The AI King, Queen & Buffon
Your bull cases are confirmed, but your stocks keep falling.
Only positive earnings today, with a cherry on top as Soitec’s management released earnings earlier and data is real good, confirming SOI demand and Soitec as a tech-agnostic player.
I will detail Google’s earnings and what they mean for others, Soitec’s momentum and catalysts, ServiceNow as a proxy for SaaS and AI demand, and some comments on TXN and STMicroelectronics for power and analog semis.
The AI King
Incredible earnings, this quarter was a confirmation of all layers of the AI bull case. The market’s bear case for quarters was always ROI. Google answered.
Continuous acceleration for a company with $100B+ quarterly revenues, margin expansion - stabilization QoQ at healthy levels, and increase in operating cash flow, net revenues and EBITDA.
Whichever metric you use to measure AI’s impact on the business, you have only one possible answer: a positive one.
Be mindful of net income as it includes their P&L, rocketing after SpaceX IPO; that’s not cash generation, just mark‑to‑market P&L they include in their statement – and EPS which also came with a massive beat kind of “forged” by that.
Still, a remarkable quarter with AI impacting all of their verticals.
Most segments’ revenues are stabilizing, but stabilizing multi‑billion‑dollar revenue streams at double‑digit growth for years isn’t a small feat, and AI is the reason for this stable growth.
Next, the Gemini app, which now has 950 million monthly active users with daily active users tripling in the last year.
Those who adopt our AI-powered campaigns like AI Max or Performance Max, see an average of 15% more conversions or value on Search at a similar ROAS. AAA Auto Club Enterprises used AI Max to personalize creative assets and capture growth from increasingly detailed insurance searches. This led to a 17% improvement in conversion volume and an 11% decrease in cost per lead.
To attract high-value shoppers across North America and Europe, outdoor brand Arc'teryx used Demand Gen to achieve a 70% better return on their ad spend compared to other paid channels.
Kate Spade reached Gen Z through a first-of-its-kind YouTube creator campaign and partnered with creators Ellie Thumann and Hannah Meloche. By leveraging multiple format videos on YouTube, the brand drove a 3.25% brand lift in purchase intent.
I won’t go over all the quotes; you get the gist. AI also powers internal work:
As just one example, a team in Chrome is now on track to accelerate delivery by 8x , compressing a two-year timeline into three months through model-driven refactoring.
This confirms most bull cases as it shows real AI demand and valuable use‑cases for companies around the world.
The beast is Google Cloud, which closed with a record ~$514B backlog for which 50% are to be realized in the next two years, with strong growth and operating margins expanding from 20.7% to 35.6% YoY.
Rapid - and unperfect, math would suggest a ~65% YoY growth for the vertical NTM with ~$45B of operating income with today’s margin. Backlog isn’t perfectly regular so that' won’t be exactly the case, but it gives you an idea of the potential and what GCP has become, again thanks to AI. These aren’t “ifs”, but real numbers behind the AI infrastructure story and CapEx.
The market was doubtful on ROI; that should answer…
Management also confirmed what we knew: they are supply‑constrained, said they’ll use third parties to meet demand waiting for their own infra. This is extremely bullish for Microsoft, Amazon, Nebius, CoreWeave, Oracle, xAI & co as it means one of them will have a juicy contract, but also that demand for their product continues to increase.
We’ll see rental contracts in the coming months.
Demand for our models is translating to strong token usage across developers and enterprise customers, and we continue to be supply constrained, a sign of momentum and rapid adoption.
Sundar Pichai, Google CEO, Q2-26 Earning Call
Now, where market gets spooked, despite the numbers and obvious trend.
Google confirmed AI has a meaningful ROI across all its verticals: improved internal workflows, improved advertising revenues, time spent on apps, massive demand for direct compute and TPUs. What AI touches, AI enhances and it comes with higher revenues, margins and cash generation.
Google wants more compute, which means more spending. This quarter was Google’s first‑ever negative FCF; they increased their CapEx guidance to ~$200B and expect even more in 2027.
Finally, we expect the free cash flow will remain under pressure, driven by our investments in technical infrastructure, which enables us to capitalize on the AI opportunity and continue to drive attractive returns.
…we continue to expect our CapEx to increase significantly in 2027 and will provide more details at a later date.
The market was worried about ROI. It had an answer. Now it is worried about CapEx funding methods as it comes with negative FCF and dilution, even if spent on AI, a technology with back tested ROI.
