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Back in 1998, a surfer named Chip Wilson took a Vancouver yoga class and walked out annoyed by the clothes: baggy cotton that sagged and went see-through. So he sewed better pants from technical fabric and gave them to yoga instructors to wear while teaching. They became walking billboards. The pants sold out, and Lululemon was born. Over 25 years, that one idea, quality workout clothes styled for exercise or yoga, grew into a company worth more than $60 billion at its peak. Lululemon did not join the athleisure category. It invented it.

Now, the founder is at war with his own board, the longtime CEO is gone, US sales are shrinking for a second year in a row, and the stock is down ~80% from its 2024 highs. The fashion press says the brand has lost its cool, that kids are buying knockoffs from Costco, and that Alo and Vuori are the names on everyone’s feeds.

If you’re in a rush

What they do: Lululemon sells premium athletic clothing, mostly through its own stores and website, with a lineup that runs from leggings and the famous Align pants to a growing men's range and a young footwear line. Because most of that product moves at full price through its own channels, gross margin is in the low to mid-50s, far above that of almost any other clothing company.

Why it crashed: The Americas, its largest and most profitable market, has not grown for about two years, with nine straight quarters of flat or declining same-store sales. In the latest quarter, America’s net revenue declined 3%, and America’s comparable sales fell 5% (-6% on a constant dollar basis) in the first quarter of fiscal 2026. Management has lowered its full-year outlook and now guides to a 0% to 1% decline in total net revenue for fiscal 2026. Other compounding factors were: margins squeezed by tariffs and discounting; a public proxy brawl with founder Chip Wilson that began after the company announced CEO Calvin McDonald's exit and only settled in late May; the leadership vacuum and the perception that Alo and Vuori are stealing the crown have caused Lululemon to fall out of favor with investors.

Possible catalysts: A product refresh already showing up in the spring numbers, a new CEO poached from Nike who starts in September, and a strange potential new tailwind: weight-loss drugs pushing more people into the gym and into new clothes.

How Lululemon makes money

The best way to segment Lululemon’s revenue is by geography. It reports three segments.

The most important metric is in the bottom row. The % of revenue from the Americas (the saturated market) fell from 85% of the business in FY2021 to 71% by FY2025, not because it shrank but because it grew more slowly, even as revenue rose from $5.3 billion to $7.8 billion. The two international engines simply grew faster. China Mainland revenue compounded at roughly 42% per year from a small base to $1.75 billion in FY2025, while the rest of the world tripled. So you are buying two businesses in one - a large, premium, very profitable Americas business not growing and in need of a refresh, and a smaller international one still growing like a startup.

Margins are under pressure. While gross margin was 56.6% last year, it dropped to 54.2% in the first quarter of fiscal 2026. Operating margin contracted sharply to 11.2% in Q1 FY2026, down from last year's 18.5% in Q1 FY2025, and well below its historical peak of 23.7%. The balance sheet remains resilient, showing $1.5 billion in cash and cash equivalents with essentially no debt. Meanwhile, management continues to aggressively buy back stock to defend the equity, purchasing 2.2 million shares for $358.3 million in the latest quarter, building on the $1.2 billion of stock repurchased last year.

A word on the margin. For all the talk of Lululemon losing its grip, the margin was remarkably steady till 2025, ending that full year at a robust 56.6%.

But now, gross margin has materially dropped. Gross margin plummeted 410 basis points to 54.2% in the first quarter of fiscal 2026. While a significant portion of the dip still stems from macro pressures, with tariffs causing a 280 basis-point reduction, markdowns have had a big effect as well. Markdowns are expected to rise 50 basis points in Q2 versus last year. Clear evidence is emerging that people aren’t chasing the product at full price like they used to.

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What went wrong

US demand rolled over

Americas’ revenue fell about 1% in FY2025. Americas’ revenue fell 3% in the first quarter of fiscal 2026, and same-store sales dropped 5%, with the full-year outlook dragged down to a 0% to 1% decline. The shopper’s complaint is blunt - the clothes got boring, and a $100 legging is a hard sell when it looks like last year’s. I’m sure the weak consumer sentiment isn’t helping.

Margin compression

In fiscal 2025, gross margin fell 260 basis points to 56.6% and operating margin fell 380 basis points to 19.9%, both down from their FY24 peaks, due to new US tariffs and heavier markdowns (discounts). The exit rate was worse, with fourth-quarter operating margin down 660 basis points year over year. In the first quarter of fiscal 2026, gross margin plummeted 410 basis points to 54.2% and operating margin collapsed 730 basis points to 11.2%, both down sharply from prior-year levels due to heavy US tariff headwinds, inventory provisions, and climbing store and proxy expenses.

The boardroom battle

Founder Chip Wilson, a major shareholder, ran a public campaign against the board for letting the brand go stale. In late May, they settled - Lululemon adds two of Wilson's nominees plus a third by October, Wilson stands down for 18 months, and Heidi O'Neill becomes CEO. Ex-CEO Calvin McDonald, who more than tripled revenue, left in January, and two interim co-CEOs are running things.

Increasing competition

Vuori and Alo Yoga have pulled younger, style-led shoppers toward their own premium athleisure, and a reviving Nike is pushing back into the category it once owned. Each is taking share that used to come to Lululemon without a fight.

Lululemon’s response is more concrete than the stock price would suggest. The problem it admits to is stale product, so it is lifting new styles from about 23% of the mix toward 35% by spring, cutting its design cycle to 12 to 14 months from 18 to 24, and pulling back on discounting to sell at full price again. It also hired Heidi O’Neill, a 26-year Nike veteran, to run product from September. The plan is sensible, but US sales are still falling, and the turnaround strategy is unproven.

The New CEO

The board hired Heidi O'Neill, who spent over 25 years at Nike running product and brand, most recently through the stretch that sent Nike into its own long slump. Investors wanted a fresh product-first fixer for the stale-product problem, not someone from the regime behind a rival's troubles. The shares fell on the news, and she does not even start until September.

Is the brand actually losing relevance?

This question decides everything, so I went looking for evidence.

The bear case is real. Younger shoppers increasingly call Alo and Vuori the fresher brands. Alo has built serious heat on TikTok and holds something like 14% of the premium direct-to-consumer athleisure market. Vuori, valued at around $5.5 billion and preparing for an IPO, owns the relaxed men’s corner where Lululemon has always been weaker. Brand-tracker BERA scores Alo highly on excitement and sophistication. And the dupes - Lululemon got so annoyed it sued Costco last summer over look-alike apparel. Add a couple of see-through fabric episodes/scandals, and the ‘Lululemon is over’ story writes itself.

Now, the other side, which gets less airtime. Even as the US activewear market softened, Lululemon’s sales have not collapsed. Its stores still achieve more than $1,400 of sales per square foot, which almost nobody in apparel matches, and it holds $100-plus price points, the clearest sign a brand has pull. The same BERA report that flatters Alo and Vuori shows their overall scores still sit in the 40s, the getting-to-know-you zone, while Lululemon is the benchmark. And dupes are a problem only aspirational brands have.

My read: the brand has cooled, not collapsed, and the cooling lines up almost exactly with a stalled product engine. When the clothes stopped feeling new, the energy drifted to whoever was shipping fresh ideas. A relevance problem caused by a stale product is fixable with a better product. Also, a huge part of the slowdown is due to weak consumer demand (most consumer discretionary businesses are affected).

But I must say that I have a contrarian bent of thinking, and that maybe is coloring my analysis here. Maybe Lululemon is a melting ice cube in the US. I’ll be humble and acknowledge that I cannot predict women’s (who drive Lulu’s sales) clothing preferences over any time period. Lulu has strong moats (brand and distribution), but these can only go so far. My research on whether the brand is becoming irrelevant in the US is inconclusive.

Will the US same-store sales turn positive?

The whole turnaround hangs on one lever: newness. Lululemon management has noted that new styles sell better than repeats and attract its highest-spending customers. So the number that matters most is the share of the lineup that is new. It fell to around 23% in mid-2025, roughly when US sales rolled over. The plan is to push it to 35% by spring 2026.

Lululemon has cut its main product development cycle from 18 to 24 months to 15 to 16 months and is targeting 12 to 14 months, while aiming to achieve about 20% more volume on its winning styles this year. It hired a Chief AI and Technology Officer to speed up design. So the strategy is not just a slogan.

So far the signals are mixed, not the clean win the bulls want. On the Q1 call, interim CEO Meghan Frank admitted that recent launches did not wow shoppers and that a wave of negative brand chatter dented traffic, though management still expects full-price selling to turn positive starting in Q2. The newer footwear push is one genuine bright spot - the Beyondfeel running shoe and Cityverse sneaker have seen solid sell-through since their 2024 debut - but it is still a small part of the mix. None of it has translated into any material improvement in the Americas numbers yet.

Coming to the biggest catalyst. The founder will now have 2 of his nominees on the board. And Heidi O’Neill, the 26-year Nike veteran who helped grow that business from $9 billion to $45 billion, takes over in September. Nike is primarily driven by sales to men, while Lululemon is driven by sales to women. Most brands tend to do well with either men or women. Even though Heidi helped grow Nike’s women’s division, I don’t think Nike has done very well with women’s apparel either. This is my pushback against this appointment, and I do agree with the market’s view that Nike itself is not a poster child for brand success in the last 5-10 years. So this appointment does not inspire much confidence.

A Strange Tailwind: GLP-1 drugs

Here is what makes this interesting. Weight-loss drugs (GLP-1), including Ozempic, Wegovy, and Zepbound, are changing how people shop, and their mechanism of action works in three ways. People lose weight, usually 10 to 20% in year one, which is one to five sizes, so they rebuild a wardrobe. They start exercising, and in one survey, the share of people exercising weekly roughly doubled, from about 35% to 71%, creating a new pool of buyers for workout gear. And people who pull off a visible health change like to show it, and premium athletic wear is how.

The scale is large. About 1 in 8 American adults has tried a GLP-1 and roughly 6% are on one today, and Bernstein estimates the wardrobe churn could add $3 billion to $13 billion a year in US apparel spending. Almost all of it is American, which lands it squarely on the 71% of Lululemon’s business the market has written off. But the catch is real - Bernstein’s bigger winners are the off-price and value names, not premium, since shoppers buy cheap clothes while their size is still moving, and only the higher-income end of the GLP-1 crowd is the kind who will pay $100 for a legging.

Examples of brands dealing with customer fatigue

Many brands have faced the same stale-product issues that Lululemon faces now, and the pattern in the table is not random. The ones that came back, Abercrombie, Crocs, and Lululemon in 2013, rebuilt the product and still had a wanted brand underneath. The ones that stalled either spent their brand equity on discounts (Under Armour, Gap) or missed a cultural shift they could not discount around (Victoria’s Secret).

Lululemon looks like a winner on what matters most - its gross margin is still in the 50s, so brand equity is intact, and it is moving early while remaining profitable. What I am wary of is the new CEO, hired from a weak (brand perception wise) Nike. Whether the new management will be able to pull off a turnaround cannot be answered by looking at historical precedents. And so even this is inconclusive. I have no confidence in predicting a turnaround at this stage. I will rather wait for it to happen.

Lululemon Valuation

We value Lululemon using a simple DCF model. One key caveat is that the model is my effort to put numbers around the story - Lulu’s model is very sensitive to the exit multiples, which will depend on the same-store sales growth for the Americas. This makes the DCF highly unreliable: as a small negative same-store sales growth versus a +2% figure will drive a material difference in the intrinsic value.

By the end of this decade (even right now), Lululemon is a maturing premium brand growing in the high single digits, so we set the multiple based on where mature branded apparel and footwear trade. The apparel group sits around 14 times forward earnings. Nike, the closest comp, trades ~25x-30x, but on depressed earnings, so normalized, it is lower. Ralph Lauren and Tapestry sit around 20 times, and Deckers, behind UGG and Hoka, at just 15 times. A premium, net-cash brand still growing 7% belongs in the upper half of that range, not above it.

So I conservatively use 15x FCF in the base case and 10x FCF in the bear case, where the brand keeps fading and the stock trades like tired apparel names.

The base lands near $153 versus ~$116 today, and the bear near $88. Unfortunately for Lululemon, unless they print a turnaround in the Americas, the market will not be interested in this name.

Lululemon Valuation

What could go wrong

Brand fade: If the US lineup fails to re-engage and comps stay negative, premium pricing will erode. This will be a slow death for the brand, and the stock will be a value trap. If it loses relevance in the US, the brand may lose its pull in China and the rest of the world as well.

Margins: Tariffs and markdowns could prove stickier than we assume, holding cash flow margin below our recovery path.

Leadership: Poor decisions by the new CEO will be difficult to recover from.

China’s growth falters: This would remove one of the bright spots from the Lululemon story.

Our take

We rate Lululemon a ‘HOLD’ with a ‘Sell on Rallies’ bias. This is in the too-hard bucket. Essentially, we will wait and watch the KPIs and revisit the thesis post-recovery (if any) in the US same-store sales.

The base case materializes only if the US stops shrinking (if and when that is) and starts growing again, with margins climbing back up. Take that away, and you fall straight back to the bear case. So the value is real, but it hangs on one thing, and that one thing has not shown up yet. That is why we are staying away. We will be patient here.

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Rebound Capital’s work is provided for informational purposes only, is intended solely for readers in the United States, and should not be construed as legal, business, investment, or tax advice. You should always do your own research.

There’s this one idea we always came back to: investing in quality companies in a drawdown.

Here’s what we wrote about Meta in 2022:

No matter how you look at the company, the financial metrics are incredible. 80% gross margin and 30% ROE with growing revenue. But the stock is down 55% in the last 1 year.

I am not pitching it as a great business. They certainly have some incredible challenges ahead of them in terms of privacy and attracting a young user base. No one knows directly the solutions for their hardest problems—that’s why they’re the hardest ones.

But writing off a company based on two bad quarterly reports is just too short-sighted.

The same theme kept recurring:

• Netflix lost 3/4th of its value because it did not grow subscribers one quarter.

• ASML lost ~1/2 its market cap on tariffs and export restrictions.

• Amazon was down 56% after its first quarterly loss since 2015.

So we finally pulled the trigger and launched Rebound Capital, putting our own capital on the line. We followed Charlie Munger’s advice of “take a simple idea and take it seriously” and spent the past year going through hundreds of stocks to find the optimal rebound setups.

Fast forward a year, and we are outperforming the S&P 500 while holding top 3 positions in relative value names such as Amazon, Constellation Software, and MercadoLibre. To put this in context, 79% of all active large-cap U.S. equity funds underperformed the S&P 500 last year.

While it’s easy to talk a good game when your portfolio is outperforming, sticking to the strategy when it's underperforming is the hardest thing to do as a public facing equity research platform. Q1 was hard on the Rebound Portfolio, where we underperformed the market by 9%. We continued to share our portfolio performance publicly throughout the period of underperformance (here are our Feb, Mar, & April updates). But sticking to our strategy helped us double down on quality names that rebounded strongly after the March dip.

Not to name names, but there are a lot of “gurus” who have Excel spreadsheets where the portfolio never goes down, and they magically exit at the right time. For us, we have maintained the policy of informing you of all our trades 24 hours in advance, and honestly, our biggest success till now is that nobody has ever said anything bad about us.

Overall, we are now in a good position with our portfolio compounding faster than the index while trading at essentially the same valuation. The headline numbers (weighted average of our portfolio holdings):

• Revenue growth, next 3 years: ~18%

• EBIT growth, next 3 years: ~19%

• EV/EBIT: ~27x, in line with the S&P 500

Here is the unusual part. We own a basket whose EBIT is set to grow ~19% per year over the next three years, compared with <13% for the S&P 500, and we pay no premium on the multiple to do so.

Divide valuation by growth, and the portfolio sits at ~27/19 = ~1.4, versus 27/11 = ~2.5 for the index (lower is better). In short, our portfolio compounds faster than the market while costing about the same, which on a growth-adjusted basis makes it materially cheaper than the index it is built to beat.

Your support has been incredible, and it's what makes this work feel meaningful. While most creators are hush-hush about how much they make, we are going to show you our real numbers. After all, this is the easy bit after sharing our portfolio performance :)

As of today, we have more than 21,000 investors who subscribe to us, of which 969 investors pay to read our research, which translates to revenue of $358K (ARR). The spike you see in December is when Michael Burry became a paid subscriber to Rebound Capital and endorsed our note on Birkenstock.

Consider this your nudge to put your own work out in public. You never know who’s reading.

Finally, of all the metrics at Rebound Capital, our retention rate is the one that we are most proud of. ~90% retention at 6 months is unheard of in the newsletter space and is the best testament to the quality of the research we produce and the value you derive from it.

Right now, the market is in love with AI. Money is pouring into a narrow group of names at prices that already reflect the next 5 years of growth. To be clear, we are bullish on what AI can do over the long run. But when an equipment vendor that has always been cyclical gets priced as if the cycle has ended, the reward for chasing it is small, and the cost of being wrong is high. With many indexes changing their decade-old rules to accommodate hyped-up IPOs like SpaceX, indexing is no longer the safe, neutral choice. The case for doing your own research only gets stronger from here.

And this is where being independent matters. A fund manager has to answer to a committee, hug the benchmark, and own the hot name so they don’t look wrong at the next quarterly review. We answer to no one but you. We never have to chase the story of the moment and can sit in an out-of-favor name and wait for the market to catch up, because no one is going to pull our capital for being early.

While investors flock to one part of the market, high-quality companies are being ignored. Some of the best compounders we know are at their lowest multiples in years. We will continue to focus here. The crowd overpays for what it loves and ignores the good businesses on sale. But the market eventually catches on.

So we will keep researching the names nobody wants to talk about. The rotation back to high-quality names will come. Our job is to be patient enough to hold the right names when it arrives.

Have a great weekend. We’ll see you Monday.

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Rebound Portfolio Performance

Happy to report that the Rebound portfolio is now beating the market (S&P 500) since inception by ~4.7%.

Drawdowns are always tough. But we stuck to our core principles during the February and March drawdown (driven by AI-doom and the Iran War). We kept researching, building DCFs, and looking for stocks in steep drawdowns.

This helped us invest in quality stocks at attractive prices and resulted in us outperforming the market by 14%, since the market bottomed on March 30th.

Looking ahead, we are focused on:

1. Derisking from the AI theme: This cycle is real, and we are still early. But AI-related stocks (especially Semiconductors) are now discounting multiple years of strong growth. Any hiccup, however temporary, will lead to a sharp fall in these AI names. The valuations that the new-age AI companies (SpaceX) are getting point to public market investors behaving like VC investors - and this will not end well. What I mean is that VCs can invest in companies that are not profitable, as they expect some of their companies to become 10x or even 100x. So they just pay for innovation. You can’t pay $2 trillion for a company and think like a VC (as the company cannot 10x). Just my 2 cents. We are now pivoting our portfolio and trimming exposure in areas with frothy valuations.

2. Quality companies overlooked amid AI mania: Multiple companies with years of strong revenue growth are now trading at their lowest multiples in a long time (Visa, SPGI, Moody’s, etc., to name a few). We will investigate such names to determine whether the lower valuations suggest a sound investment.

Portfolio statistics

Rebound Capital’s portfolio compounds faster than the index while trading at essentially the same valuation. To gauge the portfolio’s growth and valuation, we take a weighted average of each holding’s metrics. The headline numbers:

• Revenue growth, next 3 years: ~18%

• EBIT growth, next 3 years: ~19%

• EV/EBIT: ~27x, in line with the S&P 500

Here is the unusual part. We own a basket whose EBIT is set to grow ~19% per year over the next three years, compared with <13% for the S&P 500, and we pay no premium on the multiple to do so.

