The Focus List: Cash Replaces the AI Promise

The midterm elections did not break artificial intelligence earnings. They broke the construction trade behind them. When voters backed state-level candidates who campaigned against surging utility bills, Wall Street read the results as a sudden stop sign for data-centre expansion.

The whiplash was violent. First came Wednesday's relief rally, handing the Dow its best session in 19 months. Then came Thursday's reckoning. Roughly $2.5 trillion in market value vanished in a single afternoon as the semiconductor index tumbled about 12% and the Nasdaq slipped into a formal correction, more than 10% below its October peak.

Just as traders braced for a broader retreat, Friday’s payroll report landed like an electric shock. The economy added 165,000 jobs against expectations of roughly 59,000. Instead of pricing in interest rate cuts, futures rapidly shifted to price in roughly a 78% probability of a December rate hike.

That shift changes the rules of the game. For two years, tech companies funded massive infrastructure bets with cheap, abundant corporate paper. Hyperscalers issued about $194 billion of bonds in the first half of 2026 alone, up from roughly $108 billion in all of 2025. Amazon alone issued $130 billion in fresh debt over nine months.

When borrowing costs rise and local governments push back on grid connections, capital already in the ground becomes immensely valuable. Capital that exists only as an architectural drawing or an unapproved permit becomes a liability. UBS estimates that nearly 30% of anticipated 2028 data-centre capacity is now tied up in local political fights. The market spent the week brutally separating companies funded by real customer cash from those sustained by vendor debt and optimistic promises.

The scorecard

We review our calls weekly because accountability matters. Here is how the names from our 31 October edition performed against their stated triggers.

RTX (Accumulate): We noted the chief financial officer speaks at an industrial conference in mid-November. Fourth-quarter results must also generate roughly $3 billion in free cash flow to meet management's $9.0 billion annual target. The catalyst has not occurred yet. RTX fell about 5% alongside the broader market selloff. It remains ungraded.

Netflix (Accumulate): Our thesis hinges on fourth-quarter earnings in January, where management will introduce 2027 revenue guidance. The stock held flat to slightly up while tech indices dropped into correction territory. That is quietly resilient, but the catalyst is still two months out.

Applied Materials (Wait for a better entry): We looked for fiscal fourth-quarter results on 12 November to confirm guidance above $10.25 billion. The stock dropped roughly 15% as chip equipment makers sold off hard. Holding off has preserved capital so far, but the earnings print will decide whether that drop is a discount or a red flag.

Vistra (Accumulate): We waited for third-quarter earnings to validate annual profit targets ahead of December grid auctions. The company delivered: revenue climbed 27.7% to $6.35 billion, adjusted EBITDA surged over 50% to a record $2.38 billion, and management raised its 2026 midpoint guidance while offering strong 2027 figures. The shares rallied over 10% on the report after hitting a 52-week low, but remain below our initial level. The operational engine worked; the equity return is still catching up.

1. Broadcom (AVGO) — The Arms Dealer

Nvidia sells off-the-rack luxury suits; Broadcom is the bespoke tailor.

Broadcom works directly with elite technology labs to design custom computing processors, known across the industry as XPUs. Instead of buying a general-purpose processor off a shelf, a hyperscaler hires Broadcom to build a piece of silicon tailored specifically to run its proprietary AI models. Broadcom also manufactures the networking switches and optical components that wire thousands of these processors together, alongside an enterprise software empire anchored by VMware. Six massive customers buy its custom chips; tens of thousands of corporate IT departments pay for its software subscriptions.

The underlying numbers are staggering. In its fiscal third quarter, Broadcom delivered $29.591 billion in revenue, up 86% year over year. AI semiconductor sales alone surged 221% to $16.7 billion, representing 56% of the company's total business. Broadcom generates cash like a private toll road: free cash flow reached $13.7 billion, or 46% of revenue, while requiring just $0.5 billion in capital expenditures. Management expects total AI revenue to hit $58 billion in fiscal 2026, jump to $115 billion in 2027, and reach $230 billion by 2028, setting a path to surpass $30 in earnings per share.

Why is the stock sitting near a 52-week low? Broadcom suffered a double blow. In September, Anthropic’s chief executive published an essay arguing that the industry should deliberately pace frontier model development, unsettling investors who treat every lab's capex as guaranteed. Then came Thursday's chip market liquidation, knocking the shares down over 10% in a single session. The stock now trades around 15 times fiscal 2027 consensus earnings and about 15.7 times sales, against roughly 26 times sales at its summer peak. The market is not questioning Broadcom’s engineering; it is questioning whether its primary buyers will keep ordering at this pace.

The bear case here is serious and centers on customer concentration. Broadcom chief executive Hock Tan has acknowledged that Anthropic will become its largest custom-chip client by 2027. If Anthropic slows down, Broadcom’s multi-year projections falter. More concerning is how this revenue gets financed.

