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Key Market Outlook(s) and Pick(s)

On Monday, I joined Stuart Varney on Fox Business “Varney & Co” to discuss markets, outlook, earnings, the Mag 7, Alibaba, and more. Thanks to Stuart, Peyton Jennings, and Christian Dagger for having me on.

On Monday, I joined David Lin on his show TDLR. David has one of the most active and engaged audiences I have spoken to. I always enjoy talking markets with him, and this was a special episode where we dug into the Mag 7, earnings, the Fed, liquidity, and more. Thanks to David for having me on.
 

Intel Update

Each week we try to cover 1-2 companies we have discussed in previous podcast|videocast(s) and/or own for clients (including personally).
 

When Uncle Sam becomes your business partner, good things tend to happen. That’s exactly what we saw in Intel’s first report with Washington riding shotgun.

Revenue came in at $13.65 billion, up 6% sequentially and 3% year over year, beating Street estimates of $13.15 billion and topping management’s prior guidance by about $600 million. Earnings per share of $0.23 came in well ahead of consensus at $0.01 and management’s guidance for breakeven results.

All together, the quarter marked Intel’s fourth consecutive beat on guidance and its first profit after six straight losses, the company’s longest losing streak in 35 years.

This was a stock you couldn’t give away at $18 or $19 a share, with investors blinded by the “uninvestable” label and looking at me like I had two heads for pitching the name.

Fast forward to today, and Intel now sits second only to AMD as the best-performing “AI” name year to date, outperforming every MAG 7 stock that investors continue to clamor for. Now that the stock has more than doubled from the lows, analysts have been forced to hike price targets from $20 to $40 overnight, and suddenly everyone is interested. That wasn’t on anyone’s bingo card except for the loyal listeners of Hedge Fund Tips.
 

That’s because when viewers tune in each week, they do what we like to call “burdening ourselves with the facts.” That means taking the time to actually look under the hood and do the fundamental work on a company-by-company basis to know what we own. When you do that, the Intel thesis becomes simple common sense and about as straightforward as they come.

The U.S. government had no choice but to step in and backstop Intel. Without Intel, the entire world would have its eggs in the TSMC basket. Washington couldn’t let the future of advanced chipmaking rest in the hands of a single foreign company, and Intel was the only firm on U.S. soil standing on the 10-yard line of achieving that goal.

But it’s not just Uncle Sam that can’t afford for Intel to struggle. Every major chip designer, from NVIDIA and AMD to the MAG 7 names, currently depends on the kindness of strangers for advanced foundry work, and there is only one “stranger” in town: TSMC. No company in its right mind wants to rely on a single supplier halfway across the world. Jensen Huang didn’t write a $5 billion check out of charity or the kindness of his heart. He did it because his growth is capped at $4 billion a quarter with TSMC. The knight in shining armor to fix that is now Intel, and for that reason, there is nobody in the world that wants Intel to succeed more than NVIDIA.

Now that Intel has the world’s best salesman on its payroll, it won’t be long before major clients start lining up for its foundry business. Between the $5 billion from NVIDIA, $2 billion from SoftBank, and rumors of more partnerships ahead (talks around an Apple investment, early discussions with AMD as a foundry customer, and a potential Microsoft deal), the pipeline is heating up fast. And if you think President Trump can sell Boeing planes, just wait until you see how many chips he can sell. In the end, we wouldn’t be surprised if the ~$9 billion stake the U.S. taxpayer now holds in Intel goes down as the single greatest return on investment in taxpayer history.

Keep in mind, while all the headlines around INTC focus on the foundry business and AI, our investment case from day one has always viewed those as whipped cream and cherries on top.

We underwrote the investment with three potential outcomes:

1. Intel gets broken up or liquidated tomorrow (book value worth ~ $22 per share)

2. Intel survives as the leader in “mediocre chips,” meaning its legacy CPU and server business (worth ~ $45–50 per share)

3. Intel executes on its foundry and AI vision (worth ~ $100+ per share)

In any of these scenarios, it’s heads we win and tails we win less (but still win!). This all comes down to one simple principle and what Buffett calls the three most important words in investing: margin of safety. When you know what you own and don’t let headlines shake you out, investing in great companies becomes a waiting game. And as long as humans remain emotional and impatient, there will always be plenty more time-arbitrage opportunities just like Intel.

