Paradi Lab

Just a quick macro note.

Feels like the broader market will move sideways for the next 2-4 weeks, but it wouldn't surprise me to see some pressure on high beta names.

That said, fundamentally, nothing's changed w/ solid earnings across most sectors especially AI/semis names.

Stocks are in a huge bull marke, even factoring in the July dip in semis (useful to zoom out here w/ loads of names up 2-4x YTD). History tells us that this kinda bull market ends with a Fed hike / recession. Recession won't happen imo, but it's currently unclear if the Fed hikes...and to what extent? I ultimately feel like it needs to happen at some point - Sep or Dec. Get it done with lol.

Seasonality could come into play too w/ midterms usually being bad for equities pre-election, then good for equities post-election. Historically, Sep is a down month before Q4 and pre-Xmas period being positive. Lots of data around this.

In terms of catalysts, Iran/US always the hottest topic these days. Oil price impacts and second-derivative equities impacts.

For AI/Semis, you've also got the GS Communacopia + Technology Conference soon w/ OpenAI etc all doing fireside chats. On top of $Micron Tech(MU.US) and $Broadcom(AVGO.US) earnings this week.

Time will tell whether MU earnings can re-rate memory names, or AVGO earnings have the same impact for the broader semis ecosystem. $NVIDIA(NVDA.US) didn't really have that effect, so I kinda doubt AVGO will.

Silicon Photonics' optical transceiver market share is estimated to exceed 50% by 2027.

$Taiwan Semiconductor(TSM.US) VP of Advanced Packaging said today that silicon photonics is becoming the mainstream form thanks to the structural transformation of optical transceivers.

He also stated that the real bottleneck for large-scale deployment lies in lasers, optical fibers, fiber optic connectors, and product testing.

If I was to pick the "main" players instead of just name-dumping:

- $Lumentum(LITE.US) / $Coherent Corp.(COHR.US): InP lasers - CW for SiPh, ELS for CPO, 200G EMLs

- $Aehr Test(AEHR.US): SiPh WLBI testing

- $Corning(GLW.US): PM fibre, fibre arrays & MPO/MTP connectivity

- Sumitomo Electric (5802): InP lasers + substrates

Obviously you've got a ton of other names from: $Applied Optoelectronics(AAOI.US) for InP lasers, $IQE for InP base epi, $BESI for hybrid bonding and $Keysight Tech(KEYS.US) / $Viavi Solutions(VIAV.US) for optical test.

Feels like TSMC have been running the same narrative alongside the COUPE roadmap for a while now though.

But always good to get some re-confirmations on where everyone's favourite bottlenecks sit / narratives coming from TSMC themselves.

With $SIVE, you're paying EXTREMELY premium 2027 multiples for a "what if" scenario.

That is: What if Sivers' $1.2B opportunity pipeline converts into *actual* sales by roughly H2 2027.

Whereas with $Lumentum(LITE.US), $Coherent Corp.(COHR.US) and $Applied Optoelectronics(AAOI.US): you've already got revenue that's sold out, LTAs to 2028-30, shipping today, on 30-50% GMs. No "what if" needed.

So either:

1. $Lumentum(LITE.US), $Coherent Corp.(COHR.US) and even $Applied Optoelectronics(AAOI.US) are VERY cheap right now [5-14x 2027 sales].

2. Or Sivers is VERY expensive right now [~35x 2027 sales based on my current modelling].

I'll share a post later/this weekend for more detailed comments.

$NVIDIA(NVDA.US) generating $96.2B of highly profitable revenue, while also growing 106% annually is genuinely insane at their scale. People need to let that sink in.

Combine that with expectations to "grow revenue by approximately 70% in fiscal 2028" under current supply constraints...

Makes me think that $NVIDIA(NVDA.US) is perhaps the cheapest and highest quality growth stock we'll see for a long time.

Thoughts on $NVIDIA(NVDA.US) later today:

Prediction:

- I don't see a revenue beat being a catalyst for NVDA.

- Everyone knows that revenue will be ~10-15% ahead of estimates thanks to GB300 (and GB200) volume expansion.

- Moreover, looking historically, recent beat & raise quarters have not been a positive re-rating catalyst for NVDA's share price... perhaps the quarter's already been priced-in due to a +12% move in the last month.

- On the flip side, maybe this time will be different thanks to the stock currently trading at extremely low valuations... I actually think broader institutional sentiment improved as of yesterday too with significant short covering which drove the share price up. Time will tell.

For next quarter:

- No surprises - guidance will of course increase thanks to additional ramps in rack volumes, plus first Vera Rubin orders filtering through.

- I expect gross margins to remain stable thanks to ASP increases offsetting continued memory price surges from $SK Hynix(SKHY.US), $Micron Tech(MU.US), and Samsung.

In terms of "qualitative" catalysts, there are a few areas Jensen and co. need to touch on though (common threads across the street):

1. HBM:

Per JPM/MS/GS (and wider industry comments), NVDA have made changes to HBM content for both Rubin and Rubin Ultra. This is of course due to memory supply being extremely scarce currently - but what does this mean for NVDA exactly? On the flip side...what does this mean for the memory players? Can NVDA keep passing on price increases to customers if memory prices continue soaring? I hope this is all expanded on on the call in some detail.

2. Competition such as $AMD(AMD.US), $Cerebras(CBRS.US), OpenAI Jalapeno:

Around ~40-50% of NVDA's revenue comes from four hyperscalers that are all deploying their own stuff - $Alphabet(GOOGL.US) TPU, $Amazon(AMZN.US) Trainium, $Meta Platforms(META.US) MTIA, $Microsoft(MSFT.US) Maia. Plus OpenAI / $Broadcom(AVGO.US) revealing benchmark results for their in-house Jalapeno chip which shows 1.5-1.9x more throughput per kilowatt + 1.7-3.6x lower end-to-end latency against NVDA's GB200 and GB300 rack systems. All of these factors have been working against NVDA recently, even just from a sentiment perspective. Jensen's updated views will be appreciated!

3. Funding partnerships:

A few weeks ago, NVDA announced a partnership with Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs and KKR "to establish AI compute infrastructure financing platforms to mobilize over $500 billion of third-party capital." Again, what does this mean for NVDA? They quite clearly have sight over demand longer-term, but "circular financing" is still something that still comes up a lot these days (despite Jensen outlining why it's not in his X article).

Big day ahead, expecting some volatility thanks to last minute positioning adjustments.

Just some of my notes from $Semtech(SMTC.US) Q2 earnings:

TLDR: Like $Applied Optoelectronics(AAOI.US), it's all about Semtech expanding capacity - CEO said the capacity they've secured "may not be enough" for FY28...

1. Q2 upside is from 1.6T qualifying early

- Pretty shocking (in a good way) how compressed the qualification timelines have become.

- Hyperscalers and everyone upstream are pulling timelines forward so quickly rn.

- We saw with $Lumentum(LITE.US), $Coherent Corp.(COHR.US), $Applied Optoelectronics(AAOI.US) especially that demand is just bulldozing any qualification barriers. Now seeing the same with Semtech.

