%), today’s price implies an exit P/E of ~16x in 2031. At 25x, it implies EPS growth of only ~10% per year. And if EPS grows only 15% per year, my fair prices fall to $238/$495/$594.

Analyst’s note:

APP is on my Watchlist. Watchlist #001 and #002 used a 10x Bear Case multiple, from the -1 standard deviation band of 2022-2023. Here, I use 12x, the level of the Oct 30 low, since that band comes from the years when AppLovin still owned its games, and 25x instead of 26x for the Base Case (PEG 1.25 at the 20% cap). At 10x, the Bear Case fair price would be $245.

Worth noting that $391 is below the Base Case MoS price of $429. In my Portfolio and Watchlist issues, that level is the buy zone (the Manifest rule: a 30% discount to the Base Case). Here, in a deep dive, I use the stricter accumulation zone, from the Bear Case MoS price to the Bear Case fair price, so the price also covers the distrust of Oct 30.

At $391, APP is 36% below the Base Case; at the same time, it is 33% above the Bear Case fair price. The accumulation zone is $206-294, so APP is above it, even though it was inside the zone a week ago.

Due Diligence

Profitability (11 of 15):

• Positive Gross Profit: $6.76B

• Positive Operating Income: $5.92B

• Positive Net Income: $5.01B

• Positive FCF: $4.88B

• Gross margin >= 40%: Yes (88.78%)

• Net margin >= 10%: Yes (65.89%)

• FCF margin >= 10%: Yes (64.44%)

• Management (ROIC, ROE, ROA) >= 10%: Yes (74.08%/210.09%/49.57%)

• Strong 3Y Revenue Growth: Yes (69.2% per year, LTM basis, continuing operations)

• Revenue Growth Forecast: Yes (+25.1% in 2027; 32.73% per year on the 3Y forecast)

• ROE is increasing: No (~2% in 2021 -> ~300% at the peak in 2025 -> 210.09%)

• ROIC is increasing: ~3% at the start of 2022 -> 74.08%

• Revenue surprises in the last 5Y in a row: No (misses in Q1-Q3 2022 and Q2 2026)

• EPS surprises in the last 5Y in a row: No (5 misses in Q4 2021-Q1 2023)

• EPS growth YoY 5Y in a row: No (loss in 2022)

Financial Strength (5 of 6):

• Total assets ($8.58B) exceed total liabilities ($5.28B) by 1.6x

• Negative Net Debt: No ($0.34B of net debt)

• Low Debt/Equity: Yes (106.6%; 5Y mean: 248.2%)

• Debt/Capital: Yes (51.6%; 5Y mean: 68.0%)

• Interest coverage (EBIT): 28.9x

• Piotroski F-Score: 9 of 9 (FY2025; LTM 8 of 9: operating cash flow below net income)

Valuation and Advantage (2 of 4):

• Valuation < 5Y mean: No (P/S 13.0x vs 11.1x; every mean is distorted)

• Valuation < the industry: No (P/E 19.9x vs 14.3x for XLC; META, TTD and LFTO are cheaper)

• Does it have a moat: Yes (narrow)

• Outperformed the S&P 500 over 5Y: Yes (31.65% vs 11.37% CAGR)

Shares (2 of 3):

• Insider ownership >= 5%: Yes (12.8% for directors and officers; Foroughi 9.0%)

• Fewer shares outstanding YoY: Yes (331.3M vs 338.5M)

• Insider buys in the last 6M: No (only sales, grants, and gifts)

Price (4 of 4):

• 1Y price forecast > 10%: Yes (+17.5%)

• Next 5Y EPS growth estimate (CAGR) > 10%: Yes (32.01%)

• DCF Value: Yes, ~$523 (base case: revenue growth 15.7%, below consensus; 9% discount rate, below my 12%); undervalued by ~25%

• Short Interest < 5%: Yes (4.26%)

Verdict

In my view, AppLovin is one of the most profitable businesses in the market, but not one of the safest. It earns a 77.78% EBIT margin with almost no net debt, and in Q3 it grew revenue 55%. At the same time, APP trades at 19.7x forward earnings after a 71% rally in one week, and that rally came almost entirely from the multiple. Consensus expects ~19% EPS growth in 2027; at that pace, the multiple could fall to ~14x, and APP would still earn 12% a year. My fair prices are $294/$612/$735, so APP is 36% below the Base Case but 33% above the $206-294 accumulation zone. The realistic bear case is a consumer business that stays small while Unity and Meta take more of gaming. Then the market can go back to the ~12x of October, and the fair price is ~$238-294. For me, APP is a stock to watch at $391, not one to accumulate: the price already allows for a lower multiple, but not for the October one. What I watch: the Q4 and Q1 2027 reports (consumer spend after the holidays), the full rollout of the new models, Unity’s Vector, Meta’s bidding on iPhone traffic, SBC against the buybacks, and the lawsuits.

One-Pager

This is not a financial or investing recommendation. It is solely for educational purposes.

Why This List

A significant decline in a quality business typically has an underlying cause. The market may anticipate changes not yet reflected in historical data, creating a potential value trap where the stock appears inexpensive but the business fundamentals are deteriorating. Alternatively, the market may be reacting to sentiment while the financials remain stable, which can present an opportunity for long-term investors. In some cases, the business remains strong, but the previous valuation was excessive, resulting in a prolonged period of lower stock prices.

This list includes only high-quality companies, each with a consistent record of strong margins; most also deliver high returns on capital. There are three exceptions: ServiceNow’s ROIC is only 6.55%, but it remains on the list due to its growth and cash flow; Fair Isaac and Zoetis have higher debt levels. I excluded cyclicals at their peak (such as chip equipment and energy) and companies whose earnings have not compounded in recent years. Only companies trading at least ~25% below their 52-week high as of November 3 were included. Since then, Booking, Copart, and Intuitive Surgical have rebounded and are now less than 25% below their 52-week highs.

My primary metric here is the consensus EPS over the past 90 days, as a declining share price with stable estimates differs significantly from one accompanied by falling estimates.

Analyst’s note:

Prices are Nov 05, 2026 closes. That day, the S&P 500 fell 4.4% on AI and chip stocks; only ZTS and NOW fell more than 3% from this list. The charts and the multiples are from Koyfin on Nov 06 and use these closes. The revisions are from the Yahoo Finance consensus of Nov 06. Booking, Fair Isaac, and Zoetis reported only days ago, so analysts may still change their numbers. In every valuation chart, the dashed lines are the 5Y mean and ±1 SD (the usual range around the mean). There is no fair price model here, only the question of whether the fall is justified.

Two things limit the comparisons in this post. The 5Y window starts in late 2021, when many of these stocks had very high multiples, so the mean is high for several names. The -1 SD band is a better reference, but it is not a floor. The forward EPS of FICO, ISRG, and NOW excludes stock-based compensation, while INTU, BKNG, and ZTS include it, so a lower P/E does not always mean a cheaper stock. “EPS est. 5Y growth” is the consensus EPS growth for the next 5Y against its own 5Y mean.

1. Fair Isaac (FICO): -62%, a $10 Score Under Attack

The business kept growing while the stock fell 62%. Fair Isaac sells the FICO Score, the credit score that US lenders use for mortgages, cards, and car loans, and also the software that banks use for credit decisions. In the Q4 FY2026 report (Nov 04), revenue rose 27% YoY to $657.0M, and B2B Scores revenue grew 39%, mostly because the company charged more per mortgage score, even as the number of new mortgages declined. Over FY2026, non-GAAP EPS increased 44% to $42.99; FCF rose from $739M to $1.03B. At the same time, FICO fell from ~$1,845 in December 2025 to ~$707 on Nov 05, 2026. Even after this fall, FICO returned +78% over 5Y against +71% for VOO (the S&P 500 fund).

What happened. On Mar 09, Experian offered VantageScore 4.0, the competitor score from the three credit bureaus, at $0.99 per mortgage score. As a result, FICO fell 24% in 3 days. On Jul 30, it fell another 17% after the Q3 report, even with higher guidance. Mortgage growth slowed, Software grew only 2%, and the direct license program (selling scores directly to mortgage resellers, without the credit bureaus) was still waiting for approval. The path was not straight - FICO was 50% below its high by Apr 10, and only 26% below it before that report.

The second half of the fall is VantageScore in mortgages, in three steps. In early September, the Federal Housing Finance Agency (FHFA) ordered Fannie Mae and Freddie Mac (they buy mortgages from lenders, so lenders follow their rules) to let all lenders use VantageScore. FHFA Director Bill Pulte wrote: “FICO has enjoyed a monopoly. No more.” As a result, FICO fell 16.7% on Sep 04. On Sep 28, FHFA announced that Fannie Mae and Freddie Mac will move to one pricing grid, so a loan scored with VantageScore is now treated the same as one scored with FICO. Rocket Mortgage will make VantageScore its default for these loans by the end of 2026; TransUnion will keep it at $0.99 through December 2028, at no extra cost for lenders who buy a FICO score. As a result, FICO fell 26.5% on Sep 29. In late October, Fair Isaac held its wholesale mortgage price at $10, up from $4.95 in 2025, for a bundle of Classic FICO and FICO 10T, but only for lenders in its new Preferred Program, who buy through resellers that commit to pull FICO on 100% of mortgage applications. FICO increased 39% from Sep 30 to Oct 22, then fell 13.2% on Oct 26, when Pulte said more action was coming.

The Q4 report added a fourth step - no guidance. On the Q4 call, management said: “We are not providing fiscal year 2027 guidance at this time.” The reason is a new way to price mortgage scores, where each customer gets their own deal. CEO Will Lansing went further: “We’re not going to share what the prices are.” In my opinion, this is the most important line of the report. For years, investors could model FICO with one number, the price per mortgage score, but now this number is gone. FICO fell ~6% after hours on Nov 04, to ~$658, but it closed 0.9% higher at $707 on Nov 05, with the S&P 500 down 4.4%.

Estimates are falling, and now there is no guidance to compare them against. Over 90 days, the FY2027 consensus EPS decreased 12.9% to $46.28; the FY2028 number decreased 17.4% to $52.77. FY2027 is only ~8% EPS growth on ~5% revenue growth; fewer shares give most of it - if net income stays flat, fewer shares alone give ~$45.8 (my calculation).

Current vs 5Y mean:

Price/Fwd Earnings: 15.3x vs 40.2x (-1 SD: 24.8x)
Price/Fwd FCF: 14.6x vs 40.2x
PEG: 0.96 vs 2.10 (mean since 2023)
ROIC (LTM): 70.75% vs 47.22%

Analyst’s note:

PEG of 0.96 uses the 15.86% 5Y growth estimate. At ~8% of FY2027, it would be ~2, so I would not call FICO cheap on PEG. This EPS also excludes stock-based compensation. GAAP EPS was $36.32, ~19x at $707. ROIC is above its mean, but the driver for it (mortgage price increases) is now capped.

What the bears get right: mortgages are bigger than they look. They were 58% of Scores’ revenue in Q4, ~37% of total revenue. Scores has a ~90% segment margin against ~28% for Software, so mortgages are roughly half of segment profit (my estimate). Their growth is slowing: +97% in Q3, +72% in Q4, and some volume is moving to home equity lines, which have a lower average price. At ~$960M of annualized mortgage revenue, every 10% of lost price or volume is ~$3.3 in EPS, or ~7% (my calculation). If the average price went back to $4.95, EPS would be ~$30, not $46, and the stock would be at ~24x, not ~15x. This is a stress test, not a forecast.

The balance sheet is the second problem. Fair Isaac bought back $3.03B of stock in FY2026 (3x its FCF) at an average of $1,204 per share. The stock is now ~41% below that. A $1.5B term loan paid for part of it; debt increased from $3.06B to $5.26B in 1 year against $218M of cash. Net debt is ~4.9 years of FCF (my calculation); the limit in my Manifest is roughly 2 years. That is why FICO did not pass this test in Watchlist #002 (and still does not).

The debt now limits what the company can do. Management reports net debt of 3.29x EBITDA; the loan’s leverage limit falls from 4.5x to 4.0x on Dec 31, 2026, and to 3.5x a year later. The company paused buybacks in Q4 to repay debt; Lansing called it “a one or two-quarter thing.” At today’s net debt, EBITDA would have to fall ~18% to reach 4.0x, and ~6% to reach the 3.5x of Dec 2027 (my calculation; the loan’s own definition may differ). Management is already cutting costs - on Oct 01, Fair Isaac cut ~15% of its positions ($27M charge). Q4 also includes a $65M accrual for the proposed settlement of an antitrust class action about Scores.

Why would a lender pay $10 when the competitor costs $0.99? In my view, because the score is a tiny part of mortgage costs, and investors who buy these loans have decades of FICO data. But now the largest lenders have a reason to test the cheaper one. Mortgage volume hasn’t left yet, and that does not prove much. Volumes fell by a high single digit in Q4, and management blames interest rates: “we saw no meaningful loss of volume to competition.” But Fair Isaac is paid per pull, and lenders who compare two scores pull both. The real test comes now - Rocket is about to switch, and Pennymac deployed VantageScore in October. UWM keeps FICO on all credit pulls. FHFA is also “seriously considering” a bi-merge (fewer bureau reports per loan), which could mean fewer paid pulls (my inference).

My opinion: real damage, in the part that makes about half of the profit. So far, the damage is mostly to pricing power, but the first signs are in the numbers. Scores revenue fell 10% QoQ, from $458.9M to $413.8M, against ~-4% a year ago (my calculation), and the average mortgage price fell QoQ. Management attributes this to lower volumes and mix, not competition. Outside mortgages, the report looks fine - auto originations revenue increased 11%, and cards and personal loans 12%. Software increased 19% to $243.2M, after +2% in Q3. At ~15x forward earnings, FICO looks cheap only if ~$46 of EPS holds, and there is no guidance behind that number. I would not call it a temporary fall, because the cause is structural. But the business is not broken - auto and card scores still grow 11-12%, and lenders still pay for FICO.

What to watch: whether FY2027 guidance comes at all, and whether large lenders keep pulling FICO alongside VantageScore.

FICO is one of two cases on this list showing clear structural challenges. Booking represents the clearest case. Zoetis, despite beating expectations and raising guidance on November 5, declined 7.9% in a weak market and remains the company I trust the least. The remaining six companies present mixed outlooks, each contingent on a specific factor discussed below.

2. Booking (BKNG): -23%, Fear of AI Agents

Read more

TL;DR: Visa (V) operates the largest card payment network in the world and earns a small fee on almost every purchase that goes through it, without lending money or taking credit risk. The Q4 FY2026 report closed a record year, but Visa guides for slower growth in FY2027; its payments to banks and merchants for using Visa (client incentives) grow faster than revenue. After a 15% gain in October, V trades at 27.5x forward earnings, above its 5Y mean. As I see it, the business is as strong as ever, but the price leaves room for only one disappointment: slower growth or a lower multiple, not both. V is just above my accumulation zone ($285-407), so for me it is a stock to hold, not to add to.

Analyst’s note:

Visa is the first company I bought for my portfolio. I bought the first 3 shares on Dec 06, 2021, at $199.10, and since then I have only added to the position, never sold. I am very happy with it.

Investment Thesis

The FY2026 report did not change much in the Visa story. The growth was strong, the margin was stable, and Visa returned more cash than it generated. The change is in the stock. In March, V traded at ~22-23x forward earnings, at the low end of its 5Y range. Today, it is at 27.5x, above its mean. In my view, the business still delivers what the consensus expects, and the question is how much of the next 5 years the price already includes.

• FY2026 growth was the strongest in over 15 years, and the guidance says it slows. Net revenue increased 15% (14% in constant dollars, without currency effects), the fastest in more than 15 years without the post-pandemic recovery and acquisitions. In Q4, it was +13%, with payments volume +9%, cross-border volume +14%, and processed transactions +10%. Value-added services, Visa’s second business, grew 30% to $14B. For FY2027, Visa expects low-double-digit growth for net revenue and “low double digits to low teens” for EPS.

• Consensus is at the upper end of the guidance, and V trades at a full multiple for it. Consensus EPS for FY2027 is $15.03, +13% against $13.27, and the 5Y EPS growth estimate is 14.01%. V trades at 27.5x forward earnings, so the PEG ratio is 1.96, above its 1.87 mean and above the 1.5 ceiling of my rules.

• The economics are still the best I know. The non-GAAP operating margin is 67.5%, ROIC is 44.10% against a 32.77% 5Y mean, and ROE is 63.51%. FCF was $22.06B, only +2% YoY, but Visa paid ~$3.8B in litigation in FY2026 (my estimate) against $1.28B in FY2025. Before these payments, FCF grew ~13%. Visa returned $25.6B in buybacks and dividends, 116% of its FCF.

• V is above its 5Y mean on every multiple. The forward P/E is 27.5x against a 26.6x mean and a 24.6x -1 standard deviation band. P/FCF and P/B are above their means too. If the multiple stays at 27.5x, my 12% required return needs ~11% EPS growth per year, the low end of the FY2027 guidance. If V returns to ~24x (its -1 standard deviation band, rounded down), the company needs ~14%, the full consensus.

• The bear case is a costly renewal year plus a lower multiple. In FY2027, ~25% of Visa’s payments volume comes up for contract renewal, against 20% in FY2026, so incentives will grow faster. Regulation is a constant pressure (merchant settlement, the US Justice Department lawsuit); international transaction revenue grew only 8% in FY2026, while cross-border volume grew 14% in Q4. My model takes the lower multiple into account by using the -1 standard deviation band (24x) as the Bear Case exit multiple, but it keeps the consensus growth. V is 1.5% above my Bear Case fair price of $407, so it is just above the accumulation zone. If EPS grows only ~11% per year, the Bear Case fair price is $357.

Analyst’s note:

Visa’s fiscal year ends on Sep 30, so FY2026 is October 2025 to September 2026, and FY2027 is the current year. Unless I say otherwise, EPS means non-GAAP diluted class A EPS. It excludes litigation provisions, severance and other special items, and it is the basis of Visa’s guidance and of the Koyfin consensus. GAAP EPS was $12.32 in FY2026. The price anchor is the Oct 30 close of $413.59.

Company Overview

Next Earnings Date: Jan 26, 2027 (estimated)
Market Cap: $769.07B
Sector: Financials | Industry: Financial Services
Type: Large Blend
Short Interest: 1.10%

Visa connects the banks that issue cards to the merchants that accept them. In FY2025, Visa's network handled $17 trillion of total payments and cash volume in more than 200 countries and territories, according to the FY2025 10-K. In FY2026, there were 5.2 billion Visa credentials (cards and their digital versions), +6% YoY, accepted at well over 200 million seller locations, and Visa processed 281.3 billion transactions, +9%. As the 10-K says, "Visa is not a financial institution": it does not issue cards, does not lend, and does not set the rates that cardholders pay. So it does not take credit risk. Ryan McInerney has been the CEO since February 2023, and Chris Suh is the CFO. Visa had ~34,100 employees at the end of FY2025.

The business model is a fee on every step of a payment. Visa earns service revenue on payments volume (with a 1-quarter delay), data processing revenue on every authorization, clearing and settlement, international transaction revenue on cross-border payments and currency conversion, and other revenue from value-added services, licensing and marketing services. From this gross revenue, Visa deducts client incentives, the payments to banks, merchants and acquirers for using Visa. In FY2026, gross revenue was $64.22B, incentives were $18.32B (28.5% of it), and net revenue was $45.90B.

The growth now comes from more than card payments. Visa calls its two newer businesses value-added services (VAS: fraud and risk tools, issuer processing, data, consulting, marketing services) and commercial and money movement solutions (CMS: business payments and Visa Direct, its system for sending money to cards and accounts). In FY2026, VAS revenue grew 30% in constant dollars to $14B, and CMS revenue grew 19%. Together, they are "more than 40% of our total net revenue," as Visa said on the earnings call. This matters for the thesis, since these businesses grow faster than the card network itself.

Market Overview

Cards keep taking share from cash. In the US, cash was 14% of consumer payments in 2025, against about a third in 2016, according to the Federal Reserve’s 2026 Diary of Consumer Payment Choice. Credit and debit cards were ~2/3 of all payments, and the Fed describes cash use as stable after the pandemic drop. Globally, cash was 15% of in-store spending in 2024, against 44% in 2014, according to Worldpay. Visa itself estimates more than $20 trillion of consumer spending a year that still goes through cash, checks and bank transfers. So there is room to grow, but the conversion from cash is now slower in the developed markets.

The payments pool grows slower than the card networks. McKinsey’s 2026 Global Payments Report puts global payments revenue (banks, networks and processors together) at $2.6 trillion in 2025, up only ~3%, and expects ~4% a year to 2030 (Payments Dive’s summary). At the same time, Visa and Mastercard purchase volume grew 8.9% in the first 9 months of 2025, to $17.1 trillion, according to the Nilson Report, and Visa’s net revenue grew 15% in FY2026. In my view, this is the core of both the investment case and the risk. The networks take a growing share of a slowly growing pool, and this is exactly why merchants, regulators and banks push back.

Visa is the largest network in the world, and in the US, the dominant one. In 2025, the six global card brands handled 828.1 billion purchase transactions (+7.1%), and Visa had 40.76% of them (Nilson). In the US, Visa cards generated $7.03 trillion of purchase volume against $2.96 trillion for Mastercard, so Visa has 70.4% of the two together (Nilson). This scale is the moat, and it is also the reason for the US Justice Department lawsuit.

New payment rails grow fastest where governments push them. In Brazil, Pix (the instant payment system of the central bank) was 55.2% of all payments in the first half of 2026, and debit card transactions grew only 0.5% (The Rio Times, on central bank data). In India, UPI processed 24.07 billion transactions in September, +23% YoY. In the US, Zelle moved more than $1.2 trillion in 2025, +20% (Zelle). At the same time, Mastercard’s Latin America volume still grew 13.5% in its Q3 2026 report. As I see it, these rails mostly replace cash and debit in their home markets, and Visa answers them with Visa Direct and stablecoin settlement rather than competing for every domestic transfer.

Analyst’s note:

A payment rail is a payment platform or a payment network that moves money from a payer to a payee.

Regulation is the main market risk, and it moved again in October. On Oct 26, a US appeals court upheld the ruling that the Federal Reserve set the cap on debit interchange too high, so the Fed has to rewrite it. The interchange goes to the banks, not to Visa, but if banks earn less on debit, they can ask Visa for larger incentives. The Credit Card Competition Act, which would require large banks to add a second network to credit cards, was reintroduced in January with Trump’s support. Its sponsors wanted to attach it to a housing bill, but in March the Senate passed that bill without it. The merchant settlement that cuts US credit interchange by 10 basis points for 5 years and lets merchants decline some premium cards got preliminary approval in June and waits for final approval. And in the Justice Department’s debit lawsuit, filed in 2024, discovery was extended to Jan 29, 2027, with a trial likely in 2028. Separately, Capital One moved ~25M debit cards from Mastercard to its own Discover network, and it is now testing some credit cards there, which moves them off Visa.

Economic Moat

The margins are stable at a level few companies reach. The LTM net margin is 51.20% (5Y mean: 52.13%), and the EBIT margin is 66.31% (66.98%). Koyfin shows a 97.68% gross margin, but Visa does not report a cost of revenue, so this number says little. On a non-GAAP basis, the operating margin was 67.5% in FY2026, against 67.7% in FY2025. The net and EBIT margins are within ~1 point of their means. The real gap is FCF, 48.05% against 55.65%, and most of it is the litigation payments of FY2026.

The moat is a two-sided network. Banks issue Visa cards because more than 200 million seller locations accept them, and merchants accept Visa because billions of people have the cards. A new network has to build both sides at once, which is why global card payments are concentrated in a few networks. The cost of one more transaction on VisaNet is close to zero, so revenue growth can turn into profit with little extra cost. In FY2026, Visa spent the extra on marketing and people, so the margin stayed flat.

The best evidence is that revenue grows faster than volume. In Q4, service revenue grew 14%, “primarily due to pricing”, on 10% growth in Q3 payments volume, the base it is charged on. Processed transactions grew 10%, and data processing revenue 16%, because of pricing, a higher cross-border mix and value-added services. For FY2027, Visa expects new pricing “similar in magnitude and timing” to FY2026. For me, revenue growing faster than volume is the clearest proof that the moat is real.

The cost of the moat is client incentives. The pricing power works against merchants, but the banks that choose a network have their own power. Visa pays them to keep their cards on Visa, and in FY2026, incentives were 28.5% of gross revenue, against 28.3% in FY2025. In Q4, they increased 21% YoY to 29.7% of gross revenue. So Visa shares part of its moat with its largest clients, and this share is growing.

The returns show the same. ROIC is 44.10% (5Y mean: 32.77%), ROE 63.51% (48.29%), and ROA 19.61% (16.28%), and all three have increased every year since 2022. ROE is high partly because buybacks reduce equity (total equity decreased from $37.91B to $36.11B in FY2026). ROIC and ROA depend on it much less, and they increased too. In my view, Visa has a wide moat, and the question for the investment is not the moat but the price of the stock.

Business Strategy

Value-added services, the second business. VAS revenue reached $14B in FY2026, “essentially double our 2023 VAS revenue”. Its issuing, acceptance, and risk and security services grew more than 20% for the year. In Q4, the 31% growth came from three factors: the underlying business (including marketing services around the FIFA World Cup), pricing, and the Prisma acquisition. For FY2027, Visa expects VAS growth in the “low to mid-20s”. In August, it agreed to buy BioCatch, a fraud detection company that protects 1.8 billion devices for more than 100 large banks, for $2.4B in cash. The deal is expected to close by the end of March 2027. In my view, VAS is the main reason Visa grows faster than payments volume, and it makes Visa more useful to banks, not only to merchants.

Business payments and Visa Direct. Commercial payments volume grew 12% in FY2026, faster than consumer payments and the fastest in 8 years without the post-pandemic recovery. Visa Direct processed more than 15 billion transactions, about $1.5 trillion of volume, and its transactions grew 23% in Q4. This is the “new flows” part of the strategy: payments between businesses, from businesses to consumers, and between people, which are still mostly made by bank transfer or check.

The renewal year. In FY2027, contracts covering ~25% of Visa's payments volume come up for renewal, against 20% in FY2026, "including renewals with several large clients". This "implies a step-up" in the growth of incentives. Management says it manages "to net revenue growth", and the low-double-digit guidance already includes the renewals. As I see it, this is the key execution risk of FY2027. Long contracts are part of the moat, but this year many of them are repriced at the same time, and the large banks know their bargaining power.

Stablecoins: join the new rail instead of fighting it. Visa's stablecoin settlement reached $25B of annualized volume, up 10x YoY, and there are more than 225 stablecoin-linked card programs. McInerney's answer to the stablecoin threat is that Visa is "stablecoin-agnostic" and "blockchain-agnostic". In my view, $25B is still tiny next to $17 trillion of volume, but it shows that Visa wants to be the network on top of new money, not only cards.

Agentic commerce: a long option, not a 2027 driver. Visa has nearly 50 AI partners live, with Shopify's Shop Pay among the recent ones, and expects the number to double. At the same time, in FY2027 it "all remains very small in the big scheme of the enormous size of our business". I agree, so I do not include anything for it in my model.

Capital Allocation

The balance sheet is conservative - net debt is 1% of the market cap. At the end of FY2026, Visa had $14.18B of cash and investment securities and $22.07B of debt, so net debt was $7.89B, ~0.4x of annual FCF. In FY2026, Visa repaid $5.57B of notes and issued $3.0B, a net repayment of $2.57B, and total debt decreased from $25.17B to $22.07B. Debt/Equity is 61.1% (5Y mean: 58.4%), Debt/Capital is 37.93% (36.79%), and funds from operations (FFO) cover interest expense 31.3x (33.6x). Both debt ratios are slightly above their means because equity decreases with the buybacks, not because Visa borrows more.

FCF grew only 2%, and the main reason is litigation, not the business. FCF was $22.06B in FY2026, against $21.58B in FY2025, and the FCF margin decreased to 48.05% against a 55.65% 5Y mean. Most of the difference is the US interchange litigation. These payments go through operating cash flow. By my estimate (litigation provision minus the change in accrued litigation), Visa paid ~$3.8B in FY2026, ~$3.6B of it from the litigation escrow account to the merchants that settled. In FY2025, it paid $1.28B, according to the 10-K, and the same method gives $1.26B. Before these payments, FCF grew ~13%, close to the growth of non-GAAP net income (+12%). Litigation is not a one-off, though - Visa also paid $594M in FY2024.

Worth noting that class A shareholders do not pay most of this cost. The old US interchange case is paid from a litigation escrow account. Visa funds this account with its own cash, but each deposit reduces the number of class A shares that the class B shares (owned by Visa member banks and similar holders, as the 10-K defines them) will convert into. For class A shareholders, it is the same as a buyback: the cash leaves Visa, and their share count decreases. In FY2026, Visa deposited $1.28B, the last $405M on September 18, and the ~$3.6B paid to merchants came from this account. In May, Visa exchanged most of the old class B shares for new class B-3 and class C shares, so the class B shares that take this cost are now the B-3. This covers only the old interchange case, including the merchants that opted out of its settlement. The Justice Department's debit lawsuit and the US debit class actions are not covered, so any cost there falls on class A shareholders.

Buybacks are the main use of cash. In FY2026, Visa bought 61M shares for $20.5B at an average of $335, 19% below today's price, and the remaining authorization is $24.4B, or 3.2% of the market cap. The diluted class A share count decreased 3.0% in FY2026 (3.2% in Q4) and 12.8% in 5 years. The LTM buyback yield is 2.66% (5Y mean: 2.74%). Koyfin's share count went up at the end of the chart, but these are Class C shares from the May exchange that convert into Class A when they are sold, not new shares. The diluted count, which includes all classes, decreased.

The shareholder yield, which also counts dividends and debt repayment, is 3.66% (5Y mean: 3.44%).

The dividend is small but grows fast. Visa raised its quarterly dividend 16% to $0.78, the 17th increase in a row, and the dividend grew 15.88% per year in the last 5 years. At $414, the yield is 0.75%, and the payout is ~21% of FY2027 consensus EPS. In FY2026, Visa paid $5.11B in dividends.

In total, Visa returned 116% of its FCF. Buybacks and dividends were $25.6B against $22.06B of FCF, and Visa also reduced its debt. The difference came from cash, which decreased from $17.16B to $12.94B, and from the escrow account. As I see it, this pace is not repeatable every year, since it used $4.2B of cash, but the policy did not change. Visa intends “to return excess free cash flow to shareholders through buybacks”.

Stock-based compensation (SBC) is $928M, 2.02% of revenue, below its 2.23% 5Y mean. Capex is $1.67B, 3.6% of revenue. Both are small, so almost all of Visa's operating cash flow is available to shareholders.

The expense growth is the weak point of FY2026. Non-GAAP operating expenses increased 16%, faster than net revenue (+15%), mostly because of marketing (+37%, partly the FIFA World Cup) and personnel. Visa also booked $563M of severance. For FY2027, Visa expects operating expenses to grow “modestly below net revenue growth”, so the margin should be stable or slightly higher.

As I see it, Visa’s capital allocation is simple and consistent. Visa does few large acquisitions (BioCatch at $2.4B is ~11% of FY2026 FCF), returns almost everything to shareholders, and its buybacks over the last year were made well below today’s price. The guidance is credible: Visa beat the EPS consensus in each of the last 20 quarters, although in Q4, EPS beat Visa’s own plan mostly because of a lower tax rate. The weak spot is the litigation, which costs cash every year, and the question for FY2027 is the cost of the renewals.

Advantages

• A network that no competitor can rebuild. $17 trillion of volume in FY2025, 5.2 billion credentials, well over 200 million seller locations, and 281.3 billion processed transactions in FY2026 (+9%).

• Pricing power. In Q4, service revenue grew 14% on 10% growth in Q3 payments volume, “primarily due to pricing”, and Visa expects similar pricing in FY2027.

