Plus, a preview of earnings season.
In this episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski unpack the stock market’s response to the US-Iran cease fire and discuss how investors should be thinking about their portfolios as uncertainty persists. They preview earnings season and what to watch for in big bank earnings from JPMorgan Chase JPM, Bank of America BAC, and Citigroup C this week.
Tune in to find out if Johnson & Johnson, ASML, Taiwan Semiconductor and Netflix are stocks to buy ahead of earnings and whether Veeva Systems’ competitive advantages are likely to be eroded by AI. They wrap up with five undervalued growth stocks that look attractive today.
Episode Highlights
00:00:00 Welcome
00:01:42 The market’s response to new events in the Iran war.
00:10:14 How companies may approach their forecasts during earnings season.
00:11:32 What to look for in big bank earnings this week.
00:14:21 Why to watch earnings from Johnson & Johnson JNJ, ASML ASML, Taiwan Semiconductor TSM and Netflix NFLX.
00:22:53 Is Veeva Systems’ VEEV moat safe?
00:28:00 Undervalued growth stocks to buy before they come back.
Read about topics from this episode.
Q2 2026 Stock Market Outlook: Don’t Panic, Readjust
Got a question for Dave? Send it to themorningfilter@morningstar.com.
You can follow Dave Sekera on X (@MstarMarkets) and on LinkedIn (Dave Sekera) to subscribe to his weekly newsletter and keep up to date with his latest research, and follow Morningstar on Facebook (MorningstarInc), X (@MorningstarInc), Instagram (MorningstarInc) and LinkedIn (Morningstar).
If you would like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. Subscribe to The Morning Filter to get notified when we post next. We’ll see you on Monday!
Susan Dziubinski: Hello, and welcome to The Morning Filter podcast. I’m Susan Dziubinski with Morningstar. Every Monday before market open, I sit down with Morningstar Chief US Market Strategist Dave Sekera to talk about what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas.
Now, programming note for our audience, we’ll be dropping a bonus episode of The Morning Filter this week, probably on Wednesday. The episode is the recording from the second-quarter stock market outlook webinar that Dave and Morningstar Chief Economist Preston Caldwell held last Wednesday, April 8. If you weren’t able to join us for the live webinar, do not worry. You have a chance to hear what they had to say about the quarter ahead later this week.
All right, good morning, Dave. Let’s kick off today’s episode by talking about last week’s developments in the Iran war and the market’s response. Now, the US and Iran agreed to a two-week ceasefire last Tuesday night, and stocks soared on Wednesday as a result, and those stocks finished the week up about 3%, 3.5%. So, recap for us some of the sectors and stock styles that rallied most on the news and why.
David Sekera: Good morning, Susan. It was a big week last week after the truce was announced. So, breaking it down by category, growth stocks were up a little bit over 3%. I’d note that year to date, they’re still down 1.3%. Core stocks are up a little bit under 3%. They’re only up two tenths of a percent now year to date. Value stocks only rose 1%, certainly lagging the broader market, yet they’re still up 4.4% year to date.
Breaking it down, looking at some of the best-performing sectors, consumer cyclicals were up 5.6% after the truce was announced, but they’re still down 4.6% year to date. Industrials up five and a quarter percent. Year to date, they still have very strong returns, up 14.2%. Basic materials was also one of the better-performing sectors last week, up 4.25%. Year to date, they’re up 16.25%. Looks like the only sector that fell last week was the energy sector, which is down 5.4%. That just took a little bit of air out of the energy sector. Year to date, that’s still up 28.5%.
Now, following the news, over the weekend, the negotiations have fallen apart. Pre-market open, looks like the market’s down maybe a little bit over 0.5%. We’ll see where it ends up trading today. Now, my personal take here—we are six weeks in after this conflict had started. You can certainly see the indications that the market wants to trade up. By our numbers, I think the market’s about 10% undervalued. But, going forward as an investor, I think you still need to be cognizant of the impacts that this is all going to have. I think this is going to drive a lot of volatility in the weeks and months yet to come.
Overall, oil prices are still 50% higher than they were pre-conflict, so that’s got to work its way through the system. I think too, and we’ve talked about this for the past couple of weeks, there are going to be a lot of different types of supply disruptions. A lot of different types of products have either reduced the amount that they’re producing or have halted production altogether. Things like fertilizer, different types of commodity chemicals, precursor chemicals, plastics, and so forth. There’s going to be a lot of different types of supply disruptions that have to work their way through the system and the economy overall. Lastly, no matter how you measure it, inflation is going to be higher for at least several months, if not quarters yet to come.