Q3 Earnings Breakdown
 

 

 

 

 

 

 

 

 

 

 

 

 

10 Key Points

1) Intel made significant progress cleaning up the balance sheet, securing nearly $20 billion in cash through deals and improving its net debt position by roughly $15 billion sequentially. During the quarter, the company received $5.7 billion of the $8.9 billion total U.S. government funding, $2 billion from SoftBank’s investment, and $5.2 billion from the sale of Altera ($4.3B) and its Mobileye stake ($900M), with the $5 billion NVIDIA investment expected to close in Q4. Management used part of these proceeds to repay $4.3 billion of debt and plans to continue prioritizing deleveraging through 2026. Intel also returned to positive free cash flow, generating $900 million of adjusted FCF during the quarter.

2) Client Compute Group (CCG) revenue for the quarter was $8.5 billion, up 8% sequentially and 5% year over year. The growth was driven by the ongoing refresh cycle, Windows 11 adoption, and rising demand for AI PCs. With Panther Lake’s first SKU still on track to launch by year-end and additional SKUs planned for the first half of 2026, along with Arrow Lake ramping and Nova Lake strengthening the product lineup, management believes they now have the strongest PC portfolio in years. Looking ahead, management expects client consumption TAM to approach 290 million units in 2025, marking two consecutive years of growth off the post-COVID bottom in 2023 — the fastest TAM growth since 2021 — and setting the stage for another year of healthy PC demand.

3) The Data Center and AI Group (DCAI) reported revenue of $4.1 billion, up 5% sequentially and ahead of expectations due to stronger enterprise demand and growing AI workloads that are driving both refresh activity and capacity expansion. Management believes that under-investment in traditional infrastructure over the past few years should allow server CPU revenue TAM to grow comfortably going forward. Most importantly, they noted that current demand continues to exceed supply capabilities across both the Client and Data Center AI businesses, a dynamic they expect to persist well into 2026.

4) Intel’s deal with NVIDIA will integrate Intel’s CPUs alongside NVIDIA’s AI graphics processors, which currently account for ~90% of the AI chip market. Management expects the partnership to create multiple years of engagement between the two companies (AKA GPUs may be in the cards down the road) and to open up a new market opportunity for Intel, expanding its TAM in a way that is incremental rather than cannibalistic to its existing business.

5) Foundry revenue came in at $4.2 billion, ahead of expectations and driven by increased wafer output. The segment reported an operating loss of ($2.3 billion), representing a (54.8%) operating margin, which narrowed materially compared to the same period last year, when Intel Foundry posted a ($5.8 billion) loss. Management’s confidence and conviction in the Foundry business continue to grow, with projections calling for a greater than 10x increase in gigawatts of AI capacity by 2030, creating significant opportunities for Intel Foundry with external customers.

6) Yields and performance on 18A continue to make steady progress, with management noting that yields are on track to reach internal milestones and have improved at a predictable rate. The 18A node is expected to drive wafer volumes well into the next decade and deliver healthy returns on investment. Management believes that by the end of 2026, 18A yields will reach a level appropriate for margins, and by the end of 2027, will be considered industry-acceptable. During the quarter, Intel also opened Fab 52 in Arizona, its fifth high-volume fabrication facility, which is now fully operational.

7) Management’s confidence around 14A continues to grow, supported by encouraging engagement with external customers and positive early feedback. Yields on 14A are off to a strong start, showing significantly better performance at this stage of maturity compared to where 18A yields stood at the same point. Intel plans to remain disciplined in adding capacity, investing only when external customer demand is confirmed. Management noted they are heavily engaged in these discussions and are beginning to attract key process technology talent that can help drive long-term success.

8) Adjusted gross margins came in at 40% for the quarter, up 22 percentage points year over year from just 18%, and 4 points above management’s prior guidance. The improvement was driven by higher revenue and a more favorable product mix, partially offset by the early ramp of 18A and Lunar Lake.

9) Management remains disciplined on reigning in operating expenses, down to just $4.54 billion compared to $11.05 billion during the same period last year. Operating margins for the quarter stood at 11.2%, up 29 ppts YoY. INTC remains on track to right-size the company by year end (target of 75k employees), with a current employee headcount of 88,400, down from 124,100 during the same period last year.