• A second source of growth. Value-added services grew 30% to $14B, and together with business payments and money movement, they are more than 40% of net revenue.

• Exceptional returns. A 67.5% non-GAAP operating margin, ROIC of 44.10%, and capex of only 3.6% of revenue.

• Predictable capital returns. $25.6B of buybacks and dividends in FY2026, 12.8% fewer diluted shares in 5 years, and 17 dividend increases in a row.

Disadvantages

• Incentives grow faster than revenue. +21% in Q4, 29.7% of gross revenue, and ~25% of payments volume up for renewal in FY2027.

• Constant legal and regulatory pressure. $1.76B of litigation provisions in FY2026 and $2.56B in FY2025, the merchant settlement that cuts US credit interchange, and the US Justice Department lawsuit on debit. According to the 2024 lawsuit, Visa collects more than $7B a year in US debit processing fees (equal to ~15% of FY2026 net revenue), and the litigation escrow does not cover this case.

• Cross-border revenue lags cross-border volume. International transaction revenue grew 8% in FY2026 and in Q4, against 14% volume growth in Q4, because currency volatility was lower, and Visa expects volatility to be a drag in FY2027.

• Expenses grew faster than revenue in FY2026. Non-GAAP operating expenses +16%, marketing +37%, and $563M of severance.

• The stock is not cheap. 27.5x forward earnings, above the 26.6x 5Y mean, and PEG of 1.96.

What the bears get right: Part of Visa’s FY2026 growth came from sources that do not repeat: the FIFA World Cup marketing services and the acquisitions (Prisma and Newpay added ~1 point to Q4 net revenue growth). The renewals may also give back part of the pricing through incentives. In FY2027, ~25% of the payments volume comes up for renewal, and incentives already grew 21% in Q4. At the same time, the pressure comes from several sides at once: a lower debit cap, the Credit Card Competition Act, the Justice Department lawsuit, the settlement that lets merchants decline premium cards, and Capital One testing its credit cards on its own network. None of them breaks the moat alone, but together they can slow net revenue growth to high single digits. And the stock is priced for the good case. From ~28-31x, V derated twice in the last 5 years, in 2022 and from mid-2025 to March 2026, both times to ~22x. At 22x in FY2032, even the full consensus growth gives a fair price of ~$373, 10% below today’s price. If EPS growth also slows to ~11%, the pace of the low end of the guidance, the fair price at 22x is ~$327, 21% below.

Competitors

I compare Visa with 5 companies. Mastercard (MA) has the same model, a global network without credit risk, and is the closest competitor. American Express (AXP) is a network and a card issuer at once, so it has credit risk and rewards costs. PayPal (PYPL) competes for online checkout and money transfers. Fiserv (FISV) and Block (XYZ) are on the merchant side, with acceptance, processing and, for Block, Cash App. Global Payments (GPN) is not in the table, since its numbers after the Worldpay deal are not comparable yet. Discover is now part of Capital One, and its network has no separate stock.

On valuation, V and MA are the most expensive stocks in the table. On the same S&P Global data and the Oct 30 close, V trades at 27.5x forward earnings, against 28.7x for MA and 15.0x for XLF, the sector benchmark. The rest of the table is much cheaper: AXP at 16.4x, PYPL at 9.7x, and FISV at 6.8x, after Fiserv’s revenue fell 4% in Q2. The difference is growth. On the 3Y EPS forecast in the table, Mastercard grows 16.56% per year against 13.70% for Visa, so MA has the lower PEG, 1.73 against 2.01.

Part of this gap is timing. The 3Y windows are not the same. Mastercard’s fiscal year is the calendar year, so its 3Y forecast still includes 2026, when its EPS is expected to grow 18%. Visa’s starts with FY2027. On the next year alone, consensus expects +15% for Mastercard and +13% for Visa. On next year’s growth, MA’s PEG is ~1.86 against ~2.08 for V. The gap is smaller, but MA is still cheaper per point of growth.

The latest quarter is mixed. On net revenue, Mastercard grew slightly faster in its Q3 (+14% against +13% in Visa’s Q4), but Visa grew faster in value-added services (+31% in constant dollars against +19%) and cross-border volume (+14% against +11%). Mastercard’s US debit volume grew only 1.4% after Capital One moved its debit cards from Mastercard to Discover, while Visa’s US debit volume grew 9% in its Q4. AmEx grew revenue 9%, and PayPal only 2%.

On margins, Visa leads; on returns, only Mastercard is ahead. Visa’s LTM operating margin is 66.31%, against 60.07% for Mastercard and 4.88-21.41% for the others. The net margin (51.20%) and the FCF margin (48.05%) are the highest in the table too, even with the litigation payments in FY2026 FCF. Mastercard’s ROA is higher (24.45% against 19.61%), and its Debt/Equity is 355% because buybacks reduced its equity. Visa’s 61% is the second-lowest after Block.

In my view, Mastercard is the next-best alternative. Mastercard has the same moat and slightly faster expected growth, and MA has a lower PEG at almost the same multiple. Visa’s advantages are the higher margin, lower leverage, and 70% of the US Visa and Mastercard volume, but the US debit position is also the target of the Justice Department. As I see it, the choice between V and MA is not about quality. V is ~1 turn cheaper on forward earnings, MA is cheaper per point of growth, and neither is cheap. PYPL and FISV are cheap because their revenue barely grows, and AXP has credit risk.

Past

Q4 FY2026 (ended Sep 30, all USD, YoY):

• Net revenue +13% to $12.14B (+13% in constant dollars), against the $12.09B consensus

• Non-GAAP EPS +17% to $3.48, against the $3.43 consensus; GAAP EPS +22% to $3.19

• Payments volume +9% and cross-border volume +14% (constant dollars); processed transactions +10% to 74.2 billion

• Client incentives +21% to $5.12B; non-GAAP operating expenses +12%

• FCF $6.89B; buybacks $3.98B (11M shares at an average of $369) and dividends $1.26B

• FY2026: net revenue $45.90B (+15%), non-GAAP EPS $13.27 (+16%), GAAP EPS $12.32 (+21%), FCF $22.06B (+2%), and ROIC 44.10%

Why did V barely move after the report? The day after, V fell 0.3%, and on Oct 29 it gained 2.5%. In my view, there are three reasons:

• The stock had already moved. From Sep 30 to the Oct 27 close, V gained 11.8%, so a good report was already in the price.

• The beat was small. EPS was 1.5% above consensus, and EPS was better than Visa expected, primarily due to a “lower-than-expected tax rate”. Revenue was 0.4% above consensus.

• The guidance confirmed the consensus but did not raise it. Low-double-digit revenue growth and EPS growth in the “low double digits to low teens” are in line with the +11% and +13% that consensus now expects, and Visa said that incentives growth will step up in FY2027.

The FY2027 estimates went up, not down. In the 4 weeks to Nov 02, a period that includes the report, 11 of the 16 analysts in the Zacks consensus raised their FY2027 EPS estimate and 1 cut it. The Zacks consensus is $15.03, the same as on Koyfin. At the same time, the 5Y EPS growth estimate decreased from 14.41% to 14.01%.

The Oct 29 gain was not about Visa. Mastercard reported that day, and MA gained 4.2%. Over October, MA gained 15.7%, as much as V, and the forward P/E of V increased from ~25x at the end of September to ~28x in mid-October, before the report changed any estimate. So the October move was a higher multiple for both networks. On Oct 13, China’s central bank approved Visa’s application to prepare a domestic card clearing business, but it is only permission to prepare, and V started to rise before it.

The longer history is steady. Net revenue increased from $24.1B in FY2021 to $45.9B in FY2026 (13.75% per year), non-GAAP EPS from $5.91 to $13.27 (17.56% per year), and GAAP EPS grew every year. The only weak year for GAAP EPS was FY2025 (+4.8%), because of $2.56B of litigation provisions; non-GAAP EPS grew 14.1% that year. The diluted share count decreased 12.8% in 5 years, so about 3 points a year of EPS growth came from buybacks. FCF grew only 8.72% per year, slower than EPS, partly because of the litigation payments.

The Koyfin chart shows GAAP EPS. The gap between basic ($12.79) and diluted ($12.32) EPS in FY2026 comes from the share classes - diluted EPS counts the class B and C shares as converted into class A.

The consensus EPS grew every quarter, and the price caught up only now. The NTM EPS consensus more than doubled from ~$7 at the start of 2022 to $15.03. The price went the same way, but with a long pause - from its June 2025 high of $373 to the March 27 low of $296, V fell 21%, while the NTM EPS consensus increased ~9%. Since the March 27 low, V is up 40%, and ~60% of it was the multiple, from ~22.5x back to 27.5x. Over 2026 as a whole, the return came from EPS, since the multiple is about where it started the year.

I did not find one verified reason for the derating from mid-2025 to March 2026. It came together with the GENIUS Act on stablecoins (July 2025), Trump’s call for a 10% cap on card interest rates (January 2026), and his support for the Credit Card Competition Act. None of them changed Visa’s numbers. The conflict in the Middle East did. Travel stocks fell when it escalated in early March, and Visa says FY2027 laps its impact on cross-border travel.

V beat the S&P 500, but less than its EPS growth. Over 5 years, V returned 15.18% per year against 12.03% for VOO, and over 10 years 18.12% against 15.06%. At the same time, non-GAAP EPS grew 17.56% per year over 5 years. In late 2021, V traded at ~30x forward earnings, so the 5Y return lost ~2 points a year to the lower multiple, even with today's 27.5x.

Future

• Consensus revenue (S&P Global): FY2027 $51.02B (+11.2%), FY2028 $56.48B (+10.7%), and FY2029 $62.91B (+11.4%), so ~11% per year

• Consensus EPS: $15.03 -> $17.13 -> $19.51 (FY2027-FY2029), +13-14% per year; the NTM estimate increased every quarter of 2026

• 5Y forward EPS growth estimate: 14.01%, against a 15.51% 5Y mean and a 13.41% -1 standard deviation band. It was ~12-13.5% from 2024 to mid-2026, ~14.5% in August, and 14.01% after the report. At ~12.5%, my Base Case would be $429. To compare, non-GAAP EPS grew 17.56% per year in FY2021-FY2026

• Analysts (S&P Global): 36 of 40 have a Buy or Strong Buy rating, 3 Hold, and 1 Strong Sell; average target $441.15 (+6.7% from $413.59), range $330-485

• Company guidance for FY2027: net revenue growth in the low double digits, with Q2 as the low point; operating expenses growth “modestly below net revenue growth”; EPS growth in the “low double digits to low teens”; a tax rate of ~19%; Q1 EPS growth at the “low end of mid-teens”

What must go right. My model needs EPS to grow ~14% per year, the consensus. It uses 14.76% because it adds the 0.75% dividend yield, and reaches EPS of $29.92 in FY2032. By my estimate, this is possible if net revenue grows ~11% per year, the operating margin stays at ~67%, and the share count decreases ~2.5-3% per year. So the consensus does not need margin expansion, but it needs the FY2027 revenue growth for 5 more years and buybacks at about the FY2026 pace. VAS growing 20%+ and pricing make ~11% realistic.

FY2027 is harder than this average. The non-GAAP tax rate increases from 17.9% to ~19%, and non-operating expense from $141M to $250-300M, “primarily as a result of lower cash balances”. By my estimate, with 11% revenue growth and expenses growing slightly slower, non-GAAP net income grows only ~9-10% in FY2027, and EPS ~12-13% with the buybacks. This is why the EPS guidance is “low double digits to low teens”, and the +13% consensus is at its upper end.

The buybacks are the tighter part. At $414, the FCF yield is 2.9%. After the 0.75% dividend, FCF alone buys back ~2.1% of the shares a year. In FY2026, Visa bought back 3%, but it needed 116% of FCF. With 2.1% a year and 11% revenue growth, EPS grows ~13.4%, slightly below the consensus. Before the litigation payments, FCF would buy back ~2.6% a year, enough for ~14%. And most of these payments came from the escrow, where each deposit already reduced the share count like a buyback. So for class A shareholders, the real pace is closer to 2.6%, and what the consensus needs is that the cost outside the escrow stays small - the Justice Department case and the US debit class actions.

The part I trust least is incentives. If gross revenue slows to ~10% and incentives grow 3-4 points faster (in FY2026 they grew ~1 point faster than gross revenue, in Q4 ~6 points faster), net revenue growth falls to ~8-9%, and EPS growth to ~10-11%, by my estimate.

For me, the next two reports are the test. Q1 FY2027 (late January) shows the first renewals and incentives growth, and Visa says Q2 is the low point of growth. The Zacks consensus already expects Q2 EPS of $3.63, ~10% above the $3.31 of Q2 FY2026, and in the last 4 weeks, 5 analysts cut their Q2 estimate and 2 raised it. Net revenue growth of ~11% with incentives growing less than 20% is a pass. Growth below 10% in Q2 with incentives above 20% is a warning, since then the consensus is too high. The other checkpoints are the pricing in the second half, international transaction revenue against cross-border volume, the Fed’s new debit cap, the settlement approval, and the Justice Department case.

Current Valuation

Current vs 5Y mean:
Price/Fwd Earnings: 27.5x vs 26.6x
Price/Fwd Sales: 15.1x vs 13.8x
Price/FCF: 34.9x vs 27.4x
Price/Book: 21.2x vs 14.4x
PEG: 1.96 vs 1.87
Forward Earnings Yield: 3.6% (FY2027 EPS)

On earnings, V is between its mean and its +1 standard deviation band. The forward P/E is 27.5x, against a 26.6x mean, a 28.6x +1 standard deviation band, and a 24.6x -1 standard deviation band. The range of the last 5 years was ~22-32x: the lows were in October 2022 and in March-June 2026, and the highs in early 2022 and in 2025. P/S is 15.1x, just above its +1 standard deviation band (15.0x). The forward earnings yield is 3.6%, and on FY2028 consensus EPS, the P/E is 24.1x.

Analyst’s note:

Two of the multiples look more expensive than they are. P/FCF (34.9x against a 27.4x mean) uses FY2026 FCF after ~$3.8B of litigation payments; on the NTM FCF estimate, it is 27.9x against a 24.5x mean, still above it. P/B (21.2x against 14.4x) increased mostly because buybacks reduce equity, so for Visa it says little about valuation. I use the forward P/E and the PEG for the model.

The growth estimate decreased more than the multiple. The 5Y EPS growth estimate is 14.01%, against ~18% in early 2022 and a 15.51% mean. The PEG ratio is 1.96, above its 1.87 mean. So the market pays more per point of growth than on average in the last 5 years, while Visa grows more slowly than it did. To compare, in October 2022 the PEG was ~1.2-1.3, and in March 2026 ~1.7.

What does $414 already assume? If the forward multiple stays at 27.5x, V returns its EPS growth plus the 0.75% dividend. For a 12% return per year (the discount rate of my model), Visa then needs ~11% EPS growth per year, the low end of the FY2027 guidance. If the multiple returns to ~24x (the -1 standard deviation band, rounded down) in 5 years, Visa needs ~14.4% growth, about the full consensus. If it falls to ~22x, where it was in October 2022 and in March 2026, it needs ~16.4%, more than the consensus and close to the 17.6% of FY2021-FY2026, which included the post-pandemic recovery. So the price leaves room for one of the two to disappoint, not for both, and only a little - the multiple can fall to ~24x, but not to the ~22x of 2022 and March 2026. A return to 22x alone gives ~$373, 10% below today’s price, even with the consensus growth.

One chart frames this whole section. It shows the consensus forward EPS times my exit multiples (24x, 27x, and 29x) against the V price. At $414, V is above the 27x line ($406) and below the 29x line ($436). The lines use today’s NTM EPS, so the 24x line ($361) is not my Bear Case fair price ($407), which uses EPS in FY2032 discounted at 12%. In the last 5 years, V was above the 27x line for long periods in early 2022 and from late 2024 to mid-2025, and both times the next 12 months brought a lower multiple.

Fair Price

My model grows EPS for 5 years at the consensus rate. Consensus can be too optimistic, and my model takes this into account by capping future growth at 20%. For Visa, the cap does not matter. The 5Y EPS growth estimate is 14.01%, plus a 0.75% dividend yield, so the model uses 14.76%. The starting point is the FY2027 consensus of $15.03, and in FY2032 it becomes $29.92. In FY2028 and FY2029, my path ($17.25 and $19.79) is 1% above the consensus.

The discount rate is 12%; the margin of safety is 30%. The exit multiples are 24x, 27x, and 29x. 24x is the -1 standard deviation band (24.6x) rounded down, so the Bear Case assumes that V trades at the low end of its usual 5Y range. It is below today’s 27.5x, so this case includes some derating. I round the Bear Case down, not to the nearest multiple, because V traded at ~22x twice in the last 5 years. At 25x, the Bear Case would be $424, and V would be inside the zone. 27x is the 5Y mean (26.6x) and 29x the +1 standard deviation band (28.6x), both rounded to the nearest whole multiple; 29x is below the 30x ceiling of my rules. Worth noting that the mean includes 2022, when the growth estimate was ~18%. At the mean PEG of 1.87 and today’s 14.01%, the multiple is 26.2x, and at 26x the Base Case is $441. So in my view, 27x is slightly generous for today’s growth, and V is closer to its fair price than the 10% gap suggests.

Bear Case (exit P/E 24x): fair price $407 - MoS price $285
Base Case (exit P/E 27x): fair price $458 - MoS price $321
Bull Case (exit P/E 29x): fair price $492 - MoS price $345

Analyst’s note:

Portfolio #004 used the same multiples and the same FY2027 EPS, but a 14.41% growth estimate, read from Koyfin on Oct 30. In the export for this analysis (Nov 01, the same Oct 30 close), the estimate is 14.01% after the post-report revisions, so the Base Case is $458, ~$8 lower. In the Portfolio and Watchlist series, I start buying at a 30% discount to my Base Case, so the buy zone is up to $321 for V now. In this analysis, the accumulation zone is the range from the Bear Case MoS price to the Bear Case fair price, $285-407. Both numbers come from the same model.

Analyst’s note:

The chart shows the accumulation zone ($285-407), and the Base Case fair price ($458) is the line at the top edge. The Bull Case fair price of $492 is above the scale of the chart.

At $414, V is 1.5% above the Bear Case fair price and 10% below the Base Case. The accumulation zone is $285-407, so V is just above it. The result depends most on growth. If EPS grows ~11% per year plus the dividend, at the pace of the low end of the guidance, the fair prices are $357/$401/$431, and today’s price is slightly above the Base Case. At ~10% EPS growth, the Base Case is $384. If the multiple falls to 22x at the consensus growth, the fair price is $373.

As I see it, the zone has two parts. From $357 to $407, the price covers a lower multiple (24x) if EPS grows at the consensus rate. Below $357, it also covers slower growth, because the Bear Case at ~11% EPS growth is $357.

Due Diligence

Profitability (12 of 15):

• Positive Gross Profit: $44.84B

• Positive Operating Income: $28.11B

• Positive Net Income: $23.50B

• Positive FCF: $22.06B

• Gross margin >= 40%: Yes (97.68%)

• Net margin >= 10%: Yes (51.20%)

• FCF margin >= 10%: Yes (48.05%)

• Management (ROIC, ROE, ROA) >= 10%: Yes (44.10%/63.51%/19.61%)

• Strong 3Y Revenue Growth: No (12.0% per year, FY2023-FY2026)

• Revenue Growth Forecast: No (~11% per year, FY2027-FY2029)

• ROE is increasing: ~34% at the start of 2022 -> 63.51%

• ROIC is increasing: ~21% at the start of 2022 -> 44.10%

• Revenue surprises in the last 5Y in a row: No (miss in Q3 FY2024)

• EPS surprises in the last 5Y in a row: Yes (20 of 20)

• EPS growth YoY 5Y in a row: Yes (FY2022-FY2026)

Financial Strength (3 of 6):

• Total assets ($94.36B) exceed total liabilities ($58.25B) by 1.6x

• Negative Net Debt: No ($7.89B of net debt)

• Low Debt/Equity: No (61.1%; 5Y mean: 58.4%)

• Debt/Capital: No (37.93%; 5Y mean: 36.79%)

• Interest coverage (FFO): 31.3x (5Y mean: 33.6x)

• Piotroski F-Score: 8 of 9 (FY2026; not passed: higher current ratio)

Valuation and Advantage (2 of 4):

• Valuation < 5Y mean: No (P/E 27.5x vs 26.6x)

• Valuation < the industry: No (P/E 27.5x vs 15.0x for XLF; AXP, PYPL, FISV and XYZ are cheaper)

• Does it have a moat: Yes (wide)

• Outperformed the S&P 500 over 5Y: Yes (15.18% vs 12.03% CAGR)

Shares (1 of 3):

• Insider ownership >= 5%: No (0.125%, including options)

• Fewer shares outstanding YoY: Yes (Q4: 1,882M vs 1,945M diluted)

• Insider buys in the last 6M: No (only sales)

Price (2 of 4):

• 1Y price forecast > 10%: No (+6.7%)

• Next 5Y EPS growth estimate (CAGR) > 10%: Yes (14.01%)

• DCF Value: ~$352 (base case: revenue growth 9.7% - below consensus, 8.8% discount rate); overvalued by ~15%

• Short Interest < 5%: Yes (1.10%)

Verdict

In my view, Visa is one of the best businesses in the market and fits a long-term portfolio, and I hold it in mine. Visa earns a 67.5% non-GAAP operating margin and a 44% ROIC, takes no credit risk, and returned 116% of its FCF to shareholders in FY2026. At the same time, V trades at 27.5x forward earnings, above its 26.6x 5Y mean, with PEG of 1.96, after a 40% rally since March, and ~60% of that rally came from the multiple. Consensus expects ~14% EPS growth per year, and the price needs ~11% if the multiple holds and ~14% if it returns to its -1 standard deviation band. My model gives fair prices of $407/$458/$492, so V is 1.5% above the $285-407 accumulation zone and 10% below the Base Case. The realistic downside is a costly renewal year, more regulatory pressure on interchange and debit, and a multiple back at 22-24x, as in 2022 and in early 2026. With the consensus growth, the fair price is then ~$373-407; if EPS growth also slows to ~11%, it is ~$327-357. For me, this is a stock to hold, not to add to. Only below ~$357 does the price cover both a 24x multiple and EPS growth of ~11%. The things to watch are net revenue growth and incentives in Q1 and Q2 FY2027, the renewals with large clients, the gap between international transaction revenue and cross-border volume, the Fed’s new debit cap, the final approval of the merchant settlement, and the Justice Department case.

One-Pager

This is not a financial or investing recommendation. It is solely for educational purposes.

The track record

In October, the portfolio gained 1.95%, while the S&P 500 lost 0.93%. YTD, it is at +0.47% against +10.52%. Since December 2021, the portfolio is up 91.46% against 63.74% for the S&P 500, or 14.16% a year against 10.58%.

The YTD gap decreased from ~13 to ~10 points in one month. Two positions explain most of October: V gained 15.1% and EDV 6.9%, and together they added ~4 points to the portfolio. RDDT, NVDA, and OPRA took away ~2.5 points.

The comparison with QQQ changed back. In #003, QQQ was ahead since inception. In October, QQQ lost 6.58%, and the portfolio is again ahead of all four benchmarks: +91.46% against +79.59% for QQQ, +69.65% for SPYG, and +66.42% for VUG. The Sharpe ratio is 0.83 (0.82 in #003); beta (0.95) and the maximum drawdown (-19%, 123 days) did not change.

As promised in #003, the final September number is now in the table: -5.14% against -0.45% for the S&P 500. I published -4.62% against +0.36% because those numbers were taken at midday on Sep 30. The last half-day was weak for both.

Analyst’s note:

This time, all numbers are after the close of Friday, Oct 30, the last trading day of October. The “1M” column in the benchmark table matches the calendar month: +1.95% against -0.93%.

Read more

TL;DR: Netflix (NFLX) has more paid memberships than any other streaming service, and it earns almost all of its revenue from subscriptions and a growing part from ads. The Q3 2026 report was another quarter of double-digit growth. At the same time, Netflix cut its ad revenue forecast and guided Q4 below consensus, and NFLX fell again. The stock is down 50% from its June 2025 peak, while LTM EPS without the Warner Bros. Discovery (WBD) termination fee is up 25%. As I see it, if the multiple holds, the price assumes Netflix's margin stops growing, while the data shows slower margin growth, not the end of it. NFLX trades inside my accumulation zone, but the thesis is not proven yet; my full fair price math is at the end of this post.

Investment Thesis

The Q3 report on Oct 20 matched Netflix’s own revenue forecast and beat the EPS consensus, and the stock still fell - for the third report in a row. In my February analysis, the idea was that Netflix moves from subscriber growth to profit growth. At that time, Netflix’s deal to buy Warner Bros.’ studios and HBO Max was still pending. Since then, Netflix walked away when Paramount Skydance offered more, received a $2.8B termination fee, lost its co-founder from the board, replaced its content chief, and cut ~1,000 jobs. My idea here is to separate the one-offs in the 2026 numbers from the trend, and to compare the trend with what the price assumes.

• Growth slowed, but it did not stop. Revenue increased 12% YoY to $12.87B (11% F/X neutral, without currency effects), after 16% in Q1 and 13% in Q2. Operating income increased 37% to $4.46B, but Q3 2025 included a ~$619M charge for tax assessments in Brazil. Without it, operating income grew ~15%, and the operating margin increased ~1 point to 34.6%. For 2026, Netflix expects revenue of $51.1B (+13%) and a 31.5% operating margin.

• The 2027 consensus looks slow only because of one payment in 2026. Consensus EPS for 2026 is $3.57, and ~$0.52 of it is the after-tax termination fee, by my estimate. Against $3.05 without the fee, the 2027 consensus of $3.77 is +24%, not the +6% that the reported numbers show. NFLX trades at 18.1x forward earnings with a 21.28% 5Y EPS growth estimate, PEG of 0.85.

• The business generates more cash than ever, and Netflix returns all of it. LTM FCF was $11.38B, of which up to $2.8B is the fee, and the LTM operating margin was 31.3%. ROIC is 27.69% against a 19.44% 5Y mean, and ROE is 53.46%, or ~45% without the fee. In the last 12 months, Netflix spent $12.86B on buybacks, more than its FCF and 4.7% of today’s market cap. Net debt is $6.91B, 2.5% of the market cap.

• The multiple is below the low end of its usual 5Y range. At 18.1x forward earnings, NFLX trades below its -1 standard deviation band (24.3x), the lower edge of its usual range in the last 5 years. The 32.6x 5Y mean is higher because NFLX traded at ~55-60x in late 2021. NFLX pays no dividend, so if the forward multiple does not change, my 12% required return needs only ~12-13% EPS growth per year. Without one-offs, 2026 EPS is on track for ~15-16% growth ($3.05 against ~$2.64 in 2025, without the fee and the Brazil charge).

• The bear case is a Netflix that grows by price and ads, not by viewing. Engagement barely grows (view hours +2% in H1 2026), YouTube takes more TV time, US revenue growth slowed from 18% to 11% in 3 quarters, the ad business is behind its own plan, and the operating margin expands only ~1 point this year without one-offs, after ~2.5 points a year in 2020-2025. My model takes this into account by removing the fee from the starting EPS and by using today’s 18x as the Bear Case exit multiple. Even so, NFLX is 14% below my Bear Case fair price of $78. That case still assumes 20% growth, though. If the margin grows only ~1 point a year, EPS grows ~17%, and my model gives ~$68 at the 18x exit, about today’s price.

Analyst’s note:

Share and per-share numbers reflect the 10-for-1 stock split of November 2025, and the price anchor is the Oct 22 close of $67.05. Netflix’s GAAP EPS for 2026 includes the $2.8B termination fee that Paramount Skydance paid on behalf of Warner Bros. Discovery in Q1. Netflix booked it in “interest and other income” and does not disclose its after-tax effect on EPS. At the 21% US federal tax rate, it is ~$2.21B, or ~$0.52 per share. The $3.57 consensus includes the fee, since it equals the reported EPS of the first 9 months ($2.90) plus Netflix’s Q4 forecast ($0.67). Netflix’s own Q1 forecast points to a similar number. EPS was $1.23 against a $0.76 forecast made before the fee. I use the larger $0.52, so my model starts from $3.05. In cash terms, Netflix raised its 2026 FCF forecast by only $1.5B after the fee, so if anything, my adjustment is too large, not too small. The Koyfin forward multiples use NTM EPS, which no longer includes Q1 2026, so they do not need this adjustment.

Company Overview

Next Earnings Date: Jan 19, 2027 (estimated)
Market Cap: $275.3B
Sector: Communication Services | Industry: Entertainment
Type: Large Blend
Short Interest: 2.0%

Netflix was founded in 1997 as a DVD-by-mail service. Today it has more paid memberships than any other streaming service: over 325M at the end of 2025 and, as the company says, an audience approaching 1 billion people. Netflix stopped reporting membership numbers regularly in 2025. Ted Sarandos and Greg Peters manage the company as co-CEOs. Co-founder Reed Hastings, who led Netflix as CEO and co-CEO for more than 25 years, did not stand for re-election to the board in June 2026, and Jay Hoag, a director since 1999, became the chair. A year earlier, Hoag did not get a majority of the votes at the annual meeting. Netflix explains it by his low attendance in 2024 (less than 75% of the board and committee meetings), and the board rejected his resignation. It is a small point, but the new chair starts with weak support from shareholders. Netflix had ~16,000 full-time employees at the end of 2025, according to its 10-K.

The business is one product sold in two ways. Members pay a monthly subscription, and on the cheapest plan they also see ads. As of Sep 30, 2026, plans cost the equivalent of $1-37 per month, depending on the country and the plan, according to the Q3 10-Q. Advertising is still small (Netflix expects ~$2.7B in 2026, ~5% of revenue), but it is the fastest-growing part, ~80% this year. Subscriptions bring almost all the rest. Netflix also earns some revenue from consumer products and live experiences (Netflix House), but it says this revenue is not material. Netflix sells directly to members, and partners such as TV makers, pay-TV distributors, mobile operators and internet providers promote or bundle the service. In India, for example, Netflix added its first loyalty bundle with Flipkart this year.

The content comes from three sources. Netflix produces its own series and films, adds live events (NFL games, MLB, boxing), and licenses series and films from other studios after their first release. Non-English viewing increased from under 10% of all viewing a decade ago to more than a third today. Recently, Netflix signed licensing deals with Disney (DIS), Sony (SONY) and Universal, its largest deal ever with Globo in Brazil, and it integrated the whole TF1 channel into its French service. In March, it also bought InterPositive, a company founded by Ben Affleck that develops AI tools for filmmakers. Cash paid for acquisitions in Q1 was $586M.

Revenue is spread across four regions, and growth slowed in each of them. The US and Canada brought 44% of Q3 revenue. F/X neutral growth was 9-15% by region, against 15-20% a year ago. India is the example the company highlighted - a strong local slate increased view hours 24% YoY and revenue ~18% F/X neutral.

Market Overview

Streaming is now half of US TV time, and most of the new time goes to YouTube. In August 2026, streaming had 49.6% of US TV time, against 46.4% a year earlier, according to Nielsen’s The Gauge. YouTube had a record 15.8% (13.1% a year earlier). Netflix had 7.7%, against 8.7%. As a result, Netflix’s share of all streaming time decreased from 18.8% to 15.5% in 1 year, while YouTube’s increased from 28.2% to 31.9%. August 2025 was a strong base for Netflix, with Wednesday and KPop Demon Hunters at the top of Nielsen’s streaming list. Still, July shows the same 1-point decline, from 8.8% to 7.8%. Nielsen moves The Gauge to a new method from September, so the next comparable data comes later this year.