Dziubinski: As you mentioned, talks between the US and Iran did break down over the weekend, but let’s assume the ceasefire does last. What are your expectations for market performance ahead in terms of, let’s say, market capitalization?
Sekera: By capitalization, I would expect large-cap stocks to lead the way up. They were the sector that sold off the most to the downside during this correction that we had. I’d expect small-cap stocks to follow thereafter. Small-cap stocks, as we talked about on our quarterly outlook webinar, are the most undervalued. However, I would note that the current macrodynamic setup really isn’t all that conducive for small-cap stock performance. We’ve talked about this in the past when we had been recommending small caps last year, and they did very well because they do well in an environment where the Fed’s easing monetary policy, the economy is reaccelerating after a slowdown or a recession, and long-term interest rates are falling. It’s just that at this point, we’re not in that environment anymore.
Dziubinski: What would your expectations be on a sector-by-sector performance basis?
Sekera: I mean, to sector, it’s going to be a lot of what we already saw last week. To the upside, still a lot more room for consumer cyclicals to move up from here. Technology is very undervalued. I’d really look at those AI tech stocks that we rate 4 and 5 stars. One thing that we highlighted on the Outlook webinar is that technology is at one of the greatest discounts that it’s traded at over the past 15 years. I think there are only two times besides now that we’ve seen it trade at this much of a discount, going all the way back to 2010. On the downside, there would still be much further for energy to fall because, of course, oil prices will come down if the truce holds. The utility sector is overvalued. That’s another one I’d expect to fall over time.
Lastly, the consumer defensive sector is overvalued, but as we’ve talked about multiple times in the past, the food names still look very attractive there. It’s just that Walmart WMT and Costco COST are two names that we think are very overvalued. These might be names where I think we could be wrong for a while before we’re right, but because those stocks are so highly valued by the marketplace today, they skew the overall valuation of the consumer defensive sector to the high side. While you might want to try and steer clear of the consumer defensive sector as a sector overall because of those two stocks, I’d still recommend looking at a lot of those food stocks that we’ve recommended in the past. Many of them are 4 stars, a lot of them 5 stars, trading at really deep discounts.
Dziubinski: Coming into 2026, you recommended that investors maintain a barbell portfolio to take advantage of what you were anticipating to be a pretty volatile year. On one end, you said to balance high-quality value stocks, which included energy, with high-growth tech and AI stocks on the other side of the barbell. During the past couple of weeks on the podcast, you’ve been suggesting that investors take some profits in value and energy stocks and invest the proceeds in those undervalued tech and AI stocks. What’s your take on the barbell now, six weeks into the conflict, maybe in the middle of this two-week ceasefire?
Sekera: Now’s a great time to do nothing. All kidding aside, now is the time that you want to let that portfolio, let that barbell work for you. We recommended a few weeks ago to start harvesting some of the profits in energy. Essentially, the hedge had been working, so it was a good time to do some of that profit-taking. Didn’t need to sell everything in the energy sector, but at least lock in some of those gains, as well as locking in some of the gains in value. We had noted that with as much as value had outperformed the broad market, it’s a good time to take some of those gains as well, and then use the proceeds to reinvest in those really beaten-down growth stocks, specifically technology and AI. At this point, assuming that you’ve done that, I think, especially with going into earnings season, earnings season for those growth in the AI names, the tech sector is going to be very good.
I think you’re going to want to ride those names up here for a while. Once you’ve ridden them up to the point that valuations start to get pretty full, they move back into 3-star territory or maybe even into 2-star, depending on how fast that momentum pushes them up. At that point, I think it’s time to harvest those gains in the AI stocks, the tech stocks, the growth stocks, and reinvest that back into value because I’m expecting value is going to lag far behind and then get back to kind of that more equal-weight barbell.
Dziubinski: Dave, let’s talk about the week ahead. What are you going to be watching this week when it comes to the conflict?