Divide valuation by growth, and the portfolio sits at ~27/19 = ~1.4, versus 27/11 = ~2.5 for the index (lower is better). In short, the portfolio compounds faster than the market while costing about the same, which on a growth-adjusted basis makes it materially cheaper than the index it is built to beat.

Broader Market Commentary

AI adoption is in early stages, but AI stocks price in 3-5 years of growth

The latest quarterly reporting season put the AI bubble narrative on the back foot. The hyperscalers are not slowing their spend - they are raising it:

• Alphabet lifted its 2026 capex guidance to $180-$190 billion and said 2027 would see a significant increase.

• Amazon reiterated roughly $200 billion in 2026 capex. AWS accelerated to 28% in Q1, its fastest pace in fifteen quarters, against a $364 billion backlog that is up 40% year-over-year.

• Google Cloud grew 63% to $20 billion (accelerating from 48% the prior quarter) with backlog nearly doubling to over $460 billion.

• Nvidia capped it off on May 20 with record revenue of $81.6 billion (+85%), data center revenue of $75.2 billion (+92%), and a $91 billion guide for the next quarter.

The takeaway from every management team was the same - the shift to agentic AI is increasing demand for compute. Adoption is progressing from experimentation into production budgets. Caution is warranted in AI related stocks due to valuations, but the underlying trend is fundamentally strong.

Panic Buying in Semiconductor Stocks

The move in semis since March has been indiscriminate. AMD is up roughly 330% over the trailing 12 months and now trades at 50x forward earnings, compared with Nvidia at 24x. The semicap names have rerated even harder: ASML at roughly 52x trailing earnings versus 38x at the end of 2024, Lam Research at 60x against a ten-year average of 20x, and Applied Materials at 42x against a ten-year average of 18x. These are cyclical equipment vendors being valued as if the cycle no longer exists.

The memory and optics complex is where the melt-up is cleanest. SK Hynix is up about 248% year to date and Micron 226%, with both joining Samsung in the trillion-dollar club. In optics, Applied Optoelectronics is up roughly 335% YTD, Lumentum 120%, and Coherent close to 80%. Some of the other Tier 2/3 suppliers are up similarly.

We are not bearish on the AI buildout - we own it. But price has run ahead of fundamentals across much of this group, which is what informs the trimming you will read about below.

Not All SaaS Is Created Equal

SaaS has bounced over the past few weeks, but we still view AI as a material risk to the revenue model and think deep discrimination between names is warranted. Rebound Capital currently has roughly 16% exposure to this segment, and we plan to keep that allocation roughly constant rather than chase the rally. We continue to dig into more SaaS names.

The broader picture has not improved much. Investors are repricing the risk that AI will compress seat-based pricing and let customers do more with fewer tools. Much of this derating is deserved. The easy land-and-expand era is over, and businesses whose moat was workflow inertia rather than genuine switching costs are exposed.

The nuance is that SaaS is not monolithic. Owners of mission-critical, deeply embedded software will do well and can even benefit from AI. That distinction is the investment opportunity.

Consumer distress is real: Implications for consumer stocks

The 2-tier economy is showing up everywhere in the data. The top 10% of US earners now drive 49.2% of all consumer spending, a record since 1989 and up from roughly 36% in the early 1990s. McDonald’s says lower-income traffic has fallen at a near double-digit pace for almost two years while higher-income traffic rises at a similar rate. Chipotle and Cava benefited from customers trading down. Delta’s main cabin revenue fell 5% year-over-year while premium ticket sales rose 5%, and luxury hotels like Four Seasons are outperforming budget brands.

Three sector implications:

• Restaurants: the sector has been brutalized. Names like Chipotle (down -54% from all time high), Domino’s (-45%), Wingstop (-63%), and DoorDash (-27% YTD) are posting historic drawdowns. BTIG analysts have noted that sentiment is at levels only matched by COVID and the 2008 crisis! The drivers are a third straight year of weak traffic, pushback on price hikes, GLP-1 drug adoption curbing food spend, and K-shaped pressure on chains over-indexed to lower-income guests. We are interested in this sector and have done deep dives on Domino's and Wingstop. Some names are now trading at interesting valuations, and we will be patient before deploying.

• Medical devices: the same K-shaped pressure has emerged as consumers delay elective procedures. That hesitancy has created an opportunity in one med tech name, in which we have built a position. The company is the global leader with roughly 60% market share, a recurring upgrades revenue tail, and a structurally underpenetrated patient base. The surgical deferrals cannot be extended too much. The company’s moat remains intact. Full thesis here.

• High-end luxury: even the top of the K is not immune. The Iran war disruption has pushed the long-awaited recovery further out. LVMH now trades at roughly 21x trailing earnings, against a ten-year average >26x, while the broader luxury basket is closer to 17-18x forward, against five-year averages in the mid-20s. The setup is starting to look interesting (more on LVMH below).

Portfolio Holdings Update

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32 years later, Wingstop has 3,153 restaurants. Around 98% of the system is operated by franchisees - what the company calls ‘brand partners’. The company had 21 consecutive years of positive domestic same-store sales (2003-2024). Wingstop keeps the brand IP, the flavors, the technology platform, and a 6% royalty on every dollar of system sales, while taking on almost none of the operational complexity. This is an amazing business model, akin to Domino’s Pizza.

The brand partners are very happy too. Brand partner unit-level cash-on-cash returns are >50% for a ~$575,000-$650,000 buildout. The payback period is close to 2 years for most partners! No wonder Wingstop has a pipeline of 2,200+ committed restaurants, even in a weak consumer environment.

But the stock is down ~65% from its all-time high.

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The drawdown is due to the 2025-26 deceleration in domestic same-store sales growth (SSSG%). SSSG% fell to (-3.3%) in fiscal 2025 (the first negative year since 2002). Q1 2026 was worse at -8.7%. The franchise royalty engine, by contrast, is not broken, and brand partners are still investing to open Wingstop stores (over 2,000 restaurants in the pipeline). The debate isn't whether Wingstop is a great business; it is. The debate is whether a great business trading at ~23x EBITDA, with its core customer under pressure (and weak consumer sentiment more broadly), is a buy today.

How Wingstop makes money

I would say that Wingstop is not really a restaurant company. This is a company that owns IP and a brand, which it licenses at very high operating margins, and it operates 3 businesses under that brand.

Royalties

Wingstop gives out franchise rights to its partners. These ‘brand partners’ then pay a 6% royalty on every dollar of domestic system sales (& 5% on international sales), plus franchise fees, technology fees, and rebates. Wingstop does not deal with food costs, labor, rent, or working capital. Wingstop has ~1,335 corporate employees versus 3,153 restaurants. Corporate complexity scales sublinearly, while royalty revenue scales linearly with system sales. FY2025 royalty/franchise/other revenue was ~$322M, with an estimated ~40% operating margin (excluding the marketing revenue, which is a pass-through). This revenue segment is what makes Wingstop an elite business.

The advertising fund

Brand partners contribute 5.5% of sales to a national advertising fund. This is a near-perfect pass-through - fees in, advertising expenses out, with a zero economic margin to corporate. The strategic value is the scale. A 5,000-store system contributes more dollars to the same Super Bowl spot than a 3,000-store system. It is a brand-building utility, not a margin business.

Company-owned restaurants

Wingstop owns 57 corporate stores, mostly in the Dallas Fort Worth area, generating ~$128M of sales at ~24% restaurant-level margin. This is small in absolute dollars, but strategic. Every new operating standard, technology platform, and menu innovation gets tested here first. Corporate AUVs (Average Unit Volume: sales in a year) are tracking toward $2.5M, a $500K premium over the system average, and serve as a proof point of what disciplined operations produce.

Wingstop is a royalty platform selling its IP and brand, an advertising fund, and a small laboratory of company-owned restaurants. The royalty segment is what creates the economic value. The other 2 segments are used to maintain the brand's vibrancy.

Unit economics

I will dig into the unit economics for both the brand partners and the corporate/company (which we will enjoy as investors).

Franchisee economics: A Wingstop franchisee typically spends $575,000 to $650,000 to build a single location. In return, the store generates roughly $2 million in annual sales while maintaining a 22% to 25% restaurant-level profit margin - allowing owners to recover their initial investment in just 2 years. These metrics represent some of the strongest unit economics in the Quick Service Restaurant (QSR) industry. This rapid payback is driven by a comparatively smaller restaurant size - locations average just 1,400 to 1,700 square feet, completely bypassing costly drive-thrus and large dining rooms to focus entirely on takeout and delivery. Ultimately, these elite-operator returns are driving explosive brand growth for Wingstop. As an operator, why choose any other brand when Wingstop delivers such stellar returns? This is a significant moat.

Company economics: The corporate economics are stellar. They are even better than the headline numbers. Wingstop reported a 25.7% operating margin on FY2025 revenue of $697M, except that about $248M of that ‘revenue’ is just the advertising fund passing through the P&L (fees in, ads out, no economic margin). Strip it out, and the real operating margin on the business Wingstop actually keeps is closer to 40%!

Why is it down 65%?

5 factors explain the move from $420+ in mid 2024 to $157 today:

• Same-store sales broke a 21-year positive streak: Domestic SSSG went from +19.9% (2024) to -3.3% (2025) to -8.7% (Q1 2026). Consumer distress has played a large part in this. It’s difficult to say when the consumer will bounce back, though management expects a bounce back in the second half of 2026.

• Multiple compression as growth slowed: At the mid-2024 peak, the stock traded above 40x EV/EBITDA, a multiple that only made sense against 20%+ same-store sales growth. As that growth turned negative, the market re-rated it toward a more normal ~23x (LTM). That compression accounts for ~50% of the decline, and it occurred only because of the slowing growth.

• Q1 2026 one-time shocks: Atypical winter weather temporarily closed 700+ restaurants in January. Then, the Middle East conflict pushed gas prices higher. Finally, the lower-income cohort is in consumer distress and spending less.

• Repeated downward guidance cuts damaged management's credibility: Wingstop entered 2025 guiding to low to mid single-digit domestic same-store sales growth. After Q1, it cut that to roughly 1%. After Q3, it cut again, this time to a 3-4% decline. Due to these frequent cuts, the market has stopped paying for the medium-term targets, including the $3M AUV goal, until they are proven.

• Secular fears about GLP-1 drugs: The longer-term effects of GLP-1 drugs on eating out are inconsistent, but many reports highlight a lower propensity to eat out (as we highlighted in our Domino’s Deep Dive). But still, there is now a strong possibility that eating out may be structurally inhibited by people consuming GLP-1 drugs. Mind you, these drugs can keep getting better, and so the full effect is still largely unknown.

These factors are correlated, not independent. None permanently impairs the underlying business engine, but a few of these can be long-term headwinds to growth.

Competition and International Expansion

Wingstop’s scale edge in the US is structural and widening. It ended Q1 2026 with 2,653 US restaurants and a pipeline of 2,200+ committed units, so the system keeps compounding no matter what any single quarter’s comps (same store sales growth) do.

Its closest legacy rival, Buffalo Wild Wings, plays a completely different game. BWW runs ~1,180 US sports bars at ~$3.6M AUVs (and a much larger restaurant area, on average, than Wingstop), and the chain hasn’t grown its unit count since 2018. Wingstop added 493 net-new restaurants in 2025 alone. BWW franchisees also spend much more on store setup ($2.5M to $5M).

Popeyes put wings on its menu in 2023, but it's still fundamentally a fried chicken and sandwich chain. And the long tail of regional wing shops has been consolidating for a decade, with Wingstop the main beneficiary.

The bottom line: at its scale, Wingstop doesn't really have competition. It has the most stores, offers the highest returns to its brand partners (likely in my estimates), and is the only growth engine still running, while everyone else is shrinking, defending their footprint, or is too small to matter.

Outside the US, international expansion offers great upside. Since the wing occasion barely exists abroad, Wingstop is building a brand new category instead of fighting established rivals. Beyond mature markets like the UK and Mexico, the brand is expanding its digital model into Canada, South Korea, and Saudi Arabia. These countries will drive near-term growth, but India is the real game changer. With a commitment to over 1,000 stores, India could be a key driver of long-term growth.

The Moat

Wingstop’s durability rests on four reinforcing advantages. Together, they explain why brand partners continue to invest in new Wingstop stores even as consumers are in distress.

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The franchise royalty model: with high returns on capital for brand partners

95% of 2025 new restaurant openings came from existing brand partners (management commentary), a self-reinforcing loop that strengthens with system tenure. The operators who best understand the unit economics are the ones signing up to build more. Because Wingstop’s model enables high returns for brand partners, they keep investing in the brand and opening more stores. This is a virtuous flywheel for Wingstop, enabling it to scale rapidly.

Flavor IP and a lock on the next generation

Lemon Pepper, Atomic, Mango Habanero, and Hot Honey are flavors that are culturally embedded among younger consumers, backed by 30 years of investment. This is not a vague claim. Millennials and Gen Z make up a large part of Wingstop’s customer base, with 25 to 34 year olds the single largest cohort. The brand earned that position through exactly what those consumers index on - bold customizable flavor, shareable formats, a digital first ordering experience, and ownership of the game day and late-night occasions. The Q1 2026 Hot Honey Trio sold out two of three variants within two weeks. Owning the next generation of restaurant spending is a durable advantage, though a softer one than the franchise structure. Brand affinity erodes if innovation slows.

Structural cost advantage due to small restaurants and sourcing materials at scale

A third moat is structural cost, starting with the restaurant itself. A Wingstop is 1,400 to 1,800 square feet with no drive-thru and barely any dining room. Roughly 90% of sales are off-premise, and more than 70% are digital. This reduces setup costs. The Smart Kitchen concept has recently been implemented, reducing ticket times from about 20 minutes to 10. A large-format competitor with a full kitchen, dining room, waitstaff, and drive-thru cannot get its cost structure down to Wingstop’s level.

Scale shows up in sourcing, too. There is no fixed price market for fresh bone-in chicken wings. Starting in 2024, Wingstop moved most of its system’s wing purchases off the spot market into contracted pricing, giving brand partners cost visibility no independent can match. When wings spike, Wingstop’s franchisees hold their margins while the independent down the street gets squeezed. Smaller formats face similar issues. They can’t get as good a deal as Wingstop.

The data and advertising flywheel

The fourth moat is the one that compounds with scale. Wingstop has a customer database of more than 60 million users, built on a digital mix above 70% that most peers cannot approach, and a national advertising fund that collects 5.5% of sales from more than 3,100 restaurants. A 5,000-store system funds the same Super Bowl spot with far more dollars than a 3,000-store system does, and the first-party data beneath it gets richer with every digital order. As Club Wingstop rolls out nationally (membership plan), Wingstop will monetize its data.

Short-term headwinds vs. long-term opportunity

Short-term Headwinds: Wingstop’s core customer makes the brand more sensitive to macro than its peers. The CFO has said lower-income customers account for roughly 25% of transactions, and gas prices, the labor market, and inflation all hit that customer disproportionately. Two things partly offset this, though. First, even under pressure, these customers are trading up into larger bundles rather than trading down (ordering larger sizes), so ticket has held steady even as people have cut back on ordering extras, etc. Second, management is deliberately focusing new customer acquisition on the $50K-$100K household income cohort, thereby reducing reliance on lower-income cohorts.

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Each may have minor blemishes, but nothing that justifies the complete indifference they receive. Miss estimates outside the AI complex, and you get sold to valuations unseen in years. Beat them, and nobody cares. That disconnect is precisely where the opportunity lives. Mispricing tends to hide in the corners that the market has stopped bothering to look at.

The company we are looking at today controls north of 60% of a global market that grows at mid to high single-digits regardless of cycles, with gross margins above 70%, EBITDA margins in the mid-20s, and a recurring revenue tail that compounds for decades after the initial sale. Switching costs are effectively permanent.

New entrants need nearly a decade to clear regulatory hurdles, and demand is tied to secular demographic trends. And yet the stock is down close to 70% from its highs on a soft product launch and FX headwinds, temporary issues at worst. A rare combination of oligopoly economics, structural tailwinds, and a deeply mispriced entry point, hiding in plain sight.

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The recovery since the lows has been swift. Aided in part by the better than expected earnings in the latest quarter. Since the early April bottom:

• IGV is up ~24% off the lows

• IGV logged its best week since October 2001 in mid-April as the panic broke

  

• Snowflake and ServiceNow have led the bounce, up ~46% and ~26% off their lows respectively, with Barron’s recently calling them the names pulling software ‘out of the abyss.’

• Q1 2026 prints have given the rally a fundamental backbone, not just a sentiment lift

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The single most important takeaway from this earnings cycle is that Software companies are monetizing AI. They are not being eaten by it. SaaS will and is adapting to the new reality.

The data points are hard to argue with:

• Microsoft: AI business run rate is now $37B (up 123% YoY)

• ServiceNow: Now Assist (its AI product) customers with Annual Contract Value (ACV) >$1M grew more than 130% YoY. Management is guiding >$1B in Now Assist ACV for 2026

• Snowflake: Closed FY26 with 9,100+ accounts on AI features, up from 7,300 just one quarter earlier. AI was a decisive factor in roughly half of the new bookings in H2 FY26.

• Salesforce: Agentforce ARR hit $800M just 15 months after launch (up 169% YoY), with 2.4 billion Agentic Work Units delivered and 29,000 deals closed.

• Cloudflare: Strongest quarter in years (revenue +34% and $1M+ deals up 73%), explicitly tied to a surge in agentic AI traffic.

• Toast: ARR of $2.2B (up 26% YoY), Adjusted EBITDA grew to $179M from $133M a year ago, full-year EBITDA guidance raised to $790 to $810M, and a fresh $500M buyback authorization.

The ‘agents will replace workflow software’ thesis is, in the field, playing out opposite of what the bears had predicted. Agents need workflow orchestration, audit trails, governance, and tool-calling rails. That’s exactly what Software platforms sell.

But here’s the catch. Not every cheap software stock is a buy.

What separates the survivors from the value traps in any major technology shift isn’t the multiple. It’s the intangibles. Brand. Customer trust. Regulatory standing. Embedded workflows. Network density. Proprietary data. Decades of installed base. None of this shows up on a P/E screen, and none of it can be conjured out of thin air by an AI startup. Competition in the industry will increase, but AI benefits the incumbents in this competition.

David Teece made this point back in 1986: innovators rarely capture the profits. The owners of the complementary assets do.

• EMI invented the CT scanner and lost to GE, which had the hospital sales and service network

• RC Cola was first to market with both canned and diet cola, then lost to Coke and Pepsi on distribution and brand

• IBM was late to the PC and won anyway, because it controlled the ecosystem around it

No 2 transitions are the same. Still, the above lens is helpful while analyzing SaaS. For Constellation, FICO, DoorDash, and ServiceNow, the code was never the moat. The workflows, the regulatory plumbing, the network density, and the decades of customer trust were. AI lowers software development costs for everyone. It cannot replicate any of the other moats.

One sober reminder. Roughly 78% of the US market cap is now exposed to AI disruption in some form, and a P/E screen will not distinguish survivors from casualties. The focus below is on names where the intangible moat does the heavy lifting, not on the valuation/multiple.

The selloff was indiscriminate. There can be an opportunity here. Let’s dig in.

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We are publishing our first-ever 13F deep-dive without a paywall

One quirky aspect of the financial markets is that, by law, institutional investors must disclose their portfolios at the end of each quarter (with a 45-day lag). These public disclosures are called 13F filings.

This law applies to any fund managing over $100 million in assets. The government mandated this for transparency, and it gives us a look at what the best in the business are thinking about the markets.

Why track 13F filings

At Rebound Capital, we use these filings to get a sense of the market’s (institutional market’s) positioning and to track the best investors to see which companies they are investing in or divesting from. The aim is to understand both the bull and bear case thinking that leads these investors to bet on certain stocks.