2. FiberEdge is quite underappreciated

- I agree w/ mgmt that people are "overindexing on CopperEdge" - the better business is probably TIA/driver.

- 800G TIA share has gone from ~18% two years ago to well over 50%, and they expect >50% share at 1.6T by January.

- Impressive...

- Industry 800G units: they entered the year on a ~50M forecast and are now hearing 80-90M vs. ~20M two years ago.

- Impressive again...

3. Content per transceiver

- goes from high single digits to $80-90 at 3.2T.

- Quite funny - one analyst assumed that "high double digit" content meant teens. CEO corrected him with $80-90 lol. That's ~10x!

- Photonics fab capacity goes 3-4x by year-end (they picked up a fully facilitated fab next to the existing one).

- I don't think the market has modelled any of this. Even at half the claimed content, DC revenue stops scaling w/ transceiver units + starts scaling w/ units times content.

- And every merchant InP line being tripled is another pointer that InP demand is way ahead of supply.

- Which is the same signal $Applied Optoelectronics(AAOI.US) sent by clearing its HQ building for InP wafer expansion.

4. More capacity needed (obviously)

- Secured capacity "may not be enough" especially 2H FY28.

- Semtech are negotiating prepayments + joint capex with front/back-end partners, and qualifying additional OSATs to spread geopolitical risk.

- Pricing: no erosion expected near term and none in the booked backlog. Cost increases are being passed through. Just what you wanna see :)

5. Gross margins are pretty insane

- 54.5% in Q2 -> 58.3% guided -> 63.9% excl. the cellular module business being divested (closes Q4).

- CFO framed ~64% as the post-close starting point.

- I actually think 64% is the margin floor, not the target. Pretty sure they know they can do more lol. No reason to send out such a high target to the market otherwise.

CEO also said that "we have the financial capability" to fund the FY28 capacity push":

Looks like that's the case based on quick napkin maths:

- FCF was $61M in Q2

- Q3 EBITDA guided to $134M

- I'd say roughly $300M+ annualized FCF exiting the yr

- Add $204M cash + $62M coming from Compal for the cellular module unit closing in Q4

So would be surprised to see any more dilution on top of what they already did a year ago.

Overall though - pretty good earnings.

Today seems to be a red day for semis and memory.

I will be pleasantly surprised if we end up green - that'll be a huge/positive sentiment shift towards semis.

Traditional defensive stocks are all showing some strength, as well as SaaS which I personally class as "defensive tech". That's the < long SaaS, short SaaS > trade. Moreover, if $Apple(AAPL.US) is up in the pre-market, then high beta semis tend to see a negative hit.

Yields for 30Y treasury is at the highest point since pre-GFC at 5.32%. Similarly, the 10Y is at 4.74% - also at pre-GFC highs.

Seems like it's due to a few reasons: rising oil prices (new highs for Aug) and renewed fears of rate hikes from the Fed.

I don't think a hike makes sense right now, but time will tell what happens with Iran. The Fed drops their meeting minutes from the July meeting this week - will be an indication of where rates head.

I don't see this as a long-term issue though. Just feels like traders are unlevering positions after a strong few weeks of momentum across semis and memory. Many institutions are now overweight high beta tech and are sitting on (relatively) huge gains MTD. Would make sense for them to unwind some of their positions / rebalance amid an uncertain macro environment.

Fundamentally, I wanted to emphasise that the AI trade is stronger than ever after Q2 earnings. Semis and memory stocks get thrashed around from pillar to post when macro is so volatile.

Like I mentioned the other day, if names like $Nebius(NBIS.US) or $Sandisk(SNDK.US) can have 10% green days, they can certainly have 10% red days.

Overall, I am very bullish long term - just good to be aware of macro overhangs which drive short-term prices.

Just need to ride into Jackson Hole next week.

$SOXX $SPY $QQQ $SMH

GPU fleet unit economics.

TLDR: Tough to be bearish on $Nebius(NBIS.US) or $Coreweave(CRWV.US) right now.

Some maths, but it's important to understand.

Using $Nebius(NBIS.US) 1-3yr contract economics:

- $20-25M ACV per MW at a payback of 1 year 10 months.

- Take $22.5M midpoint ACV/MW at a ~55% cash margin ( $Nebius(NBIS.US) core AI cloud runs ~50%, $Coreweave(CRWV.US) 59%) and you get ~$12.4M/MW of annual cash flow.

(Payback runs against cash flow, not revenue)

- 1.83 years of that implies "all-in" capex of ~$20-23M per MW (GPUs included).

- Which ties to Nebius' $20-25B capex guide for 2026 against ~1GW.

- Over a 4-5 year life that's roughly $50-62M/MW of cumulative cash flow against ~$22M of capex.

- NPV is +$20-25M per MW even discounting at 12-15% and IRR near 50%.

Then years 1-2 of DCF nearly cover the entire capex on their own. Meaning that the GPU could go to $0 residual after year 2 and the deal basically breaks even. That is insane.

So really, the bear case doesn't need slow decay to be wrong. Rather, it needs the contracted years themselves to fail.

And those years are effectively walled off rn.

- Around 70% of $Nebius(NBIS.US) deals carry prepayments covering 50-60% of the capex, on take/pay terms.

- $Coreweave(CRWV.US)'s $104B backlog is take/pay with ~21% of it recognized more than four years out.

As we now know, $Coreweave(CRWV.US) signed an A100 contract running into 2029 (a SKU introduced in 2020) "at or above where it was years ago", and CEO told CNBC a batch of H100s coming off an expired contract was re-booked immediately at 95% of the original rate. $NVIDIA(NVDA.US)'s CFO also said that A100s shipped 6 years ago are still running at full utilization.

And $NVIDIA(NVDA.US) is now willing to underwrite residual value itself, up to 25% per project in the new financing platforms. I don't think they'd be willing to backstop if they expect GPUs to be worthless in around 3 years or so.

For the neoclouds themselves though, depreciation is the biggest cost driver e.g. Nebius D&A was larger than their adj EBITDA last Q.

If economic life actually extends to a new base case scenario of 5-6 years rather than the old 3-4 years...

Earnings power re-rates higher across $Coreweave(CRWV.US), $Nebius(NBIS.US) and even the hyperscalers as ultimate beneficiaries.

Photonics notes after $Lumentum(LITE.US), $Coherent Corp.(COHR.US), and $Applied Optoelectronics(AAOI.US) earnings:

TLDR: Earnings were bullish for photonics. The entire sector is sold out and LTAs are removing cyclicality.

1. Everything is sold out

Every single CEO highlighted that demand is strong and growing, with current revenues/margins mainly gated by limited capacity.

- $Lumentum(LITE.US): “Lasers will remain effectively sold out for the foreseeable future despite our rapid capacity expansion.”

- $Coherent Corp.(COHR.US): “The demand is robust across almost every single product across data center and comms, and it is really just a matter of whether we can sell as fast as we can ramp production.”

- $Applied Optoelectronics(AAOI.US): Revenue “bounded almost entirely by our production capacity and key component availability”

Very nice and very expected. But good to have confirmations from the horse's mouth.