10) For Q4 guidance, management expects revenue of $12.8 billion to $13.8 billion, which is roughly flat quarter over quarter when accounting for the Altera transaction and in line with Street consensus of $13.4 billion. Management expects non-GAAP EPS of $0.08, down $0.05 year over year, and gross margins of approximately 36.5%, down sequentially due to product mix and the impact of initial shipments of Core Ultra 3.

Earnings Call Highlights
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PayPal Update
 

As it turns out, old dogs can learn new tricks.

When Alex Chriss took over the reins at the “granddaddy” of fintech a little over two years ago, he inherited a company that had fallen asleep at the wheel after riding the e-commerce boom during the pandemic. Prior management had stopped innovating and tried to make up for it by spending billions on acquisitions that they struggled to integrate. Growth was slowing, transaction margins were under pressure, and the user base was declining.

From day one, Alex Chriss, who we knew was a winner based on what he accomplished leading the small business group at Intuit, has been laser focused on getting PayPal back to what made it great in the first place: innovation. While his “shock the world” comment that many laughed at may have been a bit early, he has delivered on everything he said he would — and more.

Transaction margin dollar growth is back on pace for 6–7% this year. Free cash flow is on track for a record $6–7 billion. Margins have inflected, Venmo has accelerated, unprofitable PSP customers were “fired,” and active accounts are growing again. On top of fixing what he inherited, Alex Chriss has also positioned PayPal back at the forefront of innovation, leaning into and launching products like Buy Now Pay Later, stablecoins, agentic commerce, Fastlane, PayPal World, ads, and omnichannel. In his own words, they have “moved this business from defense to offense,” all part of the goal of transforming PayPal from an online payments company into a commerce company.

For those who know what they own and actually understand the business, none of this innovation should be surprising. The market, however, spent the last two years distracted by the “slowing growth” narrative and ignored everything else. The reality is that this was a deliberate shift away from the empty-calorie, “growth at all costs” strategy that was popular under prior leadership. That shift created a temporary 5–6% drag on the top line, which fed the market’s mistaken narrative.

Now that we are lapping that drag and PSP is back to profitable mid-single-digit growth and accelerating, the market is finally beginning to pay attention to the innovation that has been right in front of it all along.

The flurry of deals we have seen recently is case in point. First came the agentic commerce deal with Perplexity back in May. A few weeks ago, it was the multiyear digital commerce deal with Google that cements PayPal as a “key” PSP across Google products. Earlier this week, they partnered with Mastercard to advance secure agentic commerce, and on the same day integrated Venmo across the entire Bilt ecosystem to allow users to pay rent or mortgages through Venmo. The list goes on.

Then came the whipped cream and cherries on top. Right before earnings, PayPal announced a deal with OpenAI to become the first payments wallet integrated directly into ChatGPT. We already knew Alex Chriss and Sam Altman had a relationship going back to Altman’s Worldcoin days, so this partnership was something we had a feeling might come together at some point.
 

All of this ties back to our broader AI-beneficiary investment thesis that we have discussed in recent podcasts and articles. Rather than owning the companies forced to pick up the AI tab and erode earnings in the process, we prefer to own the beneficiaries of AI (the Unmagnificent 493) trading at much lower multiples with accelerating earnings, and let the hyperscalers pick up the tab. We get a free ride on their coattails — capturing all the upside without spending a dime.

Going back to PayPal, the point is simple. This is a company back in growth mode.

Q3 Earnings Breakdown
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10 Key Points

1) PayPal reported net revenue of $8.42 billion for the quarter (+7% YoY), beating Street consensus by approximately $182 million. Non-GAAP EPS also came in well ahead of expectations, rising 12% year over year to $1.34 and beating consensus by $0.13.

2) During the quarter, management returned $1.5 billion to shareholders through the repurchase of 21 million shares of common stock at an average price of ~$71. On a trailing twelve-month basis, this brings total repurchases to $5.7 billion, or 78 million shares, reducing the weighted average share count by 6%. In addition to buybacks, PayPal announced the initiation of a quarterly dividend, declaring a dividend of $0.14 per share and targeting a 10% payout ratio of non-GAAP net income going forward. Most importantly, this new dividend does not impact the company’s share repurchase program and is intended to complement it, with management maintaining its long-term framework of returning 70–80% of free cash flow to shareholders, the vast majority through buybacks, and targeting ~$6 billion in repurchases for the full year.

