Key Takeaways
- What this week’s inflation reports could mean for next week’s Fed meeting
- Why long-term investors should sit out the SpaceX IPO
- Do Palo Alto Networks PANW, CrowdStrike CRWD, or Broadcom AVGO look like good investments after earnings?
- What to make of Berkshire Hathaway’s BRK.B shopping spree
- Stocks to buy to rebalance ahead of the market’s next big shift
In this new episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski preview the SpaceX IPO with Morningstar analyst Nic Owens. They discuss the company’s
, forecasts for revenue and margins, and why we think SpaceX is most likely worth less than half its IPO target.
They also cover what this week’s inflation reports could mean for the Fed meeting later this month and whether Palo Alto, CrowdStrike, or Broadcom look attractive after earnings. Tune in to find out if Berkshire Hathaway is still a buy after its purchase of Taylor Morrison and its additional investment in Alphabet GOOGL. They close the episode with five stocks to buy to rebalance a barbell portfolio.
Got a question for Dave? Send it to themorningfilter@morningstar.com.
Transcript
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, before we start, there are a couple of housekeeping items. First, I hope to see some of you at the Morningstar Investment Conference in Chicago on June 17 and 18. We’ll be taping a segment for The Morning Filter at the podcast booth on Wednesday at 2:35 Central Time. I’m sitting down with Morningstar senior technology analyst Will Kerwin to talk about many of the tech stocks he covers, which include Apple, Marvell Technology, Broadcom, and others. There’s a link in the show notes with more information about the conference and how to register.
And second, Dave and I are pretaping today’s episode on Friday, June 5, before market open, so our comments don’t reflect anything that’s happened since then.
And why are we doing that? Well, Dave is taking some well-deserved time off for a couple of weeks, but we’ll somehow manage here on The Morning Filter without him. We have a couple of special episodes in the works while Dave is out, so please continue to tune in.
All right, Dave, well, I’m clearly jealous, so share with everyone what you’re going to be doing on this well-deserved break.
David Sekera: Susan, buongiorno in Italia con mia moglie. You know what? Almost 28 years and three kids later, my wife and I are finally making it back to Italy. Our first time since our honeymoon in 1998.
Dziubinski: That’s fantastic.
Sekera: Yeah.
Dziubinski: Have a great time.
Sekera: Oh, we will. We will.
Dziubinski: But before you go. I need to ask you some questions about the market and stocks.
Sekera: Market, what market? What stocks? Who knows?
On Radar: Inflation Reports
Dziubinski: Yeah, clearly. Hopefully, Dave doesn’t have one foot in vacation mode already. OK.
So let’s get down to business. Starting with what’s on radar this week on the economic front. Now we have a couple of inflation numbers coming out. So what do you think investors should be watching for here?
Sekera: The question isn’t, is inflation going up or not going up? It’s going up. The question really is, is this going to be a temporary increase in inflation or will this dissipate once oil prices finally start to fall whenever we get some sort of agreement with Iran? I mean, the real question being here is inflation at this point already starting to become embedded, and does it actually start to continue to keep persisting even after inflation falls? And of course, if inflation persists afterwards, that’s certainly going to be a big negative for both the economy and, I think, the stock market.
I think you’re going to see a lot of analysis out there between the difference between headline inflation and core inflation. Everyone is going to be really watching to see if inflation is starting to bleed into core from headline at this point in time.
Now, I think core is probably still under control for now, but of course the higher oil stays for longer, it’s eventually going to bleed into core inflation as well. And then the other thing to keep your eye on is going to be PPI. I don’t know if we talk about PPI all that much. PPI, of course, being a leading indicator for CPI, but really the thing to watch here most closely is going to be on input costs for manufacturers. Some of the ISM numbers, ISM being the Institute for Supply Management, they’ve been noting that a lot of manufacturers are telling them that not only are energy prices increasing, but they’re just seeing a broad increase in commodity costs across the board, which means that it’s not just energy. We are seeing inflation across all commodities at this point in time. So again, I’m very concerned about inflation.