I also wanted to remind everyone that historically, optics has been a deflationary business mainly due to ASP erosion over time. Similar to memory.

However, everyone being sold out completely flips that with Lumentum saying that they’ve “been surprised at our ability to price up” on CW lasers, holding a premium on spec tightness because of better transceiver yields.

Filtering down onto margins, when ASPs go up, gross margin rebuilds organically without any product mix help at all.

For example, Lumentum crossing to over 50% non-GAAP GM is a pricing power story instead of one “artificially” inflated by selling more pricey products.

At a high level, that’s a good sign of further margin expansion further down the line.

2. LTAs

Lumentum has customer LTAs extending through to 2030 with minimum demand guarantees and set pricing. AAOI is similarly negotiating three year laser LTAs with 2-3 large customers.

TLDR: These LTAs are critical for the longer term durability of the optics sector.

Ultimately, customer-funded capacity is negative working capital expansion, which highlights that the optics buyers are the ones bidding up for scarcity.

The Lumentum and $AXT(AXTI.US) deal from a couple of weeks ago is a pretty clean example where $87.5M of Lumentum deposits applied as shipment credits, reserving substrates through to 2031.

We're now seeing this pattern is everywhere e.g. hyperscalers pre-funding supplier capex in exchange for allocation, transferring volume risk onto the buyer. This is the same dynamic at a higher level with $NVIDIA(NVDA.US)’s $500B financing announcement to support “independent compute financing platforms”.

So, the whole AI buildout is shifting capex risk onto customers and capital markets. In optics that means suppliers get to expand capacity with someone else's balance sheet and a contractual demand floor.

That’s the best terms any capital intensive company can get and, as we're seeing, acts as a huge incentive to ramp capacity as fast as possible.

3. 1.6T ramp

Lumentum: 1.6T is “ramping incredibly fast. In fact, we have seen the 1.6T ramp only pull in, be stronger, demand increase. That ramp is even faster than what we thought, say, three months ago.”

With ~80% YoY laser output feeding it, Lumentum guided data center growth “to exceed 80%” this quarter. They initiated 1.6T production as planned and the CEO stated that “we appear to be first to market in many instances, ahead of larger competitors” with a signal-integrity team “widely acknowledged as the best in a competitive field.”

AAOI is the fourth supplier qualified for 1.6T at a major hyperscaler, qualification finishing “within the next couple of weeks” and a >$200M order book which looks to be just the start with the $471M monthly transceiver revenue by mid-2027 maintained from last quarter.

At 800G the laser was the binding constraint. At 1.6T it's the 3nm DSPs and the 200G TIAs and drivers. AAOI's management specifically said that the bigger constraint now is DSP and TIA supply, not lasers, because they make their own lasers (“good news, they are making our laser. Otherwise, laser is the biggest bottleneck”).

Does this then make $MRV and $Broadcom(AVGO.US), plus the TIA/driver suppliers $Semtech(SMTC.US) and $Macom Tech(MTSI.US), the kingmakers of the 1.6T ramp??

I think that'd make sense because allocation at the DSP and analog front-end seems to be the new share battle given how constrained the laser makers are. And it then decides which module houses ramp on schedule and grow earnings fastest.

So in my opinion, if you want to know who ships 1.6T in volume in 2027, DSP and TIA allocation is the real signal/alpha.

Looking at AAOI specifically now:

- Q2 800G revenue was $12.8M.

- The guide is ~5x sequential in Q3, then more than $70M of 1.6T in Q4.

- Building to roughly $471M/month month by mid-2027 - of which management pegs $217M monthly from 800G and $164M from 1.6T.

- That’s a roughly 12 month path from a ~$36M monthly DC run rate to a $471M one.

- Requiring capacity to climb from ~200,000 units/month now to >650,000 by end of 2026 to >930,000 by end of 2027, every qualification to land on time, and DSP/TIA allocation to be there at each step.

Essentially, that’s several consecutive flawless quarters of capacity, qualification and third-party allocation with zero slip ups. Personally, I’d be modelling the mid-2027 exit meaningfully below $471 million/month and treat the target as the ceiling rather than the base case.

Whether you want to trust AAOI’s management is up to you, but so far so good.

And just touching on the CW/EML mix:

This is basically a margin event for the laser owners whichever way the pendulum swings.

Lumentum is closing the CW vs. EML margin gap by shrinking CW die, 200G EMLs are already over 25% of EML revenue heading to a majority by mid-2027, with over 50% EML unit growth targeted by the December 2026 quarter. The CEO expects SiPh viable at 1.6T but EMLs “come back in a meaningful way” at 3.2T.

Ultimately, in a constrained environment, wherever a laser can be sourced will be used to support the buildout.

While everything is sold out, customers take whichever laser they can get, so EML vs. SiPho is a margin-mix question for the supplier, not a demand question.

4. NPO = TAM expansion

Lumentum’s CEO framed near-packaged optics as pure additive TAM: “The NPO opportunity is completely additive for us, significantly increasing the optical TAM” and noted even “our largest CPO customer is looking at NPO for specific new use cases, further increasing the optical TAM at that account.”

I actually think “additive” TAM holds quite well here with NPO:

- NPO and CPO first displace copper scale-up links inside and across racks, not front-panel pluggables on scale-out.

- That means pluggable/scale-out demand and integrated-optics/scale-up demand stack rather than substitute, at least through 2028.

- The TAM claim stops being true only if scale-out itself ever moves onto the substrate which doesn’t seem to be the case for the next few years at least.

In my opinion, this is a rare case where the bullish management framing survives various mechanism checks.

This is why the content-per-XPU maths is the entire point, and it is why the laser makers sound indifferent to the specific form factor of CPO or NPO etc. Moving from a shared front-panel module to per-package light sources multiplies discrete laser count and optical power per accelerator.

That’s the mechanical reason Coherent can say NPO and CPO carry “comparable content” - in both, Coherent is selling the laser, the external laser module, the isolators, the polarization-maintaining fiber it makes in-house, and the fiber-attach.

On standards: optically these are converging on OCI/MSA-based interfaces at 200G/lane, but the form factors are proprietary per customer (Wupen Yuen). That cuts in the incumbents' favour, because it raises qualification lock-in per socket even as the optical layer standardizes.

Ultimately, the CW laser supply names and VCSEL optionality matter here. Coherent is pushing a 200G VCSEL for NPO-type applications, which widens the playing field. In terms of who loses - retimed pluggable-only franchises see their share of the optical $ shrink in relative terms as integrated optics adds a new dollar pool on top.

After looking into it a bit more over the past few months, I do believe that NPO wins the first wave because it trades power and cost for simplicity around time to market.

That, in the end, doesn’t matter to whoever owns the lasers because they’re selling comparable content into whichever one customers pick.

—

Just a few of my personal notes which I filtered down into some of the main points.

There’s other things to be aware of too like the ongoing InP chokepoint, memory bottleneck, scale-across at Lumentum, and OCS type stuff.

But don’t want this post to become longer than it already is.