Netflix’s own engagement data is the weak point. View hours increased 2% YoY in the second half of 2025, when viewing of branded originals grew 9%, and other viewing declined. In the first half of 2026, view hours increased 2% again, against 1.5% growth in 2025. In July, Netflix also said it will publish its engagement report only once a year, starting in Q1 2027, to keep the focus on revenue and operating profit. Management repeats that engagement is not only quantity but also “quality and variety” of viewing. As I see it, reducing the disclosure while the number is weak does not help credibility, even if the reason is real.

The money grows more slowly than Netflix, so Netflix takes a larger share of it. In March 2026, Ampere Analysis estimated global subscription streaming revenue at $157.1B in 2025 (+14%), and $177B with advertising. It expects subscription revenue to pass $200B by 2030, so growth slows from 14% to ~5% a year. To compare, Netflix’s 2025 revenue of $45.2B (+16%) is ~26% of the market with ads. In 2026, Netflix expects 13% growth, and ~11% without ads, about 2x Ampere’s expected pace for subscriptions. Netflix gains this share through price and ads, while its share of viewing time decreases.

Advertising is the growing pool, but ad supply grows faster than demand. US connected TV (CTV) ad spending grows 11% to $29.3B in 2026, according to the July report of the Interactive Advertising Bureau (IAB). At the same time, Disney’s streaming ad revenue grew only 3% in its June quarter, as ad rates decreased 4% on “marketplace supply growth” (Disney’s report). YouTube alone sold $11.1B of ads in Q2 2026 (+13%). So Netflix’s ~$2.7B is still small, and in my view part of its ad cut reflects a market with more inventory, not only its own product delays. Peters said that “general demand remains strong”, so this is my reading of Disney’s data, not Netflix’s explanation. The reach is growing. The Netflix ads plan reached more than 250M monthly active viewers in May, as the company said at its upfront presentation.

The subscription competitors became fewer and more profitable. On Oct 06, Skydance (SKYD), formerly Paramount Skydance, closed its acquisition of Warner Bros. Discovery, the deal Netflix walked away from. The combined company has more than 200M streaming subscribers and will merge Paramount+ and HBO Max into one service over time. It reports a pro forma content spend of more than $30B a year for the whole company, TV networks included, against Netflix’s ~$20B. At the same time, it issued $41.4B of secured notes for the deal and targets 3.0x net leverage only by the end of 2029. Disney’s streaming business earned a 12.9% operating margin in its June quarter, and Peacock was profitable for the second quarter in a row. As I see it, the change works both ways for Netflix. Stronger competitors bid more for content and talent, but they also license more to Netflix. For the thesis, the question is whether Netflix can keep raising prices while its share of viewing time decreases.

Economic Moat

The margins are at record levels. The LTM gross margin is 50.68% (5Y mean: 44.0%), the EBIT margin 31.3% (23.75%), the net margin 29.69% (20.0%), and the FCF margin 22.87% (14.75%). The net and FCF margins include the termination fee. Without it, the net margin is 25.24%.

Let’s see what produces these margins. Scale is the main source. A series costs the same whether 50M or 300M members watch it, so the largest service spreads the same content spend over the largest revenue. Netflix spends ~$20B a year in cash on content (in the first 9 months of 2026, $14.98B against $12.76B of amortization), and content amortization grew only ~9% YoY in that period, while revenue grew 14% and cash spent on content 18.5%. This is the operating leverage that took the operating margin from 18.3% in 2020 to 29.5% in 2025. No streaming competitor is close. Netflix’s operating margin (34.6% in Q3) is ~2.7x Disney’s streaming margin and more than twice the margins of HBO Max, Paramount+ and Peacock, which report a looser measure (adjusted EBITDA).

Netflix raises prices without losing members. It raised prices in 2026 in the US, Mexico, Spain, and other markets, and the member response was “consistent with prior price changes and our expectations”. In the US, the ads plan increased from $7.99 to $8.99 in March. Churn improved YoY both globally and in the US. According to Antenna, Netflix’s US churn was 2% in May 2026, after the price increase, against a 4% weighted average for nine premium services (MediaPost’s summary). On the earnings call, Greg Peters said US members pay the least per hour of viewing among subscription services, and for some competitors the price per hour is more than double. Price increases without higher churn are the most direct evidence of a moat that I see here.

Its global reach makes Netflix the natural buyer for competitors’ content. Netflix produces content in more than 50 countries, and local titles travel - non-English viewing is now more than a third of the total. This year’s licensing deals with Disney, Sony, Universal, Globo and TF1 show it.

The weak point is viewing time. Against other subscription services, the moat works. Against YouTube, it does not. YouTube does not fund most of its content upfront (creators make it and share the ad revenue), and it competes for the same TV screen. This is why the moat protects margins and prices, but not engagement.

The returns confirm the economics. ROIC is 27.69% (5Y mean: 19.44%), ROE 53.46% (34.98%), and ROA 17.12% (11.3%). Koyfin’s ROA is based on operating income, so the fee does not affect it. ROE includes the fee, and without it, LTM ROE is ~45%, by my calculation. In my view, Netflix has a narrow moat that has become wider against streaming competitors and narrower against free video. The economics are excellent, but the moat does not yet answer the question of who wins the time on the TV screen.

Business Strategy

Fewer people, the same content budget. On Oct 14, Netflix cut ~1,000 jobs, ~6% of its workforce, mostly in product, technology, legal, and human resources. The cost is ~120 basis points (bps) of the Q4 margin. Management did not quantify the savings. The target is visible in the numbers. Technology and development expenses increased 21% YoY in Q3, mostly personnel, against 12% revenue growth. Peters explained the cut as a “forcing function” for the whole organization. In my view, this is cost discipline that should show up in the 2027 margin. The cut is mostly outside content, and the content cash spend target (~1.1x amortization) did not change.

A new content chief for the US slate. Netflix replaced Chief Content Officer Bela Bajaria with Peter Rice, the former chairman of Walt Disney Television, from Oct 26. Film chief Dan Lin also left. Sarandos was direct about the reason. The US “is also working. It’s just not growing as fast as it could or as fast as we’d like.” The awards tell the same story - 16 Primetime Emmys in 2026, against 30 in 2025, according to Variety. Sarandos expects Rice to influence projects that are already in production. In my view, content takes years from approval to release, so a new chief changes the 2028 slate more than the 2027 one.

Ads: behind plan, still growing ~80%. Netflix now expects ~$2.7B of ad revenue in 2026, against ~$3B before. Peters said the business is “a bit behind our aggressive target” because of delays in the rollout of new ad products and in partner integrations. Even so, it still grows “over 80% this year”, as he put it. The ad tier comes to 15 new countries in 2027, the first 12 in March. Peters also said that the gap between the ad tier’s revenue per member and the standard plan’s is narrowing, but Netflix gives no number for it. The gap is also a cost today. The ads plan was over 60% of sign-ups in ads countries in Q1, and Peters said the gap “means underrealized revenue growth for us in the near term”. The 15 new ads countries extend this to more markets in 2027. The cut is small in dollars ($300M, ~0.6% of 2026 revenue), but it affects the fastest-growing revenue line and the credibility of the targets.

Aggregation instead of acquisition. In December 2025, Netflix agreed to buy Warner Bros.’ studios and HBO Max for an enterprise value of $82.7B. When Paramount Skydance offered more, Netflix did not raise its bid, and in February it received the $2.8B termination fee. The new approach is cheaper: license more from competitors and integrate whole services, as with TF1. Peters said that add-on services from partners could follow, with “nothing to announce today”. As I see it, this is a better use of capital than the $82.7B deal. It also shows that Netflix wants more third-party content to grow viewing.

Live events and theaters, selectively. Live programming is just over 5% of the 2026 content spend and ~1% of view hours, but events like the NFL games on Thanksgiving Eve and Christmas Day bring sign-ups and ad revenue. Netflix will release ~30 films in theaters this year, and a few large family films in 2027, Greta Gerwig’s Narnia among them, get a traditional 45-day theatrical window. In my view, both are small changes to a streaming-first model, and they test new revenue without much risk.

Capital Allocation

Net debt is only 2.5% of the market cap. At the end of Q3, Netflix had $8.22B of cash and short-term investments and $15.13B of debt, so net debt was $6.91B ($7.11B by Netflix's own measure, which adds back issuance costs and hedging adjustments). In July, it issued $1B of notes to repay the 4.375% notes due in Q4. Debt/Equity is 51.7% (5Y mean: 75.5%), Debt/Capital 34.07% (42.66%), and funds from operations (FFO) cover interest expense 14.4x (8.6x).

Worth noting that content obligations are larger than the debt. Total streaming content obligations were $25.2B at the end of Q3, ~1.7x the debt, and part of them is not on the balance sheet. They are commitments for future titles, not borrowing, but they are fixed costs that Netflix pays regardless of engagement. In the first 9 months, cash spent on content was 1.17x its amortization, against the ~1.1x that Netflix targets for the full year.

FCF increased from -$0.13B in 2021 to $9.46B in 2025, and to $11.38B over the last 12 months, a 22.87% margin against a 14.75% 5Y mean. For 2026, Netflix expects ~$12.0B, including the fee. In April, the forecast was $12.5B. The cut is mainly a real estate transaction that Netflix expects to close in Q4. 2026 also includes a ~$0.7B deposit in a tax dispute in Brazil, which Netflix expected in 2025 and paid in Q1 2026. So 2025 FCF looks ~$0.7B better than it was, and 2026 ~$0.7B worse.

The buybacks are now the main use of cash. Netflix paused them during the Warner Bros. deal and restarted them after it walked away. In the first 9 months of 2026, it bought 130.3M shares for $10.78B (3.2% of the shares outstanding) at an average of ~$83. The price paid decreased each quarter: ~$94 in Q1, ~$89 in Q2, and ~$75 in Q3. In April, the board authorized another $25B, and $22.3B is still available, 8.1% of the market cap. The diluted share count decreased 3.3% YoY, and the LTM buyback yield is 4.74%, against a 1.35% 5Y mean. Netflix pays no dividend.

Over the last 12 months, buybacks of $12.86B were 113% of FCF, and Netflix financed the difference with cash. Cash decreased from $12.26B at the end of March to $8.19B. In my view, this is fine at today’s leverage, but the pace cannot continue without more debt. At ~$11-12B of yearly FCF without the fee and the deposit, the sustainable buyback is ~4% of today’s market cap per year.

The shareholder yield, which also counts debt, is 4.3% (5Y mean: 1.53%). It is below the buyback yield, mostly because the $1B of July notes counts as new debt.

Stock-based compensation (SBC) is low, $540M over the last 12 months, or 1.09% of revenue, in line with its 1.11% 5Y mean. In the first 9 months of 2026, it increased 73% YoY, though, so it is a number to watch. Capex is small too, $933M over the last 12 months, or 1.9% of revenue, and it increased 55% in the first 9 months of 2026. Content is the real investment, and it goes through operating cash flow.

Technology and development is now the largest operating expense after content, $3.89B over the last 12 months (Koyfin shows it as R&D), against $3.62B for marketing and $2.14B for general and administrative costs. This is the line the October layoffs target.

In my view, the capital allocation in 2026 was disciplined on M&A, but the buybacks have not paid off yet. Netflix did not overpay for Warner Bros., collected $2.8B for the attempt, and kept leverage low. At the same time, the shares it bought this year at an average of ~$83 are worth ~$2.0B less at $67, and part of the money came from cash, not FCF. The guidance is credible - in each of the last 4 quarters, revenue matched or beat Netflix’s own forecast. The ad target is the exception. The question for 2027 is whether the buybacks continue at ~$67, where each dollar buys ~40% more shares than in Q1.

Advantages

• Scale no streaming competitor matches. Over 325M paid memberships, ~$51B of revenue in 2026, and a ~$20B content budget spread across ~190 countries. The LTM operating margin is 31.3%.

• Pricing power with lower churn. The 2026 price increases in the US, Mexico, Spain, and other markets went as Netflix expected, and churn improved YoY globally and in the US.

• FCF that pays for large buybacks. LTM FCF of $11.38B, $12.86B of buybacks in 12 months, and net debt of only 2.5% of the market cap.

• Local content that travels. More than a third of viewing is non-English. In India, a strong slate increased view hours 24% and revenue ~18% F/X neutral, with the largest quarter of paid net additions there ever.

• Ads as a second growth line. ~$2.7B in 2026 (~80% growth), 15 new ad countries in 2027, and, as management says, a narrowing gap between the revenue per member of the ad tier and of the standard plan.

Disadvantages

• Engagement barely grows. View hours increased 2% in H2 2025 and 2% in H1 2026. From 2027, Netflix will report them only once a year.

• US growth is now mostly price. Revenue in the US and Canada grew 18% in Q4 2025, then 14%, 10%, and 11% in Q3 2026. Q3 was the first full quarter of the March price increase (+8-12.5% by plan), so most of the 11% is price, by my estimate. It is the largest region (44% of revenue) and the most penetrated one.

• The ad business misses its own targets. The 2026 forecast decreased from ~$3B to ~$2.7B, and management explains it by delays in its own product rollout.

• Leadership turnover. The co-founder left the board, the content chief and the film chief were replaced, and ~1,000 employees were let go, all within 6 months.

• The margin expansion slowed. Without one-offs, the 2026 operating margin increases ~0.9 points, against ~2.5 points a year in 2020-2025. Live programming takes just over 5% of the content spend for ~1% of view hours.

What the bears get right: Netflix now grows mostly by price, ads, and new members outside the US, not by more viewing. In the US, the March price increase explains most of the 11% growth in Q3. If view hours stay flat, every price increase has to be justified by better content, and the US slate is exactly what management wants to fix. YouTube competes for the same screen with content it does not fund upfront. And the 2027 consensus (+24% EPS without the fee) needs the margin expansion to return to ~2 points or more, while the content that will be amortized in 2027 is already growing faster than revenue. If it stays at ~1 point a year, EPS grows ~17% a year, not 20%.

Competitors

I compare Netflix with 5 companies. Disney (DIS) has the closest streaming business (Disney+ and Hulu) plus parks and TV networks. Skydance (SKYD) owns Paramount+ and, since Oct 06, HBO Max. Comcast (CMCSA) owns Peacock. Spotify (SPOT) is the other large subscription platform that grows through price and ads. Roku (ROKU) sells TV streaming platforms and CTV advertising, so it competes with Netflix for the same ad budgets. YouTube is the main competitor for time, but Alphabet (GOOGL) is valued for search and cloud, so it is not in the table.

NFLX is not the cheapest stock here, but it is the cheapest for its growth. On the same S&P Global data and the Oct 22 close, NFLX trades at 18.7x forward earnings, above DIS, CMCSA, and XLC (14.9x), the sector benchmark, and far below SPOT (36.4x) and ROKU. The SKYD P/E is not meaningful, since Skydance has almost no forward EPS around the WBD merger. Growth explains most of the gap. Consensus expects 21.7% EPS growth per year for Netflix over the next 3 years, almost twice Disney’s rate, while Comcast’s EPS is expected to decline. Only Spotify and Roku, from a low base, are expected to grow faster. As a result, the PEG ratio is 0.86 for NFLX, against 1.24 for DIS and 1.55 for SPOT. Revenue is a different picture. Netflix’s 3Y revenue forecast (11.58% per year) is below Spotify’s and Roku’s, so more of its EPS growth has to come from the margin.

On margins and returns, Netflix leads every competitor. The LTM net margin is 29.69% (25.24% without the fee), against 18.43% for Spotify and 7-9% for Roku, Disney and Comcast. Netflix also has the highest EBITDA margin (32.08%) and ROA (17.12%) of the 6. Its FCF margin (22.87%) is the highest too, but it includes the fee, and without it, it is 17-20%, close to Spotify’s 18.04%. Only Comcast has a higher gross margin, but its EBITDA margin (27.27%) is lower. Debt/Equity of 60% (with leases) is higher than at Disney, Spotify and Roku, and lower than at Comcast (94%) and Skydance (126%). In streaming itself, the gap is clear from the companies’ own reports: Netflix’s 34.6% operating margin in Q3 against 12.9% for Disney’s streaming business and 13.5% for Spotify, while HBO Max, Paramount+, and Peacock report 14.5-16.6% on adjusted EBITDA.

In my view, Spotify is the next-best alternative. It is the only company here with similar expected growth, the same model (subscriptions plus an ad tier), and almost no debt (Debt/Equity 6%). At the same time, SPOT trades at ~2x the NFLX multiple (36.4x against 18.7x), and Netflix has higher margins and returns. DIS and CMCSA are cheaper, but Disney and Comcast are expected to grow EPS at about half the Netflix rate or less, and most of their profit comes from parks, TV networks, and broadband, not from streaming. As I see it, NFLX is the better choice of the two growth stocks at today’s prices. The discount reflects, in my view, the slower growth of Netflix’s viewing time, not weaker economics.

Past

Q3 2026 (ended Sep 30, all USD, YoY):

• Revenue +12% to $12.87B (+11% F/X neutral), in line with consensus and with Netflix’s own forecast

• Operating income +37% to $4.46B, and the operating margin 34.6% against 28.2%; without the Brazil tax charge in Q3 2025, +15% and +1.0 point

• Net income +44% to $3.66B; diluted EPS +49% to $0.87, against the $0.82 consensus

• Ad revenue +$256M YoY; FCF +8% to $2.88B

• 63.9M shares repurchased for $4.8B, the largest quarter of buybacks in Netflix’s history

• LTM: revenue $49.73B (+14.65%), net income $14.77B ($12.55B without the fee), FCF $11.38B, and ROIC 27.69%

Why did NFLX fall after the report? In my order of importance:

• The ad forecast. ~$2.7B instead of ~$3B for 2026. It is the largest miss against Netflix’s own plan, and it is the part the market pays for as future growth. Seaport Research cut its target over “delayed gratification” on ads (TheWrap’s summary).

• The Q4 guidance. Revenue of $13.44B (+11.5%) against ~$13.5B expected, and EPS of $0.67, 8% below the S&P Global consensus of $0.73, partly because of the layoff costs. The 2026 revenue forecast of $51.1B is 0.2% below the midpoint of the earlier range.

• Engagement. There was no new view hours number, and management said it is “not satisfied” with view hour growth.

At the same time, the quarter itself was solid. EPS beat consensus by 6%, revenue was in line, churn improved, and the full-year margin target held, including the layoff costs. Most analysts kept their ratings and cut their targets. The report reduced 2026 ad revenue by ~$300M (~0.6% of revenue) and the 2027 EPS consensus by 1-2%, while the stock lost ~5% of its value.

The table explains the +37%. For the full year, Netflix’s guidance gives ~0.9 points of margin expansion without one-offs, against the 2.0 points that the reported numbers show.

It was the third time this year. After the Q1 report, NFLX fell 9.7%, as the Q2 guidance was below expectations and Reed Hastings announced his exit from the board. After the Q2 report, it fell 7.3%, as the Q3 guidance was below expectations and Netflix moved its engagement report to once a year. Each time, revenue matched or beat Netflix’s own forecast, and each time, the outlook disappointed. Without the fee, Q1 EPS was ~$0.71, below the $0.76 consensus. Since the April 16 close, NFLX is down 38%. To compare, on Feb 27, after Netflix walked away from Warner Bros., NFLX gained 13.8%.

Has Netflix done what I bet on in February? Mostly yes. Revenue and the operating margin target are where Netflix guided in January. FCF is higher only because of the fee. Netflix raised the forecast by $1.5B in April, “due primarily to the after-tax impact” of the fee, and cut it by $0.5B in October for a real estate transaction. Without both, it is ~$11B, as in January. The ad business missed, and the margin expansion behind the 31.5% target is smaller than it looks. The stock went the other way. It fell 12.8%, while the S&P 500 (VOO) gained 13.0%.

The longer history is strong. Revenue increased from $25.0B in 2020 to $45.2B in 2025 (12.6% per year), the operating margin from 18.3% to 29.5%, and EPS from $0.61 to $2.53 (33% per year). EPS decreased only once in 5 years, by 11.5% in 2022. LTM EPS without the fee is $2.93 (the $3.45 on the Koyfin chart includes the fee), 2.6x the $1.12 of 2021.

Since the June 2025 peak, LTM EPS without the fee increased 25% (from $2.35 to $2.93), and the consensus for the next 12 months reached $3.59, while NFLX fell 50%.

At the same time, over 5 years, the stock barely moved. NFLX returned 1.87% per year, against 13.63% for VOO. Over 10 years, it is still ahead, with 20.98% per year against 15.22%. EPS increased 2.6x, while the price is where it was in October 2021, so the whole 5Y difference is the multiple.

Future

• Consensus revenue (S&P Global): 2026 $51.22B (+13.4%) and 2027 $56.96B (+11.2%) - the estimates already expect ~11% growth after 2026

• Consensus EPS: $3.57 -> $3.77 -> $4.50 (2026-2028); without the fee, 2026 is $3.05, so 2027 is +24% and 2028 is +19%. The direction is down.

• 5Y forward EPS growth estimate: 21.28%, against a 25.18% 5Y mean and just above its -1 standard deviation band (20.89%); to compare, GAAP EPS grew 33% per year in 2020-2025, and ~15-16% in 2026 without one-offs, by my calculation

• Analysts (S&P Global): 35 of 52 have a Buy or Strong Buy rating, 15 Hold, and 2 Strong Sell; average target $91.39 (+36% from $67.05), range $57-126

• Company guidance: 2026 revenue $51.1B, operating margin 31.5%, FCF ~$12.0B, and cash content spend ~1.1x amortization; Q4 revenue $13.44B, EPS $0.67, operating margin 26.0%. The 2027 guidance comes in January. CFO Spence Neumann repeated the objectives: “sustain double-digit revenue growth”, expand margins, and increase FCF.

What must go right. My model needs EPS of $7.59 in 2031, 20% growth per year from $3.05. By my estimate, this is possible if revenue grows ~10% per year to ~$82B, the diluted share count decreases ~2.5% per year, and the operating margin increases from 31.5% to ~41%. So the margin has to grow ~2 points per year, slightly less than the ~2.5 points per year of 2020-2025 without one-offs. Most of it has to come from content amortization growing slower than revenue, and this is the part I trust least for 2027. In the first 9 months, cash spent on content increased 18.5% YoY, and content in production increased 18% since December, to $10.9B, after a flat 2025. Netflix amortizes over 90% of a title within 4 years after release, so this spending reaches the income statement in 2027-2028.

For me, the January guidance is the test. If the margin grows only ~1 point a year, to ~36.5% in 2031, EPS grows ~17% per year, and my model gives ~$68 at the 18x exit, about today’s price. If it stays flat at 31.5%, EPS grows ~13.5%, and the model gives ~$59. So a 2027 margin guide ~2 points above 2026 without one-offs is a pass, ~1 point is a warning, and no expansion breaks the thesis, especially if US growth slows once the March price increase is in both years, from Q2 2027. The other checkpoints are content amortization in the same guidance, the next US price increase and its effect on churn, the ad launches in March 2027, and the first annual engagement report.

Current Valuation

Current vs 5Y mean:
Price/Fwd Earnings: 18.1x vs 32.6x
Price/Fwd Sales: 4.8x vs 6.6x
Price/FCF: 23.5x vs 57.1x
Price/Book: 9.2x vs 12.1x
PEG: 0.85 vs 1.30
Forward Earnings Yield: 5.5% (NTM EPS)

On earnings, NFLX trades below its -1 standard deviation band. The forward P/E is 18.1x against a 24.3x band and a 32.6x mean. On 2027 consensus EPS, the P/E is 17.8x, a 5.6% earnings yield. The other multiples are low too, but not as extreme. P/S is 4.8x, between its mean (6.6x) and its -1 standard deviation band (4.2x); P/FCF is 23.5x against a 20.5x band, and P/B is 9.2x against a 12.1x mean. The FCF yield is 4.4% on Netflix’s 2026 forecast, which includes the fee, and ~4.0-4.3% on ~$11-12B without the fee and the Brazil deposit. To compare, on S&P Global data and the Oct 22 close, the competitors with meaningful earnings trade at 6.6-51.1x forward earnings, and XLC at 14.9x.

Analyst’s note:

I exported the Koyfin data on Oct 23, before the US market opened, so its valuation charts end on the Oct 21 close of $65.04. At the $67.05 anchor, the forward P/E is 18.7x and the PEG 0.88. The Bear Case multiple is 18x either way, so the fair prices do not change. The 5Y window starts in October 2021, when NFLX traded at ~55-60x forward earnings, so the 32.6x mean is inflated by a period when Netflix was valued as a subscriber growth story. I do not use it as the Base Case. The P/FCF mean (57.1x) is distorted too, since FCF was close to zero in 2021-2022. Also, the reported 2026 P/E (18.8x on $3.57) looks lower than it is, since the fee is part of that EPS. Without the fee, NFLX trades at 22.0x 2026 EPS.

The multiple fell more than the growth estimate. The 5Y EPS growth estimate decreased to 21.28%, against a 25.18% mean and close to its -1 standard deviation band (20.89%). The PEG ratio decreased more, to 0.85, against a 1.30 mean and below its -1 standard deviation band (1.03). Even at the mean growth estimate, today’s P/E would be a PEG of ~0.72.

What does $67 already assume? NFLX pays no dividend, so if its forward multiple does not change, the stock returns its EPS growth. At ~18-19x, my 12% required return needs ~12-13% EPS growth per year. If the multiple falls to 15x, as in mid-2022, Netflix needs ~17%. If it recovers to 24x, ~6-7% is enough. So the price assumes less growth than Netflix delivers this year without one-offs (~15%), and much less than the ~21% consensus. My model is stricter. It starts from 2026 EPS without the fee, where NFLX is at 22x, and exits at 18x, so its Bear Case needs ~16-17% growth to reach $67.

One chart frames this whole section. It shows the consensus forward EPS times my exit multiples (18x, 24x, and 30x) against the NFLX price. At $67, NFLX is just above the 18x line and 22% below the 24x line. The last time it was this close to 18x was in mid-2022.

Fair Price

My model grows EPS for 5 years at the consensus rate. Consensus can be too optimistic, and my model takes this into account by capping future growth at 20%. For Netflix, the cap matters. The 5Y estimate is 21.28%, and there is no dividend yield to add to it, so the model uses 20%. The starting point is $3.05 (2026 EPS without the fee), and in 2031 it becomes $7.59. In 2027 and 2028, my path ($3.66 and $4.39) is 2-3% below the consensus.

The discount rate is 12%; the margin of safety is 30%. The exit multiples are 18x, 24x, and 30x. 18x is today’s 18.1x forward P/E rounded down, so the Bear Case assumes that NFLX never gets a higher forward multiple, even if EPS grows 20% a year. My model applies it to 2031 EPS, and on 2026 EPS without the fee, NFLX is at 22x today, so this case also includes some derating. 24x is the -1 standard deviation band (24.3x), and in 2023-2025 it was roughly the floor of the NFLX forward P/E. 30x is a PEG of 1.5, the ceiling of my rules, and still below the 32.6x 5Y mean.

Bear Case (exit P/E 18x): fair price $78 - MoS price $54
Base Case (exit P/E 24x): fair price $103 - MoS price $72
Bull Case (exit P/E 30x): fair price $129 - MoS price $90

Analyst’s note:

These fair prices are lower than in February ($88/$110 at 20x/25x) and in the free NFLX entries of Watchlist #001 and Watchlist #002 ($117/$122/$152 at 23x/24x/30x). Against February, the difference is small: the starting EPS was $3.13 then, and the exit multiples were 1-2 points higher. Against the watchlist, there are two reasons. The watchlist model started from the 2026 consensus of $3.59, which includes the termination fee, and my starting EPS without it is 15% lower. Also, the Bear Case multiple is today’s 18x instead of the 23x of early September. The Base and Bull multiples did not change. The full analysis replaces the quick watchlist model.

At $67, NFLX is 14% below the Bear Case fair price and 35% below the Base Case. The accumulation zone is $54-78. The result depends most on growth. At 15% EPS growth per year, roughly the 2026 pace without one-offs, the fair prices are $63/$84/$104, and the Bear Case is 7% below today's price. At 10%, they are $50/$67/$84. Since the margin is the least certain input here, I see the zone in two parts. Between $63 and $78, my strict Bear Case needs more EPS growth than the ~15% in 2026 without one-offs to justify the price. Below $63 (the Bear Case at 15% growth), it does not. At $67, NFLX is in the upper part, so for me this is a zone to accumulate gradually, not one price.

Due Diligence

Profitability (10 of 15):

• Positive Gross Profit: $25.21B

• Positive Operating Income: $15.56B

• Positive Net Income: $14.77B

• Positive FCF: $11.38B

• Gross margin >= 40%: Yes (50.68%)

• Net margin >= 10%: Yes (29.69%; 25.24% without the fee)

• FCF margin >= 10%: Yes (22.87%)

• Management (ROIC, ROE, ROA) >= 10%: Yes (27.69%/53.46%/17.12%)

• Strong 3Y Revenue Growth: No (12.6% per year, 2022-2025)

• Revenue Growth Forecast: No (~12% per year in 2026-2027)

• ROE is increasing: ~38% at the start of 2022 -> 53.46%

• ROIC is increasing: ~16% at the start of 2022 -> 27.69%

• Revenue surprises in the last 5Y in a row: No (misses in Q1-Q2 2022, Q1-Q2 2023 and Q2 2026)

• EPS surprises in the last 5Y in a row: No (misses in Q4 2022, Q4 2023, Q3 2025 and, without the fee, Q1 2026)

• EPS growth YoY 5Y in a row: No (-11.5% in 2022)

Financial Strength (5 of 6):

• Total assets ($58.68B) exceed total liabilities ($29.40B) by 2.0x

• Negative Net Debt: No ($6.91B of net debt)

• Low Debt/Equity: 51.7% (5Y mean: 75.5%)

• Debt/Capital: 34.07% (5Y mean: 42.66%)

• Interest coverage (FFO): 14.4x (5Y mean: 8.6x)

• Piotroski F-Score: 7 of 9 (FY2025; not passed: operating cash flow > net income, higher current ratio)

Valuation and Advantage (2 of 4):

• Valuation < 5Y mean: Yes (P/E 18.7x at $67.05, below even its -1 SD band of 24.3x)

• Valuation < the industry: No (P/E 18.7x vs 14.9x for XLC; DIS and CMCSA are cheaper)

• Does it have a moat: Yes (narrow)

• Outperformed the S&P 500 over 5Y: No (1.87% vs 13.63% CAGR)

Shares (1 of 3):

• Insider ownership >= 5%: No (1.24%, including Reed Hastings, who has left the board)

• Fewer shares outstanding YoY: Yes (4,195M vs 4,340M diluted)

• Insider buys in the last 6M: No (only sales; ~90% of the value under pre-arranged 10b5-1 plans)

Price (4 of 4):

• 1Y price forecast > 10%: +36.3%

• Next 5Y EPS growth estimate (CAGR) > 10%: Yes (21.28%)

• DCF Value: ~$83 (base case: revenue growth 8.7% - below consensus, 8.4% discount rate); undervalued by ~19%

• Short Interest < 5%: Yes (2.0%)

Verdict

In my view, Netflix is a quality compounder that fits a long-term portfolio as a core holding, and NFLX is priced as if the compounding slows down. Netflix is the most profitable streaming service, with a 31% operating margin, ~$12B of FCF in 2026 (including the fee), low net debt, and buybacks of more than 4% of the market cap a year. NFLX trades at ~18x forward earnings, below the 24.3x low end of its usual 5Y range, and if the multiple holds, the price needs ~12-13% EPS growth per year, below the ~15% pace of 2026 without one-offs. Consensus expects ~21%. My model starts from $3.05 of EPS without the termination fee, caps growth at 20%, and gives fair prices of $78/$103/$129, so NFLX is inside the $54-78 accumulation zone and 35% below the Base Case. The realistic downside is a Netflix that grows by price and ads while viewing stays flat, with margin gains of ~1 point a year instead of 2 - then EPS grows ~15-17%, and my 18x Bear Case, which already includes some derating, gives $63-68, around today’s price. The thesis is not proven yet, since it depends on the margin and on the new content team, so this is a price to accumulate gradually inside the zone rather than all at once. The things to watch are the 2027 margin and content amortization guidance in January, the ad tier launches in March 2027, the first annual engagement report (Q1 2027), and the next US price increase, since most of the US growth is now price.