Sekera: Really, it’s just the same as before, really watching those oil prices. Specifically, the front month contract, that’s the May 2026 contract, and then the June contract. I think there are two specific reasons to be watching these two contracts. The last trade date for the May contract is April 21. I believe that’s just before the two-week truce would end. The last trade date for the June contract is May 19, and of course, that’s about a week before Memorial Day. I think these two contracts are going to be pricing in something slightly different, as far as whether or not the negotiations start back up and are fruitful before the end of the truce, or whether or not they’re not fruitful by the end of the truce, and we see the conflict really start to heat back up again.
I would also just note that oil is heading back up this morning. It’s not as high as where it was before the truce was announced, but here in the short term, it’s certainly going in the wrong direction.
Dziubinski: You mentioned earnings season, and we have earnings season kicking off this week. Talk a little bit in general, Dave, about what your expectations are for earnings season.
Sekera: More than anything else, generally I’d say my biggest concern for earnings season this quarter is, considering oil prices haven’t subsided, they’re still as high as they are. If I’m the management team of a company, I might decide to give pretty weak guidance to provide myself with a cushion to the downside; trying to give myself that cushion, so that if the oil prices really are impacting the economy and consumers, I don’t have to worry about missing to the downside. If I’m not doing that, I might give a much wider range of guidance than historically what I’ve given to the markets in the past to account for that uncertainty, or I just may not provide any guidance at all. If any of those come to fruition, that could disappoint the market overall. I think that the downside risk is probably greater than the upside risk potential to the market, more broadly speaking.
Having said that, with the AI build-out boom, it’s still going great guns, still in full gear. I think that for those stocks, their earnings growth rates should be at least as good as what the market was expecting, if not even better.
Dziubinski: We have the big banks reporting this week, including JPMorgan JPM, Citi C, Wells Fargo WFC, and Bank of America BAC. What specifically are you going to want to hear about from them?
Sekera: I think that banks might be a good early indicator of how the conflict and the high oil prices might be just starting to impact the economy. I talked to our bank analyst, and he noted that the banking sector overall started off the year with pretty strong loan growth demand in January and February. I think the key will be to listen to how that loan growth demand played out over the course of March. I think that’s going to be a good early indicator of that economic impact of the conflict. Other than that, we’ve talked about how we thought that the banks were pricing in too much net interest income growth, so I want to hear more about the rising short-term interest rates and how that might be impacting the gross expectations there.
Going to listen very closely as far as what’s going on with loan loss reserves. It’s possible you might see some increases there, just as the banks start pricing in higher potential bankruptcy and default rates because of high oil prices.
On the expense side, I know the thing we’re going to be listening for is whether or not there’s any headcount reduction. If so, if the banks are attributing that to maybe some impact from artificial intelligence, making them more efficient. Lastly, we might get some questions about private credit from the banks themselves. I personally don’t think it should be an issue for the banks. Yes, the banks will have lent to the private credit funds, to the BDCs. My assumption is that the loan-to-values are low enough that the banks shouldn’t suffer any losses here. I think the bigger impact of the private credit to the banks will be those that have big investment banking groups, because I would expect to see lower M&A activity in that small and medium enterprise sector over the course of the year.
The big takeaway here is that if the banks are starting to take losses on private credit, that means it’s probably a whole lot worse in private credit than I’ve even been warning about that space for probably the past year.
Dziubinski: All right. Talk about valuations of the big banks heading into earnings. The stocks have had kind of a tough year. I think Citi’s sort of been okay, but the other ones are struggling quite a bit.
Sekera: Yeah. I mean, Bank of America, that’s down 4.5% year to date. I think that’s one of the worst performers of the big mega US banks. It’s enough that it has brought it into 4-star territory, but it’s really only a 9% discount, not necessarily all that interesting to me at this point. Across the others, JP, Wells Fargo, US Bank USB, all 3-star-rated stocks; Citibank is still holding up there at that 2-star level, not necessarily sure why that’s up there. That would be one that I’m most concerned about from a valuation point of view and potentially selling off after earnings.
Dziubinski: We’ll also get earnings from Johnson & Johnson JNJ this week, and this stock’s really been on a tear during the past 12 months. Trades at a really big premium. Morningstar’s fair value estimate on this one is $182. What are you going to be listening for here?