$Micron Tech(MU.US) comments from KeyBanc conference:

1. Micron are supplying less than half of data center demand.

2. Micron's customers are insensitive to memory prices.

3. Micron highlight multi-year demand with some customers signing LTAs to 2030+.

4. Micron says it will be the only company producing memory in the U.S.

This commentary highlights that there is zero cyclicality. No one's signing LTAs years out under inelastic pricing conditions if you think supply catches up next year.

Useful to remember also that the end of prior memory cycles came because supply > demand, where capacity was built ahead of committed demand.

However, in my opinion, the market has re-rated memory back down towards cyclical valuations.

Regardless of continued price increases and GM expansion, surely Micron etc. deserve to be valued higher purely based on the supply/demand gap that's there to be filled over the coming years?

Notes on $Lumentum(LITE.US) ahead of earnings tomorrow.

On the Q3 call (May), the CEO put the demand/supply imbalance at “somewhere greater than 30%” and said the company is “having to make choices across the company” to service demand, noting that significant customers are looking to up their orders that “we simply can't service”.

Then on pricing, the CFO said “prices are holding or they're increasing for what customers want”.

When you combine supply constraints with relative pricing power, you get a pretty powerful company...

Ultimately, Lumentum can't be competed away and forced out of the market mainly because of their 200G EML volume production. Mitsubishi, Sumitomo, Furukawa and $Coherent Corp.(COHR.US) can all do 100G, but no one can do 200G like Lumentum, and at their volumes since they're the only supplier shipping 200G EMLs in volume today.

On capacity, Lumentum's EML output is up ~8x since FY23 and management guided to roughly 50% more InP output and more than 50% EML unit growth from the December quarter last year to the December quarter this year. All while the demand/supply gap has extended. Their fabs are clearly straining, with the Japan wafer fab already “fully allocated”.

And the new Greensboro InP fab won't come online until 2028 mainly because of reactor installs and cleanroom work. Even then, any incremental output would still need to pass customer qualifications before hitting the topline, so it's still some time before seeing any sort of material benefits.

Honestly, my first instinct on any “sold out for years” claim is skepticism, however with Lumentum, their output went up ~8x and the demand gap still got wider.

That's pretty insane, and is why the stock trades at relatively lofty valuations today. YTD, a ton of pricing-in has already happened, but I do see continual growth vectors incoming:

Looking at industry numbers, 800G+ goes from ~20% of transceiver shipments in 2024 to over 60% in 2026, and EML/CW laser capacity roughly doubles this year to ~50M units a month (TrendForce puts the 2026 figure at 50.7M). Yet lasers are still a bottleneck, so if supply doubles and the shortage doesn't close, the demand curve only steepens.

- For context, TrendForce has the top three EML makers (Lumentum, $Broadcom(AVGO.US), Mitsubishi) holding ~72% of the market between them, and only Lumentum ships 200G in volume.

With CPO, $Lumentum(LITE.US) is the named laser supplier on $NVIDIA(NVDA.US) Spectrum-X/Quantum-X photonics switches (Nvidia has signaled it wants more than one laser source over time, but Lumentum is the one in the design today). The “CPO kills the optics suppliers” bear case has always struck me as an argument made by people who haven't looked at where the light actually comes from: the transition moves the laser into an external module and makes it more important…not less.

Personally, I estimate hundreds of CW lasers per 512-port switch. Lumentum already has a multi hundred million $ CPO/ELS PO on the books which gets delivered in H1'27. You can link this to $SIVE because their InP lasers going onto $GlobalFoundries(GFS.US) SiPh platform proves that SiPh still needs an InP light source, regardless of whichever packaging approach dominates at the end of the day.

There's also a vertical integration story to Lumentum that mirrors $Applied Optoelectronics(AAOI.US)'s but it runs in the opposite direction. $Applied Optoelectronics(AAOI.US) is a module maker that built its own laser fab; $Lumentum(LITE.US) is a laser maker that bought a module business (Cloud Light) and is closing the loop since its own CW lasers are set to go into ~20% of its own transceivers this quarter, and 200G EML revenue more than doubled sequentially last quarter.

So in a laser-short world, the module makers who own their laser supply actually ship, and the ones who don't just sit on their hands. Both $Lumentum(LITE.US) and $Applied Optoelectronics(AAOI.US) worked out the same thing from opposite ends, and the fact that a module maker and a laser maker independently converged on full stack integration should tell you where the bottleneck is…

Just touching on the proposed FCC China transceiver ban again. This would actually cut both ways for $Lumentum(LITE.US). Cloud Light builds in Thailand and benefits directly from that shift. On the flip side, Chinese vendors make roughly 60% of datacom optical component revenue, with InnoLight and Eoptolink taking around 60% of the high-end 800G+ orders — and $Lumentum(LITE.US) sells EMLs to them.

The problem is that $Lumentum(LITE.US) reports revenue by shipping destination, not end customer: China plus Hong Kong was ~25.5% of last quarter's revenue.

That figure overstates true China exposure, because much of it is chips delivered to contract manufacturers building for US hyperscalers, but it also hides how much of the EML business depends on Chinese module makers specifically.

Honestly, nobody outside the company knows the real split. But if Chinese customers' orders fall before Western module makers scale up to replace them, Components revenue could dip for a quarter or two, and it's quite hard to forecast accurately ahead of any earnings releases. (Assuming the ban actually goes ahead).

Even so, I think the ban would be a net positive because it just changes who assembles modules rather than impacting the demand side. Chinese module makers switching to domestic EML suppliers would still face a multi year qualification cycle at 200G that they can't shortcut. Upstream, China's export controls on InP substrates have pushed 6-inch wafer prices up ~250% (roughly $1,400 to $5,000 since February 2025), all while $Lumentum(LITE.US) locked their own substrate supply a couple weeks ago with a capacity reservation at $AXT(AXTI.US) running through to 2031, ahead of anything peers have signed.

Obviously, that supply still sits inside China's export permit regime (AXT ships from China and says it can't predict permit timing) but in my view, Lumentum being first in line is worth more than the risk it carries.

For a TLDR on key watchpoints from the Lumentum earnings call:

- 200G EML trajectory within datacom lasers (it more than doubled sequentially last quarter) and the overall EML unit ramp.

- ELS volumes and any second 1.6T Cloud Light customer.

- Greensboro InP timeline and whether first output slips or gets pulled forward.

After the July selloff, it does seem like a lot of froth has come out ahead of this ER compared to a couple of weeks ago.

Disclosure — I have a position in $Lumentum(LITE.US).

Recommended reading for the weekend:

1. Aswath Damodaran (@AswathDamodaran) — Information Timing and Release: The Gaming of Guidance!

2. Dwarkesh Patel (@dwarkesh_sp) — Why compute might get 10x+ more expensive in coming years

3. J.P. Morgan — Semiquincententacles

4. @citrini — Protection Matters: Cybersecurity’s Winners and Losers

5. Neil Shah (@neil_shah) — Innolight, Coherent, Lumentum: Who Wins and Loses in the Proposed FCC Ban on Chinese Transceivers?