One-Pager

This is not a financial or investing recommendation. It is solely for educational purposes.

TL;DR: Long Treasuries just went through the worst period in the data: 2022 was the worst year for the 10Y Treasury since 1928, and the long-term Treasury fund VUSTX fell 46% from 2020 to 2023, the most since its start in 1986. EDV, the long-bond fund I hold, is ~58% below its March 2020 peak (distributions included). In September, the Fed raised rates for the first time since 2023, and in early October, the 10Y yield reached its highest level since 2002. I hold EDV for four reasons: rate cuts, a lower portfolio beta, protection when stocks fall, and a recession hedge. History supports only the last one, and only with a condition: in the 15 down years for US stocks since 1928 with inflation below 3%, Treasuries rose in 13, while in the 11 down years with higher inflation, they lost to inflation in 9. At the same time, the price is very different from 2020: the 30Y real yield is 3.16%, while before 2026, it was never above 2.75% since the Treasury started publishing it in 2010. In my view, long bonds have a place in my portfolio as a recession hedge with a good starting yield, not as a bet on Fed cuts, and the real question is the size of the position.

What happened to long bonds in 2026

Yields increased across the whole curve, and the short end increased too. Since Dec 31, the 10Y Treasury yield increased from 4.18% to 5.09%, and the 30Y from 4.84% to 5.43%. On Oct 05, the 10Y reached 5.31%, and on Oct 07, the 20Y reached 5.71%. In the Treasury's own data, both are the highest since 2002. By Oct 16, both had come down by more than 0.2 points. At the same time, the 3M T-bill increased from 3.67% to 4.26%, and the 2Y from 3.47% to 4.74%. The market is not pricing in rate cuts anymore. It is pricing in hikes.

The Fed raised rates on Sep 16, for the first time since 2023. The vote was 12-0, and the target range moved to 3.75-4.00%. The statement is short: “Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal.” According to CNBC, 16 of the 18 participants expected another hike this year, and the officials do not expect inflation at 2% before 2029. Before the next meeting on Oct 27-28, futures price in a more than 85% chance that the Fed holds, and the next hike is expected in December.

Inflation is the main reason. According to the minutes of the September meeting, Fed staff estimated that PCE inflation increased to 3.8% in August, and core PCE stayed at 3.4%. The staff attributed it mostly to past tariff increases, higher energy and input costs from geopolitical developments, and more expensive technology goods because of the AI buildout. The September CPI was hotter than expected: 3.7% YoY, up from 3.4% in August, and gasoline alone increased 9.1% in a month. Core CPI was 2.6%. Oil prices are the part that moves every day: Reuters connects the global bond selloff with the Iran war, energy costs, and government spending.

Investors also want more pay for lending for 30 years. The minutes list what the market pointed to besides the Fed: geopolitical developments, uncertainty about the Treasury’s buyback program, and competition for capital from heavy private debt issuance to finance AI infrastructure. All of it pushes up the term premium. The Treasury tried to help: in mid-August, Treasury Secretary Scott Bessent expanded the buyback program, but according to Bloomberg, it has had little sustained impact.

Worth noting what did not change: the inflation that the market expects over 30 years. The 30Y real yield (TIPS) increased from 2.62% to 3.16%, almost as much as the nominal yield. So the inflation priced in for the next 30 years moved only from 2.22% to 2.27%. The minutes say the same: longer-term inflation expectations remained stable. In other words, the market does not price a return of the 1970s. It prices a higher real price of money.

As a result, long bonds and stocks went in different directions. YTD, EDV is at -7.9% (including distributions), while the S&P 500 total return is +12.9% (Yahoo Finance, Oct 16).

What EDV is

EDV holds only the longest part of the Treasury market, and not even ordinary bonds. It holds 80 Treasury STRIPS: zero-coupon securities that pay nothing until maturity and then pay everything at once. The index is the Bloomberg US Treasury STRIPS 20-30 Year Equal Par Bond Index. As of Sep 30, the average duration was 23.9 years, the yield to maturity 5.8%, and the expense ratio 0.05% (Vanguard).

Analyst’s note:

For readers in Europe: EDV, TLT and SGOV are US-listed ETFs, and European brokers often do not offer them. I did not find a UCITS ETF that holds Treasury STRIPS, so EDV has no exact analog. The closest one is the iShares $ Treasury Bond 20+yr UCITS ETF: DTLA (accumulating, ISIN IE00BFM6TC58) or IDTL (distributing). It tracks the ICE US Treasury 20+ Year Bond Index, the same index as TLT, with a 0.07% expense ratio. Its duration is 14.82 years (Oct 16), against 23.9 years for EDV, so it moves ~40% less for the same change in yields. For SGOV, the analog is the iShares $ Treasury Bond 0-3 Month UCITS ETF (US03, ISIN IE000PBKBK34, 0.07%), which holds T-bills with a duration of less than 0.1 years.

Duration 24 means that EDV moves ~24% for every 1 percentage point of change in 20-30Y yields. The move is not symmetric because of convexity: by my model, an immediate increase of 1 point costs ~21%, and a decrease of 1 point brings ~27%. That is why EDV is more volatile than the stock market. Since 2008, the annualized volatility of its daily returns was 22.2%, against 19.8% for the S&P 500. Since 2021, it was 21.0% against 16.5% (Yahoo Finance, my calculation). Vanguard itself writes that the fund “is primarily intended for institutional investors with extremely long-term liabilities.”

The long-term result is weak. According to the fact sheet (PDF), as of Jun 30, EDV returned -3.69% per year over 10 years and +2.67% per year since its start in December 2007. To compare, from Jan 29, 2008 (the first price in Yahoo Finance) to Oct 16, 2026, EDV returned 2.0% per year, and the S&P 500 returned 11.8% per year.

The chart shows two different stories. Until 2020, EDV had deep but temporary drawdowns: the worst was -41% from December 2008 to April 2010, and EDV was back at its high by September 2011. Then, on Mar 09, 2020, EDV reached its all-time high on the day when the 30Y yield was 0.99%. From that day, it lost up to ~60% (Oct 07), distributions included, and on Oct 16, it was ~58% below the peak.

Why I hold it

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How this issue works

In Watchlist #001, I promised to recheck these zones in every monthly portfolio issue, starting with Portfolio #003. I did not do it in #003 - it covered only the portfolio. From now on, the two series are separate. Every portfolio issue rechecks the portfolio stocks, and every watchlist issue rechecks all watchlist names. The portfolio comes out at the start of each month, and the watchlist in the middle.

The method is the same as in #001: consensus EPS for 2026, grown for 5 years at the consensus growth rate plus the dividend yield (capped at 20% in total), multiplied by three exit P/E multiples and discounted at 12% a year. Fair price = the Base Case. Buy zone = the Bear Case fair price. The model sheets have a new design, in the same style as my other charts: the consensus, the inputs, the three cases, and the model path to 2031 in one image. All changes below are against the numbers in the #001 entries.

The screens are rerun each month too. A name leaves the list in only two cases: I buy it, or a quality test breaks. A name that drops out of a screen only because its price increased (the PEG and P/E tests) stays on the list.

Analyst’s note:

The exit multiples are the same as in #001. I do not lower the Bear Case multiple between reports. If I did, the buy zone would follow the price down and never be reached. The multiples get reset after the reports, together with the estimates.

NFLX

Next earnings: Oct 20 (confirmed)
Fair price: $122
Buy zone: up to $117
Curr Price/Fair Price: 0.59 (41% undervalued)
PEG: 0.98

Netflix (NFLX) is the largest paid streaming service in the world. Since Watchlist #001, the stock decreased 13.5%, from $82.73 to $71.57, the largest decrease on the list. At the same time, the consensus EPS for 2026 did not change at all ($3.59), and the 2027 and 2028 estimates moved by 1-2 cents.

So the decrease is the multiple, not the earnings. NFLX is at 20.7x forward earnings, further below its -1 standard deviation band (24.3x) and far below its 32.9x 5Y mean. The exit multiples stay at 23x/24x/30x, and the fair prices did not move: $117/$122/$152. At $71.57, the stock is 39% below the Bear Case fair price, the deepest discount on the list. PEG is 0.98.

What I watch: the Oct 20 report. The 5Y EPS estimate is 21.18%, just above my 20% cap, so the fair prices move only if it falls below 20% or if the 2026 EPS changes. My last full analysis of Netflix was in February, at $77. The updated one, on the Q3 numbers, comes on Oct 27, one week after the report.

Below are the other 9 entries. 5 of them are in their buy zones, and all 5 are cheaper than a month ago. One estimate increased 15% in a month without moving my fair price, and one buy zone may move a lot after the next report for a technical reason. At the end: what the screens found this month, and the whole list in one table.

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TL;DR: Micron (MU) is one of three companies that make most of the world's DRAM (the working memory of servers, PCs, and phones), and it sells high-bandwidth memory (HBM) for AI chips and solid-state drives (SSDs) for data centers. The Q4 FY2026 report was another record: revenue increased 379% YoY to $54.2B, and gross margin reached 87%. FY2026 net income of $85.0B is 1.85x Micron's combined net income of the previous 10 years. At the same time, the stock is at 6.2x FY2027 consensus earnings, since the market does not believe these margins will last. Management says this cycle is different, because 26 multi-year contracts now have floor prices. I see a better cycle, not the end of cycles - only ~26% of revenue through 2030 has a defined price. Verdict: a record business priced for a peak that lasts. My model holds FY2027 EPS flat for 5 years instead of growing it, and MU is far above my accumulation zone.

Investment Thesis

Micron reported Q4 FY2026 on Sep 30 with revenue, gross margin, and EPS above the top of its own guidance, and it guided another record for Q1 FY2027. In my July analysis, I decided not to buy MU at $879, since a 6x P/E on peak memory earnings is a trap. Since then, the stock is up 25%, and it is still at 6x forward earnings, because the EPS estimates increased almost as fast. Micron has also signed contracts that, as management says, change the economics of the industry. My idea here is to test that claim against 25 years of memory cycles.

• The upcycle is still getting stronger. Revenue increased 379% YoY to $54.23B, the sixth record quarter in a row, and non-GAAP EPS reached $33.42. Part of the jump is the calendar, since Q4 had 14 weeks. On a 13-week basis, revenue grew ~22% QoQ, and the Q1 FY2027 guidance of $61.5B is another ~22% above that.

• Analysts raise the estimates, and the market still pays 6x. Consensus expects FY2027 EPS of $176.69 (+134%) on revenue of $274.7B (+106%), and the EPS estimate increased 11% in the last 7 days and 18% in 90 days. At $1,097, MU trades at 6.2x that EPS, a 16.1% earnings yield. The PEG ratio of 0.03 means nothing here, since consensus itself expects EPS to stop growing in FY2029. The better question is what the price assumes. At a 12% required return and a 12x exit multiple, MU needs FY2032 EPS of ~$161, 9% below the FY2027 consensus.

• FY2026 was by far the best year in Micron’s history. The GAAP gross margin was 80.72%, net margin 63.80%, and FCF $59.0B after $30.7B of capex. LTM ROIC is 67.49% against a 13.26% 5Y mean. Micron has $68.3B of net cash, against $2.6B of net debt a year ago.

• The multiple is low, but it is always low at the top. MU trades at 6.2x forward earnings against a 17.7x 5Y mean, and the mean is distorted by 2023, when forward EPS was close to zero. My own 10Y history from SEC filings gives a better picture. The median trailing P/E at Micron’s reports was 14.6x, but at the two previous earnings peaks, it was 2.6x (December 2018) and 6.1x (July 2022). By then, the stock was already 45-50% below its high.

• The bear case: new cleanrooms from all three large producers start output in 2027-2028, customers already cut memory per system, and by TrendForce’s estimate, memory will take 68% of the capex of large cloud companies in 2027. My model takes this into account by holding FY2027 EPS flat for 5 years instead of growing it, and today’s 6x is the Bear Case exit multiple. With these inputs, the Bear Case fair price is $602, and MU trades 82% above it.

Company Overview

Next Earnings Date: Dec 16, 2026 (estimated)
Market Cap: $1.24T
Sector: Information Technology | Industry: Semiconductors
Type: Large Growth
Short Interest: 2.60%

Micron Technology was founded in 1978 in Boise, Idaho, and it is still headquartered there. It is the only US-based DRAM producer. Memory is the whole business: DRAM brought 73% of revenue in Q4 FY2026, NAND 26%, and NOR the rest. Sanjay Mehrotra has been CEO since 2017. Before that, he co-founded SanDisk and was its CEO from 2011 until its sale in 2016. Micron had ~53,000 employees at the end of FY2025.

The product range covers the whole memory hierarchy of a data center. DRAM: HBM stacks that are placed next to AI accelerators (HBM3E and HBM4), high-capacity DDR5 server modules, low-power LPDDR5X (including SOCAMM modules for servers), and graphics memory. NAND: data center SSDs, client SSDs for PC makers, and managed NAND for phones and cars. In December 2025, Micron decided to exit its Crucial consumer business, so that the supply goes to larger customers in faster-growing segments.

Micron reports four business units. The two data center units brought 63% of Q4 revenue, and the Core Data Center unit grew more than 11x in one year. At the same time, every unit has a gross margin of 83-90%, including phones, PCs, and cars, since prices increased in every market at once.

Micron makes the chips itself. According to its FY2025 10-K, wafers are produced in the US, Taiwan, Singapore, and Japan, and chips are assembled and tested in Taiwan, Singapore, Malaysia, China, and India. New fabs in Idaho, Japan, Singapore, and New York are under construction. Sales go mostly directly to large customers. In FY2025, the top 10 customers brought more than half of revenue, and ~80% of revenue was shipped to locations outside the US.

Market Overview

The memory market is set to grow ~4.6x in 2 years. In its June 2026 forecast, World Semiconductor Trade Statistics (WSTS) expects the memory market to grow from $230B in 2025 to $804B in 2026 (+250%) and $1,062B in 2027 (+32%). To compare, the market was $158B at the peak of the 2018 cycle. The same chart also shows what this market does after a peak: -33% in 2019, -16% in 2022, followed by -29% in 2023.

Most of the growth is price, not volume. In Q3 FY2026, Micron’s DRAM revenue increased 343% YoY. In its 10-Q, the company explains it by a “low-260% range” increase in average selling prices and a “low-20% range” increase in bit shipments. In Q4, DRAM prices increased again by a high-teens percentage QoQ, NAND prices by ~30%, while bit shipments grew by a mid-single-digit percentage and ~10%, in a quarter with one extra week. So the revenue growth depends on prices that continue to rise.

Micron’s margin history shows what happened after every previous price peak. GAAP gross margin reached 61.0% in FQ4 2018, then fell to 26.6% in 5 quarters. It reached 47.3% in FQ4 2021, then fell to -32.7% in FQ2 2023, when Micron sold chips below their cost. Today it is 86.8%, 25.8 points above the previous record.

The structure is an oligopoly. In Q2 2026, Samsung, SK hynix, and Micron had 87.6% of DRAM revenue, according to TrendForce. Micron's share was 23.3%, 1.6 points behind SK hynix. In HBM, Micron is the smallest of the three with 18%, down 3 points in one quarter, while Samsung, the first to ship HBM4, increased its share from 21% to 33% (Counterpoint Research data). The fourth DRAM producer is China's CXMT. Its revenue grew 716% YoY in Q2 2026, and Counterpoint expects it to use its recent IPO to expand capacity.

Supply is tight until 2028, and then new capacity arrives. Micron expects industry DRAM bit shipments to grow in the low-20s percentage range in 2027 and 2028, with the industry supply constrained in both years. TrendForce agrees for DRAM - new fabs ramp in the second half of 2027, and “substantial output contributions are not expected to materialize until 2028”. On NAND, the two disagree. Micron expects the NAND industry to stay supply constrained in 2027 and 2028. TrendForce expects NAND supply to become looser in the second half of 2027, with “downward pressure on prices”. NAND was 26% of Micron’s Q4 revenue.

The demand risk is the price itself. TrendForce estimates that DRAM and NAND will take 47% of the total capex of large cloud service providers (CSPs) in 2026 and 68% in 2027. Its suggestion is that CSPs may reduce memory capacity per system. This is already happening. CSPs and server makers reduced server DRAM capacities in the first half of 2026, and NVIDIA (NVDA) is evaluating lower HBM configurations for its next-generation Rubin Ultra. Micron also expects server units to grow in the high teens in 2026 and 2027, with “a modestly lower rate of content growth” per server. In my view, the market here is not limited by demand for AI, but by what customers are ready to pay for memory.

Economic Moat

Every LTM margin is a record. Gross margin is 80.72% (5Y mean: 33.35%), EBIT margin 74.59% (17.74%), net margin 63.80% (14.03%), and FCF margin 44.27% (2.21%). A year ago, non-GAAP gross margin for the full year was 40.9%. Nothing in Micron’s products changed this much in one year. The price of memory did.

Let’s see what protects these margins. Scale and technology are real barriers. Only three companies produce leading-edge DRAM at scale, and a new fab takes years and billions of dollars before it gives meaningful output. Micron’s 1-gamma DRAM and G9 NAND nodes are now its largest. HBM adds qualification - each stack is designed and tested together with the customer’s chip. Micron ships HBM4 designed for NVIDIA Vera Rubin and is working with NVIDIA on a custom HBM4E. Once a product is qualified, it is hard to replace within that GPU generation.

The weak point is that the product is still interchangeable. DRAM follows industry standards, so a DDR5 module from Micron and one from Samsung do the same job, and price decides who sells. Pricing power appears in shortages and disappears in gluts. The 10-year record shows it. From FY2016 to FY2025, Micron spent $91.4B on capex and earned $46.0B of net income, so it invested ~2x what it earned. In FY2023, it lost $5.8B.

The new element is the contracts. Strategic customer agreements (SCAs) are take-or-pay contracts with committed volumes, and most of them have a floor price. Management says that even at floor prices, gross margins will be “well above our peak quarterly margins in any past cycle”. If that is true, the next downturn should be much smaller than the last ones. As I see it, this can make Micron’s cycle shallower, but it is not a moat yet - the contracts are less than a year old and have never been tested in a downturn.

Returns on capital tell the same story. ROIC is 67.49% (5Y mean: 13.26%), ROE 88.26% (15.85%), and ROA 44.56% (8.36%). The 5Y means include the boom of 2026 and are still far below today's levels. In my view, Micron has no durable moat - it has an excellent position in an oligopoly, but its excess returns appear only at the top of each cycle.

Business Strategy

Contracts before the next downturn. Micron has signed 26 SCAs and estimates them at more than 35% of its revenue through 2030. Three-quarters of this revenue has a defined pricing framework, mostly a floor and a ceiling, and one-quarter is negotiated at market prices. Customers committed $32B, mostly as cash deposits, and $12.7B of deposits are already on the balance sheet. Remaining performance obligations (RPO) increased from ~$5B at the end of May to ~$150B. As management explained on the earnings call, RPO counts only committed volumes at minimum prices, so it is a floor, not a forecast.

Here, I would like to put these numbers in proportion. 35% of revenue times three-quarters is ~26% of revenue through 2030 at a defined price. The other ~74% is sold at market prices. And $150B of RPO spread over the contracts until 2030-2031 is ~$29-35B a year, or 10-13% of the FY2027 consensus revenue. There is also a cost. The largest agreements have a ceiling price close to the market price in calendar Q2 2026. Counterpoint notes that SK hynix signed long-term agreements earlier than its competitors and lost DRAM share in a rising market, partly because its prices were fixed below current levels. The contracts protect the floor, and they also limit the upside.

HBM: price up, share down. Micron's HBM revenue grew faster than total revenue in Q4. The company has agreed on the vast majority of its calendar 2027 HBM supply "with significant price increases" and expects HBM demand to grow faster than conventional DRAM through 2028. At the same time, its HBM share decreased to 18% in Q2 2026, while Samsung reached 33%. In my view, Micron chooses margin over share in HBM for now.

Storage for AI inference. Data center SSD revenue was nearly $10B in Q4, more than 10x the year-ago quarter and over two-thirds of NAND revenue. AI models now keep part of their working data (the KV cache) on fast SSDs, and Micron expects its fifth year in a row of record share in data center SSDs. It is also NAND, the product where TrendForce expects prices to weaken first.

Cleanrooms first, equipment later. Net capex was $27.4B in FY2026, 20.5% of revenue against 36.9% in FY2025. For FY2027, Micron guides ~$25B for the first half alone and more in the second half, so the full year will likely be above $50B. Most of the increase is construction. ID1 in Idaho starts wafer output in mid-2027, the Tongluo facility in Taiwan ships meaningful volumes in mid-2027, ID2 and the Japan expansion start in late 2028, the Singapore NAND fab in the second half of 2028, and the first New York fab in 2030. Management promises to add equipment "appropriately with our demand and the market environment". In my view, this is the right approach, and it is also exactly the supply that will decide the next downturn, since Samsung and SK hynix build at the same time.

A new structure under the CEO. In August, Manish Bhatia became President and COO, with responsibility for the operating P&L, capital investment, and pricing. Scott DeBoer became President and Chief Technology and Products Officer, and the Chief Business Officer moved to an advisory role. Sanjay Mehrotra stays as Chairman and CEO.

Capital Allocation

Net debt of $2.6B became net cash of $68.3B in one year. Cash and investments reached $73.5B, including $30.0B of long-term marketable investments, and debt decreased from $14.6B to $5.2B, as Micron prepaid most of its notes. All three rating agencies now rate it BBB+ or equivalent. Worth noting that $12.7B of the cash is customer deposits, which Micron returns in the second half of each contract. Without them, net cash is $55.6B, still ~4.5% of the market cap.

Debt/Equity is 3.7% and Debt/Capital 3.61%, against 23.6% and 18.63% 5Y means. Interest expense was $106M in FY2026 against $99.3B of GAAP operating income, and funds from operations (FFO) cover interest 846x.

FCF reached $59.0B in FY2026, 44.27% margin, after $30.7B of gross capex. In Q4 alone, adjusted FCF was $33.2B. The CFO expects Q1 FY2027 FCF to be "significantly higher" than that, even with ~$11.5B of capex. Customer deposits ($12.3B in Q4) are reported as financing cash flow, so they are not part of FCF.

Almost none of this cash was returned yet. In FY2026, Micron bought back 2.5M shares for $650M and paid $610M of dividends, together 2% of adjusted FCF. The diluted share count increased 1.6%, and the buyback yield is 0.14% against a 1.32% 5Y mean. The reason is the CHIPS Act. Under its funding agreements from December 2024 (up to $6.1B of grants, later $6.4B with Virginia), buybacks in the first two years were limited mostly to offsetting dilution. From Dec 09, 2026, Micron plans to increase capital returns and, "over time," to return 100% of excess cash. Only $2.2B remains under the current authorization, and the CFO said the company will seek more. The dividend is $0.15 per quarter, a 0.05% yield.

The shareholder yield is even slightly negative, -0.03%. The reason is the -0.22% debt paydown yield, which is equal to $12.7B of customer deposits minus $10.0B of debt repayments in FY2026.

In my view, the coming buybacks are the most important capital allocation decision in Micron’s history. Since repurchases started in FY2019, Micron never spent more than $2.66B on them in one year. Now it can spend tens of billions per quarter. At 9.0x book value, every dollar of buybacks is a bet that peak earnings last. The other options are limited - the same CHIPS agreements restrict special dividends until December 2029. So a slower buyback pace and more cash are the cautious choice.

SBC was $1.33B, only 1.0% of revenue against a 2.5% 5Y mean. Costs are a different matter. Micron raised FY2026 incentive compensation for every employee and contributed $300M to community investments, so non-GAAP opex increased by $1.05B QoQ. For FY2027, it expects opex to increase another ~$2.5B (+37%), mostly R&D and incentive compensation, and ~$1B of higher costs will reduce the Q1 gross margin. In a downturn, part of these costs disappears with the bonuses, but R&D does not.

In my view, the capital allocation has been disciplined so far: debt was repaid, cash was built, and capex grew slower than revenue. The real test starts on Dec 09, when Micron decides how much of the peak cash flow to spend on its own stock at a peak price.

Advantages

• Record economics with net cash. 87% gross margin in Q4, $59.0B of FCF in FY2026, and $68.3B of net cash. Even a deep downturn would not threaten the balance sheet.

• Contracts that change the next downturn. 26 take-or-pay agreements with $32B of customer commitments and floor prices that, as Micron says, still give margins above any previous peak. A year ago, Micron’s remaining performance obligations were “not material”.

• The data center mix. 63% of Q4 revenue came from the two data center units, and data center SSDs reached nearly $10B a quarter. AI servers are the part of demand that still grows in units, while Micron expects PC and phone units to decline, potentially by double digits, this year.

• US supply. Micron is the only large DRAM producer with DRAM fabs in the US, supported by up to $6.4B of CHIPS Act grants and a 35% investment tax credit. Management lists “DRAM made in the U.S.” among its differentiation opportunities.

• A huge earnings yield if the peak lasts. At 6.2x FY2027 consensus EPS, the earnings yield is 16.1%. Mizuho expects FY2027 FCF above $140B, ~11% of the market cap, and from December, Micron can return much more of it to shareholders.

Disadvantages

• No proof of returns through a full cycle. From FY2016 to FY2025, capex was ~2x net income. The GAAP gross margin was negative for four quarters in a row in 2023, and GAAP EPS fell 79% from FY2018 to FY2020.

• Supply is coming from everyone at once. Micron’s FY2027 capex will likely be above $50B, and TrendForce notes that all major DRAM suppliers have started expansion plans. It expects new DRAM output to become substantial in 2028 and NAND supply to become looser already in the second half of 2027.

• Customers push back. By TrendForce’s estimate, memory will take 68% of large cloud companies’ capex in 2027; some of them already have negative FCF, and NVIDIA is evaluating less HBM per chip. Prices that are this high encourage customers to use less memory.

• Lower share in HBM. Micron’s HBM share decreased from 21% to 18% in one quarter, while Samsung’s increased from 21% to 33%. In HBM, the most expensive memory product, Micron is third.

• A peak valuation on book value. MU trades at 9.0x book value against a 3.3x 5Y mean. This summer, it fell 39% in 34 days, from $1,213.56 to $739.00, without any decline in earnings. The CEO sold shares every month from May to August, other executives sold too, and there were no insider buys.

What the bears get right: this upcycle is driven by price, and the price increases are slowing. Management itself expects "a more moderate rate of price increases" after Q1, and TrendForce expects conventional DRAM contract price growth to slow to 13-18% QoQ in Q3. In the last two cycles, the stock peaked before earnings: in 2018, MU peaked in May, three months before the quarter with the record gross margin ended, and in 2022, it peaked in January, before the record revenue quarter that ended in June. If FY2032 EPS ends up 50% below the FY2027 consensus, my model gives $301 at 6x and $602 even at 12x. As I see it, the main risk is not that AI demand disappears, but that supply catches up in 2028 while the price is still set for peak earnings. A small position is the only protection I see against being wrong in either direction.

Competitors

I compare Micron with 4 listed memory competitors. Samsung Electronics (SSNLF) is the DRAM leader with 39.4%, and it also sells phones, TVs, and foundry services. SK hynix (SKHY) is the HBM leader with 50%. Sandisk (SNDK) and Kioxia (KXIAY) are NAND companies, so they compete only with Micron’s storage business. CXMT is the fastest-growing DRAM producer, but I treat it as a risk for the others, not as an investment alternative.

The market prices the whole group as if the peak is near. The forward P/E is 4.3x for SSNLF and KXIAY, 4.5x for SKHY, 6.2x for MU, and 8.4x for SNDK, against ~21.7x for the iShares Semiconductor ETF (SOXX). Every PEG ratio in the group is 0.21 or lower. In other words, the market applies the same rule to all memory producers - these earnings are not normal. Within the group, MU is the second most expensive on P/E and P/S, after SNDK.

On gross margin and ROIC, Micron is the best of the three DRAM producers. Its LTM gross margin is 80.72% against 76.27% for SK hynix and 57.48% for Samsung, and its ROIC is 67.49% against 35.76% and 25.41%. Only on FCF margin is SK hynix ahead, at 48.47% against 44.27%. Samsung’s numbers include phones and foundry, so they understate its memory business. Its chip division earned KRW 89.2T of operating profit on KRW 127.5T of revenue in Q2 2026, a 70% margin, and this division also includes foundry and chip design. SK hynix reported a 76% operating margin for Q2 2026 and ~10 long-term agreements with key customers. Its net margin is above its EBITDA margin only because of large non-operating gains. Sandisk leads the group in ROIC (72.75%) and in FCF margin (56.77%).

SK hynix is the next-best alternative, as I see it. The HBM leader with a slightly lower gross margin, and SKHY trades at 4.5x forward earnings against 6.2x for MU. Micron’s advantages over it are higher ROIC, US fabs, and a US primary listing. At the same time, SK hynix signed its long-term agreements earlier, and as Counterpoint notes, part of its prices were fixed below current levels. Micron’s disadvantage is its third place in HBM. None of the five escapes the price cycle, so the choice between them is less important than the decision to own memory at this point of the cycle.

Past

Q4 FY2026 (ended September 3, 14 weeks, all USD, YoY):

• Revenue +379% to $54.23B (+345% on a 13-week basis); +31% QoQ

• DRAM +343% to $39.77B; NAND +526% to $14.10B

• Non-GAAP gross margin 87.0% against 45.7% a year ago; operating margin 82.3%

• Non-GAAP EPS $33.42 against $3.03 a year ago; GAAP EPS $32.87

• Operating cash flow $43.97B, adjusted FCF $33.20B, customer deposits received $12.3B

• FY2026: revenue $133.19B (+256%), non-GAAP EPS $75.52 (+811%), GAAP net income $84.97B, LTM ROIC 67.49%

Why did MU barely move after such a report? Revenue was 8.5% above the midpoint of the company’s own guidance and ~7% above consensus, and EPS was 5-7% above consensus, depending on the source. The Q1 revenue guidance was ~9% above consensus, and EPS guidance 6-9% above. At the same time, MU fell 0.8% after hours (to $1,056.75), and on Oct 01, it closed only 3.0% higher (at $1,097.39). The reasons, ranked by importance:

• It was already in the price. MU rose 15% in the two weeks before the report, from $926.55 on Sep 16 to $1,065.11.

• Capex. ~$25B in the first half of FY2027 alone, and more in the second half. This is the supply that the bears wait for.

• Costs. ~$1B of higher costs in Q1 (incentive compensation and startup costs), and +$2.5B of opex in FY2027. As a result, the Q1 gross margin guidance of ~86.25% is below Q4’s 87.0%.

• Slower price increases. Management expects “a more moderate rate of price increases” after Q1.

• The extra week. On a 13-week basis, Q4 revenue grew ~22% QoQ, not 31%.

At the same time, nothing in the report was weak. In my view, the reaction makes sense. The market no longer pays for beats in the current quarter. It pays for how long the cycle lasts, and the report did not change that question.

The longer history is a history of cycles. GAAP EPS was $11.51 in FY2018, $2.37 in FY2020, $7.75 in FY2022, -$5.34 in FY2023, and $74.33 in FY2026. FY2026 net income was 6.0x the previous record from FY2018. The stock followed the same pattern - in each memory downturn since 2000, MU fell ~50% or more from peak to low, and in two of them, ~90%.

Worth noting the last two rows. In 2024-2025 and again this summer, MU fell 58% and 39% while the gross margin kept rising. The stock trades on fear of the next downturn, not only on the downturn itself.

At the same time, the long-term result is excellent. With dividends, MU returned 73.64% a year over 5 years, while the S&P 500 (VOO) returned 13.80%. Over 10 years, it is 51.35% a year against 15.31%. MU is up 285% this year alone.