I really hope that we get to the point where oil starts coming down meaningfully in the short term. If it’s not, I think, inflation, not only is it going to be here for months to come, it could be quarters to come as it works its way through the economy.
Fed Meeting: What to Expect
Dziubinski: Well, given that, Dave, the Fed meets later this month for the first time with Kevin Warsh as Fed chair. The meeting is, of course, a little bit of way out, but as of today, what’s your expectation for that meeting?
Sekera: I mean, as of today, I still think the Fed is on hold for the foreseeable future, which is what you and I have been talking about for quite a while. Inflation’s heading higher. It’s going to stick around for a while. But if you look at the economic indicators, the economy is doing fine—pretty well. If you look at the Atlanta Fed GDP now, that’s telling us the economy’s running at about a 3% run rate right now. So better than that long-term 2% that I think our economists expect, but not necessarily too hot at this point in time. I think the bigger question there with the economy is just how much of it right now is really being driven by the AI buildout boom. And if that starts to slow, what happens with the rest of the economy? But for now, I think the Fed, it’s probably more likely that they would have to be in a position to potentially raise rates later this year.
If inflation comes in too hot and/or the economy starts accelerating from here, I think that they would have to bolster in the fed-funds rate. So at this point, we’ll see what happens, but I think they’re doing a lot of nothing for right now, but I do have a bet for you. With Chair Walsh conducting the meeting, I’ll bet you right now you will not hear the word “transitory” this time around.
What Is SpaceX Actually Worth?
Dziubinski: Well, we will see. You’ll probably still be in Italy. I’ll listen in, and let you know how that bet turns out when you get back. All right.
Well, the big news in the stock market this week, of course, will be SpaceX’s anticipated IPO. It looks like, as of right now, SpaceX is pricing its IPO at $135 per share, which translates to a valuation of about $1.8 trillion. Now, late last week, Dave sat down with Morningstar analyst Nic Owens, who covers SpaceX, and they talked about the company’s economic moat, Morningstar’s forecasts for revenue and margins, and what Morningstar thinks the company is really worth. Take a listen.
Sekera: Nic, thank you very much for joining us today. I know you’ve got an extremely busy calendar with everything going on, but so we’ve got the SpaceX IPO coming. We saw your note that you put out on Morningstar.com about it. So first of all, can you just really give us that 30,000-foot view on what all does this company do, and maybe explain a little bit each of their main business segments?
Nic Owens: Absolutely. And so I cover aerospace and defense, and until February, I would say SpaceX was mostly an aerospace and defense company, mostly aerospace, really. They have a rockets business. They have a satellite communications business, which we think of as Starlink. And then, now in February, they bought the xAI company from Elon Musk, which is looking into AI, AI infrastructure, and potentially AI infrastructure in space. So those are the three buckets, and it’s sort of a fast-moving target, given some of the growth rates.
Sekera: Can you give me a little bit more detail about those three main business lines?
Owens: Yeah. In 2025, the rocket business did $4 billion in revenue, Starlink did $11 billion, and the AI business posted $3 billion in revenue, and about half of that is advertising from Twitter. So that’s really the startup version. And I think what most people may not realize is just how big Starlink has gotten. It’s a really money spinner, and we see a very highly profitable growth coming out of there for years.
Sekera: Now, of course, we wouldn’t be Morningstar if we didn’t talk about our economic moat rating. In this case, I was hoping maybe not only could you describe what one economic moat rating for the entire company is, but the primary moat sources that back up that moat rating. But I’m also curious, too, how do you really derive a moat rating for the entire company when you have three such very different types of businesses that make up the overall company?
Owens: Yeah, there’s a lot there, and I actually am really glad to be able to rely on the Morningstar methodology around moats, which I think is really rigorous. Given those three buckets, what I’ll tell you is the first two, the rockets—the actual designing and making of the rockets and launching them—and the Starlink business—which uses satellites that are lifted on the SpaceX rockets—we believe those have a cost advantage, and that’s one of our core moat sources.