Just some key points from $Applied Optoelectronics(AAOI.US) earnings call today.

TLDR: Q4 is very important as management have informally guided ~$330M of 800G/1.6T revenue.

1. Demand is 20-40% above what $Applied Optoelectronics(AAOI.US) can supply. Customers keep pressing them to accelerate delivery.

- Like I said earlier, $Applied Optoelectronics(AAOI.US) is now a manufacturing story, not a demand story.

- I.e. can they produce enough to fulfil demand?

2. Q3 guided to $255-$290M which is +130% YoY and +42% sequentially at the midpoint.

- Management stated ~$330M of combined 800G & 1.6T revenue in Q4 alone.

- Implies Q4 revenue to be ~$480-500M, a potential 2x sequentially.

- I can't remember a Western optics company ever reporting growth at that cadence. Which makes Q4 the most important quarter, above Q2 and Q3.

- $Applied Optoelectronics(AAOI.US) stuck to their estimated $471M monthly transceiver revenue in 2027, which they mentioned last quarter.

I was expecting 60-80% sequential revenue growth, but $Applied Optoelectronics(AAOI.US) were hit by 100G revenue declining $20-25M because a customer couldn't source enough 100G switches due to memory shortages. If you add that "lost" revenue back, you get to a more reasonable ~50-55% growth.

3. 800G revenue

- $12.8M in Q2 which is >2x since Q1.

- Guided to grow ~5x in Q3 to ~$62M-$65M

- I mentioned earlier that "800G is a forward event that has to show up starting in Q2 and really in Q3" — great to see it happen on schedule.

4. 1.6T revenue

- $Applied Optoelectronics(AAOI.US) will be the fourth qualified supplier at one major hyperscaler.

- Full qualification expected within weeks w/ first shipments late Q3.

- >$200M order in hand with the bulk delivering in Q4.

- Q1 2027 1.6T revenue to double Q4 revenue.

- Customer demand indications of >500k units/month = $300-350M/month by end of 2027.

5. Capacity for 800G and 1.6T

- End of Q1 = 100,000 units

- Current = 200,000 units

- End of 2026 = 650,000 units

- End of 2027 = 930,000 units

So a ramp from Q1 -> Q2 as promised back in Q1.

New Texas facility for 800G/1.6T production starts up in late Q3, which frees their HQ building for InP wafer capacity expansion. Shows that modules and lasers are expanding in a clear/deliberate chain.

6. Capex

- Q2 capex was $565.5M incl. $280M of equipment prepayments.

- H2 capex intensity guided higher.

- No C Suite / Board prepays that much for equipment against weak demand signals.

7. CPO / ELSFP

- External laser source modules ramp late 2026 into 2027, targeting ~400k pieces/month by 2028.

- Total laser fab capacity +~300% by Q3 2027 plus a second Houston fab planned at ~4x the current facility's size.

- "Several major CPO customers love our laser, we just can't make enough"

Ofc, 400k/month in 2028 is two fabs and two years away. But it materially extends $Applied Optoelectronics(AAOI.US)'s moat duration as merchant EML scarcity eases in 2027-28 and deflates the original captive laser edge.

8. Chinese transceiver ban reports

- U.S. manufacturing is "the most important element of our appeal"

- Early customer feedback is that they'll "give us much more share" for U.S.-made supply.

- $Applied Optoelectronics(AAOI.US) expects to remain the largest U.S. AI transceiver manufacturer.

- With capacity booked through to Q2 2027, the response is clearly to add capacity more aggressively from ~Q3 2027.

9. InP substrates

- supply secured into end of 2027 across ~5 qualified suppliers (Europe, Japan, China).

- partnership/JV discussions with substrate suppliers for 2028–29 volumes.

- signals intent to integrate further downward as laser volumes 10x for CPO

Just initial thoughts on the things that stuck out to me most on the earnings call. I'm sure there's more stuff I'm missing rn.

I do believe though that the whole story now compresses into Q4's ~$330M of 800G/1.6T delivery.

For $SIVE, Q2 earnings from $GlobalFoundries(GFS.US) yesterday is strong third-party confirmation of Sivers' 2027-2028 photonics ramp.

Reminder: In June, Sivers signed a collaboration with Global Foundries that puts their lasers into GF's SiPh reference designs and CPO platform.

Read-throughs from $GlobalFoundries(GFS.US) earnings transcript:

1. $GlobalFoundries(GFS.US) silicon photonics revenue to "more than double in 2026". NPO ramp in 2027 / CPO ramp in 2028.

- Important external validation of $SIVE's entire photonics thesis.

2. $GlobalFoundries(GFS.US) 2027 NPO / 2028 CPO cadence lines up with Sivers' own guidance.

- "Production ready status in 2027".

- Multiple ramps in 2027.

- Sivers estimated CPO SAM of $1.0-1.4B by 2028.

- So GF is effectively narrating the demand curve into which Sivers has positioned their Glasgow ops + Win Semi capacity.

3. $GlobalFoundries(GFS.US) CID grew 20% sequentially and 62% YoY which is the fastest quarterly growth since 2022. Growth guidance raised to 50-60% YoY.

- Direct demand validation for the platform Sivers plugged into, from their collaboration in June. Growing demand.

- GF's acceleration is the leading indicator Sivers earnings in 2027+ with funnel filling upstream before Sivers seeing the units.

4. $GlobalFoundries(GFS.US) CEO: "We now expect our silicon photonics revenue to more than double in 2026 compared with the year prior"

- Clean revenue funnel logic if GF SiPho more than doubles and Sivers is the partnered external laser route into GF reference designs.

- Sivers has guided its own laser qualification to "production ready status in 2027" so Sivers captures this as design-in/NRE in 2026 and unit revenue in 2027+, not coincident with GF's 2026 doubling.

5. $GlobalFoundries(GFS.US) secured 7 new optical networking design wins with customers from transceiver suppliers and hyperscaler players.

- All are a potential downstream pull for external laser content.

- Sivers has been building this coverage independently: $Jabil(JBL.US) 1.6T LRO, $POET Tech(POET.US) ELS, O-Net/Enablence ELS, and legacy Ayar Labs.

- Looks like Sivers' Q1'26 disclosure of an opportunity pipeline up 77% YTD to $799M is the mirror image datapoint to GF's design win momentum.

6. $GlobalFoundries(GFS.US) have "more than 40 customers today in SiPho" with customers telling GF "I don't have enough secured."

- This just corroborates Sivers' narrative of an InP laser chokepoint and supports their pre-emptive capacity build via WIN Semi.

- If GF customers are scrambling, the matching external laser capacity is just as scarce = pricing power for Sivers.

7. $GlobalFoundries(GFS.US) could "10x photonics capacity"

- GF ramping PIC output 10x at existing fabs implies a proportional pull on external light sources.

- For Sivers, they need to scale InP output in lockstep or lose allocation to $Lumentum(LITE.US) / $Coherent Corp.(COHR.US).

- Sivers' answer is the WIN outsourcing + Glasgow expansion (historically framed as targeting >1,000 wafers/week).

- Interested to see if Sivers report capex/capacity commitments scaled to GF's 10x narrative.