Future

• Consensus revenue: FY2027 $274.71B (+106.26%), FY2028 $313.35B (+14.07%), FY2029 $317.34B (+1.27%)

• Consensus EPS: $176.69 -> $205.30 -> $204.29 (FY2027-FY2029), so consensus itself expects EPS to stop growing in FY2029

• Revisions: FY2027 EPS +10.7% in 7 days and +17.8% in 90 days (from $150.01), FY2028 EPS +14.5% in 7 days, according to Yahoo Finance data

• 5Y forward EPS growth estimate: 192.00% (5Y mean: 9.82%); from FY2027 to FY2029, consensus EPS grows only ~7.5% a year, so the 5Y number is not useful here, and Micron’s own history has no stable growth rate to compare with (GAAP EPS was negative in FY2023 and grew 879% in FY2026)

• Analysts: 9 Strong Buy, 36 Buy, 3 Hold, 0 Sell, 1 Strong Sell (49 analysts); average target $1,520.02, 38.51% from here (the range is $361-2,200)

• Company guidance: Q1 FY2027 revenue $61.5B ± $1.5B, gross margin ~86.25%, opex ~$2.06B, EPS $38.15 ± $1.00; FY2027 another record with sequential revenue growth each quarter, Q1 as the floor for the gross margin, opex +$2.5B, tax rate ~15.5%

The estimates go up faster than the targets. In July, the average target was $1,489.57. It increased only 2% since then, while the stock increased 25% and the FY2027 EPS estimate increased ~18%. In my view, analysts accept higher earnings, but not a higher multiple for them.

What has to happen for the thesis to work. FY2027 consensus EPS of $176.69 means ~$46 per quarter after the Q1 guidance of $38.15. That is ~21% above the Q1 level on average, or ~10% QoQ growth in each of the next three quarters. Management guides sequential revenue growth in every quarter of FY2027, so FY2027 looks realistic to me, but no longer conservative. The real question is FY2029-FY2032. For today’s price to make sense in my model, three things have to hold: DRAM prices stay high after new cleanrooms start output in 2028, the SCA floors work as management describes (contracted volumes keep margins above the old 61% record in the next downturn), and Micron spends the coming buybacks at prices that do not destroy value. The next checkpoints are capital returns from Dec 09, the Q1 FY2027 report in December, and the 2027 capex plans of Samsung and SK hynix in January.

Current Valuation

Current vs 5Y mean:
Price/Fwd Earnings: 6.2x vs 17.7x
Price/Fwd Sales: 4.5x vs 3.5x
Price/FCF: 21.0x vs 73.6x
Price/Book: 9.0x vs 3.3x
PEG: 0.03 vs 1.06
Forward Earnings Yield: 16.1%

On earnings, MU is cheap. On sales and book value, it is expensive. The forward P/E of 6.2x is far below the 17.7x mean. At the same time, P/S is 4.5x, at its +1 standard deviation (SD) band and above the 3.5x mean, and P/B is 9.0x against a 3.3x mean and a 6.3x +1 SD band. To compare, memory competitors trade at 4.3-8.4x forward earnings, and SOXX at ~21.7x. For a company whose earnings move with prices, I trust sales and book multiples more at the top of a cycle, since they do not include a peak margin.

Analyst’s note:

The 5Y mean P/E includes 2023, when forward EPS was close to zero and the P/E reached ~400x, so even the -1 SD band is negative (-9.3x). For this reason, I do not use the mean anywhere in my model. Instead, I calculated MU’s trailing P/E at each earnings report over the last 10Y from SEC filings and daily closes. The median is 14.6x, excluding 6 quarters with losses and 3 with near-zero earnings. The P/FCF mean of 73.6x is distorted in the same way, since FCF was close to zero or negative in 2023-2024. Koyfin’s forward P/E uses the next 12 months, which are almost entirely FY2027. On FY2026 non-GAAP EPS, the P/E is 14.5x.

The PEG ratio says nothing here. The 5Y EPS growth estimate is 192.00% against a 9.82% mean, so the PEG of 0.03 is the result of an extreme growth number, not a sign that the stock is cheap.

What does the price already assume? I start from the FY2027 consensus EPS and require 12% a year. Then MU needs ~13% annual EPS growth for 5 years if the multiple stays at 6x. At a 9x exit, ~4% a year is enough. At 12x, EPS can even decline slightly - FY2032 EPS of ~$161 is enough. So the price does not assume more growth. It assumes that the FY2027 level of earnings, 2.3x FY2026, is roughly where Micron stays.

One chart frames this whole section. It compares the price with three lines: consensus forward EPS times 6x, 9x, and 12x. MU is just above the 6x line ($1,060), while 9x would mean $1,590 and 12x $2,120. In 2023, all three lines were below zero. Worth noting that the corridor applies the multiples to today’s forward EPS without discounting, so its lines are higher than my fair prices.

Fair Price

My model normally projects consensus EPS 5 years forward, with future growth capped at 20% per year. For Micron, I do not grow it at all. Starting EPS is the FY2027 consensus of $176.69, the growth rate is 0%, and EPS in FY2032 is also $176.69. The 20% cap is a ceiling, not a target, and at the top of a memory cycle, even flat earnings are an optimistic assumption.

Analyst’s note:

With the usual approach (FY2027 EPS growing at the 20% cap), FY2032 EPS would be $440, and even a 6x exit would give a fair price of $1,497. That is exactly the trap I described in July - the model would call MU cheap at the peak. In July, I used book value for the zone ($180-270, at 2-3x book). Book value per share has increased 37% since then, to $122, and from now on I prefer an earnings model with flat EPS, since it shows directly what the price assumes about the peak.

The discount rate is 12%; the margin of safety is 30%. The exit multiples are 6x, 9x, and 12x, and since my model applies them to peak earnings, they have to be peak multiples. 6x is today’s 6.2x rounded down, and it is also MU’s trailing P/E at the last earnings peak (6.1x in July 2022). In 2018, the multiple at the earnings peak went down to 2.6x, so 6x is not the worst case. 12x is still below the 10Y median trailing P/E of 14.6x. The median includes the recovery years, when the P/E was high because earnings were low, while my model applies the multiple to peak earnings. 9x is in the middle - a market that believes the SCAs only partly. Worth noting that the 30% margin of safety has a simple meaning here - the Bear Case MoS price equals the Bear Case fair price if FY2032 EPS is 30% below the FY2027 consensus.

Bear Case (exit P/E 6x): fair price $602 - MoS price $421
Base Case (exit P/E 9x): fair price $902 - MoS price $632
Bull Case (exit P/E 12x): fair price $1,203 - MoS price $842

At $1,097, MU is 82% above the Bear Case fair price, 22% above the Base Case, and 9% below the Bull Case. The accumulation zone is $421-602, and MU last closed inside it on May 04, 2026, five months ago. The result depends most on the level of earnings after the peak. If FY2032 EPS is 30% below the FY2027 consensus, the fair prices decrease to $421/$632/$842. If Micron grows EPS 5% a year from that peak, they increase to $768/$1,152/$1,535, and MU would be 5% below the Base Case. Worth noting that the Bull Case of $1,203 is 21% below the average street target of $1,520. The street applies higher multiples to the peak earnings, and my model does not.

Due Diligence

Profitability (12 of 15):

• Positive Gross Profit: $107.50B

• Positive Operating Income: $99.34B

• Positive Net Income: $84.97B

• Positive FCF: $58.96B

• Gross margin >= 40%: Yes (80.72%)

• Net margin >= 10%: Yes (63.80%)

• FCF margin >= 10%: Yes (44.27%)

• Management (ROIC, ROE, ROA) >= 10%: Yes (67.49%, 88.26%, 44.56%)

• Strong 3Y Revenue Growth: Yes (~105% per year, from the FY2023 low)

• Revenue Growth Forecast: Yes (~34% per year to FY2029)

• ROE is increasing: negative in FY2023 -> 88.26%

• ROIC is increasing: negative in FY2023 -> 67.49%

• Revenue surprises in the last 5Y in a row: No (a miss in Q1 FY2023)

• EPS surprises in the last 5Y in a row: No (a miss in Q1 FY2023)

• EPS growth YoY 5Y in a row: No (a GAAP loss in FY2023)

Financial Strength (6 of 6):

• Total assets ($195.89B) exceed total liabilities ($57.51B) by 3.41x

• Negative Net Debt: Yes ($68.27B of net cash)

• Low Debt/Equity: 3.7% (5Y mean: 23.6%)

• Debt/Capital: 3.61% (5Y mean: 18.63%)

• Interest coverage (FFO): 846.0x (5Y mean: 89.8x)

• Piotroski F-Score: 8 of 9 (not passed: more diluted shares YoY)

Valuation and Advantage (1 of 4):

• Valuation < 5Y mean: No (P/S 4.5x vs 3.5x and P/B 9.0x vs 3.3x; the P/E and P/FCF means are distorted by the 2023 downturn)

• Valuation < the industry: No (6.2x forward P/E vs 4.3-8.4x for memory competitors; SOXX ~21.7x)

• Does it have a moat: No (an oligopoly, but no excess returns through the cycle)

• Outperformed the S&P 500 over 5Y: Yes (73.64% vs 13.80% CAGR)

Shares (0 of 3):

• Insider ownership >= 5%: No (0.24%)

• Fewer shares outstanding YoY: No (1,143M vs 1,125M diluted)

• Insider buys in the last 6M: No (only sales, including monthly sales by the CEO)

Price (3 of 4):

• 1Y price forecast > 10%: +38.51%

• Next 5Y EPS growth estimate (CAGR) > 10%: Yes (192.00%)

• DCF Value: ~$475 (base case: revenue growth -0.7%, net margin from 66.7% to 33.7%, 10.5% discount rate); overvalued by ~56%

• Short Interest < 5%: Yes (2.60%)

Verdict

MU is not a buy for me at this price, and if it belongs in a long-term portfolio, then as a small cyclical position, not as a core holding. Micron is one of three producers that matter in DRAM. FY2026 was the best year in its history: 81% gross margin, $59.0B of FCF, and $68.3B of net cash. MU trades at 6.2x FY2027 consensus earnings, which looks cheap, but at 9.0x book value and at a price that is fair only if FY2027 earnings last for 5 years. The SCAs make the next downturn smaller, but they cover only ~26% of revenue with a defined price and cap the upside of the largest contracts. My model holds FY2027 EPS flat, uses exit multiples of 6x/9x/12x, and gives fair prices of $602-1,203 with an accumulation zone of $421-602. At $1,097, MU is 22% above the Base Case and far above the zone. As I see it, the realistic bear case is not a collapse of AI demand but a normal memory downturn after new supply arrives in 2028, with earnings falling by half and the stock falling before them. Watch DRAM contract prices, the size and price of the buybacks from Dec 09, and the 2027 capex plans of Samsung and SK hynix, and judge the thesis on gross margin in the first quarter with falling prices, not on the record quarters.

One-Pager

This is not a financial or investing recommendation. It is solely for educational purposes.

The track record

In September, the portfolio lost 4.62%, while the S&P 500 added 0.36%. YTD, it is at -0.90% against +12.47%. Since December 2021, the portfolio is up 88.83% against 66.63% for the S&P 500, or 14.09% a year against 11.17%.

The YTD gap is ~13 points, and it has two sources. A third of the portfolio is in Treasuries: YTD, SGOV returned ~3%, and EDV lost ~12%. At the same time, FSLR and ADBE both lost ~32% YTD, and V, my largest position, gained only ~4%.

One comparison changed this month. QQQ is now ahead since inception: +93.34% against my +88.83%, or 14.65% a year against 14.09%. In #002, the portfolio was ahead of all four benchmarks. It is still ahead of the S&P 500, VUG (12.64% a year), and SPYG (13.06%). The Sharpe ratio decreased to 0.82 from 0.90; beta (0.95) and the maximum drawdown (-19%, 123 days) did not change.

As promised in #002, the final August number is now in the table: +1.62% against +2.54% for the S&P 500. It is lower than the +2.50% I published because that number did not include Aug 31.

Analyst’s note:

The “1M” column in the benchmark table is the trailing month from the day of the screenshot, not the calendar month. The calendar September is in the monthly table: -4.62% against +0.36%.

Analyst’s note:

All numbers in this issue are as of September 30, 2026, taken during the US trading session (around midday in New York), not after the close. The final September figure, with the full last day, will appear in the monthly table of #004.

Read more

TL;DR: Credo (CRDO) sells the connections inside AI clusters: active electrical cables (AECs), optical transceivers and the chips inside them, and retimers. The Q1 FY2027 report was another beat, and the company raised its full-year growth outlook to more than 85%. At the same time, the stock fell 20% the next day and is now 32% below its mid-August price. I see smaller beats, not a weaker business. The rest of the year depends on a new optical business, and stock-based compensation (SBC) is close to 20% of revenue in the Q2 guidance. Verdict: a very profitable company priced as if its growth were temporary. CRDO trades at 24x forward earnings for 50% consensus EPS growth, and the price is above the zone of my model; my full fair price math and the accumulation zone are at the end of this post.

Investment Thesis

Credo reported Q1 FY2027 on Sep 01 with record revenue, a higher full-year growth outlook, and record non-GAAP EPS of $1.20. CRDO fell 20% the next day and 27% in 2 weeks. It is now 42% below its June high, while consensus EPS for the next 12 months is at a record. My idea here is to check whether the report changed the long-term economics of the company or only the shape of this year.

• Growth is still very high, but the beats became small. Revenue increased 115% YoY to $479.0M, the seventh quarter in a row of triple-digit growth. In the three quarters before Q4 FY2026, Credo beat the top of its own revenue guidance by 12-18%. In the last two quarters, the beat was below 1%.

• The market prices in a much weaker future than analysts expect. The consensus 5Y EPS growth estimate is 50.0%, and CRDO trades at 24.1x forward earnings, a PEG ratio of 0.48. At a 12% required return and a 22x exit multiple, today’s price needs only ~17% annual EPS growth.

• The business is already very profitable. LTM gross margin is 67.07%, net margin 33.83%, and ROIC 20.8%. FCF over the last 12 months is $439M. Credo has no borrowings and $764M of cash and short-term investments.

• The multiple is near the bottom of its range. CRDO trades at 24.1x forward earnings, 47% above its 16.4x -1 standard deviation band. The 88.5x mean since the IPO comes from the loss-making years, so I do not use it. And this despite the fact that analysts expect record EPS for the next 12 months.

• The bear case: two customers bring 71% of revenue, the second half depends on optical products that have just started to ship, SBC is ~20% of revenue in the Q2 guidance, and the diluted share count increased 5% in 1 year. My model takes this into account by capping future growth at 20%, far below consensus, and by using the 17x -1 standard deviation band as the Bear Case exit. With these limits, the price of $176 is 16% above my Bear Case fair price ($151) and 10% below the Base Case ($196).

Analyst’s note:

EPS in this post is non-GAAP, since the estimates are built on it. The difference is large. In Q1, GAAP EPS was $0.67 against $1.20 non-GAAP, mostly because of SBC, acquisition costs, and the amortization of acquired intangibles. The 71% is the share of the two largest contracting customers in the 10-Q. By end customer, the top four brought 84% of revenue.

Company Overview

Next Earnings Date: Dec 02, 2026 (estimated)
Market Cap: $33.06B
Sector: Information Technology | Industry: Semiconductors
Type: Large Growth
Short Interest: 3.3%

Credo Technology Group was founded in 2008 in San Jose, California, and it is incorporated in the Cayman Islands. It started with serializer/deserializer (SerDes) technology - the circuits that move data between chips at high speed. Its engineers began to work on active electrical cables in 2017, and production of the first HiWire AECs started in 2019. An AEC is a copper cable with Credo chips at both ends, which clean and boost the signal. Credo created this product category, and AECs are still its largest business. The IPO was in January 2022 at $10 per share. Bill Brennan has been CEO for 13 years, and the two founders, Lawrence Cheng (CTO) and Job Lam (COO), are still in management and on the board.

The product range has four groups. AECs connect GPUs and servers with the first switch at distances of up to 7 meters. The optical business includes digital signal processors (DSPs) for optical transceivers, silicon photonics photonic integrated circuits (PICs) from the DustPhotonics acquisition, and ZeroFlap optical transceivers that Credo builds itself. Retimers (Screaming Eagle, Blue Heron, and Toucan) keep the signal clean inside servers and in scale-up networks. The rest is SerDes IP licensing and chiplets. Most products work with PILOT, Credo’s diagnostics software. The company is fabless - TSMC (TSM) makes its chips, and Amkor (AMKR) and ASE (ASX) package and test them. 616 of its 807 employees are engineers, according to the 10-K.

Credo sells to hyperscalers and neoclouds directly and through cable and optical module makers. By shipment destination (Q1 10-Q), 53% of Q1 revenue went to the US, 19% to Hong Kong, and 16% to Malaysia. Mainland China decreased from 23% of revenue a year ago to 0.2%.

Market Overview

The optical market is growing faster than almost any other part of the data center. According to LightCounting (January 2026), sales of Ethernet optical transceivers and co-packaged optics (CPO) for AI clusters reached $16.5B in 2025 and should reach $26B in 2026, +60% in both years. In April 2026, it forecast 65% growth for all Ethernet transceivers in 2026, after +93% in 2024. In March 2026, it wrote that there is “a reasonable chance” for AI cluster optics to reach $100B per year by 2030. To compare, Credo’s optical target of more than $600M for FY2027 is less than 3% of the 2026 market.

Copper still makes most of the connections, and AECs extend its reach. According to Brennan, copper is still more than 95% of the connections in a data center, the same share as 12 years ago. AECs cover the short end of the pluggable market, up to 7 meters. According to Brennan, the only switch between the two media so far went the other way - copper replaced optics at lengths of up to 7 meters, first of all because it is more reliable, and also because it uses less power. Credo does not report AEC revenue separately, but management says it more than doubled in FY2025 and more than tripled in FY2026. I did not find a reliable, recent third-party estimate of the AEC market. The published ones are far below Credo’s own AEC sales (AECs brought over $230M of extra revenue in Q1 alone), so I do not use them.

The buyers are few. LightCounting estimates that four cloud companies are responsible for more than 50% of AI spending on optical transceivers: Amazon (AMZN), Google (GOOGL), Meta (META), and Microsoft (MSFT). In its January report, it also expects optics to be 3.1% of the capex of the top 5 cloud companies in 2026, up from 2.7% in 2025. Credo has the same structure on a smaller scale, with two customers at 71% of revenue.

The risk is the timing, not the size. In its newest forecast (April 2026), LightCounting writes that demand exceeds supply by 30%, and that the shortages should go away by the end of 2026. It also warns that transceiver sales usually drop once the shortages ease, even while capex still grows: "This will happen again in the current cycle, but we just don't know when." In March, it pointed to a possible flat or negative year in 2027-2028. Credo plans its fastest growth for exactly this period: ~20% QoQ in Q3 (November-January) and ~30% in Q4 (February-April). In my view, this is the most important market question for CRDO today. A pause in orders across the industry would hurt a company whose guidance needs acceleration.

Economic Moat

Every LTM margin is far above its 5Y mean. Gross margin is 67.07% (mean: 62.41%), EBIT margin 31.74% (-3.07%), net margin 33.83% (-1.66%), and FCF margin 27.57% (-9.5%). The means include the loss-making years before FY2025, so the more useful number is the trend. The non-GAAP gross margin stayed between 67.6% and 68.6% for five quarters, while quarterly revenue more than doubled. Management guides FY2027 at the same level as FY2026 (68.1%).

Let’s see where this margin comes from. Part of it is intellectual property. Credo owns 86 issued US patents and 52 in mainland China. In March 2025, it filed a complaint with the US International Trade Commission (ITC) against Amphenol (APH), Molex, TE Connectivity (TEL), and Volex over its AEC patents. By March 2026, all four cases were settled with license or cross-license agreements, and Siemon and 3M (MMM) also signed licenses for Credo’s AEC patents. The terms are confidential, so I cannot say what these licenses are worth. What I like: four large cable makers chose a license over a long fight.

The system approach matters even more. Credo designs the SerDes, the chip, the firmware, and the cable, manages the supply chain, and tests its cables with the customer's own switches and network cards before it ships them. Management calls this "probably our biggest competitive moat" and says the company never fails a customer qualification. I cannot verify the second claim. At the same time, it explains why hyperscalers stay: once a cable is qualified for a cluster, a second supplier has to pass the same qualification again. Next, cost. According to the 10-K, Credo's SerDes reaches similar performance to competitors on an older and cheaper chip process.

The weak point is the customer's power. Two contracting customers brought 71% of Q1 revenue, and the remaining performance obligations were only $4.2M. According to the 10-K, Credo does not have long-term purchase commitments from its customers, and they can cancel or delay orders.

In my view, Credo has a narrow moat. The returns are high, and the patents held up, but the high profits are only 2 years old, and a customer can move volume to a second supplier after a new qualification.

The returns on capital support the moat, but the history is short. ROIC is 20.8% (5Y mean: 2.89%), ROE is 30.67% (4.0%), and ROA is 16.11% (1.81%). All three were negative or close to zero until 2025. ROIC decreased in the last quarter. GAAP operating income decreased 23% QoQ because of SBC and the amortization of acquired intangibles, and the DustPhotonics deal added $1.24B of goodwill and intangibles.

Business Strategy

Own the whole link. Credo builds its own SerDes, DSPs, and, since the DustPhotonics deal, silicon photonics PICs. On top of that, it designs complete cables and transceivers. Management says Credo is the only vertically integrated player in optical transceivers and expects this to give it an advantage on both the cost of goods and the price. Competitors split the same stack between partners. For example, Marvell (MRVL) sells AEC DSPs to cable makers, and in December 2025, it launched a Golden Cable program that gives them reference designs and software.

Sell reliability, not only bandwidth. In an AI cluster, one unstable link (a "link flap") can force a reset of the whole cluster. According to management, customers have reported losing 10-20% of GPU utilization because of it. Credo developed ZeroFlap with input from xAI and Oracle (ORCL). According to Bill Brennan, xAI can now bring a cluster up in 5 days instead of 6-8 weeks with ZeroFlap AECs, and its uptime has reached 99.9%. ZeroFlap optical transceivers do the same for longer links. They measure the health of every link in real time and take an unstable link down before it breaks the cluster. The company says it is not targeting the commodity IEEE 1.6T transceiver market, but the parts of the network where reliability justifies a higher price.

Optics as the second business. Management expects more than $600M of optical revenue in FY2027. ZeroFlap optics, silicon photonics PICs, and optical DSPs are each expected to bring more than $100M. The optical DSP business had record revenue in Q1, and the first PIC revenue came in the same quarter. The DustPhotonics team already has two design wins with major customers, with ramps late in FY2027 or in FY2028. By the end of FY2027, Credo plans to produce hundreds of thousands of optical units per month, and then double or triple that rate by the end of FY2028.

New products for FY2028. Active LED cables (ALCs) use micro-LEDs instead of lasers to reach 30 meters with the reliability of copper, and they are 75% smaller in volume than 7-meter AECs. OmniConnect gearboxes connect processors with LPDDR memory to solve the memory bottleneck in inference. Management estimates the Credo content at thousands of dollars per GPU. Both products should bring their first revenue in FY2028. Credo also joined the Open CPX MSA and has design wins for near-package optics (NPO) in scale-up networks, with ramps starting in FY2028.

Buy teams, not revenue. In 12 months, Credo made three acquisitions: Hyperlume (micro-LED technology, $92.0M, September 2025), CoMira (link layer and security IP, $35.1M, February 2026), and DustPhotonics (silicon photonics, $1.25B, May 2026). The 10-Q calls their effect on the results not material. As a result, the 115% growth in Q1 is almost entirely organic, and over 90% of the YoY increase came from higher AEC volumes.

Capital Allocation

The DustPhotonics deal halved the cash in one quarter. Cash and short-term investments fell to $764M from $1.44B in May. Credo paid $770M in cash, $169M in shares, and booked $310M of contingent consideration that depends on future milestones. As a result, goodwill and intangibles increased to $1.37B, which is 50% of the $2.73B equity. In my view, the price is high for a team with no material revenue yet, but it is 4% of the market cap, and ~38% of it is paid in shares or only if targets are met.

The balance sheet is still very strong. Total assets are $3.01B against $284M of liabilities. Credo has no borrowings, and the $26M of debt in Koyfin is operating lease liabilities. Debt/Equity is 1.0% against a 2.9% 5Y mean, and net cash is $738M.

FCF reached $439M over the last 12 months, a 27.57% margin, against a $50.1M 5Y mean. Capex is $62M, 3.9% of revenue. The weak spot is Q1. Operating cash flow was only $90.2M against $129.4M of net income, since working capital used $151.3M. Receivables increased $54.5M, and inventory increased $61.5M "to support unfulfilled backlog and related new product ramps". Another $25.3M went to refundable deposits that reserve manufacturing capacity. Inventory is now $313.1M, which is ~168 days of Q1 cost of revenue by my calculation.

The share count increases every year. Diluted shares increased 5.3% YoY to 194.4M, and management expects ~200M in Q2. The two largest increases were equity sales: a public offering of 8.94M new shares at $17.50 in December 2023, and an at-the-market (ATM) program that sold 4.8M shares for $736M of net proceeds from October 2025 to January 2026. Credo pays no dividend and does not buy back shares.

As a result, shareholder yield is -2.29% against a -3.43% 5Y mean. The negative number is the dilution.

SBC is the main cost that the non-GAAP numbers hide. LTM SBC is $235M, 14.78% of revenue, against a 14.67% 5Y mean. In Q1, SBC increased 148% YoY to $88.0M, and the Q2 guidance implies ~$104M, ~20% of revenue. In Q1 alone, Credo granted 2.1M restricted stock units (RSUs) and 1.9M performance units (PSUs). The PSUs include a special award for the CEO - up to 1.44M shares in six tranches, which require trailing revenue of $2.5-7.5B and a stock price of $244.70-489.40 before June 2031. What I like: both hurdles have to be met (with one exception for the first two tranches), and the first revenue hurdle is already the FY2027 consensus. LTM SBC equals 54% of FCF, so FCF after SBC is only $203M.

Operating costs grow slower than revenue, but faster than planned. Over the last 12 months, cost of revenue was $524M, R&D $341M, and SG&A $221M. In Q1, non-GAAP operating expenses were $95.2M, above the $86-90M guidance, since R&D for new products increased. Management expects non-GAAP operating expenses to grow ~55% in FY2027, against more than 85% revenue growth.

As I see it, Credo allocates capital in an aggressive but focused way. All the cash goes into R&D, inventory, and technology teams, and shareholders pay for it with dilution instead of receiving a return.

Advantages

• The fastest growth in the group at one of the lowest multiples. LTM revenue grew 165%, faster than Broadcom (AVGO), Marvell, and Astera Labs (ALAB). At the same time, CRDO trades at 24.1x forward earnings, against 44.8x for Marvell and 54.0x for Astera Labs.

• The inventor of the AEC category. Credo started production of AECs in 2019, and Microsoft was its first AEC customer. In 2025-2026, four cable makers settled Credo’s patent cases with licenses or cross-licenses, and two more companies licensed the patents.

• Stable margins during a very fast ramp. The non-GAAP gross margin was 67.6-68.6% in each of the last five quarters, while quarterly revenue increased from $223M to $479M. Management guides the same margin level for FY2027, even with the optical ramp.

• A net cash balance sheet after a large deal. Credo paid $770M in cash for DustPhotonics and still has $764M of cash and short-term investments, no borrowings, and a 1.0% Debt/Equity ratio.

• More products for the same customers. Credo works with 5 hyperscalers and a growing number of neoclouds. Optics should bring more than $600M in FY2027, and ALCs, OmniConnect, and near-package optics add new revenue from FY2028.

Disadvantages

• Customer concentration. Two contracting customers brought 71% of Q1 revenue, and the top four end customers brought 84%. The remaining performance obligations are only $4.2M, and customers have no long-term purchase commitments. The CEO himself describes the hyperscalers as “surging and then pausing”.

• The second half depends on products that have just started to ship. The CFO expects ~20% sequential growth in Q3 and ~30% in Q4. The first PIC revenue came only in Q1, and the first 1.6T DSP revenue is expected later this fiscal year. If the optical ramp slips by one or two quarters, the FY2027 growth outlook is too high.

• Heavy SBC and dilution. SBC is 14.78% of LTM revenue and ~20% in the Q2 guidance. The diluted share count increased 5.3% in 1 year. In Q1, GAAP EPS was only 56% of non-GAAP EPS.

• AECs become easier to copy. Marvell introduced a 1.6T DSP for AECs in 2024 and started a program with reference designs for cable makers in December 2025. Astera Labs sells smart cable modules for AECs, and the four cable makers from the patent cases now have licenses. Brennan says new entrants show that the market is large. In my view, more suppliers are the main threat to the 68% gross margin.

• Weaker cash conversion and a large inventory. Q1 operating cash flow was 70% of net income, and inventory increased 25% QoQ to $313M. Goodwill and intangibles are now $1.37B, so a failed optical ramp would also be an accounting problem.

What the bears get right: the beats became small exactly when the plan became more ambitious. Revenue in Q4 FY2026 and Q1 FY2027 came in only 0.5% and 0.8% above the top of the guidance, after 12-18% in the three quarters before. Even the top of the Q2 guidance ($535M) is +99.6% YoY, so the streak of triple-digit growth ends unless Credo beats it by more than $1M. The CFO's path for Q3 is only ~56% YoY, since Q3 FY2026 was a very strong quarter. A pause at a large customer already happened once. In February 2023, Credo's largest customer reduced its demand forecast; the company cut its quarterly revenue guidance to $30-32M (consensus was above $45M), and CRDO fell 47% in one day. FY2024 revenue then increased only 4.8%. The biggest risk, as I see it, is a repeat of 2023 at one of the two largest customers while the optical business is still small. My fair price does not include this risk, so it has to be handled with the size of a position.

Competitors

I compare Credo with 3 semiconductor companies and the sector ETF. In the 10-K, Credo names Broadcom, Marvell, and Astera Labs as its principal competitors, together with “various cable and optical transceiver suppliers”. Broadcom makes DSPs, SerDes, and custom AI chips for hyperscalers, and it also sells infrastructure software. Marvell sells optical DSPs and DSPs for AECs. Astera Labs makes retimers and switches for scale-up networks. In AECs, Marvell and Astera Labs sell chips and modules to cable makers, while Credo sells the complete cable. The cable makers from the patent cases are competitors too, but they sell many other products, so their multiples say little about AECs. The iShares Semiconductor ETF (SOXX) shows the level of the whole sector.

CRDO is not the cheapest name here, and Broadcom is the real alternative. The forward P/E is 20.7x for Broadcom, 24.1x for Credo, 44.8x for Marvell, and 54.0x for Astera Labs. SOXX trades at ~21.5x. Consensus 5Y EPS growth is 54.69% for Broadcom, 52.49% for Astera Labs, 50.0% for Credo, and 45.81% for Marvell. As a result, the PEG ratio is 0.38 for AVGO and 0.48 for CRDO, against 0.98-1.03 for MRVL and ALAB, and ~1.1 for SOXX. The strong point of Credo is LTM revenue growth: 165.11%, against 98.48% for Astera Labs and 30.62-48.69% for the other two.

On returns and margins, Credo is second after Broadcom. ROIC is 26.49% for Broadcom, 20.8% for Credo, 19.42% for Astera Labs, and 4.95% for Marvell. Broadcom also has the highest gross margin (75.52%), net margin (42.94%), and FCF margin (44.22%). Credo is second in net and FCF margin. On the balance sheet, Credo is the strongest, with a 1.0% Debt/Equity ratio, against 59.6% for Broadcom.