Sekera: With Johnson & Johnson, if you remember, we had a show long ago, and we talked about a lot of different stocks that we consider to be core holdings. Johnson & Johnson, in my mind, certainly fell in that core holding type of holding position. Fundamentally, the company is doing very well. Last quarter, they reported 6% sales growth, 8.1% growth for earnings. They provided what we consider to be pretty solid guidance for 2026, looking for 6.7% sales growth, almost 7% earnings growth. We have a very favorable outlook on a lot of their different business lines, such as their oncology and immunology businesses. Specifically, we’re going to be listening for any updates on the research and development pipeline. I want to hear if there are any advancements in some of those drugs that they currently have in different stages of trials.
I think with this stock, you really need to see more growth prospects here to support where that stock price is. As you mentioned, it’s been on a tear. It’s up 61% over the past 52 weeks. I think a lot of that is probably due to that flight-to-quality demand that we’ve seen, but at this point, it’s now at a 31% premium. It’s a 1-star-rated stock, and trades at 21 times our 2026 guidance. Granted, that’s lower than where Eli Lilly LLY trades, but it doesn’t have the same kind of growth dynamics as Eli Lilly. That 21 times 2026 guidance, that’s like seven to 10 turns higher than any other pharma comps out there. Again, when I’m thinking about this as a core holding type of stock, we’ll see where earnings come out. We’ll listen to what’s going on with their pipeline, but depending on how that turns out, I think now’s probably a good time to lock in some of the profits here.
This stock has really worked. Again, you don’t have to sell all of your position. I think it is still a core holding type of stock, but if you sell it up here and the stock does take some kind of selloff, whether it’s on individual numbers itself or just with the broad market, that then gives you that dry powder to be able to buy that back at lower prices.
Dziubinski: All right. Take some chips off the table with J&J. Now, we also have ASML ASML reporting this week. The company’s ADRs are having a pretty terrific year. They’re up 38%, and Morningstar assigns the ADRs a $1,170 fair value estimate, and they’re trading at a premium to that. So what’s the market like here, and what will the resulting forecasts need to look like to keep that stock price momentum going?
Sekera: It’s not just the momentum here in the short term. I mean, if you take a look at the chart here, this stock has doubled since September 1 of 2025. This has gone pretty quickly from a 4-star stock to a 2-star stock. It’s now trading at a 27% premium to fair value. With earnings this season, it’s not going to be a question of whether or not demand is going to be the issue. If you look at the last quarter, the company noted that it exited 2025 with a record-breaking backlog. There’s a huge amount of demand here. I think the question for the marketplace going forward is going to be execution. The market wants to hear more color on the cadence of shipments over the course of 2026, just to make sure that they’re going to be able to execute on all of that demand that they have.
Of course, the wildcard on this one is just going to be what any potential impacts there could be from US policy regulating the export of semi-manufacturing equipment to China. It’s really going to be execution is the key, and whether or not there’s any impact from US regulatory policy.
Dziubinski: We also have Taiwan Semiconductor TSM reporting this week. Stocks are up more than 20% this year, but it still trades below Morningstar’s $428 fair value. What’s your take on the company? Given its valuation, is it a stock to buy ahead of earnings?
Sekera: Like anything else with Taiwan Semi, it’s not necessarily just about Taiwan Semi itself—it’s also about what it indicates for all the other AI manufacturing and AI semiconductor companies. Of course, Taiwan Semi is most known for being the manufacturer for Nvidia NVDA and other AI chips. I think it’s a good early indicator as far as the pace of the AI buildout boom. The big thing that we’re going to be listening for with Taiwan Semi is going to be visibility into AI training versus inference demand. If inference demand is picking up, then that is a good indicator that the AI buildout boom is more structural than it is transitory. We’re listening for that change in how AI chips are being used going forward.
Lastly, I just want to hear if there’s any signs of dislocations or delays in AI capex spending, given geopolitically everything that’s going on, some of the energy cost headlines, some of the supply chain problems that we’re starting to hear about—things like helium, that’s used in the manufacturing of chips—and whether or not that’s making any kind of disruptions in their production timelines.
As you’ve noted, this is one where we’ve recommended the stock a number of times over the past several years. There’s probably still some good upside momentum here. I would just say there’s no longer that margin of safety I’d really like to see in this one. The company released its March revenue numbers. We got a pretty good stock pop after that last week. At this point, it trades at a 13% discount to our fair value, so it barely keeps it in that 4-star range. This is one where I would say, let’s wait and see what comes out after earnings. I want to see if there’s going to be an increase to our fair value estimate from our analyst team. If so, and we’ve got that good momentum, then it’s probably a good one to take a stab at with buying a position in.