Just as a list of the main read-throughs you can draw from Global Foundries' comments to Sivers.

Roundhill are launching Neocloud ETF today.

Top 5 holdings:

1. $Nebius(NBIS.US) | 30.83%

2. $Coreweave(CRWV.US) | 27.30%

3. $IREN(IREN.US) | 7.72%

4. $Hut 8 Mining(HUT.US) | 6.32%

5. $Terawulf(WULF.US) | 4.97%

Curious to see if this becomes as popular as $DRAM over the coming months!

$Sandisk(SNDK.US) and HBF thoughts:

An analyst question from the Sandisk earnings call: "High bandwidth flash, I'm wondering if you're seeing any price premium on that...versus conventional NAND."

Sandisk's response: "It's a little early to talk about pricing on some of those nodes just yet."

This answer has left me scratching my head...

HBF is Sandisk's near-term growth vector for entry into AI inference workloads. Since HBF will command higher ASPs than standard NAND flash, Sandisk's HBF economics need to be forecasted to gauge what this means for future earnings.

In turn, HBF pricing needs to be compared to HBM since every HBF order is an allocation decision made against HBM — same construction, same adv packaging capacity, same customer, same BOM line, same qualification cycle etc etc.

However, the part that left me confused is this.

It's usually the case in most industries that when you get these types of non-answers regarding new product pricing — it's a signal of a premium pricing model vs. incumbent companies and "competing" products. There are many examples you can Google separately.

So in simple terms, is this a signal that Sandisk's HBF is to be priced ~similarly to HBM?

This wouldn't make much sense since it's widely assumed that HBF is worse than HBM, by design. For example, HBF is lower latency and has slow and finite write endurance vs. unlimited for HBM.

Therefore, should HBF not be priced relatively lower than HBM to account for these shortcomings?

Ultimately, if Sandisk's HBF does get priced highly, what's to say that Sandisk's demand would remain sticky longer term?

These are just musings, but considering that the SK Hynix and Sandisk HBF specs were released earlier this week, I hope that Sandisk provides more clarity/clues in their Investor Day next week.

$Sandisk(SNDK.US) Q4 Earnings Highlights:

- Revenue surged 51% QoQ and 372% YoY, driven by stronger pricing and higher shipment volumes.

- Datacenter revenue more than doubled sequentially to $2.98B and increased 437% for the full fiscal year.

- Sandisk signed five additional New Business Model (NBM) agreements since the prior earnings report, bringing the total to ten.

- Board approved an additional $14B share repurchase authorization, increasing the remaining buyback capacity to $15.5B.

"We closed fiscal 2026 with a leading technology portfolio, established datacenter as a key growth pillar, and deepened our customer partnerships."

"Our technology and products are well positioned to create value for our customers and generate growing and durable free cash flow."

A U.S. import ban on new Chinese optical transceivers hurts hyperscalers because Western vendors like $Lumentum(LITE.US), $Coherent Corp.(COHR.US) and $Applied Optoelectronics(AAOI.US) can't scale fast enough.

In reality, I do not see how this ban actually materialises, but it’s a fun thought experiment regardless.

Currently, China is the dominant force in optical transceiver supply. According to Counterpoint Research estimates, Chinese manufacturers such as Innolight and Eoptolink account for “nearly two-thirds of global unit supply and approximately 60% of global optical datacom transceiver revenue”.

For context, Innolight is the largest global incumbent and their optical modules account for ~98% of revenue, with the U.S. accounting for 62% of 2026 revenue. In addition, per industry estimates, Innolight holds over half of Nvidia’s high speed module wallet and the bulk of Google's >800G demand this year. They’re pretty important to the U.S.

For more context on the proposed ban, per Reuters: “the U.S. is working on the measure to bar imports of new Chinese optical transceivers”. “New” is the keyword, meaning that everything already certified i.e. the entire shipping 800G base would keep flowing. Then what gets foreclosed is new authorizations. In practice, that means 1.6T qualification, running right now for 2027 clusters.

So the question is whether U.S. firms like Lumentum, Coherent and Applied Optoelectronics can supply the U.S. 1.6T ramp if China is banned from U.S. optical transceiver exports?

I believe the answer is no, which in turn materially impacts the hyperscalers’ ongoing data center buildout.

1. $Applied Optoelectronics(AAOI.US) is scaling from ~100k modules a month in Q1 toward a targeted 650k+ by the end of 2026 ~930k by end-2027 — targets from a company with a record of ramp slips.

2. $Coherent Corp.(COHR.US) only broke ground on its Sherman doubling in June. In turn, that is an ~18 month construction and qualification timeline. Management's own framing is internal InP output doubling by the end of 2026, not module output step changing now.

3. $Fabrinet(FN.US) is effectively the $NVIDIA(NVDA.US) 1.6T line and they bring a new Chonburi building online around year-end worth ~$3bn of revenue capacity. But $Fabrinet(FN.US)'s own datacom number was held back last quarter by laser and component shortages.

U.S. >800G demand is itself growing violently since 1.6T goes from under 1M units in 2025 to many millions in 2026, with an even steeper 2027 inflection. Replacing a >60% Chinese share of a growing market means that non-China output has to roughly 3x in a couple of years. I do not see how that can happen, even with the ongoing capacity expansions at $Applied Optoelectronics(AAOI.US) and $Coherent Corp.(COHR.US).

Ultimately, the binding constraint is lasers. EMLs and CW sources come from $Lumentum(LITE.US), $Coherent Corp.(COHR.US), Mitsubishi, Sumitomo and $Broadcom(AVGO.US) — a layer that is already non-Chinese. And Nvidia's $4bn March lockup of Lumentum and Coherent capacity pushed everyone else's EML lead times past 2027. Banning Chinese modules removes ~zero lasers from the ecosystem. Innolight's real moat is >90% yield at scale on 1.6T SiPh, so a new Western line starting nearer 70% turns the same EML supply into ~25% fewer “good” modules.

Then when you add up 1.6T test set lead times, alignment automation talent, and 6-12 month qualification cycles per hyperscaler platform on top, the short-term window for the U.S. to “replace” China closes up quickly.

Moreover, Western vendors simply won’t over build right now because of CPO potentiality removing pluggables within a generation or two. The rational strategy would be to harvest pricing and let hyperscaler prepayments fund capex — $Applied Optoelectronics(AAOI.US)'s prepaid hyperscaler order structure is exactly that, and I expect more “warrant and capacity” deals as each hyperscaler races to lock in scarce non-China 1.6T allocation first.

Existing certified 800G would keep flowing because the FCC would know that non-Chinese firms can’t fill the gap right now. Which would mean that Chinese 800G stays throughout 2027, and the likes of $Applied Optoelectronics(AAOI.US), $Lumentum(LITE.US) etc. are for the 1.6T U.S. design-ins.

For China, I don’t think they have a big reason to escalate this further right now and front-run an export ban themselves since Innolight would still freely sell to ByteDance, Alibaba and Tencent…China cares about China, the U.S. cares about the U.S.