And within that, the two flavors of that cost advantage are the R&D, basically, they’ve built and tested these rockets to be able to lift more per kilogram than other rockets, and that gives them an operating cost advantage, and then they also have done it more often. They’ve gone down the learning curve. They’ve launched hundreds and hundreds of times more than the nearest competitor and launched thousands of more satellites than the nearest competitor.
And so their average cost is lower. Their economies of scale have been, I think, firmly established. And so those two, let’s say, if they were stand-alone, would have the characteristics of what we would describe as wide-moat businesses. The wrinkle, if you will, is that the stated purpose of the IPO is to raise money to invest mostly in AI, the next phase, if you will. And there’s, the jury’s out, I would say, on whether xAI, or the SpaceX AI business, has a moat and/or what it might be. There’s some scenarios in which it might benefit from some cost advantage like Starlink in terms of putting thousands of satellites in space and so forth, but that’s far from certain, and they’re going to go spend, let’s say, tens of billions of dollars to find out. And so in our methodology, the risk of value destruction that might happen from that scenario, let’s say, overshadows some of the characteristics, the wide-moat characteristics of the other businesses.
So we net it out to a narrow-moat rating for the company, particularly even though the xAI business is not a huge piece of the business today, the planned investment and the capital deployed will make it a bigger piece in the future. In a normal conglomerate, let’s say, we had three businesses about equal size and one was wide and one was narrow and one was none, we’d probably end up at narrow for those averaging reasons. This is a little different but worth, I think, acknowledging the core moat around their capabilities around launch is really quite impressive.
Sekera: OK, thank you. Now, of course, when we’re talking about valuation and Morningstar, when we think about the value of a stock, it is the intrinsic valuation of the company ends up being the present value of all the future free cash flow that a company’s going to generate.
So I guess even before we get into how you’re valuing the company, how do you come up with forecasts for this company? I mean, are you really trying to forecast three individual companies and roll that up into one? How do you drive that top-line number overall and at each one of those segments?
Owens: The answer is yes. It’s much easier to look at this as three pieces because they each have different economics. And so for the rocket launch, it’s how many rockets, at what cost, times how many payloads? And for Starlink, it’s sort of subscribers. This is a telecom business, essentially. Subscribers, average revenue, incremental costs, and so forth. And we have done some work on sizing what we think is, let’s say, our view on the market opportunity there. Some of the numbers that are in the registration statement are very ambitious or sort of aggrandized, in terms of they might soak up all telecom spending globally. We don’t need to believe any of that to get to a pretty healthy growth rate and a good business in Starlink. For xAI, spent a lot of time building out, let’s say, a version of what that business could look like and really is hinged on this idea of if a commercial data center in space or GPU cluster in space is viable, what might it cost to own and operate and what might be, let’s say, market rates for AI compute, and spanning that out, I think we did 15 years just to see how it looks.
And again, there’s scenarios there. So we are able to do forecasted cash flows for all three, and then we did probability weights on these upside, downside, and base-case scenarios, which really hinge on what might happen at the AI division.
Sekera: And we were talking earlier, about when we talked about the rockets division earlier, I believe you said that you can look at the launch schedule that’s already out there and get a pretty good idea. And how far out into the future does that launch schedule typically go?
Owens: There’s a FAA schedule, they’re approved, I want to say years in advance. Beyond that, we have a forecast that is more or less from the company’s stated plan. They have plans for how many Starlink satellites they want to put out there, and then you have how many fit on a rocket, how many rockets do they own? How many rockets do they have to build to basically continue building out the Starlink constellation? Most of the stuff that SpaceX puts up in space are Starlink satellites, and then they rent out the extra space to others, and that’s its own strategy in terms of decreasing their cost by increasing their volume in a way in-house. That’s where the forecast for that comes from. And there’s one key assumption that the Starship, the newest, biggest rocket that they had a test flight for the other day, that top stage has to be reusable for some of these numbers to really pan out.