Dziubinski: Netflix NFLX announced in late March that it was increasing prices across all its US plans and tiers, and its acquisition of Warner Brothers WBD fell through in the first quarter. Given all that, what do you expect management to address on this week’s earnings call?
Sekera: What we really want to hear about is any potential impact of those price increases, whether or not we should be expecting a slowing in subscription growth, or if there’s an increase in churn in subscriptions; whether or not that’s people that drop their subscription overall, or maybe move from being a premium subscription to that ad-supported subscription. I think that’s going to be a pretty good indication of just how much pricing power Netflix has. An interesting thing that our analyst had noted in his write-up is that if Netflix can put these price increases through annually, as opposed to our base case that their price increases go through every 18 to 24 months, our analyst has noted that our forecast is probably too bearish at this point. The other big part here is going to be their advertising revenue growth, especially in light of those price increases, because again, if you get more people switching to that ad-based platform away from premium, you need to have that ad revenue pick up in order to make up that difference.
Lastly, we just want to get an idea as far as the stock buybacks that they’re going to be executing, following that acquisition of Warner Brothers that fell through, and how much that’s going to be able to soak up any supply that’s going to be out there in the marketplace if people are selling.
Dziubinski: Now, what about valuation for Netflix, Dave? How’s the stock look heading into earnings?
Sekera: Not very good according to our numbers. If you take a look at the chart, the stock peaked last June; it’s really down 25% since then. Still, in my view, in that downward channel, but even after that selloff, it’s still a 29% premium, 2-star-rated stock. I’d note that the market still expects very strong growth here. It trades at 32 times our forward earnings estimate.
Dziubinski: Well, it’s time for our question of the week. Now, as a reminder, the best way to get your question answered is to email us at themorningfilter@morningstar.com. This week’s question is from Eric, and it’s about Veeva Systems VEEV. Now, I’m going to paraphrase here, but at the crux of the question, Eric wants to know how secure Morningstar thinks the company’s wide economic moat is in the face of increased competition and the threat of artificial intelligence.
Sekera: Strap in, this is kind of a long answer here. For those of you who don’t know Veeva, it is a software company, and it’s focused specifically on the life sciences industry. There are really two main product lines. 55% of the revenue comes from what they call their R&D, or research and development solutions. The software there is used to manage clinical trials, regulatory submissions, quality control, safety, and documentation—things that are very specific to the life sciences industry and also very heavily regulated by a lot of different government organizations. The other portion of the business, the other 45% of revenue, is going to be their commercial services. That’s their customer relationship management system, their CRM, and a couple of other miscellaneous businesses in there as well. So, we do rate the company with a wide economic moat based on its switching costs.
This is one that we recently took back to the economic moat committee, as we did a major reevaluation of economic moats in light of how we see AI impacting a lot of the companies, and specifically software companies, going forward. In this case, we reiterated the wide economic moat. Now, our analysts did note we are seeing some increase in competition, but that increase is really coming from that CRM business. We did incorporate into our model some customer losses, but that’s not necessarily all that concerning. In our view, that’s not where the growth is coming; that’s not where the margin increases are coming. Those are really coming from the R&D business, which we expect to continue to keep growing pretty rapidly. From our point of view, the stock selloff that we’ve seen here really has nothing to do with either the change in the structural dynamics of the economic moat or with the company’s individual fundamentals.
To some degree, I think a lot of the stock selloff here is because it’s just gotten caught up with the bloodbath that we’ve seen among all the software companies. Almost all of these software stocks are down pretty close to 50% from their highs last fall. So what’s going on here is, I think the market is really just pricing in how much concern they have about how artificial intelligence may or may not disrupt or displace the business model. It seems like people are falling into two camps. Either you have the people who are looking at the fundamentals and are comfortable with it, and they’re the ones who are buying the stock, and the people who are selling the stock are really just puking this stock out. They think that AI is really going to displace a lot of that software going forward, and that a lot of these companies are going to either shrink or maybe just end up going away altogether over time.
Just to put this in context, a quick synopsis of our investment thesis for the software sector overall: We think that software companies will use artificial intelligence to make their products and services better, that they will improve or add more economic value to their clients. We don’t see clients really trying to vibe code or recreate entire software platforms on their own. I think what’s going to occur here in the next year or two is that there will be a disruption, but the disruption in the software companies is that they need to figure out how to change how they charge for the economic value that they provide to their customers. For example, a lot of the models right now are seat-based licenses. We think that going forward, you’ll probably have some combination of not just charging for the individual seats, but also charging for the amount of consumption that you use for the artificial intelligence. For example, maybe paying for the amount of AI tokens that you consume as you use their products.