As a naturally contrarian (value-oriented) investor, 13Fs help me make sure that:

• I am not brushing off any secular trend as a bubble (out of ego or ignorance)

• I am not being contrarian for the sake of it

Both of the above will lead to weak returns over time. Going through 50 13F filings forces me to face different perspectives on each stock I am researching. There’s always something to learn.

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Elite funds spend millions of dollars on data, experts, and analysts to research a handful of companies. When they buy, they are committing serious capital with high conviction. Tracking their moves lets you go straight to evaluating their absolute best ideas.

The $220 Million Clue: Nvidia in 2023

In early 2023, Stanley Druckenmiller’s (one of the GOATs) filing revealed he had loaded up on $220 million of Nvidia. Nvidia was in a deep drawdown (~50%) when Druckenmiller took a position in the stock, and was still ~30% below its peak when the 13F filing was revealed.

Now, Mr. Druckenmiller is a macro and theme-based investor. What was he seeing in Nvidia? Especially when the company was facing a massive slump in its gaming chips? His 13F was a major clue to turn over the stones and study AI (the new use case for Nvidia’s GPUs).

If AI is as big as I think it is, Nvidia is something we’re going to want to own for at least two or three years, not for 10 months,” he said, adding, “And maybe longer.” — Druckenmiller in Jun’23

It wasn’t about blindly copying him. It was about letting a legendary investor offer you clues that we are early in a particular cycle.

Finding the next rebound

When a stock suffers a massive drawdown, it often stays beaten down and underperforms for a really long time. It can easily become dead money for months or years. We track the best value investors to see when they finally start showing interest in these names.

At the same time, we follow many specialized smallcap investors to identify their highest-conviction ideas in mid and smallcap companies. These managers focus on beaten-down small caps, for example, in the software space currently.

By combining these approaches, we can spot the best rebound opportunities.

Quality Investors we track

We currently follow ~50 investment funds (we keep adding). This is a mix of value and growth investors. Some of the ones we admire the most are:

• Berkshire (we have new management at the helm, but Warren is still consulted)

• Stanley Druckenmiller (best macro investor of the 21st century)

• David Tepper - Appaloosa Management (predicted the bottom of the financial crisis)

• Coatue Management (high-growth tech and consumer companies)

• Li Lu (value investor who Charlie Munger gave his personal money to invest)

• Atreides Management (one of the smartest technology investors)

• Baillie Gifford (long-term investors in quality companies)

• Ratan Capital (research-intensive fund focused on misunderstood businesses)

• Alyeska (deep fundamental research on both sides of the trade)

What was sold in the March 2026 quarter

A clear theme this quarter is that smart money continues to reduce exposure to any stocks with potential AI disruption. The selling clustered in horizontal SaaS and select megacap tech, with high valuations or capex-intensity concerns.

Software

Hedge funds reportedly made about $24B shorting the sector through early 2026, and the 13Fs confirm that large funds are also reducing their long positions. CRM, NOW, ADBE all show meaningful trims across our tracked list. Sands Capital nearly exited its previously significant ServiceNow stake. The fear is straightforward. Per-seat payment based contracts will change to usage-based agentic models, forcing incumbents into messy transitions.

Atreides, Gavin Baker’s fund (a technology investor we admire), exited HubSpot and Intuit entirely, sold most of its Snowflake stake, and cut its GitLab stake by another 23% in Q1. This is a fund that knows software cold. In fact, despite the sharp drop, very few funds bought ServiceNow and Salesforce (the 2 bellwether SaaS firms) with high conviction.

Our Take: I agree that most software firms will undergo a massive change in the coming years, and hence, investing in them is difficult. Valuations are not cheap either. We will stick to vertical SaaS names for Rebound Portfolio (Constellation Software is our top pick).

UNH

Berkshire under Greg Abel exited fully. This was mostly a sweeping rotation by new management rather than a UNH-specific call. That said, the broader institutional read is negative. Most quality funds trimmed, very few stepped in to buy during UNH’s drawdown in Q1.

Our Take: We agree with the consensus and will sell out our remaining 2% position soon (currently at a ~30% gain in 9 months).

Microsoft and Alphabet

TCI cut Microsoft from 16.78M shares to 2.73M, an $8B reduction, citing AI disruption risk in its investor letter. Appaloosa went even harder, from 500K shares to 90K. Druckenmiller exited his entire Alphabet position, one he had only built up in Q3 and Q4 2025.

But the same names are being aggressively bought elsewhere. Berkshire tripled its Alphabet stake. Third Point opened new positions in Alphabet and Meta. TCI itself opened a new 2.46M-share Alphabet position while exiting its Microsoft position.

Institutional investors are divided on whether the hyperscalers are AI winners or losers (due to low Capex ROI).

What was bought in Q1 2026

Funds were buying the following themes:

• AI adjacent infrastructure, where pricing power is strong (Micron, ASML, the optical stack).

• Quality compounders trading at reasonable multiples (SPGI, MELI, MCO).

• Beaten down vertical SaaS with embedded data moats (Toast, Axon).

• A basket of niche small caps with high conviction by small-cap focused funds.

Toast (TOST)

Toast is the operating system for North American restaurants. Its major business segments are: Point of sale, payroll, payments, and a growing financial services business (Toast Capital, lending, insurance). The moat is data and operational lock-in. Every order, every shift, every supplier payment runs through the platform, and switching out is brutal. The stock is down about 45% from its highs after a Q1 revenue miss and growth decelerating to 25-26%.

Why it is interesting: net location adds were 7,000 in Q1, the highest in three quarters, and Toast Capital is starting to flow through to ARPU.

Fund Ownership:

• ValueAct: 6% of portfolio (+61% QoQ)

• Alta Fox: 5% (new position)

• Shannon River Fund: 4% (new position)

S&P Global (SPGI)

SPGI has the closest thing to a regulatory moat in finance. It has a regulatory duopoly in the US over bond ratings (with Moody’s). Platts owns commodity price benchmarks. Capital IQ is entrenched in every finance workflow. The stock has lagged peers, weighed down by macro concerns over issuance volumes and AI disruption fears in its analytics businesses.

Why it is interesting: SPGI is the perfect defensive stock to hold to diversify away from the frothy AI theme. Multiple legendary investors have upped their stakes in SPGI (see below).

Fund Ownership:

• TCI Fund Management: 13.2% (+20% QoQ)

• Himalaya Capital (Li Lu): ~2% (new position)

We had initiated a 4% position in S&P Global after our deep dive two months ago.

MercadoLibre (MELI)

MELI is the Amazon and PayPal of Latin America. The e-commerce marketplace is growing robustly, and the Mercado Pago fintech is still in its infancy, with credit penetration in Brazil and Mexico still in its early innings. The moat is the density of merchants, payments data, and credit underwriting in markets with historically low banking penetration.

Read our deep dive on MELI here.

Why it is interesting: MELI will lead South America’s e-commerce industry for many years to come. It is a long-only favorite, and funds held onto their stock in the latest quarter.

Fund Ownership:

• Durable Capital (Ellenbogen): 6%

• Baillie Gifford: 6% (held constant QoQ)

• Tiger Global: ~1% (new position)

KKR

KKR is one of the four major alternative asset management firms. Its revenue sources are fee-related earnings from PE, credit, and infrastructure, as well as an aggressively growing insurance permanent capital base. The moat is the LP brand and the scale advantage in deal sourcing and credit origination.

Fund Ownership:

• ValueAct: ~5% (new position)

ASML

ASML is the only manufacturer of EUV lithography systems. No Nvidia, no TSMC leading edge, no Apple silicon without ASML. A clean monopoly on the most strategic capital equipment on the planet. The stock corrected on China export rules and a lull in front-end semicap orders.

Why it is interesting: a top-tier technology fund (Coatue) opened a brand new ASML position in Q1 at roughly 50x earnings. A separate, ultra-concentrated long-term fund, which holds names for years (Valley Forge), was also added. ASML rarely gets cheap, and these are not the funds that show up for a trade.

Fund Ownership:

• Coatue Management: ~2% (new position)

• Valley Forge Capital (Kantesaria): ~7% position (up ~35% QoQ)

The small-cap names worth digging into

This is where the 13Fs get genuinely interesting. The small and midcap space. A 5% position at a $500M specialist fund is real conviction.

XPEL

XPEL dominates the paint protection film oligopoly. The moat is the DAP software platform sitting inside every installer shop (workflow lockin) plus the brand premium with luxury and performance dealerships. US PPF penetration is still mid single digits, so the runway is wide. After a heavy 2022 to 2025 investment cycle, EBIT margins are guided from 13% today to 26% by FY28 through vertical integration. The stock has been crushed by short reports and macro fears.

Fund Ownership:

• Alta Fox Capital: 22.5% (largest position)

ACV Auctions (ACVA) and Wingstop (WING)

ACV runs the digital wholesale auto auction marketplace where dealers buy and sell trade ins. Has been taking share from Manheim and ADESA by going digital first. The moat is the two sided network plus proprietary AVM data on every vehicle. Beaten down on the auto cycle weakness.

Wingstop is a franchised QSR chain with AUVs above $2M and an asset light royalty model running at 25% operating margins. International expansion is just getting going. Both are the kind of high quality compounders that quietly drift lower in tough tape and re-rate fast when sentiment turns.

Fund Ownership:

• ACV Auctions: Atreides Management ~$100M (+125% QoQ in Q4)

• Wingstop: Atreides Management NEW (Q4 2025)

Worth keeping on the radar

A few more that fit the same pattern. Tencent Music (TME), where Li Lu opened his first new China internet position in years, signaling he sees the regulatory cycle past peak risk. Rocket Companies (RKT), where Atreides added 260% in Q4 on a mortgage refi thesis. And DNOW, Klarman’s rare new buy at Baupost, a small cap energy distributor with deep cyclical leverage.

Our Take

Quality investors are doing four things at once this quarter. Cutting AI disruption candidates. Leaning into AI infrastructure where pricing power is real. Stepping into beaten-down compounders at de-rated multiples. And bottom-fishing in small caps, where specialists are sizing up with conviction.

The megacap tension is genuinely interesting (TCI versus everyone on Microsoft, Berkshire versus Tepper on Amazon), but the trade we are most excited to research is:

• The small cap basket. XPEL, NCR Atleos, and ACV Auctions. These are the names where a sub $1B specialist fund taking a 5 to 20% position is real conviction, and the multiples already reflect years of pain.

• We are also interested in high-quality, non-semiconductor stocks that the market is selling off, like Toast, KKR, SPGI, and MELI.

We will be writing up two of these as full rebound deep dives over the next month.

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Rebound Capital’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research

17 years later, Domino’s has grown into one of the most successful QSR brands in the world. It has posted 11 straight years of U.S. market share gains and 32 consecutive years of international same-store sales growth (SSSG).

Domino’s today has 99% of its stores franchised (capital-light business model) and $20 billion in global system sales. While Pizza Hut and Papa John’s close stores by the hundreds, Domino’s adds them. The question in May 2026 is not whether the business is great. It is whether the stock, down ~35% from its summer 2025 peak of ~$495, is finally cheap enough to own.

The short answer: Domino’s is not a screaming bargain. But the downside risk is low, and the >6% free cash flow yield is very lucrative. The key question for Rebound Capital is whether Domino’s business is in structural decline.

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Viewing DPZ from 2 valuation lenses

Domino’s trades at ~$310. Our bottom-up DCF intrinsic value is $290 (7% discount rate, 20x terminal EV/FCF). On paper, you are paying a small premium to fair value. But that is just one valuation method.

Another one is the total return breakup. At today’s price, Domino’s offers a ~6.3% trailing FCF yield and ~2% projected FCF growth over five years. That compounds to an expected 5-year return of ~8% per year if the valuation multiple remains the same. Adding the free cash flow yield (at today’s price) to the free cash flow growth CAGR over a period of time is a rough method for calculating a stock’s expected return (if its valuation multiples remain constant) over that period.

An 8% return is not too exciting, but the interesting thing here is that most of that 8% comes from free cash flow, not free cash flow growth. This is the kind of stock value investors would buy - with decent returns just from the free cash flow (they don’t like depending on or paying for growth).

Note: The above is an example, and we are not giving any advice. Also, the above calculations hold only for cases where free cash flow is growing.

Domino’s Business Model: Three Businesses in One

Domino’s is three businesses with different drivers and margins, bound together by a shared customer base and brand.

Supply Chain (60.5% of revenue, ~$3.0B)

This is the most underappreciated piece of the company. Domino’s runs 25 vertically integrated dough manufacturing and food distribution centers across the U.S. and Canada. They produce dough, cheese, sauce, and toppings, and deliver twice a week to every U.S. franchise store. Franchisees are required to buy from the supply chain at a markup over food cost.

The margin story is what to watch. Supply chain gross margin expanded from 10.6% in Q3 2024 to 11.3% in Q3 2025, despite the food basket inflation. Domino’s procurement is at a scale that no other pizza chain can replicate. For example, Papa John’s franchisees source mozzarella locally and pay 6%-10% more for it.

U.S. Stores (32.8% of revenue, ~$1.6B)

This has 3 revenue streams sharing a single driver: U.S. system retail sales. Basically, Domino’s makes a royalty on each dollar of sales done by its franchisee restaurants in the US. It also earns revenue from its own stores.

U.S. royalties and fees were ~$660M in 2025, at a ~5.5% royalty rate, carrying 90%+ operating margins. This is the company’s highest-quality line. Advertising fund revenue (~$514M) is pure pass-through and should be ignored for valuation purposes. Company-owned stores (~$342M, ~252 stores) are deliberately shrinking. Management is reducing the company's owned stores to ~150 by 2028, which is margin-accretive.

International Franchise (6.9% of revenue, ~$339M)

The smallest line, but proportionally the highest-quality cash flow. Domino’s owns no international stores. It collects royalties from master franchisees: Jubilant FoodWorks (India), DPC Dash (China), Alsea (Mexico), and Domino’s Pizza Enterprises (Australia/Japan). Operating margins are essentially 100% incremental. International had a negative SSSG% in Q1 2026 (-0.4% SSS ex-FX), dragged almost entirely by Australia/Japan. Before that, for >30 years, international sales have had positive SSSG%.

The takeaway: two-thirds of Domino’s revenue scales linearly with global system sales at near-100% incremental margins.

What Went Wrong: The 35% Drawdown

The stock recently peaked at ~$495 in summer 2025 and now sits at ~$310. Three things drove the drawdown:

Q1 2026 SSSG Disappointment

U.S. same-store sales came in at +0.9% against management’s previously guided 3% for the year. On the Q1 2026 call (April 27), management softened the guidance to a positive low single-digit range. They blamed this on ‘Covid-level’ consumer confidence, inflation, and price competition from competitors.

This was the first evidence that the broader QSR slowdown, driven by weak consumer confidence (for various reasons), is finally biting into Domino’s value proposition.

GLP-1 Anxiety

10 million U.S. adults are now taking GLP-1 drugs, up from 5 million in 2023. This number will increase to 30 million by 2030, according to JP Morgan estimates. This may be an underestimation, in my humble opinion. As better drugs come out, more and more people who are not obese may start taking these drugs for looking good/getting ripped (not kidding and not endorsing this either).

A Cornell / Journal of Marketing Research study found GLP-1 users spend 8% less on QSR meals than non-users. The market is pricing in demand compression. This has been a negative overhang on the stock for at least 1 year. This affects its terminal value multiple and is the main structural headwind to Domino’s business. Here is another article looking at how GLP-1 drugs affect eating habits.

International Softness

International SSSG% was -0.4% vs. an expectation of 0.7% rise. Domino’s Pizza Enterprises (Australia/Japan) missed Q1 expectations. Domino’s in India (a large growth market with ~2,100 stores) has seen SSSG growth stall amid weak consumer spending.

The selloff was rational. The question is whether it has gone too far.

The Moat: Deepening or Eroding?

This is the central question for any DPZ investor. Our verdict is that the moat is wide and modestly deepening.

Sources of Moat Strengthening

Store-level economics: A Domino’s franchisee generates ~$1.36M in AUV (annual sales for 1 restaurant). Pizza Hut and Papa John’s franchisees average ~$1M. When a competitor closes a store, those locations add an AUV of ~$500k. The consumer doesn’t lose access to pizza in that case. They just switch chains, and Domino’s captures them. Franchisee ROIC at Domino’s is consequently higher than at Pizza Hut and Papa John’s.

Supply chain scale: 25 plants serving 22,150 stores create buying power no competitor can match. Procurement productivity expanded the supply chain gross margin by 70bps (0.7%) in 2025 despite food inflation. As Domino’s adds another ~5,000 stores by 2030, the gap widens.

Technology stack: 1,600+ DJ dough-stretching machines automate the most labor-intensive step of pizza making. The average delivery time has dropped by 2 minutes over the past 2 years. Dom.OS is the proprietary in-store operating system and is considered the gold standard. Then there is the technology that enables efficient delivery.

Delivery Ecosystem: Domino’s has 37M+ loyalty members, to whom pizza is delivered directly through Domino’s own delivery partners and who order through the Domino’s app. The recent DoorDash partnership (May 2025) plugged the one channel where Domino’s had been absent. In Q3 2025, the first full quarter on DoorDash, revenue showed measurable uplift.

Factors That Erode the Moat

GLP-1 acceleration: Our base case assumes rapid global GLP-1 penetration. Oral formulations and future drugs with fewer side effects can shrink the pizza category in absolute terms, not just slow down growth. This is the biggest risk. If GLP-1 compresses category demand sharply, the FCF yield framework breaks down

Aggregator platforms: DoorDash and Uber Eats are platforms, not direct competitors. But by serving as a discovery layer, they level the playing field for smaller chains (like Marco’s and Mountain Mike’s) and independents. If algorithm changes start steering DoorDash users toward independent pizzerias, the playing field flattens.

Generational drift: YouGov’s August 2025 ranking of Gen Z purchase intent places Domino’s at #8 in QSR, behind McDonald’s, Chick-fil-A, KFC, Taco Bell, Subway, Wendy’s, and Dairy Queen. 61% of Gen Z agree that dining out is a treat reserved for special occasions. 73% want to try new cuisines. Pizza is the opposite of culinary novelty. This can be a drag on the business growth.

Net assessment: We estimate that Domino’s moat remains intact, especially versus other Pizza chains. The macro factors affecting the business are structural headwinds: GLP-1 drugs, aggregator platforms negating Domino’s app strategy, and a weak consumer (AI job losses could prolong consumer weakness).

Competition: Pizza Hut and Papa John’s Are Struggling

Pizza Hut’s parent, Yum Brands, has announced 250 underperforming closures in H1 2026 and has reportedly been considering a sale of the brand. Papa John’s plans to close 300 stores by the end of 2027, with 200 of those in 2026. Domino’s added 172 net new U.S. stores in 2025 and should be able to add 500-650 stores through 2030. Domino’s net new U.S. unit growth from 2019 through Q3 2025 ranks #1 across all public QSR brands of 3,000+ restaurants, pizza or otherwise. Its U.S. QSR pizza share has gone from 12% in 2014 to 23.3% in 2025, gaining roughly 100bps per year.

CEO Russell Weiner’s stated ambition is to double retail sales. We treat that as aspirational. But a 30 to 35% share by 2035 is a realistic glide path (in the US) on the current trajectory (continuing to gain 1% market share per year).

Valuation: Intrinsic value of $290 per share

The market is pricing Domino’s at a meaningful discount to its 5-year average multiple of ~22x and to the multiples of quality QSR peers (CMG at ~30x, MCD at ~23x, WING at ~30x). The 18x entry multiple reflects post-Q1 disappointment and concerns about GLP-1.