I’m not sure what this means for Google’s stock in the short term; what I know is that it isn’t cheap and is extended, so I wouldn’t buy here. But I’d hold tight onto my shares if I were a shareholder and would increase my position on key supports.
Because man… What. A. Quarter.
As for my personal favorite,
The bottom line is crystal clear: AI delivers concrete ROI and we need more compute. That comes with more spending hence more cash generation for hardware names which remain the strongest names on the market lately.
Soitec’s Cherry on Top
Management felt generous yesterday.
Before turning to the quarter, let me briefly explain why we decided to bring forward today's communication. Since the start of the second quarter, customer demand for Photonic SOI has accelerated faster than expected. At the same time, the action plan I set out to increase our Photonic SOI production output has started to deliver positive results. These developments gave us materially greater visibility on the pace of our Photonic SOI ramp. Consistent with our commitment of transparency, rigor, and timely communication, we choose to update you ahead of schedule.
They had great news to share, so they couldn’t wait. Weird, but why not.
The thesis is playing out exactly as expected. While everyone fights to be involved in the next “winner” hardware, I believe the higher you are on the supply chain, the better. You can hardly be higher than Soitec, the company selling the wafer for any optical scale-up, from pluggable to XPOs.
Most of the revenue we see right now, and most of our revenue for FY27 will be on pluggable and partly NPO as well, probably starting. We still see co-package optic ramping up at the end of the year on the scale-out. Especially on the switching racks on the scale-out.
Photonics-SOI technology has already demonstrated its ability to address different scale-up configurations, such as pluggable transceivers, Near-Package Optics (NPO) and Co-Packaged Optics (CPO).
As long as optics scales, Soitec will. And optics is set to scale for years.
This visibility is underpinned by accelerating adoption across AI data centers, expanding multi-year customer commitments to secure capacity with cash deposits, a strong signal of engagement to securing long-term supply with Soitec. Further volumes are under active discussion.
So, without surprises, revenues are up 23% YoY compared to a 15% guidance, with Photonics‑SOI as the main growth driver, up ~100% YoY, with Q3‑26 expected to come in at 30%+ due to photonics demand.
Since the start of Q2’27, the Group has seen further acceleration in customer demand for Photonics-SOI, as well as the satisfactory results of the action plan initiated to increase its production output.
Assuming no material disruption in the AI market, Photonics-SOI FY27 revenue is expected to more than double the slightly above $100m generated in FY26.
Numbers still looks weak sequentially, but this is because of scaling. We are still early and management hasn’t fully reprioritized its production lines, so sequential growth seems low – even if well above guidance. The acceleration will start now as the thesis is now confirmed.
**Precision: their FY26 closed last quarter, today is qualified as Q1-27 so they are indeed guiding to $200M+ photonics related revenues for the next four quarters.
The other verticals are healthy enough with a small bounce in automotive - driven by new tech in cars, and expected stability through the year, while the smartphone market remains filled with inventory for core products and healthy demand for new technologies, slowly scaling. Both should be stable at best, not perfect but good enough.
Management shared last quarter that they could rapidly and cheaply refocus their fabs to meet growing photonics demand. They confirmed today that their Singapore fab is ready for Photonics‑SOI high‑volume manufacturing with a first customer confirmed. This was supposed to be done by year‑end but they accelerated to meet aggressive demand. Both of their Photonics‑SOI fabs can be expanded to meet accelerating demand if needed. Management is clear that they will work to meet demand, which comes in high volume and at better margins.
This quarter is the confirmation of our original thesis which was based on maybes. These maybes are now confirmed fundamentally, and we’ll need to see them in the numbers over the next quarters.
The stock pushed on potential until now. Today’s confirmations should be enough to justify more push as the market prices success, not just potential, boosted by cash generation improvements. We just have to wait for this now.
As to how I intend to manage my position,
SaaS Fight Back
ServiceNow confirmed what we knew: demand for AI services is real. Just like with software, companies capable of bundling a service into an optimized and affordable workflow will have customers.
The quarter beat expectations and guidance, with interesting but mixed data. This isn’t the inflection point SaaS bulls are waiting for, but it gives us clear signs that AI isn’t going to disrupt them out of existence. I think we can safely say the bottom is in for the sector, even fundamentally.
On the numbers, revenues are accelerating at the expense of margins - part of it due to a more expensive acquisition than expected, but there’s also an impact from AI token costs.
Revenue growth is still strong considering the “AI will kill SaaS” narrative, which we should bury by now. This quarter proves that idea wrong.