Just to wrap things up here, taking a look at the company’s forecast in our model, our base case for revenue over the next five years on a compound, the annual growth rate, and in fact for earnings as well, are both pretty close to 13%. So, pretty strong earnings growth, the company’s trading at a little under 18 times our 2026 earnings forecast. They’ve got a $2 billion stock buyback authorization in place. I think that probably should help cushion the downside here. With that authorization, in our view, when you’re buying back stock that’s trading at as large a discount as it is trading at today, that adds economic value to those shareholders over time as you are able to capture that discount in your fair value. The takeaway here: It trades at almost a 50% discount to our fair value. That’s enough to put it well into 4-star territory.
Dziubinski: All right. It seems like an overdone selloff on Veeva. We’ve arrived at the picks portion of this week’s episode. This week, Dave’s brought us five undervalued stocks to buy for that tech AI growth portion of the barbell that he’s been advocating for. So your first pick this week is a longtime high conviction pick of yours. It’s Microsoft MSFT. Run through the numbers.
Sekera: So Microsoft is a 5-star-rated stock; it trades at a 38% discount to our fair value at this point, and provides about a 1% dividend yield. We rate the company with a medium uncertainty and a wide economic moat—that wide economic moat being based on cost advantages, their network effect, and switching costs.
Dziubinski: Now, Microsoft is one of those picks that you go back to again and again. Why do you have such high conviction in it?
Sekera: It’s not just me. This is one of the stocks our tech team has the most conviction in overall. As you’ve noted, we’ve talked about this one many times on the podcast over the past couple of months, maybe even the past year. I’m not sure what else there is to say that I really haven’t already said about this company. To some degree, this all comes down to what the market’s view and maybe your own personal view is on how AI may or may not disrupt software companies overall. When I think about Microsoft, I think they’ve just got a great portfolio of businesses, good diversification that will probably naturally balance one another out, no matter how AI works out over time. On one extreme, if AI wipes out a huge portion of their software business, that means that their AI cloud hosting business, Azure, probably has more upside than what we’re currently modeling. It means things like Copilot, their large language model and AI platform, probably has even greater growth than what we currently model in. I think that would offset the losses that you’d see on the software side.
Conversely, if it turns out that AI isn’t the huge catalyst that everyone expects it to be, and maybe as your growth slows a little bit, you’re going to continue to benefit from those traditional business lines in traditional tech that they have. Our base case right now for revenue: Five-year compound annual growth rate of 14%; our earnings compound annual growth rate over the next five years is 16%, yet the stock is only trading at slightly under 22 times our 2026 earnings estimate, one of the lower forward multiples that the stock has traded at, I couldn’t even tell you how long, at this point.
Dziubinski: Your next pick this week is Broadcom AVGO. Give us the highlights on it.
Sekera: Broadcom is a 4-star-rated stock, trading at a 26% discount to our fair value, has a little bit under 1% dividend yield, about 0.8%. We rate the company with high uncertainty, but a wide economic moat, that wide economic moat being based on switching costs and intangible assets.
Dziubinski: I may be wrong on this one, but I don’t think Broadcom has been a pick of yours in the past. Am I right on that, and is it because it’s just been too pricey?
Sekera: Yeah, you’re right on that. I don’t think we’ve had this one as a highlighted pick on past episodes. For the most part, if you looked at that price-to-fair value chart on Morningstar.com for this stock, I would say our valuation increases have been pretty much in line with the stock increase over the past couple of years. We did see a retreat in the price since December 2025, and that’s been just enough to bring that into the 4-star territory. Otherwise, since 2022, there have been only two other brief instances in time when it’s been a 4-star-rated stock. Since we haven’t talked about it before, what does Broadcom do? It designs semis and enterprise infrastructure software. The bulk of the business is coming from the design and the creation of custom AI accelerators. That’s where we’re forecasting a huge amount of growth and the earnings to come from for this company going forward.