Below is our comprehensive driver-based bottom-up model for DPZ, which includes segment-level forecasts and the DCF. DPZ’s intrinsic value is ~$290 per share.

Domino's Pizza Model

Our Take

We are giving DPZ a ‘HOLD’ rating. We expect Domino’s to remain a low-growth company with the added overhang of newer varieties of GLP-1 drugs (which may not have the side effects current drugs have - hence much worse for QSRs). On top of that, consumer spending can remain under pressure due to AI-related job losses. The high FCF yield reflects the market's recognition of the risks.

The international division will drive the majority of its growth. In the US, if competitors turn around, most of Domino’s expected share gains may evaporate. Given structural issues such as GLP-1 drug usage and weak US/International consumer spending (which show no signs of improvement), we will stay on the sidelines.

If the stock falls below $275, we will begin a starter position (~2%). At that price (~20x EV/FCF), the negatives will be more than fully priced in, and the stock will be ~10% below RC’s intrinsic value estimate (which itself is conservative).

Requesting feedback from doctors: How GLP-1 drugs will affect QSR consumption

To doctors, nutritionists, and others with knowledge of GLP-1 drugs, please help us understand how this trend will unfold. If we can negate the GLP-1 anti-thesis pointer, we can be better informed while researching QSR/consumer discretionary stocks. If this is not a structural threat, then Domino’s flips to a ‘BUY’ rating for my portfolio.

Please help ~900 fellow subscribers and me learn more about GLP-1.

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Rebound Capital’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research.

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While our portfolio has benefited from the recent run-up, we now face the challenge that nothing in this market is cheap. Most drawdowns are due to idiosyncratic stock-specific issues (except SaaS, which is selling off together).

In this environment, we are extremely strict with our stock selection process. We will buy only sector leaders at reasonable valuations. We will be strict about the industry structure we invest in - we want to invest in monopolies, stable duopolies, or stable oligopolies only!

Below, we will discuss how we plan to navigate the semiconductor stock melt-up (where we have material exposure). After that, we present a list of 6 stocks we are closely following for potential investment.

Perspective on the surge in semiconductor stocks

We have been bullish on the semiconductor sector and benefited immensely from investing in semiconductor stocks in February and March of this year! But let’s be clear - there is panic buying (FOMO) in semiconductor stocks (except maybe Nvidia).

Semis can correct sharply in response to any external shock to the markets (for example, the Iran War). This can happen even when the underlying business is compounding steadily. Also, as is playing out with Nvidia, due to the industry's cyclicality, stocks can get derated even when their underlying businesses are steadily improving - mainly because the market keeps guessing that the current cycle peak is approaching. 

Valuations are discounting the next 3-5 years of growth

The Hyperscalers are spending all their operating cash flow on capex in 2026. The total capex spend by these players is now >$700B in 2026, a ~75% increase YoY. Hence, any increase in capex in the coming years will need to be backed by accelerating revenue growth.

We do see this happening as GCP accelerated to >60% growth, Amazon to ~28% YoY, Azure grew at ~40%, and Meta at 33%. Given the commentary from the hyperscalers and Meta (and the strong demand they see), I guess we are still in the middle stages of this AI buildout (a few more years remain). We are moving from the Training Phase (buying chips to build models) to the Inference Phase (running the models for users).

Most semiconductor stocks already have valuations that reflect growth over the next 3-5 years. At RC, we will carefully choose to invest only in those companies where our outlook strongly differs from the consensus, while always keeping valuations in mind.

What are we doing with our current positions?

As we highlighted yesterday, we are trimming a few of our positions on Monday. We don’t want to sell high-quality companies just because they have gotten expensive (as business growth will reduce multiples over time), and hence, we won't completely sell out of them.

Welcome to Rebound Capital. We conduct in-depth research on beaten-down stocks and study companies that have made successful comebacks. Subscribe for free and join 21,500 investors to make sure you don’t miss our next briefing.

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6. Salesforce ($CRM)

Salesforce is the dominant player in enterprise CRM software, with over $41 billion in annual revenue and a customer base embedded deep inside the world’s largest companies. It pioneered the SaaS transition in enterprise software, and for years, the market lavishly rewarded the stock. Today, the stock is down roughly 30% in 2026 alone, its worst annual performance in a decade, and is sitting nearly 40% below its all-time highs.

The Moat

Salesforce’s competitive advantage is not the software itself. It is the data that has accumulated inside its platform over decades. When a company has logged every customer interaction, sales cycle, and service ticket in Salesforce for 15 years, the switching cost is not just the software migration; it is the loss of deep contextual memory about the business processes.

This data gravity is the reason Salesforce’s gross revenue retention rates consistently sit above 90%. The moat is real, but the question is whether it is wide enough to withstand AI-native alternatives that can ingest that same data through APIs. Or will Salesforce be better able to leverage AI to deliver greater value to customers, since they already have the data?

What went wrong

Salesforce stock is falling alongside SaaS stocks. The market fears a structural erosion of Salesforce’s moat. If AI agents built natively by OpenAI or Anthropic can manage a sales pipeline, log customer interactions, and draft follow-ups autonomously, the value of a seat based CRM layer shrinks materially. Q4 FY2026 showed ~12% revenue growth: solid but uninspiring amid the AI disruption narrative running high.

Business Model Evolution

Salesforce is transitioning from a per-seat CRM to an AI agent platform. The bet is on Agentforce, an AI layer that automates sales, service, and marketing workflows with pricing shifting from flat-seat licenses to consumption-based usage fees.

This is the right strategic direction, but it introduces near-term complexity in revenue recognition: existing customers can access some Agentforce functionality under current contracts, making incremental revenue from AI harder to isolate and report cleanly. Management claims Agentforce is the fastest-growing product in company history, with genuine enterprise deployments, not just pilots.

Rebound Catalysts & Expected Results

The $50 billion share buyback (with $25B in debt taken) signals management's conviction amid the most pessimistic sentiment. FY2027 consensus points to low double-digit revenue growth if Agentforce converts enterprise interest into incremental billing.

The bull case: Agentforce becomes the orchestration layer through which Fortune 500 companies run their AI agents, making Salesforce the operating system of enterprise AI rather than a legacy CRM.

The bear case: Agentforce is a defensive product that slows churn but doesn’t re-accelerate growth, and the business slowly drifts toward 6–8% revenue growth with a sub-25x multiple. At roughly 20x forward earnings, the market is currently pricing the bear case. A single quarter of clean Agentforce ARR growth could shift that narrative sharply.

Our Take

Salesforce is an amazing company and one of the original SaaS pioneers. Their moat is real, as they serve as the system of record for their customers, and I do believe they can incorporate AI into their systems to massively enhance the value they deliver. But I do think Salesforce is using AI incrementally, not in the revolutionary way that OpenAI or Anthropic uses it. It may be an unfair comparison, but that’s who Salesforce is now competing with.

But the key issue here is that, as an industry, SaaS will face greater competition in the coming years than in the past (due to AI). For taking on this uncertainty, I am paying ~23x PE multiple, and I get a ~10% growing company (maybe 13% - 15% if AI features take off). This risk-reward equation doesn’t excite me, to be honest. If the company’s revenue growth rate accelerates or it enters value territory with a PE < 15x, I will revisit my thesis.

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5. Adobe ($ADBE)

Adobe is the creative software monopoly that has become one of the most debated stocks in the public markets. The company reported record FY2025 revenue of $23.77 billion, growing 11% year-over-year, and generated over $9.5 billion in free cash flow. The stock has been cut nearly in half from its 52-week high, driven almost entirely by narrative, not fundamentals (as yet).

The Moat

Adobe’s moat has two components that AI competitors cannot easily replicate. The first is workflow depth - Photoshop, Illustrator, Premiere, and Acrobat are not point tools; they are the backbone of how creative and marketing teams operate, integrated into enterprise content supply chains and approval workflows.

The second, and increasingly important, is legal indemnification. Adobe’s Firefly models are trained exclusively on licensed Adobe Stock content and public domain material, meaning enterprise clients using Firefly are protected from copyright litigation. In an era of intense legal scrutiny of AI-generated content, this ‘commercially safe’ positioning is a genuine differentiator that AI-native startups cannot quickly replicate.

What went wrong

Adobe’s stock has been in a freefall since 2024 due to slowing revenue growth and the fear that AI tools will erode the pricing power of Adobe’s products (they are not cheap, and most creative personnel are unhappy with the pricing).

Turning to near-term catalysts, net new Digital Media ARR of $400 million in Q1 FY2026 missed analyst expectations despite a revenue beat - signaling that Firefly’s massive user engagement (850 million MAUs, up 17% YoY) is not yet converting into incremental subscriptions at the pace investors demanded. CEO Shantanu Narayen’s retirement announcement introduced leadership uncertainty. And Canva, with 260 million monthly active users, is compressing Adobe’s TAM. Figma is also a capable entrant, with very strong consumer retention. So good that Adobe wanted to buy it in 2022.

Business Model Evolution

Adobe is layering a consumption-based revenue model on top of its traditional subscription base. Users now purchase ‘Generative Credits’ for AI features - effectively a razor-and-blade model where the subscription is the handle and AI usage is the blade. This unlocks ARPU expansion through three levers simultaneously: seat growth, tier migration to higher-priced Creative Cloud Pro plans, and credit pack purchases.

The company is also building GenStudio, an enterprise content supply chain platform, targeting a different buyer (the CMO, not the designer), which opens an entirely new expansion surface. FY2026 revenue guidance is $25.9–$26.1 billion, implying roughly 9% growth, with ARR growth guided at 10.2%.

Rebound Catalysts & Expected Results

Firefly Enterprise’s new customer acquisition grew 50% year-over-year in Q1. The freemium to paid conversion pipeline - 80 million creative freemium users, up 50% YoY - could be a leading indicator.

The bull case: Adobe can transition to a usage-based model on top of its subscriptions. Users continue to turn towards Adobe for AI-enabled creative workflows, and Adobe maintains its pricing power.

The bear case: ARR growth stays range-bound as free AI tools reduce willingness to pay, and the leadership transition creates strategic drift. At roughly 10x NTM P/E — the lowest multiple in over a decade for a business with 46% operating margins, 89% gross margins, and $9.5 billion in annual FCF - the bear case is already priced in.

Our Take

We were positive on Adobe’s ability to manage the AI threat about a year ago. Now, with AI advancing at the rate it is, we expect AI foundation model companies to attach creative workflows or LLM models for creative works as add-ons to their platforms. This will definitely affect Adobe’s pricing power. Hence, we don’t think we can model Adobe’s cash flows anymore (without stable pricing), and we will stay away.

4. Blackstone ($BX)

Blackstone is the world's largest alternative asset manager with $1.3 trillion in AUM. In 2025, it generated record distributable earnings of $5.57 per share, grew private wealth fundraising 53% year-over-year to $43 billion, and raised approximately $240 billion in total inflows. The stock is down roughly 37% from its all-time high.

The Moat

Blackstone's competitive advantage operates differently across its four segments, and none of it is easily replicable.

In real estate, owning assets at scale creates a proprietary data and deal-sourcing network that no underwriter relying on public comparables can match, and its $25 billion QTS Data Centers commitment, secured before AI infrastructure became consensus, exemplifies how that scale enables pre-emptive positioning.

In private equity, the moat is a company’s brand: institutional LPs return to the fund over and over, each new vehicle launching with a committed base that structurally bars smaller competitors.

In credit & insurance, now the largest segment at ~$389B in AUM, the edge lies in origination volume; Blackstone can underwrite deals that no $20B credit fund can hold, and its 18% growth in insurance AUM provides permanent, lower-cost capital that reduces dependence on fundraising cycles.

Cutting across everything is a cross-platform information advantage. A credit fund financing a company in a PE portfolio, or infrastructure intersecting with a real estate data center, single-strategy rivals structurally cannot replicate this. Perpetual capital now represents 48% of fee-earning AUM, transforming historically lumpy performance fees into something approaching recurring revenue.

Business Model Evolution

The most significant structural shift is Blackstone's penetration of the private wealth industry, the industry's next $10 trillion frontier. Private wealth fundraising grew 3x in five years. With over 450 dedicated wealth professionals globally, its distribution network took a decade to build, and competitors are only beginning to match.

Insurance AUM, up 18% in 2025, is an increasingly permanent capital source and key part of the business strategy.

What went wrong

Fears about the private credit market and firms’ exposure to the software segment have led to the drawdown in Blackstone shares. BCRED (Blackstone Private Credit Fund) redemption pressure is the immediate trigger. Q1 2026 requests hit 7.9% of the fund’s value, up from ~5% in Q4, forcing the board to lift its 5% cap and requiring Blackstone to inject $400 million of its own capital to honor withdrawals. For a firm whose private wealth flywheel is central to the growth narrative, elevated redemptions are the single most damaging data point.

Rebound Catalysts

BCRED’s underlying credit quality remains intact. Management stated that 2026 drawdown fundraising is expected to be ‘well above 2025 levels’, a comment that makes current Street estimates appear conservative. Five new drawdown funds are expected to become fully fee-earning by year-end, creating a structural ramp in fee-related earnings. Free cash flow is estimated to nearly double in 2026 as those funds activate.

As redemption pressure stabilizes and the real estate segment, which CFO Michael Chae explicitly described as ‘yet to reemerge’ in earnings power, begins its recovery, Blackstone can re-rate towards >25x NTM PE ratio from ~20x currently.

3. Lululemon ($LULU)

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We had a tough Q1 2026, during which our performance slipped. Such drawdowns are always tough. But we follow a framework that has worked for the past 100 years: Value Investing. It is this track record that gave us the confidence to stick to our philosophy during the drawdown and continue researching and investing in high-quality companies at a discount.

Our portfolio performed especially well during the market rebound. We were able to gain exposure to AMD, Nvidia, and other quality stocks at low prices. We are now rejigging our portfolio to improve the risk-reward.

Let’s dig in.

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The Rebound portfolio continues to do well and has significantly narrowed the gap versus the S&P 500’s return. We expect to outperform as the market grinds higher, as we were able to invest in quality, high-growth companies during the drawdowns in February and March (due to AI-doomer fears and the Iran War uncertainty) at attractive prices.

The months of January to March were tough for our portfolio. But we stayed true to our value investing principles. We kept on researching, making DCFs, and looking for stocks where the narrative has caused a material discount to intrinsic value.

Happy to report that our portfolio has outperformed the S&P 500 by 6.5% over the last 1 month (since the market bottomed). Note that the overall portfolio performance (since Aug’25) is shown later in the article. Though short-term performance is immaterial, after underperforming during the drawdown, we expect our stock picks to outperform when the market recovers (otherwise, we need to reassess them).

In this article, we'll update you on the big tech earnings (Amazon, Microsoft, Meta, Google) from April 29th and their implications for the AI trade.

Next, we will share our portfolio performance since August 2025. We will then explore the direction of this AI supercycle and estimate how technology and semiconductor stocks will trade based on commentary from big-tech earnings.

Big Tech Earnings Review

The 29th April earnings from Amazon, Microsoft, Meta, and Google once again validated the strength of the AI supercycle. All of these companies stated that they are supply-constrained. Google also mentioned that they will materially increase capital expenditures in 2027 vs. 2026! I expect the other companies to do the same and to communicate to the market in due course.

The strong demand for AI and the expected increase in CapEx suggest that we are still in the early to middle stages of the AI buildout. This validates our thesis in buying semiconductor and cloud computing companies in our portfolio, as they will form the basis for this AI build-out in the coming years. Fears that companies are overbuilding AI infrastructure remain unfounded and are not reflected in the data.

Amazon

Earnings Highlights

• Revenue of $181.5B (+17% YoY), beat by 2.4%

• AWS Revenue of $37.6B (+28% YoY), fastest growth in 15 quarters. Bedrock spend +170% QoQ

• AWS Backlog of $364B, excluding a new $100B+ Anthropic deal

• Custom silicon (Trainium/Graviton) annualized run-rate of >$20B

• 2026 CapEx of ~$200B

Implications for Big Tech and AI Trade

AWS re-accelerating to 28% growth is a strong signal that enterprise AI is moving from experimentation to production. The Anthropic partnership is a direct AWS tailwind, with Anthropic committing to use up to 5 GW of Trainium capacity and OpenAI committing ~2 GW. Custom silicon crossing $20B annualized revenue shows in-house chips gaining ground, but this complements rather than displaces Nvidia, as overall compute demand grows faster than any single supplier can serve. The $200B capex plan signals strong confidence in sustained AI demand and represents a multi-year demand for Nvidia, AMD, and semiconductor names (this will probably go up materially next year).

Google

Earnings Highlights

• Revenue of $109.9B (+22% YoY), beat by 2.7%

• Cloud Revenue of $20.0B (+63% YoY), beat by 8.8%. Cloud Operating Margin of 32.9% (from 17.8% a year ago)

• Cloud Backlog at ~$462B, nearly doubling sequentially. Gen-AI product revenue +~800% YoY

• Search queries at all-time highs driven by AI Overviews and AI Mode

• 2026 CapEx raised to $180–190B and 2027 CapEx to increase significantly

Implications for Big Tech and AI Trade

Google Cloud's acceleration to $20B in quarterly revenue, 32.9% margins, and a backlog doubling to $462B in a single quarter reflects enterprises committing to multi-year AI contracts at a staggering pace. Google remains supply-constrained, and every dollar of new compute capacity is immediately absorbed.

The 2027 capex increase is the most important sign that the AI cycle is robust. All three major hyperscalers are simultaneously accelerating their buildouts, an unambiguously positive backdrop for Nvidia, AMD, and semiconductor capital equipment companies (broadly the whole AI trade).

Microsoft

Earnings Highlights

• Revenue of $82.9B (+18% YoY) and Operating Income of $38.4B (+20%)

• Azure revenue growth of +40%, beat guidance of 37–38%. AI ARR of >$37B (+123% YoY)

• Copilot now has >20M paid seats, +250% YoY seat adds

• Guidance: Azure constant currency revenue growth of 39–40% (for next quarter) and FY26 operating margin now expected to expand ~1pt YoY

• 2026 CapEx of ~$190B. Management said they are capacity-constrained through at least 2026

Implications for Big Tech and AI Trade

Azure growing at 39% next quarter, while management guides for further acceleration in 2H CY26 is a powerful statement on the durability of AI-driven cloud demand. Copilot crossing 20M paid seats validates the enterprise monetization thesis. AI is becoming a software revenue story, not just an infrastructure one. Microsoft expanding operating margins while absorbing $190B in capex is a further sign of business model strength.

Meta

Earnings Highlights

• Revenue of $56.3B (+33% YoY), beat by 1.4% and Q2 guidance of $58B–$61B

• Ad revenue +33% YoY with impressions +19% and price per ad +12%

• 2026 CapEx raised to $125–145B.

Implications for Big Tech and AI Trade

Meta’s ad engine remains exceptionally strong, and Business AIs growing 10x in weekly conversations in one quarter signal a significant future monetization layer. The $107B jump in contractual infrastructure commitments is the most striking data point of Meta’s quarter - locking in multi-year compute supply at a scale that leaves no ambiguity about management’s conviction. This is a direct positive for Nvidia, AMD, and Broadcom, and reinforces the durability of the semiconductor demand supercycle.

Rebound Portfolio Performance

Our portfolio (started in Aug’25) trails the S&P 500 by 1.7% (vs. 6% last month). In March and April, we invested in leading companies during steep drawdowns and expect our portfolio companies to compound steadily over the next 3-5 years. This positions us well to grow our capital at satisfactory rates.

Portfolio statistics

Rebound Capital’s portfolio is expected to grow much faster than the index and is available at a valuation only slightly higher than the S&P 500. To calculate the portfolio’s valuation and growth, we compute a weighted average of these metrics across our holdings.