RPO and current RPO – to be recognized in the next 12 months, have stable growth on a large base, which is impressive - like for Google. If AI and LLMs were replacing SaaS, this growth would already have collapsed: demand is for AI-enhanced services.
We can note though that cRPO is growing faster than total RPO; looks like enterprises are taking one‑year subscriptions to see what happens, without committing long term too soon. With 98% retention for the quarter, we can assume most of them will renew, but that depends on confirmed AI value‑added.
AI demand is clearly the source of that demand.
The number of customers with agentic AI in production has increased 9x over the last nine months, a leading indicator for the future consumption opportunity.
ServiceNow AI continued to outperform expectations in Q2, with ACV crossing over $1 billion and net new ACV growth accelerating sequentially, growing over 40% quarter-over-quarter.
Deals including five or more ServiceNow AI products grew 5.5x YoY, which drove a tripling of million-dollar-plus deals.
The percentage of renewal customers purchasing agentic AI for the first time doubled quarter-over-quarter and year-over-year. Customers that weren’t already on the AI journey are signing up fast.
Interesting quotes which show in the numbers: more high‑paying customers, proving that average contract value is increasing, which usually comes with AI services.
There’s a lot of good in this quarter. The best is that it proves AI services demand, and shows that companies aren’t using LLMs to replace SaaS, as the market once feared – sometimes still fears. This was obvious, but now we have data.
Are customers going to build their own? I've yet to meet a customer who would even consider it. The best tech leaders know it will cost 5x to 10x to build an agent versus run one on ServiceNow.
What it doesn’t prove is long‑term commitments. It proves interest, maybe curiosity, and gives signs of where demand is headed, but doesn’t confirm with long‑term acceleration. This looks like what the market needs to bottom SaaS names – and I believe they have, but not enough to start a new uptrend, even on optimism.
I could be wrong and we could see re-ratings on optimism alone, but it seems early to me, given the signals.
On the contrary, it isn’t early for cyber‑security SaaS especially after OpenAI’s LLM model attack this week. ServiceNow is integrated within cyber companies, so this could indirectly be a catalyst for the company. But for non‑cyber‑focused SaaS, this still looks like early innings.
Great signals, two quarters in a row.
The Power is Out
We had both Texas Instruments and STM earnings, both were excellent. Yet, TXN is down ~5% and STM ~17% while beating expectations, with no guidance raise.
Demand for any kind of product related to power or data‑center hardware is growing both sequentially and YoY, and both companies are talking about rising demand.
During the quarter, demand increased further with strong bookings and book-to-bill close to 2 overall. We were well above one in whole end markets and significantly above 2 in communication equipment, computer and peripheral, mostly driven by optical connectivity, including silicon photonics. We saw improved visibility and signs of tight supply in several product categories.
STMicroelectronics Q2-26 Earning Call
STM raised its guidance for data centers and expects data‑center revenues above $1B by FY26 and well above $2B by FY27, with improved margins, strong traction in photonics with multiple design wins, and strong interest in solar and battery storage.
Both calls are bullish for my investment thesis: increased photonics demand means more photonics hardware, and strong interest for BESS and analog is the thesis for data‑center expansions. But the market is fading good news, just as it has for some time now, and this isn’t really bullish… Especially after these earnings.
All these names will become great opportunities in time. For now, fundamentals are improving everywhere, but narrative remains the driver #1 of stock prices and it isn’t really optimistic right now.
Patience.
Market Overview
Everything is being sold pre‑market. Google is down ~5%, Meta ~3% and Amazon ~2.5% as well. Power semis are all down, SaaS is flat… only Soitec is still up ~20%, but I wouldn’t be surprised to see that fade if the U.S. market opens red.
I won’t try to predict the market’s reactions. But earnings were good, great in many cases – and that was already true last week with TSM AEHR ASML or SMCI, but the market doesn’t care. Tensions in the Middle East might not be helping, oil is rising again; it’s hard to know exactly what and why. What we do know is that good news aren’t bought, and until they are, we shouldn’t be too aggressive.
All these names have a long way ahead of them and are great opportunities, but their stocks still need time. Consolidation – despite great earnings, remains my base case.
Slow and steady during tough market environments.
No reason to increase risk here.
Disclaimer: I am not a licensed financial advisor, analyst, or broker. This content reflects my personal opinions and investment decisions for informational and educational purposes only. I hold positions in securities discussed and may buy or sell without notice. Nothing here constitutes a recommendation to buy, sell, or hold any security. Past performance does not guarantee future results.
Always conduct your own research and consult a qualified professional before making investment decisions. I accept no responsibility for any financial losses.