Broadcom helped assemble a $35 billion financing structure with Apollo and Blackstone to back Anthropic's computing infrastructure, providing credit endorsements and residual-value guarantees on roughly $30 billion of that debt. A short-seller would point out that Broadcom is partially financing its own order book, and the future scrap value of a custom processor is anyone's guess once the next chip generation arrives. Furthermore, gross margins sit near 69% and face modest pressure as custom silicon outpaces high-margin software sales.

What we're watching: Fiscal fourth-quarter results arrive in mid-December, a day after the Federal Reserve’s interest rate decision. AI semiconductor revenue must top the $21.7 billion quarterly guidance target, and management must reaffirm its $115 billion target for fiscal 2027 without expanding its debt guarantees.

Our take: Accumulate. Trading at roughly 15 times next year’s earnings with 46% free cash flow margins, the stock has priced in a dramatic spending slowdown that has not shown up in the order books. We would change our view if AI segment revenue misses the quarterly guide or if loan guarantee liabilities expand.

2. Amazon (AMZN) — The Funded Incumbent

Amazon is the digital shopping mall that quietly built its own private electric utility.

The business model rests on three distinct pillars: retail commerce, digital advertising, and cloud infrastructure through Amazon Web Services. Everyday consumers pay for Prime memberships and home deliveries, brands purchase sponsored ad placements across those product searches, and startups and Fortune 500 enterprises rent computing power from AWS. The retail and advertising divisions produce high-margin daily cash that helps subsidize AWS's massive physical footprint.

Third-quarter performance highlighted this scale. Total sales climbed 12% to $201.9 billion. AWS delivered its fastest expansion in nearly five years, jumping 39% to reach an annualized run rate of $184 billion while posting an operating margin of 38.6%. Total operating profit set a company record at $28.1 billion. Net income reached $20.7 billion, though reported earnings per share of $1.89 dipped slightly below the prior year's $1.95 because the 2025 quarter benefited from a $9.5 billion paper gain on its Anthropic investment.

The cash reality, however, is what divides investors. Amazon generated $168.3 billion in operating cash flow over the trailing twelve months, up 29%. Yet it spent $210.7 billion on property and equipment over the same period, driving free cash flow to negative $42.4 billion compared to positive $14.8 billion a year earlier. Long-term debt reached $173.1 billion after issuing $130 billion in debt over nine months, pushing quarterly interest expense to $1.69 billion. Defending that spend is a contracted order backlog of $578 billion across agreements averaging 6.1 years in duration, an increase of $82 billion in just three months.

The stock jumped roughly 6% the day after the election, well ahead of a broad relief rally, as investors worked out what a permitting freeze does for incumbents. Investors recognized that regulatory pushback against new data centres gives an enormous structural advantage to incumbents whose campuses are already electrified. If you cannot get a permit to build a competing data centre, you are forced to rent server capacity from someone who already did.

The bear case is simple cash math. Amazon is currently spending beyond its operational cash generation, filling the difference with bond offerings just as credit markets face higher interest rates. The company faces a future wave of depreciation charges tied to its $509 billion in net property and equipment, which will hit income statements in 2027 and 2028. Meanwhile, advertising revenue growth slowed to 11% this quarter after five consecutive quarters above 20%, shrinking the consumer cash buffer that historically absorbed heavy infrastructure spending.

What we're watching: The holiday quarter guidance of $240 billion to $247 billion in sales, alongside the full-year 2027 capital expenditure outlook scheduled for early February. A capital expenditure projection topping $300 billion without positive free cash flow validates bear concerns; advertising reaccelerating toward mid-teens growth strengthens the bull case.

Our take: Accumulate. Paying roughly 24 times next year's earnings gives you the only cloud giant using a profitable retail and advertising engine to build an infrastructure moat out of capacity that already exists. We would revisit this stance if 2027 capital spending pushes past $300 billion without a corresponding recovery in cash flow.

3. SoFi (SOFI) — The Bank in Your Pocket

SoFi is a fully chartered consumer bank operating under the sleek aesthetic of a smartphone app.

It is not an asset-light software business; it is a balance-sheet lender. SoFi collects retail customer deposits and issues personal, student, and residential home mortgages, keeping a portion of those loans on its books while selling others to institutional investors. It also licenses the underlying core banking software, Galileo and Technisys, to third-party financial institutions. More than 17.1 million members use its digital products, while approximately 140 million partner accounts run on its tech infrastructure. What makes SoFi compelling right now is what it lacks: zero AI capital expenditure, no server depreciation schedules, and no industrial power bottlenecks.

Third-quarter operational results showed exceptional momentum. Net revenue rose 44% to $1.385 billion, and net income climbed 73% to $241 million, translating to $0.18 in diluted earnings per share. Net interest income—the cash profit made on the spread between what a bank pays depositors and what it charges borrowers—grew 59% to $929.5 million, accounting for two-thirds of total revenue. Total deposits reached $51.3 billion, surging 37% since December. Loan losses remained well controlled: annualized personal-loan net charge-offs stood at 2.26%, or roughly 3.4% on an all-in basis, an improvement of 30 basis points from the previous quarter.