Here are a few stats for our cumulative portfolio:

• Next 3 years revenue growth estimate = ~20%

• Next 3 years EBIT growth estimate = >25%

• Average EV/EBIT of ~35x vs. EV/EBIT of ~27x for S&P500: a justified premium given our portfolio’s EBIT is growing way faster than the S&P500 (25% vs. ~11%) over the next 3 years. Dividing EV/EBIT by the growth rate, we get 35/25 = 1.6 for RC’s portfolio, vs 27/11 = ~2.5 for the S&P 500 (lower is better).

These stats highlight how our portfolio is growing much faster than the S&P500 index (expected to grow earnings at <11% over the next 3 years) while trading at a small premium (EV/EBIT multiple), which is justified given the faster EBIT growth %.

Portfolio Holdings Update

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In 2013, Vlad Tenev and Baiju Bhatt had a simple observation: the technology required to execute a stock trade costs almost nothing. The $7 to $10 per trade commission charged by every major brokerage was, in their view, pure extraction. So they built Robinhood, a mobile app that charged nothing. By 2019, every incumbent had matched them. Schwab, Fidelity, and E*TRADE. A startup had reshaped a $65-billion-a-year industry before making a dollar of profit.

By 2025, Robinhood posted $4.5 billion in revenue, its second consecutive year of 50%-plus growth. It had 27 million funded customers, $324 billion in platform assets, and had been added to the S&P 500. It is no longer a trading app. It has a credit card, a banking product, a professional trading platform, a prediction markets business, a crypto exchange, and ambitions to become the first stop for every financial decision a younger American makes.

Welcome to Rebound Capital. If you are new here, we conduct in-depth research on beaten-down stocks and study companies that have made successful comebacks. Subscribe for free and join 21,300 other investors to make sure you don’t miss our next briefing.

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How Robinhood Makes Money

Trading

Every time a customer trades, Robinhood earns a small rebate from the market maker who executes the order. The customer pays nothing; the market maker pays Robinhood for the order flow. This is called Payment for Order Flow (PFOF), and it accounts for a large % of total revenue. But the mix within trading matters enormously. Options trades pay multiples more per contract than stock trades. Crypto, though volatile, is high-margin when markets are active. Futures and prediction markets, launched only in 2024, are already scaling rapidly, hitting a $300-million-plus annual run rate in their first year.

Robinhood is now the number one options trading platform by volume, having taken market share from platforms like tastytrade and Interactive Brokers. It has received positive net inflows from all major brokerage competitors for eight consecutive quarters. The April 2026 SEC removal of the Pattern Day Trader rule, which previously required a $25,000 minimum balance to trade frequently, is a direct tailwind that opens active trading to smaller accounts, precisely Robinhood’s core demographic.

Net Interest

When customers hold uninvested cash on the platform, Robinhood sweeps it into short-term Treasuries and keeps the spread between what it earns and what it pays customers. It also lends customer shares to short sellers for a fee and offers margin loans to customers who want to borrow to invest. This segment generates roughly 34% of revenue, or about $1.5 billion. After cutting its margin lending rate to an industry-leading 5.75% for Gold subscribers, Robinhood’s margin book grew from $8 billion to over $16 billion in less than a year. Each additional billion in margin balances generates roughly $57 million in annual interest income.

Gold Subscriptions

Robinhood Gold is a $5/month premium membership that bundles a 3.5% - 4% yield on uninvested cash, a 3% IRA contribution match that vests over 5 years, preferential margin rates, and the Gold credit card, a metallic Visa offering 3% flat cashback on every purchase. Gold subscribers grew 58% year-over-year to 4.2 million. The credit card reached 600,000 cardholders with $10 billion in annualized spend. Management has committed to doubling the number of cardholders to over 1 million by the end of 2026. Gold customers have average account balances nearly eight times higher than standard users, making this segment the engine of lifetime value.

“We want active traders to feel like they’re at a disadvantage trading anywhere but Robinhood.” - Vlad Tenev, Q4 2025 Earnings Call.

What went wrong

The ~45% drawdown in Robinhood Markets from its 2025 highs primarily reflects the very high starting valuation. Post this correction, at ~40x PE, Robinhood is still expensive, but not trading at nose-bleed valuations.

The sell-off comes down to 4 main factors:

Q4’25 earnings miss

The inflection point came with Q4 2025 results. Robinhood reported ~$1.28 billion in revenue (up ~27% YoY), which missed expectations of $1.34 billion.

The stock dropped meaningfully after the release as investors shifted focus from strong revenue growth to deteriorating operating leverage. The business was doing well, but after 2 years of breakneck revenue and operating profit growth, a period of digestion was expected - the market just had not anticipated it.

Trading dependence became more visible

A large share of revenue still comes from options and crypto trading. When activity cooled after a strong 2024–2025 period, revenue expectations were revised downward. Because these segments generate higher revenue per trade, even modest slowdowns had an outsized impact.

Margins came under pressure

Robinhood is investing heavily in new areas of Banking, Gold (including the IRA match), AI, and new products like prediction markets. While these initiatives are strategically important, they are currently weighing on margins.

Competition is tighter than before

Charles Schwab and Fidelity Investments have improved their platforms, while Coinbase remains strong in crypto. Robinhood is still gaining share, but at a slower, more incremental pace.

Robinhood’s innovation engine

Robinhood is a truly innovative company. Consider the following:

• Zero commissions on trading.

• Fractional shares from $1

• 24/7 overnight trading

• Cryptocurrency alongside stocks in the same account

• Regulated prediction markets at scale

• A 3% IRA contribution match at $5 a month

• Tokenized US equities on a blockchain for European retail investors

Each of these was dismissed as too risky (mostly no one thought of doing them), until Robinhoood made it possible. Competitors may copy the features, but the innovation and product culture at Robinhood will be difficult to match.

This innovation history matters for a specific structural reason: Millennials and Gen Z, who distrust traditional institutions, are now entering their peak earning years and are the primary recipients of the $100 trillion-plus generational wealth transfer from older generations. The generation that opened their first brokerage account on Robinhood is growing up, and their assets are growing with them. Schwab has $10 trillion under management, but their average customer skews considerably older.

Here’s the kicker — Less than 1/3rd of respondents said they would take financial advice if they received $1M+ in inheritance.

As the wealth transfers, Robinhood is positioned to catch it.

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In this article, we are sharing our research on six companies that appear to be interesting value plays: Alibaba, Fiserv, Accenture, Palantir, FICO, and Moody’s.

These notes serve as a starting point: our perspective on why these companies are interesting and our current stance on each. For FICO, this also updates our September 2025 deep dive. We hope these notes will help you if you're considering investing in any of these companies.

Let’s get into it.

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Alibaba Group ($BABA)

Current Price: ~$141 · Market Cap: ~$337B · P/E: ~25x trailing

Quick take: Offers value, but the geopolitical risk keeps us away.

The business

Alibaba is China’s internet conglomerate, a company so sprawling that it is best understood as several businesses held together under one roof. Its China E-Commerce Group (Taobao, Tmall, and 1688.com - the B2B wholesale marketplace) generates roughly 54% of group revenue and remains the profit engine. Taobao is China’s consumer marketplace; Tmall hosts brands and retailers; 1688.com targets bulk buyers and SME merchants (B2B segment). This segment is mature (though Chinese e-commerce is still growing), but meaningful and revenue returned to ~10% growth in the September 2025 quarter after years of decline. Alibaba has faced huge competition from PDD Holdings in the last 10 years at the lower end of the Chinese e-commerce market. In fact, it is fair to say that PDD dominates this segment. Alibaba has sharpened its focus on the more affluent segments of e-commerce, and this strategy is working. To compete at the lower end, they have been offering subsidized products, but I am not sure this is a profitable category (PDD is king here).

The International Digital Commerce Group (AIDC) includes AliExpress (cross-border retail into Europe, Russia, and Latin America), Trendyol (Turkey’s dominant e-commerce platform, now expanding into the Gulf), Lazada (Southeast Asia), and Daraz (Pakistan/Bangladesh). This is the segment to watch for growth. AIDC posted 19% YoY revenue growth in Q1 FY26 and is approaching breakeven. The breakeven milestone matters less for near-term profits and more as a signal that Alibaba can build profitable international commerce, something it has struggled with for years. Competition internationally is fierce, from Temu (PDD Holdings), Shopee (Sea Ltd), and local champions. We remain skeptical about Lazada’s long-term prospects (Sea is entrenched in SE Asia), but Trendyol is a genuine standout.

Alibaba Cloud (Cloud Intelligence Group) is the most important part of the story. Cloud revenue grew 34–35% YoY in recent quarters, with AI-related products delivering triple-digit growth for ten consecutive quarters. The vertically integrated AI stack: Qwen foundation models, AI chips (developed in-house), and cloud infrastructure positions Alibaba as China’s leading AI (Cloud) hyperscaler. This is strategically important: unlike many Western AI spenders, Alibaba is building the full stack, from silicon to model to application. AI-related cloud revenue is growing rapidly and contributing meaningfully.

Other segments include Cainiao (Logistics, a competitive advantage for the e-commerce business), Local Services (food delivery and maps, including Ele.me), and Digital Media/Entertainment. These are either loss-making or subscale, and we do not assign them significant value in our assessment.

What went wrong

Alibaba’s stock is down ~25% from its 2025 highs and has significantly underperformed the broader global tech market. The persistent market share loss in domestic e-commerce (especially at the value end of the market) to PDD Holdings (Pinduoduo/Temu) and Douyin (ByteDance’s TikTok commerce), weak Chinese consumer confidence post-COVID, and a major $52B (~RMB 380B) three-year capex commitment into AI and cloud that has pushed free cash flow to near-zero and compressed near-term EBITDA margins sharply from ~20% in FY25 to an expected ~12% in FY26. The market is punishing what it perceives as an undefined return on that capex.

We think the PDD narrative is partially correct but overstated. Taobao has stabilized. Alibaba is not losing e-commerce in the way that bears fear; it is transitioning from a volume-growth business to a monetization-driven business (higher take rates, better ad products). The real question is whether the Cloud/AI bet creates a durable new profit pool. We have no doubt that it does.

The ownership & delisting question: aka ‘China’ risk

Western investors holding BABA ADRs do not own shares in Alibaba Group. They own a contractual claim through a Variable Interest Entity (VIE) structure, a legal workaround for China’s foreign ownership restrictions. The Chinese government could, in theory, move to unwind VIE structures or restrict foreign investor rights, rendering ADR holdings worthless. This is not a new risk, but it is real. It's up to individual investors how they analyze this tail risk. For the most part, we have been avoiding Chinese stocks (no matter how well thought out the other side of the debate is).

The game theory here is interesting: China has a significant incentive to keep its tech giants listed in the US (capital access, prestige, liquidity), and the US has historically been reluctant to trigger the forced delisting of companies with large institutional investor bases. We view the risk as non-trivial but not imminent.

Capital allocation history has been mixed. Management destroyed significant value through ill-timed investments and empire-building prior to 2022. Post-restructuring under CEO Eddie Wu, the focus has sharpened. Buybacks have been active, and the share count has been reduced by ~3% over the last year. Alibaba has also begun paying a dividend (~0.8% yield).

Valuation & Our View

At ~$141/share and a market cap of ~$337B, Alibaba trades at ~25x trailing earnings. It’s a significant discount to global tech peers. For the next fiscal year, consensus expects modest revenue growth (~5%) and slightly higher EPS growth due to buybacks, but EBITDA margins will be compressed by the capex cycle.

The bull case is straightforward: Alibaba is a dominant franchise with cloud/AI optionality trading at a 40-60% discount to comparable Western peers, and if the AI cloud bet pays off, earnings power by 2028-2030 could be 3-4x current levels. The bear case: the VIE risk never fully goes away, Chinese consumer weakness persists, PDD continues to erode domestic share, and the $52B capex generates poor returns in a competitive cloud market (seems unlikely).

We see decent value in Alibaba. But we are unwilling to accept the China risk. Hence, we are avoiding Alibaba. For someone who believes that US-China relations will not deteriorate in the coming years, this can be an interesting bet (we would have bought Alibaba if not for the China risk).

Read our deep dive on Alibaba’s e-commerce rival PDD Holdings here. It's even cheaper than Alibaba, and Li Lu’s fund has a ~20% position in it.

Fiserv ($FISV)

Current Price: ~$64 · EV: ~$62B · EV/EBITDA (LTM): ~7x

Quick take: Very cheap, but the industry’s competitive dynamics are too hard to analyze. This goes in the ‘too hard’ bucket for us.

The Business

Fiserv is one of the largest financial technology companies in the world, serving over 10,000 financial institutions and processing billions of transactions annually. It operates two primary segments: Merchant Solutions (led by the Clover point-of-sale platform for small and mid-sized businesses) and Financial Solutions (core banking technology, debit processing, card issuance, and payment infrastructure for banks). The Financial Solutions segment, which accounts for nearly 50% of revenue, is the embedded financial plumbing for much of US banking, deeply integrated, hard to rip out, and carrying massive switching costs. Clover has ~25% penetration of value-added services.

What went wrong

Fiserv’s stock declined roughly 70% from its 2025 high of ~$235 to $64, including a catastrophic single-day 44% collapse in October 2025 following Q3 earnings. The scale of the selloff warrants scrutiny.

The surface cause: Fiserv slashed its organic revenue growth guidance from ~10% to 3.5-4% for 2025, and guided for just 1-3% growth in 2026. The underlying cause is more nuanced. Argentina, where hyperinflation had artificially inflated Fiserv’s organic growth numbers (contributing ~10 percentage points to Fiserv’s 16% organic growth in 2024), saw that tailwind reverse sharply as Argentina’s economy stabilized after the peso devaluation. Strip out Argentina, and Fiserv was growing in the mid-single digits all along. Investors had been paying a high-teens growth multiple for what was, in reality, a mid-single-digit core business.

The earnings shock also triggered accounting concerns from investors. The new CEO firmly rejected any accounting irregularities, attributing the miss to Argentina’s normalization and deferred investments. But the damage to trust was significant. Many shareholder lawsuits were initiated. The C-suite was reshuffled: a new CFO, co-presidents, and a board refresh followed within weeks of the earnings miss. Then there’s scrutiny from Democratic senators Warren and Wyden, who requested information on the role that the former CEO and Chairman played in the company’s forecasts (he’s now in a government role).

Why we will pass up this opportunity

Despite the significant de-rating, we are placing Fiserv in the ‘too hard pile.’ Here is our reasoning:

• Competitive landscape opacity: Fiserv operates in one of the most complex financial services landscapes. Merchant acquirers face pressure from Stripe, Square, Toast, and global giants such as Worldpay and Global Payments. Core banking faces competition from legacy players such as FIS and Jack Henry, as well as emerging cloud-native cores such as Temenos, Thought Machine, and Mambu. Quantifying competitive positioning is genuinely difficult.

• Modeling complexity: Fiserv’s cash flows are notoriously hard to model. Large acquisition intangibles, non-GAAP vs GAAP divergence, and the Argentina distortion mean that reported organic growth has been a poor guide to underlying economics. FCF is guided at ~$4B for 2026 after significant capex investment - but this assumes the turnaround works.

• Debt load: Fiserv carries significant debt from its $22B merger with First Data (2019). Leverage reduces flexibility during a transition year.

• AI uncertainty: Core banking and payments processing face emerging threats from AI-native challengers. Whether incumbents like Fiserv benefit (as an infrastructure layer) or suffer (as economics shift) is unclear.

• Near-term growth is weak: 1-3% organic growth in 2026 is essentially flat, and 2027’s projected return to mid-single-digit growth depends on the successful execution of the ‘One Fiserv’ plan.

At ~7x EV/EBITDA, the valuation is cheap on an absolute basis. But we need significantly more evidence of execution before we are comfortable that the low price is not a value trap. We will revisit in 2027 if the ‘One Fiserv’ plan begins delivering. Even then, this industry is truly one to keep in the ‘too hard’ bucket.

Fair Isaac Corporation ($FICO)

Current Price: ~$1,000–1,050 · P/E: ~37–40x trailing · Forward P/E: ~30x · Potential Buy

The moat is strong

We covered FICO extensively in our September 2025 deep dive. The core thesis has not changed: FICO has one of the most durable moats in financial services, built over 30+ years through network effects across four constituencies - lenders, regulators, secondary market investors, and consumers. The FICO score is embedded at multiple points in the mortgage value chain: loan origination systems, automated underwriting, pricing, secondary market securities, and regulatory reporting. The $10T mortgage-backed securities market is underwritten using FICO scores. Convincing both lenders and the investors who buy their loan bundles to switch is an extraordinarily high bar.

FICO’s pricing power has been exceptional: scores went from $0.50-0.60 in 2022 to $4.95 in 2025, a near 10x increase, with limited customer defection because the score represents less than 1% of total mortgage closing costs. The Direct Licensing Program (launched October 2025), bypassing credit bureaus to sell directly to lenders at $10, is a smart strategic move that both stabilizes pricing and reduces FICO’s dependency on the same bureaus that fund its chief competitor. Note that the price increased to $10 per pull in 2026, up from $4.95 in 2025! This extreme flexing of their pricing power has had unintended consequences (more on that later).

What Has Changed Since Our Deep Dive

The competitive and regulatory environment has intensified negatively:

Read more

Never bet on it being the end of the world, because if you're right, it only happens once, and there won't be anybody to collect from anyway.

While the Iran crisis is far from over, if you were “monitoring the situation”, it felt like the end of the world. Not to name names, but even investors that we looked up to were panic-selling and acting like we are the beginning of World War 3.

Yet just a month later, the S&P 500 is at an ATH, and the quality names investors sold out during the crisis have rebounded strongly.

This is not just a one-time thing. It’s a repeating pattern.

2020 — Covid caused Rolls-Royce stock (ADR) to drop <$1

2022 — Crypto crash caused a 66% drawdown for Nvidia

2025 — ASML dropped 35% due to China restrictions by the U.S.

Fast forward to today, Rolls-Royce is now worth $150B, Nvidia is 16x from its 2022 lows, and ASML has doubled in the last year.

This is the entire thesis behind Rebound Capital. Buying great businesses when the market is irrationally (or rationally!) afraid. Every once in a while, the market will give a window of opportunity to load up on quality companies. We try to take advantage of the same (we are agnostic as to what presents us with the opportunity - whether it is macro or idiosyncratic events).

And it’s not like we just talk about these companies - we put money where our mouth is and doubled down on quality names during the latest crisis.

The result: while the S&P 500 recovered approximately 10.8% from its March 31st, our portfolio recovered 13.5% over the same window.

That 350 basis points of outperformance doesn’t matter (as it's short-term). But what matters is why it happened, and the names in the broader market that exemplify the rebound pattern.

Key positions in our portfolio

We present a snapshot of ~50% of our portfolio below, with the % rebound for the stocks (vs. ~10% for the S&P 500). These are point-in-time figures, but we estimate the following stocks can keep compounding from here. The idea behind showing the sharp rebounds is to present a live case study of rebound investing. There are other names like Nvidia, which we took a position during the war, and which rebounded ~20% from its March lows.

Amazon ($AMZN): ~27% rebound

Amazon has rebounded 25% from its March lows. Even before the war started, Amazon's shares were weak. The stock had fallen 10% after Q4 2025 (5th February) earnings on fears that the $200 billion capex commitment would fail to generate adequate returns. We strongly disagreed with that thesis then, and all signs point towards the fact that we were right. Read our original deep dive here.

AI use cases are proliferating faster than even optimistic forecasters expected. Anthropic has reached $30 billion in annualized revenue as of April 2026, up from $9 billion at the end of 2025 - 3x growth in 3 months, with no precedent in B2B software history.