*If* this Chinese export ban passes, the real fight would however become private: hyperscalers lobbying if the DC buildout stalls and Chinese vendors restructuring toward exemption to profit maximise. That would split the transceiver supply chain into a premium U.S. price curve and a discounted “everywhere-else” curve.

$Aehr Test(AEHR.US) has received ANOTHER follow-on order from their lead silicon photonics customer for a fully automated burn-in system.

I've lost count of how many times this customer's ordered from them...

- Expected to ship in the first half of 2027.

- The order includes automated wafer handling & loading capabilities for production-scale SiPh integrated circuit manufacturing.

Very impressive execution and order flow.

Compute constrained.

On reflection, the growth in Q2 hyperscaler cloud backlog is utterly ridiculous. And they'll only be more ridiculous in Q3.

Ofc, it's extremely bullish for $Nebius(NBIS.US)'s hyperscaler book. $Coreweave(CRWV.US) too, albeit to a lesser extent since they're lab-heavy with OpenAI commitments.

Fun times ahead with Nebius Q2 earnings next week.

Notes on $Applied Optoelectronics(AAOI.US) ahead of Q2 earnings next week:

For the TLDR thesis: $Applied Optoelectronics(AAOI.US) is the only Western vertically integrated transceiver maker with its own InP laser fab pointed directly at the 800G/1.6T ramp. Currently undergoing capacity expansions in Texas, so if the capacity lands, the revenue is essentially pre-sold due to the demand/supply gap. Everything else, like a high multiple / dilution risk / CPO timelines is secondary noise to whether $Applied Optoelectronics(AAOI.US) can actually build modules fast enough.

On the Q1 call, CEO said: “the actual demand is not $1.1B, it is $1.4-1.5B” with the FY guide raised only to “exceed $1.1B” revenue because production and supply chains are their cap right now.

Therefore, given that demand > supply, $Applied Optoelectronics(AAOI.US) then becomes a bet on manufacturing execution.

I.e. can $Applied Optoelectronics(AAOI.US) take 800G/1.6T capacity from ~100,000 modules/month (in Q1) to >650,000/month by Y/E and ~930,000/month by the end of 2027? Since I’m not an insider, I have no idea. But if they ramp up, both revenue and margins inflect.

Also, I personally feel like most $Applied Optoelectronics(AAOI.US) bear posts I read are over-indexing on customer concentration and dilution, while under pricing their one properly differentiated asset: the laser fab.

Everyone is short InP.

InnoLight, Eoptolink, and the entire merchant module base buy their EMLs from a handful of suppliers. Mainly $Lumentum(LITE.US) and $Coherent Corp.(COHR.US). Who themselves are capacity constrained and locked in their supply via the $NVIDIA(NVDA.US) investment back in March. Even $Fabrinet(FN.US) mentioned that their datacom line is capped by component and material supply e.g. lasers, DSPs, ASICs, and not demand.

Whereas $Applied Optoelectronics(AAOI.US) is the one player in Western supply chains that makes its own EMLs on its own tools and is expanding that laser fab by ~4x heading into 2027.

In Q1, the CFO said: “equipment availability has not been a problem to date because most of this equipment is developed in-house… which means that we are not generally in direct competition with other similar companies for supply.”

So in a world short of lasers, vertical integration essentially means that $Applied Optoelectronics(AAOI.US) can actually ship while merchants can’t.

That’s also why the tariff overlay matters more than you think because the bulk of global transceiver assembly sits in China. For U.S. hyperscalers, a U.S. laser fab supplier is an effective procurement hedge with no Chinese peers. Chinese modules still undercut on price by ~20-25%, so this is a security/supply argument rather than a cost saving one. Which is the structural reason why $Amazon(AMZN.US) and $Microsoft(MSFT.US) engaged in the first place, and is why $Applied Optoelectronics(AAOI.US)’s Texas expansion is genuinely strategic rather than vanity capex like many people have feared with the AI infra buildout.

That said, 800G is still tiny: in Q1, it was just 5.6% of DC revenue, with the quarter carried by 100G (41% of DC) and 200G/400G (46.7%). The “800G ramp” is a forward event that should begin showing up slightly in Q2, but a lot more materially in Q3.

For this reason, I believe that the Q2 numbers will be “disappointing” to a bunch of people who are bullish. For context, management explicitly told everyone H1 is only about 1/3 of the FY, and that the “significantly larger ramp” starts in “Q3 as additional capacity comes online.”

So, a “weak” Q2 wouldn’t be a warning signal if optical margins are soft. Really, the only number that matters is Q3 guidance and the 800G unit trajectory.

If $Applied Optoelectronics(AAOI.US) guides Q3 to the 60-80% sequential growth, that just confirms 800G becoming their largest DC rev line, with 1.6T beginning to contribute. Obviously, if the Q3 guide is soft, the capacity conversion story I talked about slips, and then we rightly have to look back at management and their prior track record of overpromising / disappointing shareholders.

Imo, these are the things to watch in order:

1. Q3 revenue guide

2. 800G revenue and unit shipments

3. Gross margin vs. the 29-30% guide + any reiteration of the Y/E ~35% target

Disclosure — I have a position in $Applied Optoelectronics(AAOI.US).

Key points from $Amazon(AMZN.US) earnings call:

CEO Andy Jassy: "I think we're still in the relatively early stages of how much demand there's going to be for AI."

AWS:

- Fifth straight quarter of AWS acceleration and fastest growth in 18 quarters.

- AWS revenue was $42.2B (+37% YoY), and growth was about 80% more than Amazon's largest increase ever.

- Accelerating off a 2x larger base means the absolute dollar adds are unprecedented.

- Backlog is $496B which is ~2.5x Q3'25 level which derisks the capex fairly significantly.

- "The lion's share of capacity in 2027...is largely reserved. And we have quite a bit of capacity that's already been reserved for 2028"

- Trainium: "the two leading AI labs in the world, Anthropic and OpenAI, making multi-year, multi-gigawatt commitments"

- Amazon also predict that AWS could be a $1T annual revenue business. At current growth rates, it looks like that could actually happen by 2030.

Capex / FCF:

- Raised 2026 capex by $20B to ~$220B. Surging memory costs are the key driver. $Apple(AAPL.US) also confirming on their earnings e.g. "For September, we expect to pay even higher memory costs."

- TTM FCF now -$7.6B because of ~67B long-term issuance in H1. "You've seen us issue debt this year... we have a lot of options available to us".

- "If the demand isn't there, we won't spend the capital for servers and networking equipment" - positive signals on surging demand.

- "We will still not have enough capacity to meet all the demand we have in 2026. And I believe this dynamic will also be true in 2027 too."

Demand shape:

- AI labs "consuming gobs and gobs of compute" like Anthropic and OpenAI.

- Current enterprise production workloads "will be the largest absolute segment"

- "Enterprises are still very early in using inference at scale in their current production applications"

Summary:

- Same message as $Alphabet(GOOGL.US), $Microsoft(MSFT.US) and $Meta Platforms(META.US) where demand exceeds supply through 2027 at least.

- Binding constraint is capacity.