3) Adjusted free cash flow for the quarter was $2.3 billion, up 48% year over year, bringing year-to-date FCF to $4.3 billion. Management reiterated full-year FCF guidance of $6–7 billion, which would mark a record high and imply an ~11% FCF yield at the midpoint.

4) The Payment Service Provider (PSP) segment has now turned the corner after lapping the “firing of unprofitable customers,” with total payment volume (TPV) up 6% year over year and accelerating from 2% growth in the prior quarter. This includes Enterprise payments (Braintree), which delivered mid-single-digit TPV growth and is now consistently contributing to transaction margin dollar growth. Management plans to expand the PSP segment into physical retail during Q4 through the Verifone partnership.

5) Buy Now Pay Later (BNPL) continues to perform well, and management plans to lean into it even further over the coming years. BNPL is expected to reach ~$40 billion in total payment volume for the full year, growing more than 20% year over year and outpacing the broader market, with economics on par with or better than peers. Management continues to see BNPL drive a meaningful uplift in overall user activity and engagement, similar to what is observed with Venmo and PayPal debit cards (6x transaction frequency and 3x average revenue per account). They view the BNPL segment as a generational shift in consumer behavior that PayPal is well positioned to lead. Looking ahead, PayPal will expand BNPL into new geographies and product offerings in 2026, having launched in Canada last week and set to extend its reach across Europe.

6) Venmo’s total payment volume (TPV) increased 14% YoY, accelerating from 12% last quarter and marking the fourth straight quarter of double-digit growth. Full-year revenue is on track to reach ~$1.7 billion, up 20%+ YoY and ~10 ppts above 2023’s growth rate. Management believes Venmo is still in the early innings of monetization, driven by Pay with Venmo (monthly actives +25%) and the Venmo debit card (monthly activity +40% and over 1 million first-time users added in Q3 through college partnerships). For the 66 million monthly active accounts, ARPA is >$25 and growing mid-teens, with management seeing massive room for monetization as ARPA remains 1/3–1/4 of peers (~$75–$100). If ARPA reaches peer levels and the MAA base remains flat (currently +7% YoY), Venmo could generate $4.95–$6.6 billion in annual revenue over time. Venmo is just scratching the surface.

7) Branded experiences, which include PayPal, Buy Now Pay Later, Venmo, and debit card programs, saw total payment volume (TPV) grow 8% YoY, led by the U.S. with 10% growth (more than double last year’s rate). Growth was largely driven by omnichannel initiatives such as debit and tap-to-pay, which delivered 65% TPV growth and continue to scale globally. Branded checkout TPV still grew 5% during the quarter despite a choppy macro environment. While PayPal saw less pressure from Asia-based marketplaces selling into the U.S., this was partially offset by softer consumer discretionary spending in Europe and the U.S. later in the quarter.

8) Management once again raised full-year guidance following a hike last quarter, lifting non-GAAP EPS guidance to a midpoint of $5.37, compared to $4.65 last year and initial guidance of $5.03 (up 15.6% year over year and 6.9% above initial guidance). In addition, management increased transaction margin dollar guidance to $15.45–$15.55 billion (5–6% YoY growth), up from the initial range of $15.2–$15.4 billion provided at the start of the year.

9) Transaction margin dollars excluding interest on customer balances increased 7% during the quarter to $3.6 billion and remain on pace for 6–7% growth for the full year. Most importantly, management reiterated confidence in achieving high single-digit transaction margin dollar growth over the long term.

10) Total active accounts increased 1% year over year to 438 million and rose 0.1% (0.3 million) compared to Q2, reaching a record high. Monthly active accounts grew 2% to 227 million, supported by strength across both PayPal consumer accounts and Venmo. Most importantly, transactions per active account excluding PSP increased 5% year over year.

Earnings Call Highlights
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Market

The CNN “Fear and Greed Index” ticked up to 38 this week from 27 last week. You can learn how this indicator is calculated and how it works here: (Video Explanation)
 

The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) ticked up to 90.35% this week from 84.87% equity exposure last week.
 

Our podcast|videocast will be out sometime today. We have a lot of great data to cover this week.  Each week, we have a segment called “Ask Me Anything (AMA)” where we answer questions sent in by our audience. If you have a question for this week’s episode, please send it in at the contact form here.

*Opinion, Not Advice. See Terms

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