Every dollar Anthropic earns runs largely (by RC estimates) on AWS infrastructure and Trainium silicon. Meanwhile, compute scarcity is real: Trainium 2 is nearly exhausted, Trainium 3 is almost fully booked, and a significant portion of Trainium 4 is already reserved. A substantial portion of that capex has committed customer backing — including OpenAI’s $100 billion+ commitment to AWS. AWS AI services carry over $15 billion in annualized revenue; its custom chip business exceeds $20 billion, growing at triple-digit rates (2025 Amazon Shareholder Letter).

Crucially, AWS is a neutral cloud provider that doesn’t compete with the frontier labs it serves - a structural advantage the market isn’t fully pricing in. Both Google and Microsoft will need to compete directly with the AI labs (Anthropic and OpenAI) to protect their core business.

Advanced Micro Devices ($AMD): ~40% rebound

AMD dropped 17% in February 2026 after Q4 earnings, where guidance overshadowed a strong beat: the company reported $10.27 billion against consensus of $9.67 billion, guided Q1 above analyst expectations, and still got punished. A classic overreaction. The market just got impatient, and the sentiment was weak.

Read our analysis on AMD here.

We bought AMD because after the selloff, it was trading at roughly 10x its medium-term earnings power. At AMD’s November 2025 Analyst Day, Lisa Su, who has a well-established track record of under-promising and over-delivering, guided to 35% annual revenue growth over three to five years, with the AI data center growing at 80% per year.

Since then, OpenAI committed to deploying up to 6 gigawatts of AMD Instinct GPUs (this deal was public before the Q4 earnings overreaction), Meta followed with its own 6-gigawatt agreement, and reports of a potential Anthropic collaboration would further cement AMD’s position as the dominant second-source supplier in the AI compute arms race. We estimate that AMD’s revenue by 2030 can be 2x -3x larger than today.

Constellation Software ($CSU): ~15% rebound

CSU fell by more than 50% from its highs amid fears that AI would disrupt its software businesses, fears that reveal a fundamental misunderstanding of CSU’s moat. Constellation acquires and operates vertical market software for niche industries: funeral homes, transit authorities, and agricultural co-ops. The moat was never code generation (which AI solves for); it’s decades of workflow integration, institutional trust, and regulatory entrenchment. These aren’t categories that attract AI startups because the TAMs are small and sales cycles are long.

On valuation, CSU’s FCF yield has reached approximately 5% - rarely seen for a business compounding at double-digit rates. Headline earnings are depressed by acquisition-related amortization. CSU has virtually zero SBC (stock-based compensation), a key factor alongside fears of terminal-value erosion that have driven the massive fall in SaaS valuations. CSU continues to trade at a meaningful discount to its intrinsic value.

S&P Global (SPGI): ~9% rebound

SPGI fell roughly 20% from its August 2025 all-time high on fears that AI would disrupt its core business. In reality, its most valuable assets, the S&P 500 index brand, its credit ratings duopoly, and Platts commodities benchmarks, are legal and regulatory standards embedded in trillions of dollars of contracts. The CFO has confirmed that only ~$540 million of revenue faces any meaningful AI substitution risk. If anything, generative AI applications will run on S&P’s proprietary datasets and benchmarks (which drive a 95% of revenue), deepening its ecosystem value.

The near-term catalyst is the spin-off of the Mobility division (CARFAX), which has weighed on SPGI’s multiple. Post-spin, the core business should rerate toward MSCI and Moody’s at 25x+ forward earnings. Our sum-of-parts analysis suggests meaningful upside.

Birkenstock (BIRK): ~17% rebound

Birkenstock is down over 40% from its peak on FX pressures, U.S. tariff risk, and expectations of a weak consumer.

But the market is ignoring the potential for multiple years of strong growth for this brand. 35% of customers repeat-purchase within two years, up from 20% in 2021. The company sells at over 90% full-price realization (that is, no discounts). Gross margins of ~58% exceed Nike’s and approach levels seen in luxury footwear. FY2025 revenue of €2.1 billion was up 18% in constant currency, with Asia growing 34% (the brand is just starting there). At approximately a 15x PE ratio, you’re paying a stagnated consumer staples multiple for a brand growing at double-digit rates with luxury-level margins.

TIC Solutions (TIC): ~26% rebound

TIC is the most asymmetric opportunity on our watchlist. Formed by the August 2025 merger of Acuren and NV5, it’s a $2.1 billion revenue platform in testing, inspection, and compliance - a large portion of which is legally mandated by federal regulators. Customers cannot cut these budgets without risking shutdowns and fines. Both legacy businesses experienced only marginal revenue declines during 2008 and COVID. The AI-driven data center boom is directly boosting TIC’s power and utilities segments. The direct revenue from data centers is ~3% of the total, but growing by over 40% year-on-year.

The stock has corrected sharply, due to slower than expected integration and a recent management change. It was sold down to an irrationally cheap level by the market - the recent rebound rectifies a little bit of that.

Executive Chairman Sir Martin Franklin executed an almost identical playbook with APi Group, delivering 25%+ annualized returns over five years. At ~$8 per share, TIC trades well below our bear-case intrinsic value of $16 and our base case of $23 - a stock a $33 billion institutional fund bought via private placement at $12 just months ago.

The Pattern Behind the Pattern

What connects all of these names? None of them became worse businesses when the Iran War started. Their competitive positions didn’t erode. Their customers didn’t disappear. Their long-term earnings power wasn’t impaired.

What changed was sentiment. And sentiment, unlike fundamentals, tends to correct fast.

The current market environment (with strong volatility) will continue to offer great opportunities to those waiting for the right valuations (as I write this article, Netflix has fallen 10% after its earnings release!).

We at RC will continue to dig into quality companies and wait for the inevitable drawdown. Consider upgrading your subscription to get all our reports as soon as we publish them.

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Disclaimer: Rebound Capital’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research.

This is our first ever company deep-dive without a paywall. Enjoy!

In the spring of 1999, a 28 year old Argentine named Marcos Galperin had an idea to build an online marketplace for Latin America, a region where most people didn’t have credit cards, banks regularly froze deposits, and the idea of sending money to a stranger on the internet felt like handing your wallet to a thief. The idea was simple. He had seen the success of firms like eBay during the dot-com boom, but there were none in Latin America.

Galperin started building in Argentina in 1999. A country that would, within two years, suffer one of the worst sovereign debt crises in modern history. The peso would collapse. Banks would be locked. Riots would fill Buenos Aires. Multiple presidents would cycle through power in 2 weeks.

And MercadoLibre, somehow, would survive all of it.

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MercadoLibre’s enduring success is rooted in its anti-fragility. The company has successfully weathered (and grown through) numerous significant challenges, including Argentine hyperinflation, Brazilian currency crises, the dot-com bubble, the 2008 financial crisis, and the recent global pandemic. Now, it faces its most intricate challenge yet: a simultaneous competitive onslaught from tech giants like Amazon, Shopee, Temu, and Nubank. Crucially, MercadoLibre is proactively making voluntary sacrifices to its own margins, channeling those funds into building the infrastructure that will secure its leading position for the next decade.

In August 2007, the Latin American startup IPO’d on NASDAQ at $18 a share, the same day BNP Paribas halted redemptions on subprime funds. Despite the timing, the stock, the first Latin American tech company listed on NASDAQ, now trades at $1,850, nearly 100x the IPO price.

How MercadoLibre makes money: three key segments

Most investors mentally categorize MELI as ‘Latin America’s Amazon’, an e-commerce company that also handles payments. This is an increasingly inadequate mental model. A more accurate description is that MELI is the foundational digital infrastructure for commerce, credit, and financial services in Latin America, a platform that is simultaneously Amazon, PayPal, UPS, Goldman Sachs, and Google Ads for a market of 650 million people.

The core e-commerce marketplace

The core marketplace charges sellers a tiered commission of 12% to 19%, plus a flat fee on low-value items. With GMV running at nearly $80 billion annually (annualized from Q4 2025), this is a massive, growing revenue stream. The commerce segment is divided into 3 important segments:

First-party retail (1P): Like Amazon’s own-brand products, MELI now sells goods directly as a retailer rather than just as a marketplace host. This is currently unprofitable, as management acknowledged on the Q4 call (‘still not profitable on its own’), but it serves a strategic purpose: it allows MELI to offer competitive pricing against Temu and Shopee in categories where third-party sellers cannot match ultra-low prices. This is a deliberate investment, not an accident.

Meli+ subscriptions: The Meli+ bundles, costing roughly $3–4/month across Brazil, Mexico, and Chile, offer free shipping, access to Disney+, Netflix, and Apple TV in some markets, and same-day delivery for Meli+ members. The subscription model transforms one-off transaction revenue into recurring, high-retention revenue streams while building habits that make switching to competitors psychologically costly.

Cross-border trade: MELI is now scaling its China-to-LatAm and US-to-LatAm corridors, enabling consumers to buy directly from international sellers at prices that undercut local prices. This is a direct competitive response to Temu and Shein - matching their pricing model through MELI’s own logistics infrastructure rather than ceding the category.

The fintech segment

Mercado Pago began as a transaction facilitator: a way to make it safe to pay a stranger online. Today, it is one of Latin America’s most sophisticated financial platforms, and the division with the largest long-term upside and the most near-term risk.

The fintech flywheel works like this: sellers on the marketplace use Mercado Pago to receive payments. Those payments generate a wallet balance. That balance earns interest (MELI offers 105–120% of Brazil’s CDI rate, designed to attract primary banking relationships). Users with balances start using those balances for spending, saving, and eventually borrowing. Borrowers repay with data that improves MELI’s credit scoring. Better credit scoring enables more lending. More lending generates more revenue. More revenue funds better products.

The key metrics tell the story of this flywheel’s power:

Mercado Pago’s ambition is explicitly stated: it aims to become the largest digital bank in Latin America. ‘We are building the largest digital bank in Latin America,’ said Alejandro Melhem, SVP of Mercado Pago for Hispanic LatAm. On top of the 78 million MAUs and $18.8 billion in assets under management, it already has the highest NPS (net promoter score) amongst digital banking products.

The Mercado Pago credit card became the most-used credit card on the marketplace in Brazil in 2025, with over 50% of its total payment volume now happening off-platform, meaning users are using it for everyday purchases at supermarkets, gas stations, and restaurants, not just on MELI’s marketplace. That is the definition of a primary banking relationship, exactly what MELI is targeting.

The advertising segment

The least-discussed of the three segments may ultimately be the most important for margin recovery. Mercado Ads - MELI’s retail media network grew 67% YoY on an FX-neutral basis in Q4 2025. For context, the global retail media market is expected to grow at a 17% CAGR. MELI is growing at 4x the industry rate.

The reason is structural: MELI sits on one of the most valuable first-party data assets in the world, 26 years of purchase history, browsing behavior, credit behavior, and payment data for 150 million active users across 18 countries. Brands wanting to reach LatAm consumers cannot get this data anywhere else. This creates a pricing power moat that compounds automatically as MELI’s user base grows.

The AI integration makes this even more powerful. MELI’s GenAds product, built with Amazon Bedrock and Stability AI, automates banner ad production for small and medium-sized sellers who previously couldn’t afford professional creative work. The result: a 25% average increase in click-through rates (CTR). Better CTRs mean sellers get more value from their ad spend, which means they spend more on ads, which means MELI earns more revenue. The flywheel works here, too.

In Q4 2025, advertising revenue helped drive the overall commerce take-rate to 25.0% - significantly above MELI’s historical range. As the advertising business scales, it becomes a structurally higher-margin revenue layer that sits atop the marketplace’s existing transaction economics.

The flywheel: More buyers bring more sellers, leading to more transactions, better credit, increased purchasing, enhanced advertising data, improved targeting, more valuable ads, higher seller ad spend, and greater earnings for MELI, creating a compounded loop.

The Three Markets: Brazil, Mexico, Argentina

Brazil is both MELI’s largest and its most contested market. With 264 million monthly visits, Mercado Livre is the unrivaled market leader by traffic, but the Asian platforms are gaining ground. MELI’s response has been bold: committing $10.9 billion to Brazil in 2026 (up 50% from the ~$7 billion deployed in 2025), including 14 new fulfillment centers and 10,000 new jobs.

Mexico is the growth story that often gets overshadowed by Brazil. Items sold grew 45% YoY in Q4 2025. Fulfillment penetration hit a record 80%. The nearshoring trend, as U.S. manufacturers shift supply chains from China to Mexico, is lifting income levels and commerce volumes, and MELI, as the default digital commerce infrastructure, captures this. Proposed interchange fee caps from regulators have been delayed, removing the most immediate near-term threat to Mercado Pago’s Mexican take-rates.

Argentina is MELI’s home and its highest-margin market. Even amid three-digit inflation and currency chaos, Argentines have embraced e-commerce and digital finance at rates that exceed regional averages. 18% of all retail sales occur online, compared to a regional average of 10%. The Mercado Pago platform has become a critical inflation hedge for Argentine consumers, who park their savings in Mercado Pago’s yield-bearing accounts to earn daily interest and protect purchasing power. This creates extraordinary product-market fit. MELI solves an acute pain point, but it is exposed to Argentina’s inherently volatile macroeconomic trajectory.

What Went Wrong

The current drawdown in MercadoLibre from its $2,645 all-time high to $1,830 (a ~30% decline) is driven by a fundamental narrative shift: the market views MELI as a company sacrificing its bottom line to defend its territory (in Brazil and Mexico).

The drawdown is a result of four primary catalysts:

Earnings miss

While revenue growth remained robust in Q4’25 (+45% YoY), MELI has struggled with consistent earnings misses.

• Q4 2025 earnings miss: Despite beating revenue estimates, a tax-adjusted underlying margin of ~9% (down from 13.5%) led to another 8% after-hours slide. Investors sold on the divergence between topline and bottom line.

• Q2 2025 earnings miss: A 15.6% EPS miss triggered by surging credit provisions caused an 8% drop.

Margins compression

To combat the rise of Shopee and Temu (the latter securing >10% of Brazil’s e-commerce traffic and ~5% of GMV in record time), MELI slashed its free shipping threshold to R$19. Analysts projected a 500–600 bps hit to operating margins. The stock slid steadily as medium-term operating profit expectations were revised lower. Keep in mind that Brazil is MELI’s biggest market.

Ballooning credit book

The Mercado Pago credit book has expanded sharply to $12.5B (+90% YoY), but the quality of these loans is still unknown. Provisions for doubtful accounts outpaced revenue growth (58% vs 37%). This signaled to the market that MELI might be ‘buying’ growth by lending to high-risk consumers (many of its customers are subprime), creating potential credit quality issues in the coming quarters.

Rising fintech competition

The announcement of the Amazon-Nubank partnership signaled rising competition for Mercado Pago. By aligning with Brazil’s largest digital bank (100M+ users), Amazon gained the localized credit and payment infrastructure it previously lacked. This neutralized MELI’s lending moat, leading to a de-rating.

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MELI’s Competitive Moat

We think of MELI’s moat as a system of interlocking competitive advantages - each reinforcing the others and each with different levels of vulnerability to the current competitive environment. Since Brazil is MELI’s largest market, we will highlight key metrics from there for this discussion.

Logistics network (Mercado Envios)

In Brazil, MELI operates 28 fulfillment centers (42 by the end of 2026), ensuring that 75% of all orders reach customers within 48 hours. This massive scale drove a decisive 11% reduction in unit costs during FY25.

In Mexico, operational excellence is even more pronounced, with fulfillment penetration hitting a record 80%. The physical footprint continues to scale: after ending 2025 with 21 logistics nodes, the company is now estimated to target ~25 or more nodes by the end of 2026.

MELI’s network is backed by a $10.9 billion commitment to Brazil in 2026 alone; this infrastructure represents a 15-year head start that rivals can’t replicate quickly.

Fintech flywheel (Mercado Pago)

Mercado Pago is a formidable fintech flywheel, with 78M MAUs and $18.8B in assets under management, with the highest NPS in its core markets of Brazil, Mexico, Argentina, and Chile. The ecosystem is anchored by a $12.5B credit portfolio, with its proprietary card now the most-used credit vehicle on the platform in Brazil. This integration creates a powerful lock-in effect; as users embed their credit history, savings, and daily payment habits into the app, the high switching costs ensure high retention.

First-party data and advertising

MercadoLibre (MELI) leverages 26 years of purchase, payment, browsing, and credit data from 150M+ users, providing brands with unique insights unavailable elsewhere. Their advertising segment surged 67% YoY on an FX-neutral basis in Q4. By integrating advanced AI, including GenAds and Amazon Bedrock, MELI is deepening its data moat. We project that this high-margin revenue stream will ultimately deliver most of the e-commerce platforms’ operating profit (the 1P and 3P businesses will be run at 0 profit to deepen the platform's moat).

Brand trust and network effects

In markets where consumer trust is hard-won, MELI’s 25-year track record is invaluable. Buyers trust the platform. Sellers have their inventory, reviews, and transaction history embedded in MELI’s ecosystem. Meli+ subscriber loyalty is reinforced by streaming bundles and financial perks that create multi-dimensional switching costs.

How competitors are attacking MELI’s lead

Price competitiveness

Shopee’s products are 11–12% cheaper on average in Brazil. Temu’s factory-direct pricing undercuts local sellers across most commodity categories. MELI’s take-rate of ~16% + flat fee is structurally higher than Shopee’s 14% + smaller fee. While MELI has aggressively cut shipping thresholds, it cannot match factory-direct pricing without its own 1P buildout, which is ongoing but not yet at scale.

Mass-market GMV share

Shopee holds ~15% of Brazilian e-commerce GMV, up from near zero in 2020. Temu holds ~5%. These are not small numbers; they represent a meaningful structural shift in where consumers shop for low-ticket, fashion, and commodity items.

The Asian invasion

The competitive threat that has most rattled investors is the entry of Asian-backed platforms into Brazil. Understanding the nature of each threat and MELI’s specific countermeasures is essential to forming a view on whether the moat is being permanently eroded or temporarily compressed.

The key insight about Shopee, the most credible competitor, is that it is simultaneously MELI’s most threatening rival and the most likely to ease competitive pressure in 2026. Sea Limited (Shopee’s parent) is under significant investor pressure to demonstrate profitability across its global markets. Shopee’s pivot towards profitable growth is already reducing subsidy intensity in Brazil. When Shopee stops competing on subsidized shipping, MELI gets margin breathing room without losing the customer habits it has built during the shipping war.

The most important competitive dynamic to understand: Shopee dominates fashion, beauty, and low-ticket accessories (average order value ~$9–$13). MELI dominates electronics, home goods, and branded products (average order value ~$27). These are different shopping occasions. The real competitive risk is not that Shopee will displace MELI in its core categories - it’s that Shopee will capture the next wave of first-time e-commerce users with low-ticket purchases, preventing MELI from growing its buyer base as quickly as it otherwise would. This is a growth rate risk, not an existential risk.

Short-term headwinds vs. long-term opportunity

The next 12–18 months will be volatile. The next 5–10 years are extremely compelling.

Short-term headwinds (12–18 Months)

The $12.5B credit portfolio nearly doubled in a year, issuing 3 million new cards in Q4 2025. This growth introduces forensic risk: the default volatility of new cohorts has not been tested over a full cycle. The 4.4% 15–90 day NPL may be artificially low due to the ‘denominator effect’ (fast book growth masking rising older defaults).

Margin recovery is a 2027 story, not 2026

Management stated on the Q4 call that investments in shipping, credit cards, first-party commerce, and cross-border trade will continue in 2026. Margin recovery will not occur until these initiatives are profitable at scale. Investors expecting a Q1 2026 margin rebound will likely be disappointed, potentially leading the stock to underperform for the next 1–2 quarters, even if the long-term thesis holds.