In fact, we’re forecasting AI chip sales to increase by over a 60% compound annual growth rate through 2030. Our growth projections there are driven by growth volumes we’re seeing from Google, and they’re also ramping up revenue to new customers like OpenAI and Anthropic. Right now, software is 42% of the total sales of the company in fiscal 2025, but we’re projecting that software will fall to only a double-digit percentage of revenue by 2030, because it’s going to be so outpaced by the growth that we’re seeing in the AI accelerator business. Our forecast overall: Five-year compound annual growth rate for revenue over 37%. Our five-year compound annual growth rate for earnings is about 40%. So it is expensive looking today; it trades at 32 times our 2026 earnings estimate, but based on that type of growth rate, that drops to only 21 times our 2027 earnings estimate.
Dziubinski: Now, Broadcom inked a deal with Alphabet GOOG last week, and that led to a bit of a rally in the stock. Talk about that deal and how that ties into Morningstar’s thesis on the company.
Sekera: That should provide pretty good momentum for the stock going into earnings season as well. Essentially, what they announced here was a long-term supply agreement for TPUs and other networking chips until 2031. It’s not just for Google’s own uses. I know Anthropic also announced plans that they’re building out new data center capacity based on Google’s TPUs. We’re getting, from a couple of different customers, new revenue sources that are coming in. Our analyst noted that he just thinks this supports our existing projections in our base case. For example, there was no revenue that was attributable to Anthropic, but now we’re forecasting 20 billion in sales in the second half of this year, forecasting that to increase all the way up to 60 billion by 2027, just for that one individual customer. When we break down some of our forecasts to individual products, we’re forecasting 75% annual growth in XPUs over the next five years. Of that, these TPUs are 80% of that revenue. For those of you who aren’t familiar, TPUs are a specific type of XPU, which is an accelerator for AI. We’re seeing both Google and Anthropic moving their AI onto those types of AI accelerators. We’re modeling in our base case, really significant growth over the next couple of years.
Dziubinski: Your next pick this week is a fallen software stock. It’s Salesforce CRM. What are the key numbers on this one?
Sekera: Yeah, it’s fallen enough that Salesforce now trades at over a 40% discount to our fair value, which puts it well into 4-star territory. Not much of a dividend, it’s only about 1%. As far as our uncertainty rating, we do rate it as a high uncertainty, pretty similar to what we rate all the other tech stocks. It has a narrow economic moat, that narrow economic moat being based on network effect and switching costs.
Dziubinski: You mentioned the moat on Salesforce, and Morningstar downgraded Salesforce’s economic moat rating from wide to narrow due to the threat of AI on the business. Walk us through the rationale for that moat rating downgrade, but explain why you like the company despite the downgrade.
Sekera: This is just one of these recommendations that I’ll have to admit, it’s definitely gone against us ever since we started talking about this stock. In fact, the entire software sector has been trading off just based on those concerns about how AI may or may not necessarily impact these companies. This is just a good example of how I recommend starting with a partial position in a stock and being able to dollar cost average into it to the downside.
As you noted, the moat committee did end up downgrading this one. I think we reviewed our ratings on over a hundred different companies to try to take into consideration the acceleration and the rate of change, the pace that we’re seeing, and how software may be impacted by artificial intelligence. In this case, that downgrade accounts for slightly lower confidence we have in the company’s ability to use those moat sources to be able to generate returns on invested capital higher than their weighted average cost of capital for over 20 years.
We need to see over 20 years of those higher returns on invested capital to earn a wide moat. We’re now assuming the return on invested capital will probably only exceed the weighted average cost of capital for the next 10 years, and then we’ll end up getting competed away thereafter. At this point, we did downgrade or reduce our fair value estimate by a little bit from 300 to 280, yet it remains our top pick among all the different software companies. Fundamentally, this company is doing very well. Our forecasts are lower than the company guidance, the long-term guidance from the company. I think that gives us additional cushion to the downside in our base case. I think it’s just a matter of the stock selloff, based on the software sector overall that we see coming down.
Just taking a look at our model here, the five-year compound annual growth rate for revenue is 8.6%. Our earnings compound annual growth rate for the next five years is 11.7%, yet this company is only trading at 12.5 times this year’s earnings forecast. What that’s telling me is what the market is pricing in. I went through our model and was playing with it just to see what the market pricing is in. The market’s currently pricing in revenue growth at an inflationary, increasing pace over the next five years. No expansion in operating margins, holding operating margins flat. Again, I think it just indicates how there are two camps of investors in software. Either those who think that this company will survive over the long term, and it looks ridiculously undervalued here, or those who think that software stocks are just going to be a melting ice cube overall, and they just want out at this point.