In my view, the next-best alternative is Broadcom. It has a lower P/E, a lower PEG ratio, higher margins, and a higher ROIC. The difference is the exposure. Broadcom is a much larger and more diversified company, with custom chips, networking, and software, and it has much more debt. Credo is a pure play on AI connectivity, with the fastest revenue growth in the group, net cash, and a much higher customer concentration. For me, CRDO makes sense only as a bet on this specific market, not as a cheaper Broadcom. On valuation alone, Broadcom wins.

Past

Q1 FY2027 results (quarter ended August 1, USD, YoY):

• Revenue: $479.0M, +115% (+10% QoQ), above the top of the $465-475M guidance

• Non-GAAP EPS +131% to $1.20; GAAP EPS +97% to $0.67

• Non-GAAP gross margin 68.0% (67.6% a year ago); non-GAAP operating margin 48.2% (43.1%)

• Non-GAAP operating expenses +75% to $95.2M, above the $86-90M guidance

• Operating cash flow $90.2M and FCF $82.9M; inventory +$62M QoQ to $313.1M

• LTM: revenue $1.59B, net income $538M, FCF $439M, and ROIC 20.8%

Why did CRDO fall 42% from Aug 14 to Sep 15? The stock was already 27% below its August high when the report came out. Here are the reasons, starting with the most important one:

• The reaction to the report. CRDO fell 8.65% on Sep 01, before the release, and 20.04% on Sep 02, while SOXX increased 0.23% that day.

• Small beats. Revenue was $4M (0.8%) above the top of the guidance and 0.7-1.2% above the consensus (Zacks and TipRanks). EPS of $1.20 beat the $1.17 consensus by 2.6%. In the first three quarters of FY2026, the beats were much larger, so the market read it as a slowdown.

• The GAAP gross margin. It decreased from 68.2% to 64.5%, and the Q2 guidance is 62.9-64.9%. Some analysts saw pricing pressure in it. The main reason is accounting: $11.0M of amortization of the DustPhotonics intangibles and $5.7M of SBC in cost of revenue. The non-GAAP margin was 68.0%, at the midpoint of the guidance.

• Operating expenses. Non-GAAP operating expenses were $95.2M, above the $86-90M guidance, and GAAP operating expenses more than doubled YoY.

• The sector. On Aug 18 and Sep 14, CRDO fell 13.03% and 7.89%, while SOXX fell 4.96% and 5.63%. Coherent (COHR) fell ~13% on both days, and Astera Labs fell 11.74% on Sep 14. From Aug 14 to Sep 15, SOXX lost 9%, and Astera Labs lost 21%.

Still, the numbers in the report were strong. The Q2 guidance midpoint ($530M) is 5% above the Zacks consensus before the report ($502.69M), and the company raised its full-year growth outlook. In my view, the reaction is only partly justified. The worry about the second half is fair, since it depends on new optical products. The worry about the gross margin is not, since the non-GAAP margin did not change.

Over a longer period, the record is uneven. Revenue increased from $58.7M in FY2021 to $1.34B in FY2026, and the 3Y revenue CAGR is 93.5%. The path was not smooth. FY2023 revenue ($184.2M) missed the company’s own target of “at least $200 million”, and in FY2024, revenue increased only 4.8% after the largest customer reduced its demand forecast. Credo had GAAP net losses from FY2021 to FY2024 and returned to profit in FY2025 ($52.2M). In FY2026, net income reached $472.3M, and GAAP EPS reached $2.51.

The stock was an excellent investment, but not a calm one. Since its first trading day on Jan 27, 2022, CRDO returned 1,410%, or 79.5% per year, against 14.66% per year for the S&P 500 (VOO). Right now, it is 42% below its June high, and earlier this year, it increased 245% from its March low in less than 3 months. Beta is 3.23.

Analyst’s note:

Koyfin shows a 70.74% CAGR “over 5 years” for CRDO, but the stock has traded for 4.6 years, and the chart starts from the first month-end close ($12.12). I calculated the returns from the daily closes instead: $11.65 on Jan 27, 2022 and $175.89 on Sep 18, 2026, with dividends reinvested for VOO.

Future

• Consensus revenue: FY2027 $2.50B (+87.36%), FY2028 $3.88B (+54.96%), FY2029 $5.07B (+30.86%) - the growth is expected to slow every year

• Consensus EPS: $6.31 -> $9.70 -> $12.45 (FY2027-FY2029); FY2027 EPS is 82% above the FY2026 non-GAAP EPS of $3.46

• 5Y forward EPS growth estimate: 50.0%, against a 33.56% mean since 2022 and a 59.83% +1 standard deviation band. To compare, non-GAAP EPS was $0.70 in FY2025 and $3.46 in FY2026

• Analysts: 18 of 19 rate the stock Buy or Strong Buy (4 Strong Buy, 14 Buy, and 1 Hold), average target $282.47, +60.59% from here (the range is $185.00-350.00)

• Company guidance: FY2027 revenue growth of more than 85% (raised from more than 80% in June), optical revenue of more than $600M, a non-GAAP gross margin broadly consistent with FY2026, ~55% growth in non-GAAP operating expenses, and a non-GAAP net margin of ~50%; Q2 revenue $525-535M, a non-GAAP gross margin of 67-69%, and non-GAAP operating expenses of $100-105M

What must go right. The CFO described the path at the Goldman Sachs conference on Sep 10: ~11% sequential growth in Q2, ~20% in Q3, and ~30% in Q4. That gives ~$2.47B of FY2027 revenue and a $1B quarter "within our sights" in early FY2028. In my view, the plan is realistic if three things happen: the optical products ramp on time, the AEC business keeps growing with the move to 1.6T, and the gross margin stays near 68% while optics becomes a larger part of revenue. The first one is the least certain. My model needs only 20% annual EPS growth over 5 years. That is why the stock does not need the full plan. It needs the business to keep growing after FY2027. The next checkpoints are the ALC demonstration at the Open Compute Project (OCP) summit in October and the Q2 report in early December.

Current Valuation

Current vs mean since IPO:
Price/Fwd Earnings: 24.1x vs 88.5x
Price/Fwd Sales: 11.4x vs 14.2x
Price/FCF: 75.4x vs 195.3x
Price/Book: 12.1x vs 12.4x
PEG: 0.48 vs 2.88
Forward Earnings Yield: 3.6%

All five multiples are below their means since the IPO, but these means are not a good anchor. The forward P/E is 24.1x against a 16.4x -1 standard deviation band, and Price/Sales is 11.4x against an 8.9x band. On GAAP earnings, CRDO trades at 62.2x LTM EPS, and the FCF yield is only 1.33%. To compare, SOXX trades at ~21.5x forward earnings. In my view, CRDO is priced slightly above an average semiconductor company, although its PEG ratio is 2.3x lower (0.48 vs ~1.1).

Analyst’s note:

The means start in 2022, when Credo had no profit, so the forward P/E reached almost 400x in 2023, and the 88.5x mean is not usable. Price/FCF has data only from mid-2024, when FCF became positive. Also, Koyfin’s 24.1x uses next-12-months EPS ($7.30), which includes part of FY2028. On FY2027 EPS of $6.31, the P/E is 27.9x. The exit multiples in my model start from the -1 standard deviation band, not from the mean.

The growth estimate is above its mean, and the PEG is near its lowest level. The 5Y EPS growth estimate is 50.0% against a 33.56% mean, and the PEG ratio is 0.48 against a 2.88 mean. The mean PEG is also distorted by 2023, but even SOXX has a PEG of ~1.1, which is 2.3x higher.

What does the price already assume? If I require 12% per year, CRDO needs ~24% annual EPS growth for 5 years when the multiple decreases to 17x. At a 22x exit, ~17% is enough, and at 30x, ~10%. Consensus expects ~53% per year from FY2026 to FY2029. A reverse DCF shows that the current price implies 41.4% annual revenue growth for 5 years, while consensus expects ~56% per year until FY2029.

One chart frames this whole section. Its three dashed lines are the consensus forward EPS multiplied by my exit multiples (17x, 22x, and 30x), and the black line is the price.

Fair Price

The model starts from the FY2027 consensus EPS of $6.31 and grows it for 5 years. Consensus expects 50.0% per year, which is 2.5x my 20% cap, so the model uses 20%. Credo pays no dividend. As a result, EPS reaches $15.70 in FY2032, while consensus already expects $12.45 in FY2029.

The discount rate is 12%; the margin of safety is 30%. The exit multiples are 17x, 22x, and 30x. 17x is the -1 standard deviation band (16.4x today), so this case assumes that CRDO stays at the bottom of its range for 5 years. At the 20% cap, 17x is a PEG of 0.85. 22x is where CRDO traded right after the September 1 report, a PEG of 1.1. 30x is the ceiling of my method, a PEG of 1.5 at the 20% cap.

Bear Case (exit P/E 17x): fair price $151 - MoS price $106
Base Case (exit P/E 22x): fair price $196 - MoS price $137
Bull Case (exit P/E 30x): fair price $267 - MoS price $187

At $176, CRDO trades 10% below the Base Case. It is also 16% above the Bear Case fair price. My accumulation zone is $106-151, so the price is above it. Growth is the input that moves the result most. If EPS grows 15% per year, not 20%, the fair prices fall to $122/$158/$216, and CRDO is 44% above the Bear Case. At the same time, 15% would already mean a very sharp slowdown from the ~53% that consensus expects until FY2029. Worth noting that the average street target ($282) is above my Bull Case ($267), so my corridor is more conservative than the street.

Due Diligence

Profitability (12 of 15):

• Positive Gross Profit: $1.07B

• Positive Operating Income: $505M

• Positive Net Income: $538M

• Positive FCF: $439M

• Gross margin >= 40%: Yes (67.07%)

• Net margin >= 10%: Yes (33.83%)

• FCF margin >= 10%: Yes (27.57%)

• Management (ROIC, ROE, ROA) >= 10%: Yes (20.8%/30.67%/16.11%)

• Strong 3Y Revenue Growth: Yes (~94% per year)

• Revenue Growth Forecast: Yes (~56% per year over the next 3 years)

• ROE is increasing: negative in FY2024 -> 30.67%

• ROIC is increasing: negative in FY2024 -> 20.8%

• Revenue surprises since the IPO in a row: No (in line in Q3 FY2023 and Q4 FY2024)

• EPS surprises since the IPO in a row: No (a miss in Q2 FY2023)

• EPS growth YoY 5Y in a row: No (losses until FY2024)

Financial Strength (5 of 6):

• Total assets ($3.01B) exceed total liabilities ($284M) by 10.6x

• Negative Net Debt: Yes ($738M of net cash, with cash and short-term investments of $764M against $26M of lease liabilities)

• Low Debt/Equity: 1.0% (5Y mean: 2.9%)

• Debt/Capital: 0.95% (5Y mean: 2.83%)

• Interest coverage (FFO): Yes (no borrowings)

• Piotroski F-Score: 6 of 9 (not passed: operating cash flow below net income, lower current ratio YoY, and more shares outstanding)

Valuation and Advantage (3 of 4):

• Valuation < mean since IPO: Yes

• Valuation < the industry: No (P/Fwd E 24.1x vs SOXX at ~21.5x and AVGO at 20.7x)

• Does it have a moat: Yes (narrow)

• Outperformed the S&P 500 since the IPO: Yes (79.5% vs 14.7% CAGR)

Shares (1 of 3):

• Insider ownership >= 5%: Yes (9.06%)

• Fewer shares outstanding YoY: No (194M vs 185M diluted)

• Insider buys in the last 6M: No ($178M of sales, mostly under 10b5-1 plans)

Price (3 of 4):

• 1Y price forecast > 10%: +60.59%

• Next 5Y EPS growth estimate (CAGR) > 10%: Yes (50.0%)

• DCF Value: ~$102 (base case: revenue growth 28.2% - below consensus, 10.1% discount rate); overvalued by ~42%

• Short Interest < 5%: Yes (3.3%)

Verdict

CRDO belongs in a long-term portfolio as a small, high-risk growth position, not as a core holding. Credo created the AEC category and turned it into a very profitable business, with a 67% gross margin, a 21% ROIC, net cash, and revenue that grew 115% in the last quarter. CRDO trades at 24.1x forward earnings and a PEG of 0.48, not far from its -1 standard deviation band and slightly above the whole semiconductor sector, although analysts expect 50% annual EPS growth. I cap growth at 20% in my model and use exit multiples of 17x/22x/30x. My fair prices range from $151 to $267, with an accumulation zone of $106-151. At $176, CRDO is 16% above the top of that zone. For me, the realistic bear case is not the end of AI spending but a pause at one of the two largest customers while the optical ramp is late, as in 2023, when the stock fell 47% in one day. For this reason, the position should stay small. Accumulate gradually inside the zone with a multi-year horizon, and judge the thesis on optical revenue in the second half and the non-GAAP gross margin, not the share price.

One-Pager

This is not a financial or investing recommendation. It is solely for educational purposes.

TL;DR: Adobe (ADBE) makes the standard software for documents and creative work (Acrobat, Photoshop, Premiere) and sells marketing software to large companies. The Q3 FY2026 report was a beat and a raise, and the business is still one of the most profitable in software. At the same time, the stock is at 9.4x forward earnings, since the market expects AI tools to replace paid Adobe seats. I see a slowdown, not a decline. Without the Semrush acquisition, annual recurring revenue (ARR) grows ~9%, and buybacks provide half of the EPS growth. Verdict: a high-quality business priced for decline. Organic growth and the operating margin still move in the wrong direction. ADBE is just above my accumulation zone; my full fair price math and the accumulation zone are at the end of this post.

Investment Thesis

Adobe reported Q3 FY2026 on Sep 10 with record revenue, a higher full-year EPS target, and record Q3 operating cash flow. Over 5 years, consensus forward EPS more than doubled, and the share price lost 62%. My idea here is to separate what is really slowing inside the business from what the price already assumes.

• Growth is slower than the headline, but it is still there. Revenue increased 13% YoY to $6.76B, and total ARR increased 11.2% to $27.50B. Both numbers include Semrush, which Adobe bought in April. Without it, I estimate revenue growth at ~11% and ARR growth at ~9%.

• The price assumes much less than consensus. The consensus 5Y EPS growth estimate is 13.92%, and ADBE trades at 9.4x forward earnings with a PEG ratio of 0.67. At a 12% required return, the free cash flow after stock-based compensation (SBC) implies only ~3.5% long-term growth.

• The business is still one of the most profitable in software. LTM gross margin is 89.25%, the FCF margin is 40.79%, ROIC is 39.19%, and FCF reached $10.59B. The diluted share count decreased by 6.8% in 1 year.

• The multiple already fell below every historical anchor. ADBE trades at 9.4x forward earnings against a 24.5x 5Y mean and a 15.2x -1 standard deviation band. And this despite the fact that consensus EPS for the next 12 months has increased every year.

• The bear case: AI tools make a paid Creative Cloud seat less necessary, organic ARR growth slides below 8%, the non-GAAP operating margin keeps declining, and a new CEO takes over on Dec 01. My model takes this into account by keeping today’s 9x multiple as the Bear Case exit. Even then, ADBE is only 5% above my Bear Case fair price of $240.

Analyst’s note:

Adobe’s fiscal year ends in late November, so FY2026 ends soon. EPS in this post is non-GAAP because the estimates are built on it. GAAP EPS is ~$18 for FY2026, mostly because of SBC. The organic numbers are my estimates. The company disclosed ~$40M of revenue and ~$480M of ARR from Semrush for its first month. Its FY2026 targets include ~$280M of Semrush revenue for 7 months, which is ~$120M per quarter.

Company Overview

Next Earnings Date: 10 Dec 2026 (estimated)
Market Cap: $100.26B
Sector: Information Technology | Industry: Software
Type: Large Value
Short Interest: 4.5%

Adobe Inc. is a software company from San Jose, California, founded in 1982 by John Warnock and Charles Geschke. The first product was PostScript - the page description language behind desktop publishing. Photoshop followed in 1990, and the PDF format in 1993. In 2013, the company stopped selling boxed software and moved the creative suite to Creative Cloud subscriptions. Subscriptions are now 97% of revenue. Shantanu Narayen has been CEO since 2007. On Dec 01, 2026, Anil Chakravarthy (at Adobe since 2020, before that the CEO of Informatica) becomes CEO, and Narayen moves to Executive Chair.

The product range splits into two customer groups. The first one is Business Professionals & Consumers ($1.91B in Q3, +16% YoY): Acrobat, Reader, Acrobat Sign, and Express (the document and quick-design tools for everyday users). The second one is Creative & Marketing Professionals ($4.65B, +13% YoY): Creative Cloud (Photoshop, Illustrator, Premiere Pro, Lightroom, InDesign, After Effects), Firefly (the generative AI studio, plus its enterprise version), and Adobe CX Enterprise for marketers (Experience Platform, Experience Manager, and GenStudio). Semrush is reported inside Creative & Marketing Professionals.

Distribution is direct (web, app stores, and inside sales) plus resellers and multi-year enterprise agreements. By geography, 59% of revenue comes from the Americas, 27% from Europe, the Middle East, and Africa, and 14% from Asia.

Market Overview

The market itself is large. At its March 2024 investor meeting, Adobe estimated its addressable market at ~$205B for 2024 and ~$293B for 2027, which is ~13% growth per year. Customer experience software is ~$155B of the 2027 figure, creative software ~$91B, and document software ~$47B. In April 2026, the company described the opportunity as expanding to new surfaces such as AI chatbots and agentic browsers. If the estimate is right, Adobe’s organic ARR grows slower than its market. The risk is not fewer users, but fewer paid seats per user.

Adobe’s audience is growing faster than its revenue. More than 1 billion people use Adobe products every month, up more than 20% YoY. The creative freemium base (Firefly, Express, and the web and mobile versions of Photoshop, Premiere, and Lightroom) crossed 100 million monthly active users (MAU), up more than 70% YoY. Acrobat and Express together are used by more than 900 million people (up more than 25% YoY), and Acrobat AI Assistant users doubled in one quarter.

The competitors grew faster from much smaller bases. Figma (FIG) grew revenue 48% YoY to $370M in Q2 2026 and guides ~39% growth for the year, but it still reported a GAAP net loss of $112M in the quarter. Canva is private. It ended 2025 with ~$4B of ARR and more than 265 million MAU. Recently, it cut its revenue growth forecast from 30% to 20%, since it slowed its AI rollout to reduce the cost of AI tasks. In addition, image and video models from OpenAI and Google (GOOGL) produce good-enough visuals for free or inside a chatbot subscription. To compare, Adobe’s LTM revenue of $25.97B is ~18x Figma’s full-year guidance.

AI revenue is small, but it grows fast. AI-first ending ARR is more than $650M, growing more than 150% YoY. That is 2.4% of total ARR. Firefly ARR from the app and credit packs grew 40% QoQ. In my view, the model matters more than the size - Adobe sells the generative features as credits and higher plans, instead of giving them away to defend the base.

The marketing business grows faster than the creative one, but part of it is bought. Ending ARR for Experience Manager, GenStudio, and Experience Platform each grew more than 20% YoY. Digital Experience subscription revenue increased 22% YoY in Q3, and I estimate ~9 points of that is Semrush. Without it, the marketing side grew ~13%, against 11% for Digital Media (the creative and document products). More than 20,000 enterprises use Adobe’s customer experience software. CX Enterprise Coworker (an AI agent for marketing workflows) had more than 1,700 customers and early adopters after it became generally available in June.

The problem is monetization, not the audience. Total ARR growth decreased from 13.8% in Q1 FY2024 to 11.2% now. The FY2026 target is 10.2%, and it already includes the ~$480M of ARR that Adobe bought with Semrush. Net new ARR in Q3 was $0.40B against $0.66B a year ago. In June, the company said it had decided "to defer previously planned Creative Cloud second half line optimizations" (planned price changes) to push the free products first. The CEO put half of the ARR impact on this decision and half on the freemium push.

Economic Moat

The LTM margins are still at or above their 5Y means: gross margin is 89.25% against an 88.48% mean, EBIT margin is 35.70% against 35.71%, net margin is 28.05% against 28.01%, and FCF margin is 40.79% against 39.47%. The quarterly trend in 2026 is weaker. The non-GAAP gross margin decreased from 90.5% in Q3 FY2025 to 89.5%, since subscription cost of revenue increased 24% YoY against 14% growth in subscription revenue. Semrush explains only a small part of it, since its gross margin was 80.5% in 2025. The company does not explain the rest, but I think the main reason is the compute cost of generative AI features.

Let’s see where this margin comes from. Most of it is switching costs. File formats: PDF is an ISO standard that Adobe created, and the PSD, AI, and INDD files of Photoshop, Illustrator, and InDesign are the working formats of design studios and print shops. Next, training: design schools teach Adobe tools, and job descriptions ask for them. Next, the bundle: Creative Cloud sells 20+ applications in one subscription, so an alternative has to replace the whole workflow, not one app. The weak point is pricing power. Adobe deferred its planned Creative Cloud price changes this year, so the moat has not been tested with higher prices in the AI era.

Figma is the clearest test of the moat. In 2022, Adobe agreed to buy Figma for ~$20B, half in cash and half in stock. In December 2023, the companies terminated the deal, since there was no clear path to approval from the European Commission and the UK Competition and Markets Authority. Adobe paid a $1B termination fee. Today, Figma is a listed competitor with 136% net dollar retention, which means its existing customers spend 36% more every year.

Worth mentioning also the enterprise contracts. Large customers sign multi-year agreements, and remaining performance obligations (RPO) of $22.16B equal 85% of LTM revenue. 67% of them are expected to be recognized over the next 12 months. Management reports “continued strength in retention” across enterprise customers, but it does not disclose a retention rate, so I cannot check it.

The marketing software is different. Adobe built most of it through acquisitions (Omniture in 2009, Marketo and Magento in 2018, Semrush in 2026), and it competes directly with Salesforce (CRM). I count it as the main source of growth, not as part of the moat.

The returns on capital still support the moat: ROIC is 39.19% (5Y mean: 30.93%), ROE is 61.90% (41.90%), and ROA is 19.73% (16.14%). Worth noting that ROE is inflated by buybacks, since $55.6B of repurchased stock reduces the equity to $11.76B. ROIC is the cleaner number here, and it decreased slightly in the last quarter after 2 years of increases.

Business Strategy

Free first, paid later. Express, Firefly, Reader, and the web versions of the flagship apps have free tiers, and the paid step is a credit pack, a higher plan, or a team seat. The company states that this builds “long-term durable growth”. The data confirms the first half of the plan. The second half, conversion into ARR, is not visible yet. On the Q3 call, Anil Chakravarthy said that engagement “is starting to translate into ARR”, but by my estimate, organic ARR growth decreased from ~10.5% in Q2 to ~9% in Q3. The newest example is Saudi Arabia, where the Ministry of Communications and Information Technology and HUMAIN make Firefly and Express available to 27 million citizens and residents.

Agents inside the flagship apps. The Creative Agent now works in Photoshop and Premiere, the Productivity Agent in Acrobat turns documents into reports, slides, and audio summaries, and CX Enterprise Coworker executes marketing workflows. Adobe also routes tasks to third-party AI models inside its own apps. What I like: Adobe positions Firefly as commercially safe, which matters for enterprises that publish the output. Disney (DIS) Imagineering is integrating Firefly Foundry into its theme park design toolkit.

Go where the documents are opened. Acrobat is now available inside ChatGPT, Chrome, Claude, Edge, and WhatsApp. Instead of waiting for users to open Acrobat, Adobe puts it inside the tools they already use. Student Spaces in Acrobat targets universities, where the next generation of business professionals learns its software.

Buy the missing pieces. Semrush (closed on Apr 28) is now part of Adobe Brand Visibility - a tool that shows brands how they appear in ChatGPT, Google AI Mode, Copilot, and Perplexity. Paid customers of the brand visibility solutions doubled QoQ. Topaz Labs (an AI video and image enhancement company with more than 1 million users) is the next deal, expected to close in Q4.

A new leadership team. In March, Shantanu Narayen said he would step down once the board found a successor. On Sep 03, the board chose Anil Chakravarthy, who manages the customer experience business and worldwide field operations. David Wadhwani, president of the creativity and productivity business and seen as a candidate, then said he would leave. CFO Dan Durn left on Jun 15 for Marvell (MRVL), and Steve Day is the interim CFO. As I see it, the board chose the enterprise marketing side to lead the company, and the creative side lost its leader in the same week.

Capital Allocation

The balance sheet moved from net cash to net debt in 9 months. Cash and short-term investments decreased from $6.60B at the end of FY2025 to $5.64B, and borrowings increased from $6.21B to $6.36B. As a result, net cash of $0.39B became net debt of $0.72B. The Semrush deal explains most of it, since buybacks already use ~90% of FCF. Adobe paid ~$1.9B, ~4x the $471M of ARR that Semrush reported at the end of 2025. In 2025, Semrush grew revenue 18% with a 12% non-GAAP operating margin. In my view, the price is reasonable, but the deal adds growth, not margin. Worth noting that Koyfin's total debt of $6.76B also includes $0.40B of lease liabilities.

Leverage is still low relative to cash flow. Debt/Equity is 57.5% against a 41.1% 5Y mean, and Debt/Capital is 36.50% against 28.57%. Interest coverage based on funds from operations (FFO) is 41.6x against a 55.0x mean. The equity is small because of buybacks, so I prefer to compare debt with cash flow - total debt is 64% of one year of FCF.

FCF reached $10.59B over the last 12 months, a 40.79% margin, against an $8.05B 5Y mean. Capex is $214M, less than 1% of revenue. Operating cash flow of $2.52B was a Q3 record.

Adobe pays no dividend and returns cash through buybacks. The buyback yield is 9.41% against a 4.67% 5Y mean. The share count decreased from ~477M in 2021 to 397.5M. In Q3 alone, the company bought 9.5M shares for $2.23B, 92% of Q3 FCF, and $24.55B remains under the April 2026 authorization (~25% of the market cap). What I like: at 9.4x earnings, each dollar of buybacks retires ~2.6x more shares than at the 24.5x mean. Worth noting that past buybacks were made at much higher prices. In FY2025, Adobe bought 30.8M shares for $11.28B (~$366 per share on average), and ADBE now trades 31% below that average.

Shareholder yield is 9.17% against a 4.42% 5Y mean. It is 0.24 points below the buyback yield, since Adobe added a small amount of debt over the last 12 months.

SBC is $2.07B, 7.97% of revenue, down from ~8.9% in 2023. The buybacks are ~4.6x SBC in dollars, so the share count decreases even after the dilution. At the same time, SBC is the main reason why the FY2026 GAAP EPS target (~$18) is ~26% below the non-GAAP one.

Operating costs grow faster than revenue this year. Over the last 12 months, sales and marketing were $7.15B, R&D $4.69B, G&A $1.92B, and cost of revenue $2.79B. In Q3, non-GAAP operating expenses increased 16% YoY against 13% revenue growth, and GAAP R&D expenses increased 18%. As a result, the non-GAAP operating margin decreased from 46.3% to 44.0%. By my estimate, Semrush explains ~0.6 points of that, since its margin is much lower. Management targets ~45% for FY2026 against 46.2% in FY2025.

In my view, the capital allocation is disciplined but not yet proven. The FY2025 buybacks lost value, and the extra spending has created users, not yet ARR.

Advantages

• The cheapest high-return company in its group. ADBE trades at 9.4x forward earnings with a PEG ratio of 0.67, while Salesforce, Intuit (INTU), Autodesk (ADSK), and ServiceNow (NOW) trade at 13.3-29.3x. Adobe also has the highest ROIC and FCF margin of the 5.

• Two standards nobody has replaced. PDF and Photoshop have been the defaults for more than 30 years, and more than 400 billion PDFs are opened in Acrobat every year. So far, AI tools have added users to Adobe’s free products instead of taking them away.

• Cash flow that pays for the AI investment. $10.59B of FCF, capex of $214M, and $22.16B of contracted revenue in RPO. Adobe increased R&D 18% YoY in Q3 and still bought back ~$9.4B of stock over the last 12 months.

• Buybacks at a low price. The diluted share count decreased 6.8% in 1 year, and $24.55B of authorization remains. Consensus expects ~9% revenue growth and ~13% EPS growth for FY2027. Most of the gap comes from buybacks.

• The derating has already happened. From ~50x forward earnings in 2021 to 9.4x, while ROIC increased from ~26% to 39.19%. The downside from further derating is smaller at 9x than it was at 25x.

Disadvantages

• AI competes for the seat. If a marketing team needs 3 Creative Cloud seats instead of 10, Adobe’s ARR decreases even if its AI features are the best. That would push revenue growth below the ~9% consensus for FY2027 and make the EPS estimates in my model too high.

• Organic growth is slowing. Without Semrush, I estimate Q3 ARR growth at ~9% and the Q4 revenue guidance at ~8% growth. JPMorgan (JPM) notes that Adobe expects net new ARR to decline for the full FY2026.

• Margins are declining. The non-GAAP operating margin decreased 2.3 points YoY in Q3, and the subscription gross margin decreased from 91.2% to 90.4%. If compute costs keep growing faster than revenue, EPS growth will come mostly from buybacks.

• New management in a difficult year. A new CEO from Dec 01, the head of the creative business leaving, and an interim CFO since June. The planned Creative Cloud price changes are deferred, and the next CEO has to decide when to bring them back.

• Net debt and GAAP earnings. Net cash became net debt of $0.72B in 9 months. On GAAP EPS, ADBE trades at 13.9x FY2026 earnings, not 10.3x. The difference is mostly SBC, which is a real cost to shareholders even when buybacks offset the dilution.

What the bears get right: the free products grow much faster than the revenue. ARR growth decreased to 11.2%, and ~2 points of that was bought with Semrush. Even an analyst with a positive rating says so. On Sep 11, JPMorgan cut its target from $340 to $315 and kept its Buy rating. The analyst pointed to 8% RPO growth and the deferred Creative Cloud pricing. If organic ARR growth falls below 7% and stays there, my 9x Bear Case multiple is too optimistic, not too conservative. In my view, the key risk is the conversion of free users into paying ones, not the quality of the AI features. Position size should reflect the chance that I am wrong here.

Competitors

I compare Adobe with 4 large application software companies. Salesforce is the leader in customer and marketing software; Autodesk has the closest business model (design software sold as subscriptions); Intuit is a quality benchmark in application software; the market treats ServiceNow as a winner of AI in software. Figma and Canva compete more directly in design, but Figma has no 5Y history as a public company, and Canva is private.

ADBE is the cheapest of the 5 on every price multiple. The forward P/E is 9.4x against 13.3x for Intuit, 16.3x for Autodesk, 16.9x for Salesforce, and 29.3x for ServiceNow. Growth does not explain the gap. Consensus 5Y EPS growth is 13.92% for Adobe, 14.02% for Intuit, 16.22% for Salesforce, 16.42% for Autodesk, and 24.45% for ServiceNow. As a result, the PEG ratio is 0.67 for ADBE and 0.99-1.20 for the others. To compare, ServiceNow is expected to grow EPS ~1.8x faster and trades at ~3.1x the multiple. The weak spot is LTM revenue growth - Adobe's 12.03% is ahead of Salesforce (11.23%) only.

On returns and margins, Adobe leads the group. ROIC is 39.19% against 26.54% for Autodesk, 17.20% for Intuit, 8.51% for Salesforce, and 6.55% for ServiceNow. Adobe also has the highest net margin (28.05%), FCF margin (40.79%), and EBITDA margin (37.56%). Autodesk has the higher gross margin (92.50% against 89.25%). Debt/Equity of 57.5% is in the middle: Intuit is at 44.3%, ServiceNow at 67.5%, and Salesforce and Autodesk are above 100%.

In my view, no other company here has a ROIC above 30%, an FCF margin above 40%, and a P/E below 10x at the same time. The next-best alternative on quality is Autodesk, with a 26.54% ROIC and 16.42% expected EPS growth, but at 16.3x earnings. There are reasons for the discount. Adobe has the most direct exposure to AI-generated images and video of the 5, and its revenue growth is the second lowest. The market pays ~29x earnings for ServiceNow, which it sees as a winner of AI, and ~9x for ADBE, since it sees Adobe's creative software as a loser. So far, the data supports a much smaller difference than that.