FX translation headwinds

FY25 revenue grew 39% (USD) but 52% (FX-neutral). The 13 percentage point difference is due to the depreciation of the Brazilian real, Argentine peso, and Mexican peso. A strong USD in 2026 will continue to compress reported USD revenue relative to operational growth. This FX-related reporting issue does not affect LatAm purchasing power (it can in case of uncontrolled inflation), but it obscures the genuine operational performance markets use to price the stock.

Long-term structural tailwinds (2030 and beyond)

Rising e-commerce penetration

Latin American e-commerce represents only 12–15% of total retail. China is at 45%. Mature Western markets are 25–30%. The region’s per-capita GDP now exceeds $10,000, placing it well above the income threshold at which e-commerce historically accelerates. MELI does not need to take share from competitors to grow dramatically — it just needs to capture the structural shift from offline to online retail that is happening regardless of who wins market share battles.

Digital banking for 300 million underbanked people

Latin America has 300-400 million people with limited access to formal financial services. Mercado Pago is not competing to replace JPMorgan (or other banking channels) - it is giving people their first credit card, their first savings account, their first insurance product. Once a consumer’s entire financial life is embedded in Mercado Pago, they do not leave. This is a winner-take-most market in financial services, and MELI has the first-mover advantage, the data advantage, and the trust advantage.

Advertising to exceed 5% of GMV

Retail media advertising is projected to grow at 17% CAGR globally. MELI is growing at 4x that rate. As the platform scales, advertising revenue becomes an increasingly large percentage of total revenue at near-zero marginal cost — effectively operating leverage that compounds automatically with traffic growth. This is the margin restoration story that most sell-side models are not yet fully capturing.

AI-induced workforce efficiency

MELI’s partnership with Anthropic (Claude models via the Model Context Protocol) aims to achieve 20–30% gains in workforce efficiency. Its AI customer support system resolves 87% of Mercado Pago inquiries without human intervention. AI seller assistance advises on 20% of GMV. With 123,000 employees and an annual hiring of 14–18K, even modest AI-driven efficiency gains translate directly to margin improvement at scale.

Agentic commerce

If AI shopping agents (like Claude’s shopping features) gain traction, market share will shift to the largest retailers who can invest to pivot their models. MELI is already working to improve its shopping experience through agents, and as the leader in South American ecommerce, the rise of agentic AI can help MELI gain market share.

The decade-long thesis in simple terms: MercadoLibre is the foundational digital infrastructure for a region of 650 million people who are in the early stages of joining the modern economy - both digitally and financially. The short-term pain is real, measurable, and largely self-inflicted. The long-term opportunity is structural and durable, and it is not yet reflected in current prices.

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Valuation

We have built a bottom-up Excel model for MELI’s business and valued it at $2,400 in the base case and at $1,500 per share in the bear case.

MELI Model

Note: We have had to estimate profitability across segments, as MELI does not break it out. And we may be off. We will refine this model as we learn more about the South American e-commerce market.

Key Risks

Unseasoned credit book

The $12.5B credit portfolio nearly doubled in a year, with 3 million unseasoned credit cards issued in Q4 alone. Any economic slowdown in Brazil or Mexico can significantly impact earnings due to increased loan losses. The Amazon-Nubank partnership also heightens competitive pressure in MELI’s credit segment.

Sustained Margin Compression Beyond 2026

We model margin recovery beginning in 2027, assuming the shipping war ends as Shopee targets profitability and MELI’s 1P commerce breaks even. However, if Shopee (Sea Limited backed) re-accelerates subsidies or Temu’s semi-fulfillment model (launching July 2025) matches local delivery speeds, MELI’s margin investment could extend into 2027 or 2028, reducing the DCF’s present value.

Argentina Macroeconomic Instability: FX Band Risk

The new inflation-indexed monetary band (effective Jan 2, 2026) links current inflation to future currency depreciation, risking a spiral. MELI’s late-2025 credit card launch in Argentina exposes its initial cohorts to this instability. If Argentina faces a likely 2026 currency crisis, MELI will incur credit losses in its new Argentine card portfolio and major FX translation headwinds on revenue from its highest-margin market.

Amazon–Nubank Fintech Partnership

Amazon’s integration of Nubank’s payment and credit features is a major strategic challenge to Mercado Pago. With ~100 million customers, Nubank rivals Mercado Pago’s 78 million MAUs in LatAm. Offering compelling credit through a trusted partner could impede Mercado Pago’s ‘principality’ strategy (primary banking relationship) in Brazil, MELI’s key market.

Stock-Based Compensation and Dilution

Stock-Based Compensation (SBC) rose 38.6% YoY to $793 million in the last twelve months (ending Sept 2025). While manageable for a company trading at ~30x forward earnings, this is a real economic cost that either dilutes earnings or requires buybacks. Competition for AI talent could further intensify SBC.

Regulatory and Geopolitical Risk

Brazil’s ‘Remessa Conforme’ program (taxing international e-commerce parcels) creates near-term headwinds for Temu and Shein, which actually benefits MELI. But regulatory risk cuts both ways: COFECE in Mexico has flagged that two platforms control 85%+ of the vendor base, potentially signaling antitrust scrutiny ahead. Brazil’s Central Bank is tightening oversight of digital banking. Proposed interchange fee caps across multiple markets could reduce Mercado Pago’s take rates if implemented.

Our Take

We are giving MELI a ‘HOLD’ rating. Although the long-term potential is significant, medium-term margin uncertainty prevents us from investing in the company.

If you understand the competitive landscape of Latin American e-commerce platforms well and believe in MELI's margin recovery path, taking a starter position could be reasonable now, since the base case (assuming no business issues in the medium term) values the company at around $2,400 per share.

We will hold off on acting until operating margins stabilize, implying that competitive dynamics have stabilized (which will help us model the business better).

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Before we share the top 7 stocks in our watchlist for April, I want to share Rebound Capital’s view on a few sectors of the US stock market. Here’s our sectoral view, along with the opportunities and key risks we see in each.

Megacap Technology

Alphabet, Amazon, Meta, Microsoft, and Nvidia have fallen by 15% - 30% from their all-time highs (and recovered strongly post the Iran ceasefire).

During the recent earnings season, all the Cloud Service Providers (AMZN, MSFT, and GOOG) announced substantial increases in capital expenditure for 2026. This is a direct result of rising computing demand driven by the expansion of AI use cases across businesses. Although we can understand why they are investing aggressively, this rise in CapEx makes Amazon, Google, Microsoft, and Meta less attractive to investors, as their capital intensity has increased materially (versus when they were investing in the cloud pre-AI). 

Amongst Megacaps, we expect Amazon, Google, and Meta to thrive in the AI era. Meta has demonstrated the ROI of its AI investments, with accelerating revenue growth from its advertising business (growing ~25% YoY). We expect Amazon and Google to be the lowest cost providers of AI cloud services in the coming years (helped by their custom silicon GPU programs). On the other hand, Microsoft’s competitive advantage is most at risk; its latest enterprise productivity software release (E7) in May will serve as a crucial test of its innovation in the AI era.

We see Nvidia continuing to lead the AI industry. Its stock dropped due to fears that AI CapEx can’t keep growing in the coming years. We doubt that analysis because we are just at the beginning of AI boosting all parts of the economies of the developed world. We are massively compute-constrained and will remain so in the coming years. The sharp increase in ARR at Anthropic underscores the exponential rise in demand for AI. This will directly help Nvidia’s business (as the largest provider of GPUs).

Software

We have previously written on the software sector here. To thrive in an AI world, software firms will need to:

• Shift from a seat-based to a consumption-based model. Sell agents and outcomes, and not software features

• Cut high labor costs and cut stock-based compensation. Layoffs maybe necessary

• Have a moat stemming from deep integration into their customers’ workflows, proprietary data, or become the go-to provider of agentic AI for their customers

The era of selling features for $20 per month per seat is gone. Being GAAP unprofitable after 20 years (Atlassian) is also over. The disruption is real. For most SaaS companies, the biggest advantage was having smart people develop code and customers accustomed to their UI. These are no longer valid competitive advantages.

Semiconductors

The most obvious and direct beneficiary of the ongoing AI revolution. We will divide semiconductors further:

Chip Manufacturers

We are bullish on TSMC's business prospects (It has a monopoly in the logic foundry market). We expect multiple years of strong >20% growth here. Valuations are expensive, though.

Memory manufacturers like Micron, SK Hynix, and Samsung are trading at steep market caps relative to the past. While we agree that the AI revolution probably means that ‘this time is different,’ we remain unsure about the extent to which the industry's cyclicality has reduced (i.e., higher margins for the cyclical through). These stocks are in the ‘too hard’ pile for us. The short term looks terrific for them. But we are unable to model the medium- to long-term economics of these businesses.

Semicaps

ASML, Lam Research ($LRCX), KLAC, and Applied Materials ($AMAT) supply equipment to the manufacturing companies listed above.

These stocks have performed very well recently, and there's a good reason for that. All of these companies operate in duopoly or oligopoly markets (ASML and KLAC are monopolies at the leading-edge nodes). Spending on equipment is also expected to increase significantly from about $100 billion last year to over $200 billion around 2030. The valuations reflect this, so we're not currently seeking exposure here.

Another key risk for the Semicaps is that all of these firms derive a significant (>25%) portion of their revenue from China, and the US government may decide to reduce exports of Semicap equipment to China by restricting the sale of more and more equipment and services. This can represent a critical short-term headwind for these firms.

Chip Designers

This is the segment we are most bullish on. Both AMD and Nvidia were in drawdowns recently, due to the expectation that AI capex may have peaked. But we disagree and expect the amount spent on AI computing chips (GPUs and CPUs) to secularly rise in the coming years. Refer to our write-up on Nvidia and AMD for more details.

Consumer Discretionary

Many restaurant companies (Chipotle, Dutch Bros, Starbucks) and consumer discretionary firms (Nike, LVMH, Lululemon, Birkenstock) are in drawdowns. With consumer spending weakening and AI set to impact the job market in the coming years, investors must be very selective in their bets in this sector. We are trying to identify companies that are still expected to grow their revenues robustly (double-digit %) for many years to come.

We will avoid turnaround opportunities in this sector because we're uncertain about how much AI will impact the job market in the coming years. In this backdrop, we don’t want to risk betting on a brand that may have plateaued.

With our sector outlook complete, we'll now highlight our most closely watched stocks. None of them are recommended for purchase without further analysis. However, each one deserves a closer look. Read to the end to vote on which company we should focus on for our next deep dive.

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7. Zoom ($ZM)

Zoom became a verb during the pandemic and then, just as quickly, became a punchline. The stock has spent four years trying to escape that narrative (it’s down ~80% from its all time highs). The stock is down roughly 14% from its January highs, due to muted growth in its core business.

The business is not growing as much as it was in 2020, but the bears may be too pessimistic about the company. Full-year fiscal 2026 revenue came in at $4.87 billion (4.4% YoY growth), and the company has guided to breaching $5 billion in FY2027. The company holds $7.8 billion in cash and completed $2.4 billion in share buybacks during the last 2 years. That is not the capital allocation of a business in distress. Zoom also owns $2B-$4B of Anthropic (our estimate) and, in our view, will soon be worth >$5B-$6B closer to Anthropic’s IPO. Excluding cash and Anthropic’s stake, the core business trades at ~5x-6x earnings!

(Note: the ownership figures are our estimates and may be off)

What went wrong

In Zoom’s Q4 FY2026 earnings, revenue beat expectations at $1.25 billion, but earnings per share of $1.44 missed the consensus. More importantly, the full-year adjusted EPS guidance disappointed, and investors who had been hoping for margin expansion instead got a message about continued investment. The stock slid roughly 15% after the earnings report.

The market’s concern is structural, though. Microsoft Teams is bundled into the Microsoft 365 suite used by millions of enterprises, and it continues to erode Zoom’s pricing power at the low end. The fear is that Zoom gets squeezed from below by cheap bundled alternatives and from above by more sophisticated agentic AI tools that don’t require a video call at all. There is also the fear that, as AI disrupts the labor market, Zoom’s per-seat pricing model will be under pressure.

Adding to the uncertainty, CEO Eric Yuan stopped breaking out AI-driven ‘New Product Revenue’, saying Q4 FY2026 would be the last quarter for that metric, a move some interpreted as burying a number that had become harder to grow impressively.

Rebound Catalysts

The bull case rests on Zoom AI Companion, which tripled year over year, and on the Contact Center business. If Zoom can convert its AI engagement into incremental revenue, moving beyond the freemium AI Companion toward paid enterprise AI agents, it could re-rate as an AI productivity platform rather than a video conferencing utility.

Our interest in Zoom, though, stems from the ~$8B in cash and the $5B-$6B in the Anthropic stake (if Anthropic goes public at a valuation>$500B). Adding up the cash and the Anthropic stake equals ~$14B. Zoom’s market cap is $24B, implying the core business trades at ~5.5x PE!

Our biggest issue with Zoom is that the upside is capped at 20%-30% from current levels, even if our thesis is right. But if the stock falls sharply due to market conditions, we may be potential buyers at $70/share or below.

6. Accenture ($ACN)

Accenture is the world’s largest consulting firm. We have previously written about Accenture here. More recently, Accenture has been trying to become the company that enterprises call when they want to implement AI. For example, in 2024, Accenture trained 30,000 employees to implement Nvidia’s technology in enterprises. It now claims to have 85,000 AI and data professionals.

With over 780,000 employees and a presence in nearly every major global industry, it is also the most visible symbol of a market debate playing out in real time: does AI make consulting firms indispensable, or redundant?

In 2026, the market has leaned toward redundancy. Accenture shares are down roughly 50% from their 2025 highs.

What went wrong

The narrative turned sharply against Accenture in early February 2026 when a broad selloff in knowledge-work stocks accelerated. On 3rd Feb 2026, shares fell 9.6% amid fears that generative AI tools would reduce demand for billable consulting hours, leading to fewer humans needed for the work that makes up Accenture’s revenue model. The irony is that Accenture’s Q1 FY2026 results, reported in December 2025, showed $2.2 billion in advanced AI bookings, nearly doubling year-over-year, and record quarterly bookings of $20.9 billion overall.

The Q2 FY2026 results in March were also stable but similarly punished. Revenue of $18.04 billion beat estimates, and bookings hit a record $22.1 billion. The market focused instead on Q3 guidance that came in below expectations and on a comment from CEO Julie Sweet that federal government business would create a roughly 1% drag on FY2026 growth.

The broader structural fear that agentic AI systems will absorb the strategy and analysis work that Accenture charges $250 per hour for has not gone away. Accenture is also undergoing an $865 million restructuring while simultaneously mandating aggressive AI adoption internally, including tracking senior employee logins to AI tools.

Rebound Catalysts

The bull case is that Accenture is not being disrupted by AI; it is becoming the primary conduit through which AI enters the enterprise. Nearly 85,000 Accenture employees are now AI and data professionals, and the company has deep relationships with Google Cloud, Microsoft, AWS, and other hyperscalers. No AI tool sells itself into a Fortune 500 company; someone has to design the implementation, manage the change, and take accountability when it goes wrong. That is Accenture’s job.

The stock now trades around 16x trailing earnings (Accenture usually traded at >25x) with a dividend yield of 3%, levels not seen in years for a business that has historically compounded at high-single-digit revenue growth. If revenue growth reaccelerates toward the 7–9% range the market previously rewarded, the re-rating could be substantial.

5. Moody’s ($MCO)

Moody’s is one of the most durable oligopolies in global finance. For 125 years, it has sat at the center of global debt markets as an essential gatekeeper. No significant bond issuance occurs without a Moody’s or S&P Global rating. The business has two engines: Moody’s Investors Service (MIS), which rates debt and earns fees whenever companies or governments issue bonds, and Moody’s Analytics (MA), which sells risk software and data tools with recurring subscription revenue. Warren Buffett has called it one of his forever stocks.

What went wrong

First, geopolitical tensions and interest rate volatility in January and February 2026 raised fears that debt issuance would freeze - a direct hit to MIS revenue. If companies and sovereigns stop issuing bonds, Moody’s fees drop with them. The market sold the stock as if a prolonged issuance drought were the base case.

The second blow came when S&P Global reported weak Q4 2025 earnings and disappointing 2026 guidance, missing the 2026 consensus EPS estimate of $19.96 with a forecast of $19.40–$19.65. Moody’s fell 5% in sympathy, along with FactSet, MSCI, and other financial data names. The sector-wide repricing hit firms that had done nothing wrong operationally. This earnings miss was compounded by the market’s fear that many of these financial firms will now be disrupted by companies like Anthropic, which own the foundational LLMs capable of performing bond analysis.

There is also a longer-tail concern: companies like Bloomberg and others are beginning to offer automated credit analysis tools (using AI) specifically for private placements. Moody’s management has pushed back firmly on this narrative, arguing that ‘AI can build a model, but it can’t be calibrated on actual loss data’ - a reference to the firm’s proprietary database of historical defaults, the largest in existence, which regulators require banks to use for risk assessments.

Rebound Catalysts

Moody’s Q4 2025 results, reported in February, were genuinely impressive: adjusted EPS of $3.64 beat the $3.42 consensus by 6%, and the company guided 2026 adjusted EPS of $16.40–$17.00 - a range that was above analyst expectations. CEO Rob Fauber used a BofA conference in March to make a compelling case: an estimated $68 trillion in global infrastructure investment needs, an accelerating military buildup cycle across NATO, and a massive 2028 refinancing wall make debt issuance a structural necessity regardless of near-term volatility.

Private credit, a rapidly expanding segment, is also a tailwind. Moody’s private credit revenue in MIS grew nearly 60% in 2025, and its partnership with MSCI to bring credit analytics to private market investors positions the firm at the center of one of the fastest-growing parts of global finance. Even though private credit is in a spot of bother now, we do expect the business to continue to grow in the coming years.

A few more quarters of strong performance, and the market will realize that the AI threat to Moody’s is minimal. Due to its proprietary data, which serves as the basis for any AI to work from. The market may not rerate Moody’s, as it’s still trading at a 26x NTM PE ratio, which seems fair (not cheap yet).

4. FICO ($FICO)

FICO’s score is embedded into virtually every mortgage, auto loan, and credit card decision made in the United States. It has achieved something almost impossible in finance: a brand that is also a regulatory standard. And yet the stock is down roughly 50% from its late 2024 highs, a collapse more commonly associated with speculative tech than with a near-monopoly financial utility. Refer to our deep dive on FICO here.

What went wrong

The short answer is the market believes that FICO’s monopoly has been cracked. The Federal Housing Finance Agency’s decision to allow VantageScore 4.0 alongside FICO scores for mortgages delivered to Fannie Mae and Freddie Mac sent a jolt through FICO’s valuation. For decades, FICO had a legally mandated position in the mortgage market. The new ‘bi-merge’ credit report framework and the multi-model scoring environment effectively ended that protected status.

Investors interpreted this as the beginning of potential pressure on FICO’s pricing power. The stock had been trading at over 50x forward earnings in mid-2025; the regulatory change catalyzed a violent derating.

But the most significant concern is that AI-driven alternative scoring models could commoditize credit assessment, which has weighed on sentiment.

Rebound Catalysts

While the stock has been halved, the actual business has barely slowed. Q1 fiscal 2026 results showed revenue up 16% year-over-year and scores revenue up 29%, with non-GAAP operating margins expanding over 400 basis points to 54%. Mortgage originations revenue, the very segment the market is most worried about, grew 60% year-over-year in Q1.

Five major resellers, representing 70–80% of the reseller market, have already signed on to the FICO Mortgage Direct Licensing Program, which streamlines score access and reduces lender costs. Wells Fargo analysts have noted that lenders have minimal incentive to abandon FICO for VantageScore given the transition costs and the lower predictive power of competing models. FICO Score 10T, the next-generation model, is meaningfully more predictive than alternatives and is being rolled out through Direct Licensing in 2026.