Dziubinski: Well, your next pick this week isn’t tech-related, but it is a growth stock, so it fits in with your barbell recommendation. The stock is Chewy CHWY. Fill us in on it.
Sekera: Chewy trades at a 30% discount. It’s a 4-star-rated stock. It doesn’t pay a dividend at this point because it’s still in a very high growth stage of its development. Of course, we rate it as a very high uncertainty because it is a growth stock. You need that growth in order for this company to really grow into the stock valuation, but we do rate it with a narrow economic moat based on its intangible assets.
Dziubinski: Chewy has been a pick of yours in the past, so why are you coming back to it?
Sekera: It was actually a first to pick in November of 2023, and we reiterated it as a pick in 2024. As the stock moved up, once it hit the 3-star level, it kind of just fell off my radar as a small-cap stock. I wasn’t paying attention to it thereafter. In fact, the momentum kept going up on this one. It was a 2-star-rated stock in June 2025, which would’ve been a pretty good time to take profits. At this point, it’s fallen enough. It’s now back in that 4-star territory. Honestly, I’m not necessarily sure why the stock has retreated that much. Maybe it’s just a matter that the market was overextrapolating the growth too much. With growth, it’s still very high, but maybe it’s slowing at a rate that the market hadn’t priced in. That’s why it’s pulled back.
From a fundamental point of view, it looks just fine to us. Last quarter, sales were up 8.1%, and that was driven by volume increases. The adjusted EBITDA margins expanded to 5% from 3.8%. You had similar results even in the prior quarter before that. I think fundamentally, it still looks good to us. It’s in line with our forecasts. Taking a look at our model here, the five-year compound annual growth rate for revenue of 8%, five-year compound annual growth rate for earnings is 38%. We’re looking for operating margin expansion. Their operating margin last year was 2%. We’re looking for 3.2% this year, expanding to 6.3% in 2030. That’s how you’re getting that operating margin expansion, really hitting the earnings line. Now, it does look expensive; it trades at 31 times our 2026 earnings estimate, but based on our current forecast, that drops to 21 times our 2027 earnings forecast.
Dziubinski: Your final stock pick this week is a new name that fits with the growth theme. It’s On Holding ONON. Tell us about it.
Sekera: It’s a 4-star-rated stock, 29% discount. Another one that doesn’t pay a dividend because it is kind of in that growth stage of its lifecycle. We rate it with a very high uncertainty because it is in that growth stage, but we also assign it a narrow economic moat based on intangible assets.
Dziubinski: The stock of On Holding is having a pretty tough year. It’s down more than 25%. What’s been going on, and why do you like it at today’s price?
Sekera: What’s been going on is that the company, On, has been the fastest-growing sportswear company in the world since the pandemic. Now, 93% of the company’s sales come from athletic shoes, best known for On Cloud running shoes. They’re sold globally, in Europe, North America, and Asia. Products are available now in over 80 countries. To me, it just looks like the stock probably got overextended in early 2025, and it’s my guess here that the market’s probably readjusting to a deceleration in the growth rate, even though we still expect a very strong growth rate going forward. I opened up our model. The revenue growth rate in 2023 was 46%, 29% in 2024, and 30% 2025, yet we’re only looking for a 17% growth rate here in 2026. I think that this company, its product, and its brand still have a long way to go.
Generally, consumer awareness of On as a brand is still pretty low, but it is rising. We see a lot of opportunities for the company here. We’re looking for more geographic expansion. We look for them to extend into other lines, other than just footwear, so thinking of clothing and accessories. From our base case forecast, we’re looking for a five-year compound annual growth rate and revenue of 16%, looking for good operating margin expansion. That’s going to drive our growth rate for earnings to 29%, yet it trades at 28 times our 2026 earnings estimate, but only 21 times our 2027 estimate.
Dziubinski: Thanks for your time this week, Dave. Viewers and listeners, keep an eye out for the bonus episode that we’ll be dropping this week, featuring Dave and Morningstar economists talking about their second-quarter outlooks. If you want more information about any of the stocks Dave talked about today, visit Morningstar.com for more details. We hope you’ll join us next Monday for The Morning Filter podcast at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.