Past

Q3 FY2026 (ended August 28, all USD, YoY):

• Revenue +13% to $6.76B (+12% constant currency), including ~$120M from Semrush, by my estimate

• Non-GAAP EPS +15% to $6.13, while non-GAAP net income increased 7%; GAAP EPS +11% to $4.62

• Total ARR +11.2% to $27.50B; net new ARR $0.40B against $0.66B a year ago

• Non-GAAP operating margin 44.0% against 46.3% a year ago

• Operating cash flow $2.52B (a Q3 record); 9.5M shares repurchased for $2.23B

• LTM: revenue $25.97B, net income $7.29B, FCF $10.59B, and ROIC 39.19%

Why did ADBE fall 14% in the first 2 weeks of September? Most of the move happened before the report. The reasons, from the largest to the smallest:

• The leadership change. On Sep 03, the board chose Anil Chakravarthy as the next CEO, and David Wadhwani said he would leave. ADBE fell 6.73% on Sep 04 and 3.47% on Sep 08.

• The Q4 revenue guidance. The $6.825B midpoint is 0.4% below the $6.85B LSEG consensus and implies ~10% growth after 13% in Q3. Adobe beat the midpoint of its own Q3 revenue guidance by $65M but raised the full-year target by only $51M, so the implied Q4 decreased by ~$14M.

• The organic slowdown. Without Semrush, the Q4 guidance is ~8% growth, by my estimate.

• The forward indicators. RPO grew 8% YoY to $22.16B, after 13% in Q2.

• Freemium without conversion yet. The free products bring users, but ARR growth decreased, and the planned Creative Cloud price changes are deferred.

At the same time, the report itself was solid. Revenue, EPS, and both customer groups came in above the top of Adobe’s own guidance. Revenue beat the LSEG consensus by 0.9% and EPS by 0.7%, and consensus FY2027 EPS increased from $27.50 to $27.67 the day after the report. On Sep 11, ADBE closed 1.4% higher. In my view, the leadership change explains the size of the move better than the numbers do, since the report changed the implied Q4 revenue by only ~$14M.

The longer history is more important. GAAP EPS increased from $10.02 in FY2021 to $17.91 over the last 12 months, and LTM EPS growth is 11.61% against a 9.82% mean. In FY2021, GAAP EPS decreased 7% after a one-time tax benefit in FY2020, and in FY2022, it increased only 0.8%. Consensus forward EPS more than doubled over 5 years, from ~$13 to $26.89.

At the same time, the stock was a poor investment. The total return was -17.49% per year over 5 years against 12.60% for the S&P 500 (VOO), and 9.41% per year over 10 years against 15.25%. The whole difference is the multiple, which decreased from ~50x forward earnings in 2021 to 9.4x.

Future

• Consensus revenue: FY2026 $26.61B (+11.96%), FY2027 $29.02B (+9.05%), FY2028 $31.47B (+8.44%) - the slowdown is already in the estimates

• Consensus EPS: $24.48 -> $27.67 -> $31.42 (FY2026-FY2028); the FY2026 number is inside the company’s guidance, and FY2027 EPS increased 1.0% since Aug 24

• 5Y forward EPS growth estimate: 13.92%, against a 15.88% 5Y mean and below the -1 standard deviation band (14.52%); it decreased from ~17.6% at the end of 2024 to ~13% in early 2026. To compare, non-GAAP EPS grew ~14% per year from FY2021 ($12.48) to FY2025 ($20.94)

• Analysts: 23 of 40 rate the stock Hold (4 Strong Buy, 8 Buy, 23 Hold, 4 Sell, and 1 Strong Sell), average target $279.05, +10.63% from here (the range is $190.00 to $377.07)

• Company guidance: FY2026 revenue $26.576-26.626B, non-GAAP EPS $24.45-24.50, ending ARR growth 10.2% (Semrush included), and non-GAAP operating margin ~45%; Q4 revenue $6.80-6.85B and non-GAAP EPS $6.30-6.35

What has to happen for the thesis to work. Consensus expects ~9% revenue growth and ~13% EPS growth in FY2027. In my view, this is realistic if three things happen: organic ARR growth stays at ~8-9%, the non-GAAP operating margin stops declining at ~44%, and buybacks keep reducing the share count by ~5% a year. The buybacks are the most reliable part, since they depend on FCF, not on AI. The first two are the ones to check. My model assumes 13.92% EPS growth per year for 5 years, so all three have to hold well beyond FY2027. The next checkpoints are Adobe MAX in November and the December report, which normally includes the targets for the next fiscal year and will be the first one under the new CEO.

Current Valuation

Current vs 5Y mean:
Price/Fwd Earnings: 9.4x vs 24.5x
Price/Fwd Sales: 3.5x vs 9.1x
Price/FCF: 9.5x vs 25.9x
Price/Book: 8.5x vs 13.7x
PEG: 0.67 vs 1.57
Forward Earnings Yield: 9.7%

All five multiples are below their -1 standard deviation bands. The forward P/E is 9.4x against a 15.2x band, Price/Sales is 3.5x against 5.6x, and Price/FCF is 9.5x against 15.6x. ADBE trades at a 9.7% forward earnings yield and a ~10.6% FCF yield. To compare, the 4 competitors trade at 13.3-29.3x forward earnings. In my view, these yields are high for a company whose revenue still grows ~11% organically.

Analyst’s note:

The 5Y means include late 2021, when ADBE traded at 40-50x forward earnings, so the 24.5x P/E mean is inflated, and I do not use it as the Base Case. Also, Koyfin’s 9.4x uses next-12-months EPS (mostly FY2027, since the fiscal year ends in November). On FY2026 EPS of $24.48, the P/E is 10.3x. The exit multiples in my model start from today’s 9.4x.

The market cut the multiple much more than the growth. The 5Y EPS growth estimate decreased from a 15.88% mean to 13.92%, while the PEG ratio decreased from a 1.57 mean to 0.67. Even at the mean growth rate, today’s P/E would be a PEG of ~0.6.

What does the price already assume? With my 12% required return, ADBE needs ~15% annual EPS growth if the multiple stays at 9x. If the multiple recovers only to 12x, ~9% EPS growth is enough, and at 15x, ~4% is enough.

One chart frames this whole section. It applies the three exit multiples of my model (9x, 15x, and 20x) to the consensus forward EPS and compares the result with the price.

Fair Price

My model projects consensus EPS 5 years forward. It takes the risk of overly optimistic estimates into account by capping future growth at 20% per year. Here the cap does not bind. The consensus 5Y estimate is 13.92% per year, and Adobe pays no dividend, so the model uses 13.92%. Starting EPS is $24.48 (FY2026), which compounds to $46.97 in FY2031.

The discount rate is 12%; the margin of safety is 30%. The exit multiples are 9x, 15x, and 20x. 9x is today’s multiple rounded down, so this case assumes the market never re-rates ADBE, even with 14% EPS growth. 15x is the -1 standard deviation band (15.2x), where ADBE traded at the end of 2025, and a PEG of ~1.1. 20x is a PEG of ~1.4 and still below the 24.5x 5Y mean, which the 2021 period inflates.

Bear Case (exit P/E 9x): fair price $240 - MoS price $168
Base Case (exit P/E 15x): fair price $400 - MoS price $280
Bull Case (exit P/E 20x): fair price $533 - MoS price $373

At $252, ADBE trades 5% above the Bear Case fair price and 37% below the Base Case. The accumulation zone is $168-240. The model is sensitive to growth. At 10% annual EPS growth instead of 13.92%, the fair prices decrease to $201/$336/$447, and ADBE would be 25% above the Bear Case. Since growth is the least certain input here, the lower end of the zone ($168) is a more conservative anchor than the Bear Case fair price. Worth noting that the Base Case of $400 is 6% above the highest street target ($377). The corridor is more optimistic than the street on the multiple, with the same consensus EPS.

Due Diligence

Profitability (11 of 15):

• Positive Gross Profit: $23.18B

• Positive Operating Income: $9.27B

• Positive Net Income: $7.29B

• Positive FCF: $10.59B

• Gross margin >= 40%: Yes (89.25%)

• Net margin >= 10%: Yes (28.05%)

• FCF margin >= 10%: Yes (40.79%)

• Management (ROIC, ROE, ROA) >= 10%: Yes (39.19%/61.90%/19.73%)

• Strong 3Y Revenue Growth: No (~10.5% per year)

• Revenue Growth Forecast: No (~10% per year over the next 3 years)

• ROE is increasing: ~36% -> 62%

• ROIC is increasing: ~26% -> 39%

• Revenue surprises in the last 5Y in a row: No (in line in Q3 FY2022 and Q4 FY2022)

• EPS surprises in the last 5Y in a row: Yes

• EPS growth YoY 5Y in a row: No (GAAP decline in FY2021 after a one-time tax benefit in FY2020)

Financial Strength (5 of 6):

• Total assets ($29.98B) exceed total liabilities ($18.22B) by 1.65x

• Negative Net Debt: No ($0.72B of net debt, with cash and short-term investments of $5.64B against $6.36B of borrowings)

• Low Debt/Equity: 0.58 (5Y mean: 0.41)

• Debt/Capital: 0.37 (5Y mean: 0.29)

• Interest coverage (FFO): 41.6x

• Piotroski F-Score: 8 of 9 (not passed: higher current ratio YoY)

Valuation and Advantage (3 of 4):

• Valuation < 5Y mean: Yes

• Valuation < the industry: Yes (the lowest P/E, P/S, and P/FCF among the competitors)

• Does it have a moat: Yes (narrow)

• Outperformed the S&P 500 over 5Y: No (-17.49% vs 12.60% CAGR)

Shares (2 of 3):

• Insider ownership >= 5%: No (0.45%)

• Fewer shares outstanding YoY: Yes (395M vs 424M diluted)

• Insider buys in the last 6M: Yes (a director in June)

Price (4 of 4):

• 1Y price forecast > 10%: +10.63%

• Next 5Y EPS growth estimate (CAGR) > 10%: Yes (13.92%)

• DCF Value: ~$579 (base case: revenue growth 7.7% - below consensus, 8.8% discount rate); undervalued by ~56%

• Short Interest < 5%: Yes (4.5%)

Verdict

ADBE belongs in a long-term portfolio as a satellite value position, not as a core holding, until organic growth and the operating margin stabilize. The company is the standard in documents and creative software, with more than 1 billion monthly users, an 89% gross margin, a 39% ROIC, and $10.6B of FCF that goes into buybacks. ADBE is priced at 9.4x forward earnings and a PEG of 0.67, below its -1 standard deviation band on every multiple. My model uses the consensus 13.92% growth and today’s 9x multiple as the Bear Case. The fair price corridor is $240-533, and the accumulation zone is $168-240. At $252, ADBE is just above that zone. In my view, the realistic bear case is not a crash but dead money: organic ARR growth slides to ~7%, the multiple stays at 9x, and the return is mostly the buyback yield. Accumulate inside the zone with a multi-year horizon, and judge the thesis on organic ARR growth and the non-GAAP operating margin, not the share price.

One-Pager

This is not a financial or investing recommendation. It is solely for educational purposes.

TL;DR: Uber (UBER) is the world's largest ride-hailing and delivery platform. Over 200 million people use it at least once a month, across 70+ countries. The business is in its best shape ever - bookings increased 24% in Q2, trailing free cash flow passed $10B for the first time, and ROIC reached 24%. At the same time, the stock is down 16% over the last year, at 19.7x forward earnings for ~27% consensus EPS growth - a PEG of 0.74. The market is pricing one fear: autonomous vehicles. This post is my attempt to weigh that fear against the numbers. Verdict: at $76, the stock is 20% below my Bear Case fair price, deep inside the accumulation zone. My full fair price math and the accumulation zone are at the end of this post.

Investment Thesis

The gap is simple to state. Uber's users, bookings, and free cash flow are at all-time highs, yet the stock lost 16% over the past year. Everything in this post hangs on whether the reason for that loss (the robotaxi story) deserves the price it already collected.

• Growth remains strong where it matters. Gross bookings increased 24% YoY in Q2, to a record $58.0B, and 208 million people now use the platform monthly (+16% YoY) - the company added more first-time users over the last 12 months than in any period of the last 5 years. Uber One members now account for more than 70% of delivery bookings.

• The growth is not priced in. Consensus expects ~27% EPS growth per year over the next 5 years: $3.36 this year, $4.38 next, $5.46 in 2028. UBER trades at 19.7x forward earnings against that - a PEG of 0.74.

• Quality stopped being the question. ROIC is 23.97%, ROE is 37.16%, the FCF margin is 18.32%, and Debt/Equity fell to 0.52 against a 0.88 historical mean. The company that burned cash until 2022 now buys back 4% of its shares a year.

• The derating already happened. Uber’s early P/E history is useless (the company lost money until 2023), but the readable metrics agree: P/B is at 5.8x, exactly its -1 standard deviation band; P/S is below its mean; PEG is 0.74.

• The bear case: Robotaxis remove the driver, and the driver is the reason an aggregator exists. Waymo already sells rides through its own app in San Francisco and Los Angeles, Tesla (TSLA) promises the same, and a vertical winner does not need Uber in the cities where it operates. My model takes this into account by capping growth at 20% against the 26.8% consensus, and by using today’s 20x multiple as the Bear Case exit - a world where the market never changes its mind about Uber. Even that scenario prices the stock above today’s quote. The math is in the Fair Price section.

Company Overview

Next Earnings Date: Nov 03, 2026 (estimated)
Market Cap: ~$155B
Sector: Industrials
Industry: Ground Transportation
Type: Large Growth
Short Interest: 2.3%

Uber is a marketplace. It matches riders with drivers, hungry people with restaurants and couriers, and shippers with carriers. 208 million people use the platform at least once a month, in over 70 countries. The company reports in three segments, and Q2 shows their weight: Mobility generated $29.0B of bookings (+22% YoY), Delivery $27.5B (+26%), and Freight $1.6B (+25%). Worth noting that delivery now grows faster than rides.

The product range grew far beyond a taxi app. In Mobility: everything from Moto and UberX Share at the cheap end to Black and Reserve at the expensive end. In Delivery: restaurants, groceries and retail, and increasingly advertising on top of the order flow. Uber One ties the segments together, and membership reached another all-time high in Q2.

The deal history shows the same pattern for years: buy the regional leader (Careem), buy the missing piece (Postmates, Transplace), keep equity when leaving a market (Didi in 2016, Grab (GRAB) in 2018, a ~25% stake in Aurora after selling its own AV unit in 2020).

The company is managed by Dara Khosrowshahi (LinkedIn), CEO since 2017. He came from Expedia, took Uber public in 2019, and led the company through the turn from heavy losses to real profitability. The CFO is Balaji Krishnamurthy (LinkedIn). The marketplace behind the leadership grows on both sides: a record 10.2 million drivers and couriers earned over $25B on the platform in Q2, more than 400,000 merchants participate in Uber One offers (+50% YoY), and the membership program is backed by 35+ outside partners, from Delta (DAL) and Marriott (MAR) to PayPal (PYPL) and Disney+ (DIS).

Market Overview

The core question for Uber is what autonomous vehicles (AV) do to a demand aggregator. Everything else about the company is going well, and the market knows it - which is exactly why the stock trades on this one question.

The market itself keeps growing - trips on the platform increased 18% YoY to 3.9 billion in a single quarter, and Uber remains the largest player in both categories it serves. AVs today are still a small share of the market. Waymo (the clear technology leader) has a fraction of a percent of Uber’s quarterly trip count.

Worth noting the geography. Only about 30% of Uber's US gross bookings (and ~25% of its profits) come from the top 20 cities - exactly where robotaxis arrive first. The rest of the volume lives in suburbs, smaller towns, and 70+ countries, where the AV economics do not work yet and will not for years.

The demand side of ride-hailing is not linear - it spikes at 8 a.m. and 5 p.m. A robotaxi fleet has to own enough cars for the peak (and burn capital at noon) or own too few (and lose the customer). Uber’s human drivers flex with the peak. And the company answers the fear with data: in the most mature AV markets (Los Angeles, San Francisco, Phoenix), Uber reports a higher category share than a year ago - both citywide and inside the AV operating zones. So far, robotaxis are growing the category instead of eating the aggregator. In my view, that is why the most likely outcome is not replacement but partnership - the AV companies build the cars, and the aggregator with 208 million users fills them.

The chart above is the whole situation in one picture: revenue estimates at a record, price 22% below its high. As a result, the bear narrative needs a strong argument to justify the gap.

Economic Moat

Gross margin is 40.75% against a 34.7% mean, the FCF margin is 18.32% against an 8.73% mean, and the operating margin went from deeply negative to 12.13%. The one line that fell is the net income margin - it spiked above 30% in 2025, when the one-time 2024 tax benefit was inside the trailing window, and normalized to 17.34% as the benefit rolled off. The company that lost 40 cents per revenue dollar in 2022 now keeps 17 cents of it as net income.

The moat is the network effect, and it can be measured. Uber has 208 million monthly users, and they take 18-19 trips per quarter on average. To compare, DoorDash (DASH) gets 12-15 orders per user and Lyft (LYFT) gets 8-9 rides over the same period. Uber has also averaged ~15% user growth since 2022 against ~10% at Lyft - and this despite the fact that Uber’s base is several times larger. More riders attract more drivers, more drivers cut wait times, shorter waits attract more riders. Every trip provides data for the pricing and matching algorithms, so the marketplace gets better as it gets bigger. That is the flywheel.

The returns confirm it. ROIC went from deeply negative to 23.97%, ROE to 37.16%, ROA to 6.88%. A marketplace at scale is a very good business.

Business Strategy

Mobility and Delivery share one subscription, one map, and one payment method. Uber One membership is at a record; members order more often, and ~40% of eligible members are active across both Mobility and Delivery - the subscription is the switching cost for this business. Advertising grows on top of the order flow as an almost pure-margin layer.

The largest deal in company history. Uber agreed to acquire Delivery Hero (DHER), which expands the platform to nearly 100 markets and almost doubles the number of markets where Uber offers both rides and delivery - from 34 to 58. The company counts 50 million+ newly eligible cross-platform users, and Uber One extends to all of them.

Commercialize everyone's cars, build none. Uber sold its own autonomous unit to Aurora in 2020 (keeping ~25%), and its stated ambition now is to be the commercialization platform for autonomous mobility. The numbers behind the words: AVs are already live on Uber in 7 cities, with a target of up to 15 by year-end, and partners have committed ~120,000 vehicles to the network. The 2026 deployment roster counts more than 20 companies: Waymo, Wayve, Nuro, Zoox, WeRide, and Pony.ai on the self-driving side, with carmakers and fleet operators around them. Wayve's cars received London licenses in August and launched supervised rides in the UK in early September. The logic is simple: if many AV makers compete, the aggregator picks the terms. So Uber works to make sure many compete, including through an AV Labs team that collects millions of miles of driving data each month for its partners.

Cost discipline. Sales and marketing falls as a share of revenue year after year. Stock-based compensation fell from over 7% of revenue in 2022 to 3.5%. Capital expenditure is $308M on $55B of revenue - the company owns software, not cars. And on Sep 02, Uber announced 3,300 job cuts (10% of the workforce, the largest reduction since the pandemic) and a 20% reduction in managers. The company states the goal is fewer management layers and more resources for the delivery and AV investments.

Capital Allocation

The balance sheet is solid but not excellent. Total debt is $14.7B against $5.4B of cash; Uber has a net debt position of ~$9.3B. The trend is what matters: Debt/Equity fell to 0.52 against a 0.88 historical mean, Debt/Capital is 0.34, and FFO covers interest 22.6x against a 9.0x mean. Worth noting that the debt edged up over the last year - the balance sheet improvement comes from earnings, not from repayment.

Free cash flow is the story of the decade for this company - from a trailing burn of more than $1B in early 2022 to $10B over the last 12 months. Capex is minimal, so operating cash and free cash are almost the same number.

There is no dividend. Instead, Uber buys back stock: $510M in Q2 alone, with a stated plan of directing roughly half of free cash flow to repurchases. The diluted share count declined ~4% YoY, and the trailing buyback yield is 4.2%. With SBC down to 3.5% of revenue, the buyback is real: it reduces the count instead of hiding dilution.

Worth mentioning also the Q2 exception. Buybacks were smaller than usual because ~$4B went into a ~37% economic interest in Delivery Hero - the first step of the full acquisition, with the rest funded through existing liquidity and debt, and closing targeted for the second half of 2027. Management states gross leverage stays below 2x through the deal.

Advantages

• The network effect. 200 million users taking 18-19 trips a quarter - the highest engagement in the industry, and it reinforces itself.

• Asset-light economics. $308M of capex on $55B of revenue. Uber owns the marketplace, while drivers own the cars.

• The cash machine. Trailing FCF passed $10B for the first time, an 18.3% margin, and a buyback that retires 4% of the shares annually.

• Diversification. Two large segments plus freight, 70+ countries, and only ~30% of US bookings from the top 20 cities. A robotaxi launch in one place does not touch most of the business.

• The data flywheel. Billions of trips provide data for pricing and matching algorithms that competitors cannot replicate at smaller scale - and that AV companies will need.

Disadvantages

• The AV question. Waymo and Tesla can build their own demand apps and bypass the aggregator. The Waymo relationship is already cooling: the exclusive partnerships in Austin and Atlanta expire in the first half of 2028, and the two companies lobby for opposite regulatory frameworks.

• Regulation. The business model depends on drivers being contractors, not employees. California’s Proposition 22 went Uber’s way, but there are many jurisdictions, and one unfavorable ruling can reprice the whole cost structure.

• GAAP noise. Uber’s stakes in Didi, Grab, and Aurora swing reported earnings every quarter. In Q2 alone, revaluations added a $1.6B pre-tax benefit - GAAP EPS came in at $1.17 against $0.81 Non-GAAP. Trailing EPS of $4.58 is inflated the same way, so I use consensus EPS everywhere in this post.

• Low switching costs. A rider with two apps installed pays whoever is cheaper. Uber One softens this, but the platform still has to win on price and wait time every single day.

• Ambitions cost money. Uber plans to commit over $10B (equity stakes, infrastructure, and vehicle offtake commitments) to bring AVs to market, and the Delivery Hero acquisition adds debt to the balance sheet on top. Both strain the asset-light story - the company states it is evaluating financing structures with third-party capital providers for the AV deployments.

What the bears get right: if Waymo proves the vertical model in the top places, Uber's pricing power in its densest, most profitable markets erodes first - and the market will not wait for the suburbs to confirm it.

Competitors

The competitor set depends on the segment. In US ride-hailing, it is Lyft; in delivery, it is DoorDash and Instacart (CART); internationally, it is Didi, Grab, and Bolt; in the AV scenario, potentially Waymo and Tesla. I made the comparison in numbers.

DoorDash is the one real operational rival. Consensus expects 45% EPS growth from DoorDash over the next 5 years against Uber’s 27%, and charges 34.6x forward earnings against Uber’s 19.7x. On PEG, the two are almost identical: 0.77 against 0.74. The difference is what the buyer gets today. Uber trades at 15.3x free cash flow with a 23.97% ROIC; DoorDash trades at 37.1x free cash flow with a 6.27% ROIC. At the same price per unit of growth, Uber is the one that already produces the cash and the returns.

Lyft looks like the cheapest stock in the table. The 9.2x P/E comes with negative expected EPS growth over the next 5 years, and the PEG of 2.55 is the worst in the set - the multiple is low because the earnings are expected to decline. The 42.32% net income margin with a 64.21% ROIC is not operational either - in Q4 2025, Lyft released the valuation allowance on its deferred tax assets and booked a $2.9B one-time benefit. The 0.69% EBITDA margin shows the operating reality. Uber recorded the same kind of benefit in 2024, so I treat both the same way and look at cash instead. On cash, Lyft is genuinely cheap at 5.9x P/FCF, but cheap with declining earnings is a value case, not a growth case.

Instacart is the cheapest per unit of growth. A PEG of 0.47 with a 72.58% gross margin is the best-looking line in the table. But Instacart is a one-category company, and both Uber and DoorDash are pushing into groceries with much larger user bases. The 11.4x multiple prices in the risk that the growth does not survive that competition. Grab is the opposite case - the market pays 3.0x forward sales for Southeast Asian growth with a negative FCF margin and a 1.65% ROIC today. Worth noting that Uber holds equity stakes in both Grab and Didi, so the international competition is partly owned by Uber itself.

In my view, Uber is the only company in the set that combines expected EPS growth above 25%, a ROIC above 20%, and a free cash flow multiple below 20x. DoorDash has the growth without today’s returns, Lyft has the cash without the growth, and Instacart’s discount is the price of competing with the first two. Debt changes nothing here: Debt/Equity ranges from 1.3% at Instacart to 51.9% at Uber, and every company in the table generates positive free cash flow against it.

Past

The last report (Q2 2026) was strong: gross bookings reached a record $58.0B, +24% YoY (+22% in constant currency), once again above the high end of the company’s own outlook. Revenue grew 12% to $14.2B - the gap versus bookings comes from business model changes that cut ~8 points off reported revenue growth. Adjusted EBITDA increased 33% to $2.8B (4.9% of bookings), and Non-GAAP EPS grew 35% to $0.81. The only soft spot was Brazil, the highest-volume market on the platform - a driver shortage in Moto cost ~2 points of global trips growth. The trailing 12 months: revenue $55.2B, net income $9.6B, FCF $10.1B.

The EPS chart tells the whole 5-year arc: from -$5 in 2022 to +$4.58 today. There is no smoothing in that line - the whole swing happened in about 30 months.

A 14.8% 5Y CAGR against 12.8% for the S&P 500 (VOO) - ahead, but not by what the business did. The last year explains it: -16%, driven not by results but by the AV narrative. The selling started with the February guidance (19% bookings growth at the midpoint - a deceleration) and accelerated on every Waymo headline since. Why did the stock fall on strong numbers? Because the market is not pricing this year. It is pricing the terminal value of an aggregator in a robotaxi world.

Future

• Revenue consensus: $57.96B this year (+11.42%), $66.84B in 2027 (+15.32%), $76.22B in 2028 (+14.05%).

• EPS consensus: $3.36 -> $4.38 -> $5.46 (+37.34%, +30.2%, +24.56%).

• The 5Y forward EPS growth estimate is 26.8%.

• Analysts: 51 cover the stock; the average rating is Strong Buy, the average target is $101.81 (range $70-150), which is +34% above the current price.

• Company guidance for Q3: gross bookings of $58.25-60.25B (+18-22% constant currency, with ~1 point of currency headwind) and Non-GAAP EPS of $0.84-0.88 (+28-35%), which translates to Adjusted EBITDA of $2.86-2.96B. The midpoint implies a step down from Q2’s pace - that deceleration, not the results, is what the market keeps selling.

Current Valuation

Current vs 5Y mean:
P/E (NTM): 19.7x (mean not usable)
P/S (NTM): 2.5x vs 2.7x
P/FCF (LTM): 15.3x (mean not usable)
P/B (LTM): 5.8x vs 8.7x (at the -1 SD band)
PEG (NTM): 0.74 vs 0.72
EV/EBITDA (NTM): 13.0x

Analyst’s note:

Uber’s 5Y valuation means are mostly unusable. The company was unprofitable until 2023, so the P/E “mean” of 41x and the P/FCF mean of 50x average in the loss-making years - I do not use them anywhere in my model. And I use the forward P/E, not the trailing 17x: trailing GAAP earnings include revaluations of the Didi, Grab, and Aurora stakes, so the consensus $3.36 for this year is the honest denominator. The metrics that survive the history check: P/S, P/B, and PEG.

The readable metrics agree with each other: P/S slightly below its mean, P/B exactly at its -1 standard deviation band, PEG at 0.74. For a company growing bookings 24%, none of that reads expensive.

One chart frames this whole section:

Fair Price

The model takes the consensus EPS for this year ($3.36) and grows it for 5 years. Consensus says 26.8% a year, but my model caps growth at 20% (the cap is a rule). The result is multiplied by three exit multiples and discounted back.

The discount rate is 12%; the margin of safety is 30%. The exit multiples are 20x/25x/30x: the Bear Case is today’s multiple (19.7x, rounded to 20x) - a market that never re-rates Uber; the Base Case is 25x - a PEG of 1.25 on my capped growth, since the polluted historical mean gives me nothing to anchor on; the Bull Case is 30x - a PEG of 1.5, the most my own rules allow me to pay for any stock.

Bear Case (exit P/E 20x): fair price: $95; MoS price: $66
Base Case (exit P/E 25x): fair price: $119; MoS price: $83
Bull Case (exit P/E 30x): fair price: $142; MoS price: $100

At $76, the stock is 20% below the Bear Case fair price - deep inside the accumulation zone, and below even the Base Case MoS price of $83. To say it plainly, the current quote assumes less than a never-re-rated multiple on a growth rate cut by a quarter.

Verdict: UBER belongs in a long-term portfolio as a large-cap growth holding. The business is the largest ride-hailing and delivery aggregator in the world: 208 million users, an 18% FCF margin, and a buyback of 4% of the shares a year. The stock trades at 19.7x forward earnings with a PEG of 0.74, and P/B is at its -1 standard deviation band. My corridor is $95-142, and the accumulation zone is everything up to the Bear Case fair price of $95; at $76, the price is 20% below it. The realistic bear case here is not a crash but dead money - the multiple stays where it is while every Waymo headline resets the AV debate, and the stock stays cheap until the terminal-value question gets an answer. Buy with a multi-year horizon, and judge the thesis on bookings growth and the FCF margin, not the share price.

Due Diligence

Profitability (11 of 15):

• Positive Gross Profit: $22.5B

• Positive Operating Income: $6.7B

• Positive Net Income: $9.6B

• Positive FCF: $10.1B

• Gross margin >= 40%: Yes (40.75%)

• Net margin >= 10%: Yes (17.34%)

• FCF margin >= 10%: Yes (18.32%)

• Management (ROIC, ROE, ROA) >= 10%: Mostly (23.97%/37.16%/6.88%)

• Strong 3Y Revenue Growth: ~18% per year

• Revenue Growth Forecast: ~14% per year over the next 3 years

• ROE is increasing: negative in 2022 -> 37.16%

• ROIC is increasing: negative in 2022 -> 23.97%

• Revenue surprises in the last 5Y in a row: No (2025: -0.05%)

• EPS surprises in the last 5Y in a row: No (2025: -11.71%)

• EPS growth YoY for the last 5Y in a row: No (losses until 2023)

Financial Strength (4 of 6):

• Total assets exceed total liabilities by 1.76x

• Negative Net Debt: No ($14.7B of debt against $5.4B of cash)

• Low Debt/Equity: 0.52 (historical mean: 0.88)

• Debt/Capital: 0.34

• Interest coverage (FFO): 22.6x

• Piotroski F-Score: 6 of 9 (not passed: Higher ROA yoy, Higher Current Ratio yoy, and Higher Asset Turnover yoy)

Valuation and Advantage (3 of 4):

• Valuation < mean: Yes (on the usable metrics: P/S, P/B, PEG)

• Valuation < the industry: Mixed (below DASH and GRAB, above LYFT and CART)

• Does it have a moat: Yes (narrow, network effects)

• Outperformed the S&P 500 over 5Y: Yes (14.8% vs 12.8% CAGR)

Shares (1 of 3):

• Insider ownership >= 5%: No (3.95%)

• Fewer shares outstanding YoY: Yes (-4%)

• Insider buys in the last 6M: No (the CFO bought in February)

Price (4 of 4):

• 1Y price forecast > 10%: +34% (average target $101.81)

• Next 5Y EPS growth estimate (CAGR) > 10%: Yes (26.8%)

• DCF Value: undervalued by 12% (86.85)

• Short Interest < 5%: Yes (2.3%)

Watchlist Note

The largest ride-hailing and delivery aggregator. 19.7x fwd earnings, PEG 0.74, P/B at -1SD; 5Y means unusable (losses until 2023). Consensus +27%/yr, model capped at 20% -> fair value $95/$119/$142, zone up to $95 - price deep inside, below Base MoS $83. Watch: bookings growth >= 20%, FCF margin >= 15%, Waymo/AV headlines, gig-worker rulings. Next report: Nov 03 (estimated).