At roughly 35x forward earnings, FICO is being priced for much slower growth than in the last few years. If the mortgage market reaccelerates and the VantageScore threat proves more theoretical than real, the stock has a compelling path back toward its prior highs in the coming years.

3. Coinbase ($COIN)

Coinbase is the definitive crypto exchange for the US market. Its regulatory positioning, custody infrastructure, and brand trust give it an enduring edge over offshore competitors.

What went wrong

Q4 2025 earnings, reported in February, were a clear disappointment. Revenue fell by 5% from the prior quarter to $1.78 billion, missing the $1.85 billion consensus. The non-GAAP EPS was $0.66, 37% below the $1.05 street estimate. The company also posted a net loss of $667 million for the quarter after marking down the value of its crypto holdings and investments, compared to a $1.3 billion profit in the same period a year earlier.

The root cause of the drop in the stock since July 2025 highs has been a cold crypto market. Bitcoin and major tokens fell sharply from their late-2024 and early-2025 highs, draining trading activity across the digital asset market. Spot trading volumes, which are still the core driver of Coinbase’s revenue, collapsed alongside prices. Cryptocurrency transaction revenue has fallen ~33% since its peak in the Q4’2024 quarter.

The broader structural concern for Coinbase is cyclicality. Despite building out stablecoin infrastructure, custody services, derivatives (via the Deribit acquisition), and the Base Layer 2 network, the company’s financials are still largely a function of where Bitcoin trades.

Rebound Catalysts

The long-term infrastructure story at Coinbase remains intact. Average USDC (stable coin pegged 1:1 to the dollar) balances on-platform grew to roughly $17.8 billion in Q4 2025 (~117% YoY growth), subscription and services revenue grew 23% year-over-year in 2025, and the Deribit acquisition has meaningfully expanded derivatives capabilities. CEO Brian Armstrong’s declaration that “we store more crypto than any other company in the world” is not a boast and reflects a genuine moat.

US stablecoin legislation, the GENIUS Act, could be a meaningful catalyst. If USDC becomes embedded in the US payment infrastructure, Coinbase, which shares economics on USDC with Circle, stands to benefit substantially. The company’s Q1 2026 report, due in May, will be closely watched for signs that trading volumes have stabilized after the Q4 2025 weakness. With $11.3 billion in cash and equivalents and no near-term solvency concerns, Coinbase has the runway to wait out the cycle. Excluding cash and equivalents from market capitalization, the core business trades at ~31x PE ratio. This seems reasonable for a secularly growing platform.

2. Robinhood ($HOOD)

Robinhood is the brokerage that democratized investing for a generation of retail traders. Its mobile-first, commission-free platform pulled millions of young Americans into the market for the first time, and then built a genuinely impressive financial services business around them, adding Gold subscriptions, margin lending, crypto trading, futures, prediction markets, and international expansion.

After rising by more than 200% in 2025 and being added to the S&P 500, the stock has lost ~55% of its value since its 2025 high.

What went wrong

Robinhood entered 2026 at a valuation that left no margin for error. The stock was trading at a price-to-sales ratio of over 25x, more than twice its historical average since going public in 2021. When growth began to slow, the derating was brutal and fast.

Q4 2025 earnings, reported in February, captured the problem in a single data point: crypto transaction revenue fell 38% to $221 million YoY, driven by sharply lower digital asset trading volumes as Bitcoin retreated from its highs. Total revenue of $1.28 billion came in below the $1.34 billion analyst consensus, even as EPS of $0.66 beat the $0.63 estimate. Revenue decelerated to 27–28% growth from the triple-digit rates of mid-2025.

Prediction markets, which had been a genuine source of investor excitement, also face growing competition from Polymarket, Kalshi, and potentially others. The narrative that prediction markets could be as large as crypto for Robinhood has cooled alongside the actual crypto market.

Rebound Catalysts

Despite the selloff, Robinhood’s underlying financial architecture is stronger than it was two years ago. The company generated $4.5 billion in revenue for full-year 2025, with earnings of $2.05 per share, a legitimately profitable brokerage business. Gold subscribers, who pay monthly for premium features, continued to grow rapidly and represent a more stable revenue stream than transaction fees. The platform’s young, asset-generating user base means ARPU should increase structurally over time, even in quiet markets. A valuation of ~35x PE is expensive but fair for buying into a management team that has consistently executed and diversified its platform.

A revival in crypto trading volumes, which history suggests is a matter of when, not if, would be the most powerful near-term catalyst. Robinhood’s $1.5 billion share buyback program also provides a floor for the stock.

1. MercadoLibre ($MELI)

MercadoLibre is Latin America’s Amazon and PayPal combined. It operates the dominant e-commerce marketplace across Brazil, Mexico, Argentina, and a dozen other markets through Mercado Libre, and runs the leading fintech platform in the region through Mercado Pago. The company is building logistics infrastructure, consumer credit, digital banking, and advertising capabilities simultaneously — all in a region of 650 million people where e-commerce and financial inclusion are still in early innings. It is one of the most exceptional growth businesses in the world.

The stock has fallen roughly 34% from its mid-2025 highs.

What went wrong

MercadoLibre’s Q4 2025 earnings, reported in late February, were a classic case of a great business disappointing a market that had priced in perfection. Revenue beat estimates, growing 39% for the full year to reach $28.89 billion. But earnings (EPS) growth for 2025 slowed to 4.5% year over year, as the company made heavy investments in logistics, credit expansion, and new market penetration, deliberately compressing near-term margins in pursuit of long-term dominance. Analysts at Morgan Stanley and UBS (and others) both lowered price targets following the report.

The headwinds go beyond a single quarter. Brazilian e-commerce has attracted intensifying competition, with Shopee (backed by Sea Limited) aggressively expanding in the region and Amazon continuing to invest. Brazilian regulators have increased scrutiny of fintech operations, adding compliance costs and uncertainty to Mercado Pago’s expansion plans. The recent quarter showed reduced margins for MELI in Brazil due to a lower free shipping threshold. This is good for the business's long-term health, but has caused weakness in near-term results.

The broader market has also become more risk-averse toward EM-exposed names. Amid dollar strength and geopolitical uncertainty, investors have rotated out of stocks with significant exposure to Latin America.

Rebound Catalysts

The company's fundamentals remain solid. Full year 2025 revenue of $28.89 billion grew 39%, and the company has announced a $10.9 billion investment in Brazil alone for 2026 - a 50% increase from 2025. Mercado Pago is evolving from a payment wallet into a fully-fledged digital bank, offering savings, investments, and credit products with higher structural margins than its commerce platform.

Mercado Libre’s advertising business is still in its infancy. This will be a high-margin business layered on top of the core ecommerce business in the coming years.

At around $1,770 per share, MELI trades at roughly 32x forward earnings. The business is executing a deliberate, Amazon-like margin sacrifice strategy in its highest-growth markets. We will look to enter MELI once we are certain the business’s long-term economics are solid (given that Amazon, MELI, and Shopee coexist in a stable oligopoly).

That’s it for now. Stay tuned for our upcoming post, where we will share our latest research notes and valuations for multiple stocks, including Netflix, Disney, Meta, Lam Research, KLAC, TSMC, Copart, and Mercado Libre.

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Rebound Capital’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research

We have a lot of good names trading at attractive valuations due to macro-economic conditions, and nothing to do with the company fundamentals - making it the ideal condition required for rebound investing :)

At the same time, we have to look at what the current situation is for what it is, a global supply shock that is not priced in completely. JP Morgan's research team shared this insightful chart showing an air pocket forming in the oil supply chain. Due to the ships on the water, the U.S. and Europe will only stop receiving their oil supply starting the second week of April. Add a few weeks more’ worth of inventory, and the supply shock will reach the markets by the end of April or mid-May.

We would guess the outcome mirrors what we saw during Covid: as long as the issue remained contained abroad, the equities barely blinked, and as soon as the shock reached the U.S., a sharp correction followed. Nothing changes sentiment like seeing your Gas and grocery prices shoot up.

We list our current portfolio positions and how we plan to trade the crisis. But before that, here are the top 5 stocks we are looking to invest in in case the war escalates into a full-blown crisis:

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5) Copart

We have previously written about Copart here. Copart operates a digital marketplace selling vehicles that have been declared a ‘total loss’ by insurance companies. It earns >35% operating margins and is the market leader in a duopoly market. Its key competitive advantage is that it owns a majority of its junkyards, which are nearly impossible for a new competitor to set up.

Copart is down ~50% from its recent high and now trades at ~21x PE ratio. Management has started stock buybacks.

The Moat: We like the following about Copart and are looking to build a position at the right price:

• Stable industry structure (duopoly) with Copart as the leader

• The temporary nature of Copart’s demand weakness

• Copart’s free cash flow generation will increase (after many years of heavy investment for growth)

Rebound Catalyst: Recovery in demand for Copart’s platform, as the temporary slowdown in car insurance (due to premiums rising steeply) resolves. Faster international growth can also lead to a re-rating.

4) Doximity

Doximity is in a deep drawdown as the market worries that pharma advertising budgets - Doximity’s primary revenue source- will be weak in the medium term. While this may be true, pharma ad spending is cyclical, and Doximity is the largest network of US physicians (~80% of US doctors use the app), which will benefit as marketing budgets recover.

The Moat: Roughly 80% of US physicians are enrolled on Doximity’s platforms. This is very difficult to replicate. For the pharma companies, it is the best place where they can reach prescribers at scale with strong data (from the platform) for efficient targeting.

Rebound Catalyst: Once pharma marketing budgets normalize, Doximity will stand to benefit as the largest platform. In the meantime, we get mid-single-digit to possibly low double-digit revenue growth in the coming 2 years (guidance) and a ~5% free cash flow yield, which together make for a nice double-digit estimated return. The company is also starting to monetize its workflow tools (telehealth and AI drafting, etc.), which were free and can represent a second source of revenue. At ~19x PE ratio, the stock is cheap.

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Why is it down?

As of March 30, 2026, Nvidia is trading near $165, reflecting a roughly 20% correction from its recent all-time high of $212.19. Despite reporting record-breaking fiscal 2026 revenue of ~$216 billion, the stock has entered a ‘risk-off’ phase as investors pivot from chasing momentum to a more defensive stance.

• ‘Sell the News’ at GTC 2026: Even after CEO Jensen Huang announced a $1 trillion pipeline for the new Blackwell and Vera Rubin architectures (through 2027), the stock failed to rally. Investors have largely ‘priced in’ this growth, leading to a classic ‘sell the news’ reaction where even strong guidance wasn’t enough to sustain the rally.

• Geopolitical and Macro Volatility: Ongoing conflict in the Middle East and renewed U.S.-Iran tensions have rattled global markets. Furthermore, the 25% tariff on AI chips and proposed per-customer caps on sales to China have limited Nvidia’s ability to fully capture revenue from the world’s second-largest AI market.

• Customer Concentration: Recent filings revealed that just four customers (likely Big Tech hyperscalers) account for over 60% of Nvidia’s revenue. As Meta, Alphabet, and Amazon accelerate the rollout of their own custom silicon (such as TPUs and Trainium), the market is pricing in a potential peak in GPU demand.

• Antitrust Pressure: In mid-March, a preliminary EU antitrust probe into GPU bundling and a U.S. Senate inquiry into the Groq deal created regulatory overhang.

NVIDIA’s current business performance is stellar. The market is questioning whether the company can sustain strong growth in the coming years. The ~20% drawdown occurred after Nvidia reported 73% YoY revenue growth and guided to 81% YoY growth in the coming quarter!

From our perspective, given the myriad news cycles (AI ROI doubts, trade war, actual war), the market is overlooking the fact that the world is highly compute-constrained.

Below, we attach the pricing for compute rental. The trend is clear. Even older generations of GPUs, like the A100s, are seeing rental prices rise.

This pricing increase, coupled with strong commentary from the AI industry, gives us confidence that this infrastructure cycle is still early and that demand for Nvidia’s chips will continue to grow in the coming years (as AI use cases continue to explode).

The price of compute has gone up materially since the start of 2026, following the latest viral Copilot Cowork and other enterprise use cases, such as coding and agentic workflows. The TAM for AI is not just about increasing workers’ efficiency but also about adding agentic knowledge workers (essentially, the TAM is much larger for agents than it was for training models). And Nvidia’s GPUs turn electricity into autonomously working agents! The market is underestimating the demand for compute once agentic AI takes off. 2026 is the year in which this massive change plays out. The market is too distracted by the war to realize this.

Edit: A day after our Nvidia notes were released, SemiAnalysis made the following pricing graphs public. Their data is further proof of our thesis that compute demand is inflecting, and we are in the midst of a compute shortage - which will directly result in higher revenues for Nvidia.

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The investment thesis for Microsoft has undergone a fundamental transformation over the last 2-3 years, shifting from a software-as-a-service (SaaS) model to a vertically integrated, capital-intensive artificial intelligence provider (Azure).

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Today, Microsoft is a combination of a defensive, high-margin software provider (potentially under threat from AI) and a capital-intensive infrastructure play that is essential to the global economy’s digital transformation. We will dig into Microsoft’s revenue model, the hyperscale cloud industry, and the intrinsic value of its shares.

Why is it down?

As of March 2026, Microsoft (MSFT) is trading roughly 33% below its October 2025 peak of $555. This correction has erased nearly $1.3 trillion in market value, driven by a shift from AI enthusiasm to a demand for concrete financial returns.

The downturn is primarily attributed to three factors:

• The ROI Gap: Investors are growing wary of massive capital expenditures. In the most recent quarter, Microsoft’s CapEx surged 66% to $37.5 billion. The market is now penalizing this spend, demanding proof that these multi-billion-dollar data center investments will deliver decent ROI.

• Decelerating Azure Growth: While still robust, Azure’s year-over-year growth slowed from 40% to 39% (with forward guidance of 37%). In a high-valuation environment, even a 1% deceleration signals to investors that the cloud market may be reaching a temporary saturation point.

• OpenAI Concentration Risk: Approximately 45% of Microsoft’s $625 billion contract backlog is currently tied to OpenAI. Analysts have flagged this as a significant counterparty risk, questioning the stability of a backlog that is so heavily dependent on a single, unprofitable partner.

Microsoft in the AI Era

In 2023, Microsoft was off to a great start with generative AI. They bought a material stake in OpenAI and leapfrogged their rivals to become the face of AI. They integrated AI into their search engine, Bing, and rumors surfaced that they were taking market share from Google.

Cut to 2026, Microsoft has not released any popular AI product. Their partnership with OpenAI has had its share of problems, and their most successful division in the last decade, Azure, is now transitioning to a very capital-intensive business model, with uncertain ROI. Anthropic’s productivity software releases, such as its Excel and PowerPoint plugins, have threatened Microsoft’s core productivity business.

On top of that, the competition in the cloud business is so intense that Amazon and Google are guiding to nearly $200B of CapEx in 2026, with Microsoft’s trajectory pointing towards >$150B in CapEx. Investors are rightfully worried about this level of expenditure.

This pressure on its core moat, combined with the capital-intensive nature of its cloud business, has led to the stock dropping by more than 30%. Microsoft was once looked at as a beneficiary of AI, but not anymore. There are serious concerns about Microsoft’s ability to compete in an AI-first world.

Business segments

Productivity and Business Processes (PBP)

This segment is the backbone of the modern workplace. It includes the Office 365 suite (Word, Excel, Teams with >300 million users), LinkedIn, and Dynamics 365 (Microsoft’s ERP and CRM software). PBP is Microsoft’s most profitable division, with operating margins exceeding 60%. In the last 12 months, PBP has generated approximately $125B in revenue and $78B in operating profit.

Within Microsoft 365 Commercial, the installed base has reached approximately 450 million seats. While total seat growth has moderated to mid-single digits (6%-7% YoY), revenue growth is increasingly driven by a ‘mix shift’ towards premium licensing tiers. The transition from Office 365 E3 to E5 represents a significant ARPU uplift, as the E5 ($57 per user per month) tier includes advanced security, compliance, and analytics, and is priced around 60% higher than E3 ($36 per user per month). The Microsoft 365 E7 suite will be priced at $99 per user per month and will be available from May 1, 2026. The E7 suite will provide users access to Microsoft’s latest agentic AI tools and the latest Copilot.

Another key product in the PBP segment is LinkedIn. It has continued to grow as the leading global professional network with >1 billion members. Revenue growth is ~10% and is driven by a mix of premium subscriptions, talent solutions, and advertising. LinkedIn is integrating AI to automate hiring workflows and personalize ad targeting, helping maintain higher engagement amid a broader hiring slowdown.

The key investor concerns for the PBP segment center around Microsoft’s inability to develop popular AI productivity tools. Microsoft reports 15 million users of Microsoft Copilot. But, is this $30/month add-on actually being used, or is it shelfware bundled by Microsoft? Claude’s Excel and PPT add-ins are more popular than Microsoft’s own Copilot.

The second headwind concerns seat-based software sales. If agents replace knowledge workers, how will Microsoft transition to a value-based model that charges for productivity gains or outcomes rather than for features? How does this transition affect Microsoft’s margins? Will MSFT be dependent on the foundation model owners, and how will this affect its profitability?

It is quite instructive how well-received Anthropic’s Excel and PowerPoint add-ins are. Whether Microsoft will be able to continue growing revenue at high rates in PBP will depend on its ability to deliver value to users. The upcoming E7 launch is critical. More on that later.

Intelligent Cloud

Intelligent Cloud includes Azure (Microsoft’s cloud division), GitHub, and server products (Windows Server, SQL Server). It has generated $122B in revenue over the last 12 months. In the most recent quarter, its revenue grew by 29% YoY, with Azure growing at 39% YoY. This segment has an RPO (remaining performance obligations) of $625B, signaling strong future revenue visibility. However, 45% of this is tied to OpenAI, exposing Microsoft to vendor-concentration risk.

The key debate regarding the IC segment is whether Microsoft (and other cloud providers) will be able to derive sufficient ROI from their mammoth investments in their cloud computing divisions. The Hyperscalers have indicated approximately $660B in capital expenditures in 2026, primarily for their cloud divisions. Paradoxically, Microsoft is currently capacity-constrained, and management highlighted that they had to prioritize spending on internal products, which slowed Azure growth.

Industry Structure and Evolution of Cloud

The cloud infrastructure and enterprise software industries have entered a phase of extreme concentration. The landscape is now dominated by Microsoft (Azure), Amazon (AWS), and Alphabet (GCP). In 2018, these big 3 held ~55% of the global cloud infrastructure market. By 2025, this has increased to 68%. This consolidation is driven by an astronomical barrier to entry: these 3 companies spent a combined $260B in CapEx in 2025 alone. This effectively means that very few companies can compete in this space (In fact, very few countries can match this level of CapEx!). We are in a land-grab phase, with the final ROI of the massive AI investments uncertain. But with 3 companies competing, we expect the industry to deliver decent ROI for investors in the coming years. We expect the market’s fears about high cloud capex to subside in the coming quarters as revenue from monetizing AI begins to be recognized.

More Personal Computing

This is the legacy segment covering Windows OEM, devices, gaming, and search (Bing). Its LTM revenue is $55B, and in the most recent quarter, the segment’s revenue contracted by 3% (primarily due to weakness in Xbox hardware sales).

This segment is much smaller than the other 2 and is not expected to grow much. Hence, its performance will not decide the fate of Microsoft’s stock. We will focus on the other 2 segments for the remainder of the article.

Microsoft vs Amazon vs Alphabet

A key question is why Microsoft trades at a lower multiple than Amazon and Google. In 2025, Microsoft generally traded at a premium relative to Google and Amazon. So, why the flip now?

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