The idea is to be able to fly the same actual rocket, which is—the space shuttle was the last time we had a upper-stage reusable, but it had to go into the shop for months and months to have tiles replaced and so forth. So the goal, the engineering problem at hand, is can you have an upper stage that’s reusable in hours? And I think there’s a realm, it’s within the realm of possibility, it’s just engineering, it’s thermal resistance and metallurgy and things that I don’t have expertise in, but I think is doable. And so if you believe that, then you get to these scenarios where it’s worth—that they can launch thousands and thousands of satellites sometimes launching the same rocket multiple times a day.
Sekera: Well, that actually goes right into my next question then talking about cost. So it’s really the similar question.
You’ve gone through how you forecast revenue. How do you think about forecasting the operating margin? How do you think about it not only for forecasting maybe here in 2026, but trying to think about what’s the path of that margin over the next couple of years, maybe getting out through your five-year forecast period?
Owens: Again, on the rocket launch, it’s relatively straightforward, especially from my perspective covering other airspace manufacturers and given the volumes that we’re talking about, again, if you assume viability of a reusable upper stage, then you’re just looking at a manufacturing supply chain and cost curve where there’s some savings every doubling of how many you make manufacturing. And then there’s the actual launch costs, fuel and so forth, where because the new Starship has a launch bay or a cargo bay that’s so huge, the average cost to lift something into space goes down per kilogram every time they do it. And this is an important part of what SpaceX has already achieved. If you compare the space shuttle, the launch cost today is 95% lower than it was then and continuing to go down.
If you have a business plan that you want to do biology experiments on a satellite in space, and then you got a quote 10 years ago for how much that would cost to launch, you’d say, “Well, never mind.” But now all kinds of things are possible because that dollar launch cost comes down. And so that’s an interesting feature, and then that dollar launch cost comes down for Starlink to put the radio satellites up there. For space, that’s a fairly straightforward model. We can look at manufacturing costs and these average launch costs, and it’s really dividing, let’s say, by the kilogram capacity of the rocket. Then on the satellite side, telecoms is interesting because once you have the network set up, traditionally we look at things like fiber optic or mobile cell towers, but there’s an analogy here to the satellite constellation. The cost to add a customer is very, very, very low.
The incremental profit from growing your subscribers and services is very attractive. And the other interesting aspect that we found is when you think about, say, cell towers or fiber, the investments that you have to make to go reach another 10,000 homes or something, they apply in that ZIP code. Whereas if you put a hundred new satellites up to widen the available capacity or spectrum of that network, everyone on earth could potentially be benefiting from those because they’re spinning around and they switch to other zones and provide coverage wherever they are. That is like dividing by a higher denominator in terms of the ROI for those investments. That’s an interesting aspect of how we modeled out the potential profitability for Starlink. On the xAI side, still it’s just far less certain. We think that it is also within the realm of engineering possibility to put data GPUs in a satellite.
They have solar cells. We think they can do heat dumping on the backs of the solar panels. And the open question is whether it’s enough economic savings versus a terrestrial data center for it to be, let’s say, compelling or just interesting. In this “Moonshot” scenario that we modeled, we’re saying it’s compelling, they might have some incremental cost advantage because sun is brighter above the atmosphere, solar power is free versus, let’s say, natural gas or whatever on the ground, etc., etc.
But even on a good enough, we think there’s a niche that they could potentially serve where you have this, let’s say, economically reasonable computing capacity in orbit, it probably wouldn’t have the same fast latency that your neighborhood data center would, but so there’s going to be tons and tons of demand for AI computing that might be like overnight jobs or hour delay or what have you.
I mean, the delays are not that long, but categories of AI work that could make sense for this network are what we modeled in.