Despite reporting its twelfth consecutive profitable quarter and raising guidance, the stock surrendered an initial 13% earnings pop and currently sits near half its 52-week peak. The market is skeptical about profit conversion. Although revenue is expanding at a 40% clip, the company's guided effective tax rate now sits at 22%, 700 basis points above its original plan, muting bottom-line growth. SoFi now trades at roughly 18 times 2027 guided earnings and 1.86 times book value.

The bear argument centers on balance-sheet vulnerability in a stubborn rate environment. Two-thirds of revenue comes directly from lending spreads, while the Technology Platform segment contracted 24% following the departure of a major client. SoFi relies on its balance sheet for expansion just as borrowing benchmarks threaten to climb. If the Federal Reserve raises rates again, SoFi must hike the yields it pays to keep its $51 billion deposit base intact. The rates on its existing consumer loans take far longer to reset.

That dynamic compresses lending profit margins. Additionally, holding consumer loans under fair-value accounting models can delay the visible impact of souring debt if employment conditions soften.

What we're watching: The Federal Reserve's rate decision on 9 December. Management's 2027 targets already account for two rate hikes, but a third would compress net interest margins and challenge the $0.90 annual earnings target. We are also watching early February's report to ensure 2027 revenue guidance holds at roughly $6.4 billion.

Our take: Accumulate. Valued at 18 times 2027 guided earnings for a business growing top-line revenue at 27% with a self-funding deposit base, the stock reflects excessive fear over rate policy. We would reconsider if all-in personal loan defaults exceed 4% or if management reduces its $0.90 per share profit forecast.

4. Zscaler (ZS) — The Checkpoint

Zscaler is the corporate security checkpoint stationed between a remote worker and the open internet.

Traditional enterprise security operated like a moat around an office building: once an employee passed through the perimeter wall, they had access to the interior network. Zscaler pioneered "zero trust" architecture. It routes employee internet traffic—and now enterprise AI agent traffic—through more than 200 proprietary data centres around the globe, inspecting every single data packet and verifying every login request in real time. Rather than selling hardware boxes, it bills corporate and government clients via annual per-seat software subscriptions.

Financial results for its fiscal year ending 31 July demonstrated healthy top-line demand. Full-year revenue reached $3.3525 billion, up 25% year over year, while non-GAAP operating margin expanded to a record 23% for the year, touching 24.3% in the fourth quarter. Annual recurring revenue reached $3.771 billion.

The trouble lies in the underlying growth trajectory and changing cash dynamics. When stripping out its acquisition of Red Canary, organic annual recurring revenue growth slowed to 20%, with organic net new recurring revenue up only 17%. Furthermore, Zscaler is discovering that running intensive packet inspection for AI applications requires heavy computing muscle. Capital expenditures and capitalized software spending reached $218.5 million in the fourth quarter, compressing the quarterly free cash flow margin from 24% down to 7%. For fiscal 2027, management guided annual revenue growth to between 16.6% and 17.5%, a sharp deceleration from last year's 25% pace.

The equity suffered a structured unwind over recent months. In May, the initial forecast of 16% to 17% recurring revenue growth shaved nearly a quarter off the stock. In September, the chief revenue officer stepped down. Last week, Wall Street analysts downgraded the shares just as peer Fortinet lowered its forward service projections, driving Zscaler down roughly 12% over two sessions. Yet despite trading roughly 40% below its 52-week record, Zscaler still commands a valuation of about 40 times fiscal 2027 earnings and nearly 10 times trailing sales.

The bear case is that the valuation multiple does not reflect the structural business shift. A software business compounding at 25% easily justifies a rich valuation; a security provider slowing to 17% growth while facing higher infrastructure costs does not. Red Canary introduces higher customer turnover, and the need to purchase advanced computing hardware eats away at free cash flow. A short-seller looks at Zscaler and sees an enterprise paying high multiples for a maturing software suite that must now absorb its own AI computing bill.

What we're watching: Fiscal first-quarter earnings on 2 December. First-quarter net new recurring revenue typically accounts for 15% of the annual target, creating an absolute benchmark of $95 million to $100 million. Anything lower indicates that enterprise cyber budgets are tightening further.

Our take: Wait for a better entry. The core security platform remains an essential enterprise standard, but paying 40 times forward earnings for 17% growth with declining cash flow margins offers little margin of safety. We want to see the 2 December order figures confirm the revenue baseline before building a position.

The bottom line

Wall Street spent the week shifting its attention from long-dated technological dreams to the immediate reality of hard cash. Broadcom builds the custom silicon engines that hyperscalers cannot function without, and Amazon controls the land, the power and the retail profits needed to survive an infrastructure bottleneck. SoFi compounds banking margins without buying a single graphics processor, while Zscaler still faces a valuation recalibration before its price tag matches its new growth reality.

We will keep tracking how these capital cycles play out.

Analysis, not advice. We may own these names and we may sell them at any time.