- $496B of contracted backlog against capacity sold out two years forward just confirms demand > supply.

Very good earnings overall in my opinion.

Glad that the markets didn't look at the negative FCF in a bad way when you consider a contracted backlog of $496B is being built/supplied against it.

Maybe the best hyperscaler earnings this quarter?

This Leopold / Situational Awareness story is crazy.

> Go from $1.5B to $20B in under two years.

> Over 1,000% since launch, 270% ytd to May alone.

> Jane Street which almost never allocates to external managers becomes an investor.

> $24B near the highs, levered as much as 4x. Up 439% for H1'26.

> July 2026: AI names go down as much as 50%.

> Compounded with up to 4x margin...

> Leopold sends letter to LPs for additional capital reported by FT yesterday, says that this is a buying opp.

> Today: CNBC reports Situational Awareness has exited all public equity positions.

> One buyer takes everything, both L/S books, in one enormous block.

> Jane Street?? Who buys a whole levered spread book in one go? Isn't that is literally Jane Street's business?

> As an LP, Jane Street had the inside view of exactly his book. Which would make this even more ironic...

> If it was JS, the arc completes: Leopold's rarest backer would be the buyer of his whole book lol.

> What's left of Leopold? Whatever's left in the private book after selling Anthropic stake and the capital raise, if any.

If you're running risk at Leopold's prime broker, somewhere in your account docs sits the big red button...the power to margin call Situational Awareness and force liquidate it's positions.

Indeed, the Situational Awareness fund is highly levered, collateral halved, and every anon on this app has been spouting that Leopold is cooked. Liquidation notices, forced unwinds, the works.

Except...you open the account and see a fund that made 439% net YTD June.

So, if Situational Awareness fell 50% this month, it's up roughly 170% YTD. If it fell 70% (a genuine Lehman-level catastrophe), it's still up about 60%. Which is why, even in the disaster scenarios, the fund sits above its high-water mark = Leopold's fee engine never stopped running and isn't about to.

Yes, Leopold's risk is through the roof, but even that worst case 2026 scenario still beats the best year most fund managers will ever have.

Rather than Leopold's emails going berserk with angry investors, it'll be the complete opposite where his already diligenced AI bulls will be wanting to give him fresh money. Lows will ultimately be bought and I'm pretty confident that Leopold will somehow time things better than most fund managers.

Ultimately, Leopold will be fine and will raise capital at better terms than the risk-on market we saw in Q1 and the start of Q2.

Recap of things that happened today:

1. $Microsoft(MSFT.US) and $Meta Platforms(META.US) both reported quarterly earnings

Microsoft:

- Revenue $90.0B (+18% YoY) vs $87.62B expected. EPS $4.74 vs $4.24 expected. But the EPS included a $3.2B gain on its Anthropic stake. That said, this is the best set of Microsoft earnings I can remember.

- Azure revenue grew 43% vs. the 40% that analysts expected, surpassing $100B for the first time. Moreover, Copilot passed 30M paid seats.

- Hyperscalers aren't supposed to accelerate at this scale, especially being FCF positive/growing heading into the coming years...

- The circularity critique got dismantled on the call: nearly 90% of cloud revenue comes from customers outside the frontier labs, and contract backlog rose 25% in Q4 excluding OpenAI.

- Crucially, Microsoft did not raise capex guidance and kept the ~$190B CY26 framework roughly intact. The market rewarded this with a +8.2% move after-hours, vs. the market punishing $Alphabet(GOOGL.US)'s increasing capex with a ~7% sell-off last week (and $Meta Platforms(META.US) below).

Meta:

- Revenue $60.80B (+28% YoY) beat the ~$60.19B consensus, but EPS was $6.18 which missed the $7.17 estimate. This was because operating costs rose ~55% on higher AI and legal/severance expenses on top of the AI ramp itself.

- Meta raised the low end of its FY2026 capex range to $130B - $145B vs prior $125B - $145B. Conversely to Microsoft who held capex flat, the markets did not enjoy this from Meta, resulting in a ~9% sell-off after hours.

- FCF was $784M in the quarter against $31.08B of capex and finance lease payments, with $83.7B of long-term debt now on the books, which is why the CFO pointed to the BlackRock El Paso JV as the template for structuring capacity off balance sheet.

- Zuckerberg cited momentum at Meta Superintelligence Labs, emphasizing continued heavy AI infra investment and plans to maximize compute capacity through 2026-2027.

- Zuckerberg also noted that Meta is seeing demand for its compute at premiums above what it paid for the capacity which is positive read through for neoclouds like $Nebius(NBIS.US) / $IREN(IREN.US) / $Coreweave(CRWV.US).

Net-net: both beat on revenue and both are spending historic sums with the difference being self-funding. Microsoft covers its buildout from their cloud business growing 43% and guided capex flat, while Meta is funding a comparable ramp from an ads business with FCF at roughly zero.

2. FOMC decision

The Fed held the federal funds target at 3.50% - 3.75% for a fifth straight meeting, but the vote was a hawkish 9-3 where three regional presidents dissented in favor of an immediate 25bp hike. This was the first time since September 2016 that three policymakers dissented with a unified view of which direction rates should head.

The statement was again pared back under Chair Kevin Warsh and noted "economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East" with inflation still above 2% partly on energy supply shocks due to the Iran war ongoing.

The overall market reaction was negative however, where stocks sold off hard into (and after) the decision, with the 10Y yield rising ~5bps to ~4.69%.

3. KOSPI sell-off

The KOSPI triggered a circuit breaker for a second straight day, which is the first back-to-back marketwide halts in the KOSPI's history.

The selling is increasingly mechanical rather than fundamental, with SK Hynix dropping as much as 17% post-earnings and closed down 9.6% despite reporting the best quarter in its history. Forced deleveraging in single-stock leveraged ETFs amplified the move.

Korea's Finance Minister, Koo Yun-cheol, apologized in parliament for introducing the products without careful consideration, with one lawmaker telling him "the country has turned into a casino".

After an emergency meetings today, authorities said measures taking effect immediately will cap single stock leveraged ETFs as a proportion of retail portfolios (a 20% ceiling is one option under discussion) and establish a legal basis for government intervention during extreme volatility.

4. CXMT IPO

While Korean memory was circuit-breaking, CXMT surged another 11% today on its third trading day post-IPO. As a result, this lifted CXMT’s market cap to approx. RMB 3.3 trillion ($487B) and making it China’s most valuable listed company. In the process, it has passed the likes of $Intel(INTC.US) ($413B) and $Cisco(CSCO.US) ($443B). Consequently, MSCI said it will add the stock to the China All Shares Index on August 10.

5. Moonshot AI Funding

Moonshot closed a larger than expected $3.5B funding round at a $35B valuation (it had targeted only $1-2B), led by China's National AI Industry Investment Fund - the state vehicle that also backs DeepSeek. ARR reached $300M in June, up from $200M in April and $100M in March, with API licensing >70% of revenue (per Tech Times). Moonshot is now seeking a follow-on at a $50B pre-money valuation ahead of a possible Hong Kong IPO this year.