One-Pager

This is not a financial or investing recommendation. It is solely for educational purposes.

Why trust these zones

The fair price models here are the same ones I publish in my analyses, so their track record is public. The August 4 Microsoft analysis put the fair price at $567 with the stock at ~$457 - three weeks later, the stock was $514. The July 28 NVIDIA analysis identified an accumulation zone of $181-258 while the market argued about peak AI demand - the stock is $217 today, still inside that zone, and the quarter reported since then showed +106% revenue growth. And the honest side of the same coin: the Reddit analysis identified a $149-213 accumulation range at a $160 price - the stock is $145 now, below the bottom of it. I also bought On Holding inside its zone at ~$38 - the stock is below $28. Zones are not a prediction of the bottom - they mark the price where the math stops needing optimism.

Worth noting that the same screens that feed this watchlist hold 5 of my 9 portfolio stocks today. The list below is not a separate universe - it is the queue my next buys come from.

How names enter and leave this list

A name enters in two steps. The screens find the numbers - the same quality tests my portfolio stocks pass. Then I review the business myself and build the fair price model you see in every entry. A screen finds numbers - it does not find moats. I try to find moats in my detailed analyses.

To be clear about what this list is not: a watchlist entry is not a finished deep dive. The full analysis comes before any buy - that rule stays. A name leaves through two doors only: I buy it, and it moves to the portfolio; or a quality test breaks, and I remove it with the reason stated. A name never leaves for going up in price. A stock that ran away from its zone simply waits in the list. The list holds 15 names at most, because every name has a live fair price model that must be refreshed after every report. The zones get rechecked in every monthly portfolio issue.

Explanations

The method is the one from Portfolio #002: consensus EPS, grown for 5 years at consensus growth plus the dividend yield (capped at 20% in total), multiplied by three exit P/E multiples and discounted at 12% a year. Fair price = the Base Case. Buy zone = the Bear Case fair price.

The exit multiples are never invented numbers. Each one is a real anchor from the stock’s own history: today’s multiple, the -1 standard deviation band, the 5Y mean, or the +1 standard deviation band. The Bear Case is the pessimism that already happened - the lower of today’s multiple and the -1 standard deviation band, so the buy zone assumes no recovery at all. The Base Case is the norm I actually believe - the 5Y mean, unless the mean is poisoned by a bubble or pre-profit years. Then I step down to the next anchor I trust, and I say so in the entry. The Bull Case is the most I would pay myself - and it never exceeds 30x, because at my 20% growth cap, 30x is a PEG of 1.5, the ceiling from the Manifest. When two multiples land next to each other, that is not a rounding accident. It is the model saying the derating has already happened, or that the ceiling already binds.

NFLX

Next earnings: Oct 16 (estimated)
Fair price: $122
Buy zone: up to $117
Curr Price/Fair Price: 0.68 (32% undervalued)
PEG: 1.10

Netflix (NFLX) is the largest paid streaming service in the world, with 325 million subscribers and the biggest TV entertainment audience both in the US and internationally. The model is on-demand series, films, and documentaries, without regular live or sports. The advantage is economies of scale - one content budget spreads over a base no competitor matches. And since 2022, advertising has grown as a second revenue stream, and the company expects it to roughly double this year.

The stock fell 33% over the last year while consensus still expects ~21% EPS growth over the next 5 years. NFLX is at 23.3x forward earnings - below its -1 standard deviation band (24.6x) and far below its 33.6x 5Y mean. My exit multiples are 23x/24x/30x: today’s multiple, the -1 standard deviation band, and my 30x bull ceiling. At $83, the stock is 29% below the Bear Case fair price - the scenario where the multiple never recovers at all.

What I watch: the 5Y EPS estimate. It already came down from a 25.7% mean to 21.2%; my model caps growth at 20% anyway, so the fair prices move only if the estimate falls below that.

Analyst’s note:

Netflix’s 5Y mean P/E of 33.6x includes the 2021 period at 55-60x forward earnings. In my view, that mean is inflated, so the model does not use it. The Base Case takes the -1 standard deviation band instead, and the Bull Case is capped at 30x - at my 20% growth cap, that is a PEG of 1.5, the most I allow myself to pay for any stock.

Below is the list of the other 9 entries. 5 of them are in their buy zones right now. The cheapest one trades at a PEG of 0.37, the deepest fell 56% in a year, and one is on the list precisely because I refuse to buy it at today’s price. Each entry has the fair price model, the buy zone, and the one thing that would change my mind. At the end - the whole list in one comparison table.

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The track record

Since inception in December 2021, the portfolio compounds at 15.71% a year - ahead of the S&P 500 (11.37%), QQQ (14.39%), VUG (14.46%), and SPYG (14.49%). Beta is 0.95; the max drawdown is -19%. The method is unchanged and documented in issue #001: TWR returns via Portseido, percentages and not dollars, 4 benchmarks.

August was an average month: +2.50% vs +2.88% for the index. YTD, I remain behind: +4.79% vs +12.44%. The reason is the same as in #001: a large treasury block while the market keeps running. That block got smaller in August - the details are below.

Analyst’s note:

All numbers in this issue are as of August 30, 2026 - the last trading day included is Friday, August 28.

Read more

TL;DR: First Solar (FSLR) is the largest thin-film solar module manufacturer in the Western Hemisphere, and its Q2 2026 report was built on margin, not sales: earnings beat estimates by 43%, even as revenue fell 3.7% YoY to $1.06B. Gross margin reached 44.0% LTM, helped by Section 45X manufacturing tax credits and a growing mix of US-made modules. The stock trades at 10.8x forward earnings and a PEG ratio of 0.51, with $1.5B of LTM free cash flow and roughly $1.5B of net cash on the balance sheet. Strong backlog through 2030. Even so, the stock is down 14% YTD on tariff uncertainty, global module oversupply, and its dependence on US clean-energy policy. Verdict: the earnings power is improving faster than the price. My full fair price math and the accumulation zone are at the end of this post.

Investment Thesis

First Solar reported second-quarter 2026 results with earnings 43% above consensus and a fourth straight quarter of margin expansion, even as revenue fell 3.7% YoY. The stock is still down 14% YTD. Below are my main points of view.

• The growth is in earnings and backlog, not yet in revenue. The contracted backlog stands at 45.1 gigawatts, worth $13.6B through 2030, and consensus expects EPS to grow from $17.60 in FY2026 to $23.09 in FY2027 and $29.19 in FY2028, even as reported revenue guidance for 2026 is roughly flat at $4.9-5.2B.

• The market is not paying for that growth. Consensus expects a 21.3% EPS growth rate over the next 5 years, and the PEG ratio is now 0.51 - the cheapest of its solar-equipment competitors that are still growing at all.

• The margin profile keeps improving. 44.0% gross margin LTM, 32.5% net margin, 16.5% ROIC, $1.5B of FCF, and roughly $1.5B of net cash - both margins are the highest among its competitors.

• The multiple has compressed. The forward P/E is 10.8x against a 30.4x 5Y mean (inflated by 2022-23’s near-zero earnings), even as EPS estimates for 2026 through 2028 keep increasing.

• The bear case: a $60-80M net tariff headwind assumed for 2026, a pending Section 232 investigation that could affect close to 1.8 gigawatts of finished Southeast Asia capacity, intense competition from Chinese crystalline-silicon manufacturers, and a 2026 guidance built on $2.10-2.19B of Section 45X tax credits. My model takes this into account. Even then, the stock trades below my Bear Case fair price.

Company Overview

Next Earnings: 27 Oct 2026 (estimated)
Market Cap: $24.24B
Sector: Information Technology
Industry: Semiconductors and Semi-Equipment
Type: Mid Core
Employees: ~7,900
Short Interest: 9.20%

First Solar, Inc. is headquartered in Tempe, Arizona, and is the world's largest thin-film photovoltaic (PV) solar module manufacturer and the largest PV solar module manufacturer in the Western Hemisphere. It was founded in 1999 and incorporated in 2006. Unlike most of the solar industry, which relies on crystalline silicon, First Solar uses a proprietary cadmium telluride (CdTe) thin-film technology - a process that represents only about 5% of the global solar module market. Worth noting that this is also why the stock is filed under Semiconductors and Semiconductor Equipment rather than a solar-specific industry: a CdTe module is, technically, a semiconductor product.

The company designs, manufactures, and sells solar modules that convert sunlight into electricity, and it provides operations and maintenance (O&M) services to system owners after installation. Modules are its only reportable segment.

Production runs across 4 countries: the United States, India, Malaysia, and Vietnam. The international lines are being scaled back as manufacturing shifts toward the US. Domestic capacity is expected to reach about 14 gigawatts once current expansions are complete, and the company sells almost entirely to project developers, system integrators, and utility-scale renewable energy operators, with an estimated 30% historical share of the US utility-scale solar market.

Market Overview

Global solar module manufacturing is a scaled, commoditized industry. Production is heavily concentrated in Asia, with China alone responsible for roughly two-thirds of global capacity, and crystalline silicon is the dominant technology at about 95% of the market. Falling module prices have made solar economically competitive against traditional generation almost everywhere, but the module makers themselves have historically captured little of that value - the segment has a long history of thin and volatile returns on invested capital.

First Solar is outside that commodity race in two ways. First, its cadmium telluride technology is a genuinely different manufacturing process, with a simpler supply chain and no dependence on polysilicon pricing. Second, and more important, it is the largest domestic solar manufacturer in a market that US trade and tax policy has increasingly closed to low-cost imports. The Section 45X manufacturing credit pays roughly $0.17 per watt for US-made modules, and FSLR domestic factories ran at 98% utilization in Q2 2026.

The bear case says this is a policy-dependent position that disappears once incentives fade, or global oversupply pushes prices down again. The contracted backlog is the counterargument: 45.1 gigawatts worth $13.6B through 2030, with US production substantially booked through 2028. That is more revenue visibility than most cyclical manufacturers get, even if the multiple the market pays for it should stay modest.

Economic Moat

As I see it, First Solar does not have a structural moat in the traditional sense. Solar modules are a commoditized product, and crystalline-silicon competitors can copy a price cut quickly. What protects the business today is policy, not technology: trade barriers and the Section 45X credit have fenced off the domestic market from the low-cost Chinese supply that dominates the rest of the world.

What still separates First Solar from its competitors is that its cadmium telluride process is a genuinely different technology - simpler, with a shorter supply chain, and no dependence on polysilicon pricing. That gives it a lower carbon footprint and stronger yields in hot, humid climates, but it does not give it a durable cost advantage. On a pre-credit basis, FSLR cost per watt runs modestly above its crystalline-silicon competitors. Without the 45X credit, the moat argument would be much weaker.

Analyst’s note:

I am calling this a no-moat business on purpose, even though the balance sheet and the backlog are genuinely strong. A moat has to survive a change in policy, and First Solar’s current advantage mostly does not.

Contracted demand is the more durable protection. The backlog runs 45.1 gigawatts and $13.6B through 2030, and US production is substantially booked through 2028. Developers pay a premium for that certainty: the average selling price on new US bookings was $0.36 per watt in Q2 2026, with room to charge more through so-called technology adjusters as CuRe and perovskite improvements roll out.

The returns on capital confirm the improvement, even without a classic moat. ROIC is 16.5% against a 14.0% 5Y mean, ROE is 18.5% against 16.2%, and ROA is 8.6% against 7.3%. All three increased sharply from below 6% in 2023 to today's levels, as the tax-credit-driven margin expansion flowed straight to the bottom line. Among its solar-equipment competitors, only Nextpower (NXT) does better on this measure, at 23.6% ROIC; Enphase (ENPH), Sunrun (RUN), and SolarEdge (SEDG) are all in the mid-single digits or negative.

Business Strategy

Here, I would like to define four choices that create the strategy. First, US-first manufacturing. Domestic capacity is on track to reach about 14 gigawatts once current expansions are complete, and a new finishing facility in South Carolina will let the company complete modules started at its international plants inside the United States. Management gives priority to integrated US factories when allocating production, which reduces dependence on short-cycle international demand.

Second, contract discipline over volume. Management continues to focus on pricing, contract quality, and balanced risk terms rather than booking volume for its own sake. The result is the backlog of 45.1 gigawatts - demand from large corporate energy users and data-center customers adds to that pipeline.

Third, a technology roadmap built around CuRe and perovskites. FSLR has started customer notifications tied to CuRe contract adjusters, the first step in converting performance improvements into future revenue. Management says factory and field results have exceeded expectations across several climates. The company is also advancing a perovskite program, with a Series 6 pilot line expected in the first half of 2027 - the next differentiation wave once crystalline silicon closes the current efficiency gap.

Fourth, capacity as the only real margin lever. Roughly 80% of operating expenses are fixed, and long-term pricing power on the panels themselves is limited, so further capacity growth (not price increases) is what expands operating margins from here. Every gigawatt added toward the 14-gigawatt US target flows mostly to the bottom line once it is running.

Capital Allocation

The balance sheet is very conservative. Total assets are $13.4B against $10.3B of equity and just $3.1B of liabilities. Cash and short-term investments are $1.7B against only $194M of total debt - net cash of roughly $1.5B. FFO interest coverage is 55.8x against a 43.5x 5Y mean. Debt/Equity is just 1.9%, next to 51.9% for Enphase, 98.9% for SolarEdge, and 292.5% for Sunrun. Whatever tariffs or module pricing do next, First Solar is not a solvency risk.

FCF only turned reliably positive in 2025, after years of funding capacity expansion from the balance sheet. LTM FCF is $1.5B, a 27.9% margin, against a 5Y mean of -6.1%. The company was still burning cash as recently as 2023 and 2024 while it built out its US and India capacity. There is no dividend and effectively no buyback.

Capex is funding the US and India build-out: $655.6M LTM, down from a peak above $1.5B in early 2025 as the domestic expansion phase matures. R&D spending is comparatively small at $269.7M LTM - this is a manufacturing-scale business, not an R&D-intensive one. Stock-based compensation is only 0.44% of revenue LTM, low even by the standards of a capital-intensive industry.

Shares outstanding have increased slightly to 107.47M on modest stock-based compensation.

Advantages

• A strong balance sheet in a cyclical industry. Net cash of roughly $1.5B, FFO interest coverage of 55.8x, and almost no debt. FSLR has the resources to outlast competitors that have failed in past solar-industry downturns.

• Demand visibility most manufacturers do not have. A 45.1 gigawatt, $13.6B backlog running through 2030, with US production substantially committed through 2028.

• US policy has fenced off its core market. Section 45X tax credits worth $2.10-2.19B are built into 2026 guidance, trade barriers keep low-cost imports out, and the company holds an estimated 30% share of the US utility-scale market.

• Cheap on every basis. 10.8x forward earnings, a PEG of 0.51, a Price/Book of 2.3x, and a 9.3% forward earnings yield - all near the low end of their own history. The PEG is the cheapest among competitors still posting positive growth.

• Margins keep expanding. 44.0% gross margin LTM against a 31.4% 5Y mean, 32.5% net margin against 20.1%, and a 16.5% ROIC that is still rising - both margins are the highest of its competitors.

Disadvantages

• Earnings depend on a tax credit that could change. 2026 guidance assumes $2.10-2.19B of Section 45X credits - a large share of projected profitability. Any reduction in incentive value or added compliance complexity would reduce margins directly.

• No structural cost advantage. On a pre-credit basis, First Solar’s cost per watt runs modestly above its crystalline-silicon competitors, and the broader industry is fiercely competitive and commoditized. SolarEdge’s own swing from a deeply negative gross margin in early 2025 back to positive within a year shows how quickly conditions can turn even for a US-listed equipment name.

• Tariffs cut both ways. 2026 guidance assumes a net $60-80M tariff impact. A pending Section 232 investigation could affect close to 1.8 gigawatts of finished Southeast Asia capacity, and the company is already carrying about $30M of quarterly underutilization costs there.

• Revenue is flat to down in 2026. Guidance of $4.9-5.2B implies a roughly flat year after the Southeast Asia capacity pullback. This year’s story is funded by margin and tax credits, not volume.

• Little cushion in a drawdown. No dividend and effectively no buyback; a Beta of 1.75 and 1Y volatility near 54% mean large swings around every catalyst.

What the bears get right: a 9.2% short interest is real money betting the policy tailwind fades faster than the market expects. Their case is straightforward: the solar module industry has a long history of poor returns on invested capital, Chinese crystalline-silicon manufacturers have far more capacity than global demand needs, and roughly a third of First Solar’s own manufacturing footprint is in Southeast Asia, exactly where US tariff policy is least settled. If Section 45X credits shrink or a Section 232 ruling goes the wrong way, the earnings growth behind today’s cheap multiple could prove temporary. As I see it, the balance sheet and the contracted backlog are real protections, but the position only works if the policy backdrop holds, and that is not something a spreadsheet can fully price in.

Competitors

The competitors set here is: Enphase Energy (the quality benchmark, though its own growth has stalled), SolarEdge Technologies (a turnaround still working through a brutal 2024-2025 drawdown), Sunrun (the residential installer, financed with far more debt than the rest of the group), and Nextpower (a smaller name with the best returns on capital of the 5).

The obvious comparison set of large crystalline-silicon module manufacturers like JinkoSolar and Canadian Solar has too little fresh data on the tools I use for this series, so this is the US-listed solar-equipment group.

On forward P/E, First Solar is at 10.8x. Sunrun is lower at 9.3x; Enphase is at 20.3x, Nextpower at 21.1x, and SolarEdge at a distorted 84.3x - a symptom of earnings that only recently turned positive again.

Consensus 5Y EPS growth tells the more interesting story: First Solar's 21.3% is the highest in the group. Nextpower is next at 15.9%, and then the numbers turn negative: Sunrun's is roughly flat at -1.0%, Enphase's is -9.5%, and SolarEdge's is -92%. As a result, FSLR's PEG of 0.51 is the cheapest growth-adjusted multiple among the names still actually growing; Sunrun is at 0.76 and Nextpower at 1.33. Enphase and SolarEdge's PEG numbers are not meaningful here, since a PEG built on shrinking or near-zero forward earnings does not measure the same thing.

On returns on capital, Nextpower actually leads the group at a 23.6% ROIC, though that is down sharply from above 50% in 2022 as its base of invested capital has grown. First Solar is next at 16.5% and rising; Enphase is at 4.9%, Sunrun is close to breakeven at 0.3%, and SolarEdge is destroying capital at -17.1%, still recovering from its drawdown.

First Solar's Debt/Equity is 1.9%, and Nextpower's is 1.5% (both essentially unlevered) against 51.9% for Enphase, 98.9% for SolarEdge, and 292.5% for Sunrun.

On margins, First Solar also leads: 44.0% gross margin and 32.5% net margin, both the highest of the 5.

In my view, First Solar is not the best business in this group by ROIC alone - Nextpower's returns are still better. But it is the only one that combines real growth, the highest margins, and a sub-1 PEG all at once.

Past

Q2 2026 (ended June 30, all USD, YoY):

• Net sales $1.06B, down 3.7% (missed consensus by 0.4%)

• EPS $3.92, beat consensus by 43.1%, up 23.3% from $3.18

• Gross profit $605M, up 21% from $499.9M; gross margin expanded about 12 points to 57% for the quarter

• Adjusted EBITDA $644M, up 15%, with margin expanding 990 basis points to 60.9%

• Cash and equivalents $1.69B, down from $2.80B at year-end 2025; no long-term debt, versus $282.6M at year-end 2025

• Contracted backlog: 45.1 gigawatts worth $13.6B through 2030, with 1.9 gigawatts of new US bookings during the quarter at $0.36 per watt

Why is the stock still down 14% YTD, after a quarter like this? I see three reasons, in order of importance:

• The 2026 top line is flat to down. Guidance of $4.9-5.2B implies a roughly flat-to-negative year after the Southeast Asia capacity pullback, and Q2 sales themselves missed consensus and fell 3.7% YoY.

• The policy overhang never really lifted. A $60-80M net tariff impact, a pending Section 232 investigation, and a 2026 guidance built on $2.10-2.19B of Section 45X credits keep the stock trading on Washington news as much as on its own numbers.

• Cash on the balance sheet fell sharply on paper. $1.69B at the end of Q2, down from $2.80B at year-end 2025, even though this mostly reflects the normal seasonal timing of credit monetization and capacity spending rather than a change in the business.

Worth noting also what a headline-only read misses: gross margin expanded 12 points, and adjusted EBITDA grew 15% despite the sales miss, and the backlog still runs through 2030. A business shedding revenue for structural reasons does not usually see margin expand like this.

The longer history matters more. LTM revenue reached $5.38B, net income $1.75B, and FCF $1.50B. Every margin is above its 5Y mean: gross margin 44.0% against 31.4%, net margin 32.5% against 20.1%, and FCF margin 27.9% against a negative 6.1% mean - the company was still burning cash on a trailing basis as recently as 2023 and 2024.

Total return of 162.16% over 5 years (21.26% per year) against 90.01% for VOO (13.70% per year); and the gap holds over 10 years too, at 16.97% per year against 15.42%. FSLR has already beaten the market by a wide margin, and at 10.8x forward earnings, it does not look like a stock that needs to keep doing that to still be attractively priced.

Future

• Consensus revenue: FY2026 $5.05B (-3.31%), FY2027 $5.91B (+17.07%), FY2028 $6.53B (+10.49%) - the flat year is 2026 only

• Consensus EPS: $17.60 -> $23.09 -> $29.19 (FY2026 - FY2028)

• 5Y forward EPS growth estimate: 21.30%, almost exactly in line with its own 20.41% mean - the growth outlook itself has held steady while the multiple compressed

• Analysts: Buy (9 Strong Buy / 15 Buy / 10 Hold / 1 Sell / 1 Strong Sell, 36 covering), average target $270.97, +20.13% from here (the range is $150.00 to $402.00)

• Company guidance: FY2026 sales of $4.9-5.2B, gross profit of $2.4-2.6B, module shipments of 17-18.2 gigawatts, and capital expenditure of $0.8-1B

Current Valuation

Current vs 5Y mean:
Price/Fwd Earnings: 10.8x vs 30.4x
Price/Fwd Sales: 4.4x vs 4.1x
Price/FCF: 16.2x vs 27.3x
Price/Book: 2.3x vs 2.6x
PEG: 0.51 vs 2.23
Forward Earnings Yield: 9.3%

Most multiples here are at or below their 5Y mean. Price/Book is 2.3x against a 2.6x mean, and Price/FCF is 16.2x against a 27.3x mean. On a Price/Sales basis, FSLR is actually slightly above its own mean, at 4.4x versus 4.1x - the one multiple here that has not compressed. First Solar now trades at a 9.3% forward earnings yield. To me, that is a high yield for a business consensus expects to grow EPS at over 20% a year.

Analyst’s note:

The 5Y mean here is distorted by 2022 and early 2023, when First Solar’s earnings were near zero. A near-zero denominator sent the forward P/E and PEG to extreme, meaningless levels for several quarters, which drags the 5Y average up to 30.4x and 2.23 respectively. I do not use those means anywhere in my model. The exit multiples in the Fair Price section start from today’s levels, not from the distorted average.

One chart frames this whole section. The corridor below takes the consensus forward EPS estimate and multiplies it by my 3 exit multiples: 11x, 15x, and 20x.

Fair Price

My standard model projects EPS 5 years forward and takes the slowdown risk into account by capping future growth at 20% per year. Consensus for the next 2 years runs above that (+31.2% for FY2027, +26.4% for FY2028), so my projection is below the consensus average. There are no dividends to add. Starting EPS is $17.62 (FY2026), which gives $43.84 in FY2031.

Analyst’s note:

Consensus moved to $17.60 for FY2026 after I had built the model, which starts from $17.62. The 0.1% difference is well within the 30% margin of safety, so I did not rebuild it. On the newer number, the Bear Case is $273 instead of $274.

The discount rate is 12%; the margin of safety is 30%. The exit multiples are 11x, 15x, and 20x. 11x is close to where the stock already trades today - the current NTM multiple is actually a touch below even that. 15x is a modest re-rating, still well under the 30x-plus levels First Solar traded at during 2022-23’s near-zero-earnings stretch. 20x assumes First Solar earns something closer to a quality-industrial multiple once the policy backdrop proves durable over a full cycle. The 30.4x historical mean plays no role, because it is distorted by the near-zero earnings of 2022 and early 2023.

Bear Case (exit P/E 11x): fair price $274 - MoS price $192
Base Case (exit P/E 15x): fair price $373 - MoS price $261
Bull Case (exit P/E 20x): fair price $498 - MoS price $348

At $225.56, the stock trades 18% below the Bear Case fair price, inside the accumulation zone of $192-274. Worth noting that my Base Case of $373 is still below the highest street target of $402.

Verdict: First Solar belongs in a long-term portfolio as a policy-levered value-and-growth position - not a core holding, and sized like a cyclical industrial with real regulatory risk attached. The company is the largest thin-film solar module manufacturer in the Western Hemisphere, protected less by technology than by US trade and tax policy. The stock trades at 10.8x forward earnings and a PEG of 0.51, among the cheapest multiples in its competitor group despite having the best margins of the 5. My model’s corridor runs $274-498, with an accumulation zone of $192-274; at $225.56, the stock is inside that zone. I’ve owned the company for more than 1.5 years and am going to hold it further. The realistic bear case here is not a demand decline but a policy shock - a cut to Section 45X credits or an adverse Section 232 ruling would reduce earnings directly, since a large share of 2026’s projected profitability runs through the tax credit line rather than the module business itself. Buy with a multi-year horizon, and judge the thesis on the durability of US manufacturing policy and the pace of the backlog converting into shipped, credit-qualified gigawatts - not the share price.

Due Diligence

Profitability (10 of 15):

• Positive Gross Profit: $2.37B

• Positive Operating Income: $1.81B

• Positive Net Income: $1.75B

• Positive FCF: $1.50B

• Gross margin >= 40%: Yes (44.0%)

• Net margin >= 10%: Yes (32.5%)

• FCF margin >= 10%: Yes (27.9%)

• Management (ROIC, ROE, ROA) >= 10%: Mostly (16.5% / 18.5% / 8.6%)

• Strong 3Y Revenue Growth: ~26% per year

• Exceptional Revenue Growth Forecast: Mixed (FY2026 guidance is down 3.3%, but FY2027-2028 consensus implies ~14% CAGR)

• ROE is increasing: ~7% -> 18.5%

• ROIC is increasing: ~6% -> 16.5%

• Revenue surprises in the last 5Y in a row: No (Missed: 2021, 2022, and 2023)

• EPS surprises in the last 5Y in a row: No (Missed: 2024 and 2025)

• EPS growth YoY 5Y in a row: No (Decline in 2022)

Financial Strength (6 of 6):

• Total assets ($13.39B) exceed total liabilities ($3.07B) by 4.4x

• Negative Net Debt: -$1.54B (cash and short-term investments of $1.73B against $194M of debt)

• Low Debt/Equity: 0.02 (5Y mean: 0.07)

• Debt/Capital: 0.02 (5Y mean: 0.07)

• Interest coverage (FFO): 55.8x

• Piotroski F-Score: 8 of 9

Valuation and Advantage (2 of 4):

• Valuation < 5Y mean: Yes

• Valuation < the industry: Mixed (cheaper than most named competitors on forward P/E, but a forward Price/Sales of 4.62x that runs above the broader solar sub-industry’s 2.13x)

• Does it have a moat: No

• Outperformed the S&P 500 over 5Y: Yes (21.26% vs 13.70% CAGR)

Shares (1 of 3):

• Insider ownership >= 5%: Yes (5.54%)

• Fewer shares outstanding YoY: No (slight, steady dilution)

• Insider buys in the last 6M: No

Price (2 of 4):

• 1Y price forecast > 10%: Yes (+20.13%)

• Next 5Y EPS growth estimate (CAGR) > 10%: Yes (21.30%)

• DCF Value: $205, overvalued by 10%

• Short Interest < 5%: No (9.20%)

Watchlist Note

Largest thin-film solar module manufacturer in the Western Hemisphere. No economic moat but a strong balance sheet: net cash ~$1.5B, Debt/Equity 0.02, FFO coverage 55.8x. Gross margin 44.0%. Backlog 45.1GW/$13.6B through 2030. Trades at 10.8x forward earnings, PEG 0.51, 9.3% forward earnings yield. The best margins in its competitor group at one of the cheapest multiples. Down 14% YTD. Fair price corridor $274-498; accumulation zone $192-274. Risks: heavy dependence on Section 45X tax credits ($2.10-2.19B of 2026 guidance), tariff and Section 232 uncertainty, no structural cost advantage over crystalline silicon, no dividend or buyback.

One-Pager

This is not a financial or investing recommendation. It is solely for educational purposes.

TL;DR: On (ONON) reported its highest gross margin ever and raised its margin outlook: 65.4% (best in sportswear), with full-year gross margin guidance raised to 65%. Still, the stock fell on weaker US demand, HOKA (DECK) and a rebirth of Nike (NKE), the strong franc, and 6.4% short interest. It now trades at 17.3x forward earnings against a 53x mean since IPO. Consensus expects ~25% annual EPS growth over the next 5 years; the PEG ratio is now 0.70. The strategy is premium-only, DTC-first, beyond running shoes, and sustainability. On sells its shoes at full price; the innovation pipeline and the athletes support the premium prices. ROIC is 17.1% and rising while the company is still building stores and warehouses. I see a running brand that becomes a sportswear house with a young audience. The stock trades below my Bear Case fair price, inside the accumulation zone. The full model is at the end of this post.

Investment Thesis

On reported Q2 2026 results with 21.6% constant currency growth, its highest gross margin ever, and a raised margin outlook. As a result, the stock fell 14% on the report; YTD decline is 33%. The business and the price now tell two different stories, and this post is my intention to explain which one is correct and why.

• Growth remains strong where it matters. Direct-to-consumer (DTC) grew +34.3% constant currency, Asia-Pacific +54.7%, and full-year guidance expects low-20% constant currency growth with gross margin raised to 65%.

• Valuation is low relative to growth. Consensus expects ~25% annual EPS growth over the next 5 years. The PEG ratio is now 0.70.

• The fundamentals remain strong. 65.4% gross margin (best in sportswear), 12.3% net margin, 17.1% ROIC, $542M of FCF, and ~$0.8B of net cash.

• The stock derating has already happened. 17.3x forward earnings against a 53x mean since IPO - around the -1 standard deviation band. Despite the fact that forward EPS estimates have continued to rise.

• The bear case: weaker US demand, HOKA and a rebirth of Nike, the strong franc, and 6.4% short interest. My model takes this into account by capping future growth at 20%. Even then, the stock trades below my Bear Case fair price.

Analyst’s note:

All prices and multiples in this post are in USD, because ONON is the NYSE listing. On itself is a Swiss company and reports in CHF.

Company Overview

Next Earnings Date: 10 Nov 2026 (estimated)
Market Cap: $10.36B
Sector: Consumer Discretionary | Industry: Textiles, Apparel and Luxury Goods
Type: Mid Growth
Short Interest: 6.4%

On Holding AG is a Swiss premium sportswear company from Zurich. It was founded in 2010 by former professional triathlete Olivier Bernhard together with David Allemann and Caspar Coppetti. Roger Federer has been an investor and product partner since 2019. CloudTec cushioning is their core technology. Newer technologies include the LightSpray one-piece upper (a robot sprays the shoe in minutes) and the SURREAL superfoam that debuts in the Cloudsurfer 3 later this year.