Sekera: All right, let’s get down to the brass tacks. We’ve talked about how you forecast revenue. We’ve talked about margins. Maybe let’s just get to your valuation in your base case, based on your forecast and your analysis, what do you think the intrinsic value of the company is today?
And I guess the biggest question there, too, then, is what do you think really differentiates your base case, some of those probability weightings that you’ve done versus what they’re talking about that IPO being priced at in the market?
Owens: The base case, we didn’t really change our scenarios for rockets and satellites that much. Those two together add up to about $611 billion of enterprise value in our model, let’s say, across the board. Then it really, the question mark, the uncertainty in my view was around what could the AI business be worth, and basically putting out there that there’s some unproven things. I’m starting to think of this as, or express this as, like a nested probability of does Starship turn out to be reusable, let’s say, and really scalable, and do data centers and space end up mathing out in terms of … I think that the engineering is probably doable. The question is just, is it commercially successful or reasonable? We assign a 7% probability of both of those being true, what we call the Moonshot scenario, and that actually gets us to a $1.9 trillion enterprise value, which is very close to what they’re talking about pegging the enterprise value at the IPO.
And let’s say if the data centers in space are completely unviable, which is, well, if we think there’s a 43% chance that not both of those will be true and that they would actually spend some money to find out about the data centers in space, but then they would stop. And so that kind of subtracts a little bit from our base case scenario. But we think the most likely scenario is what we’re calling a “Minimum Viable Product,” where they do have data centers in space. They may not be compellingly cheaper, but that they fill a niche and they work, and that those three added up is what got us to the $780 billion average, or weighted average enterprise value, which happens to come in very close to half of what the IPO price is. But I think the way I would reframe that in specifically the Morningstar point of view, we talk about margin of safety and so forth,
if the IPO is at $1.8 or $1.9 trillion market value and our upside scenario, which we think has some dependencies on it is about the same number, what that’s saying is as a disinterested investor who’s looking for margin of safety, you wouldn’t necessarily pay full value for that scenario, but that’s what the IPO investors are, let’s say, being asked to do. Pay me for what it could be worth in the best-case scenario. And I just think that’s one way to think about it. We took the weighted average, and that gets you to a lower number.
Sekera: I’m also thinking about when this IPO does occur, stock is now free to trade. In the short term, I see a whole bunch of different technical reasons out there which are going to influence how that stock trades in the short term more than what the long-term intrinsic valuation of the company may be.
In the months after the IPO, maybe even like the next year or two after the IPO, is there anything specific that you would really tell investors that they should be watching for, that could maybe sway how that stock could trend either up or down, both from our own intrinsic valuation point of view as well as how the market may price it?
Owens: Absolutely. I think I should answer that in two parts. Fundamentals, the things to look at are progress on Starship, reusability, whether that’s announcements or demos for better heat shielding, etc.—the more certain that becomes over the next, say, two, three years, then these probabilities go up, probability of success, let’s say; and similarly, on the data centers and space. Again, the engineering we think is inside the realm of the possible. The question is what’s the incremental cost and how that works through a commercial model for that. And I think we’ll know more inside of two or three years how those play out. And so changes in those probabilities as we get news, let’s say, would change our fair value.
Sekera: And in many cases, probably quite substantially then.
Owens: Yes. And that’s what’s particularly exciting about a company at this stage of growth and in this sort of moment, right? It takes more to move the needle on some of my other companies than just changing a probability, especially, I guess, because of the range of the outcomes: We have negative $85 billion in the “No Go” scenario and, I think, it’s $1.3 trillion on top of the 600 in the upside.
In terms of things that could move the stock price and milestones to look at, I would simply think of that as in terms of supply and demand. They’re only selling a couple percent of the company here in what we think is next Friday, and there’s more where that came from. There’s lots of investors who’ve invested as a private entity in the company over the years, and most of them have agreed to lock up. So they’re 180 days out or in the case of the chairman, Elon Musk, a year out, but there’s still supply of shares out there.
And then there’s also, I would argue, unprecedented demand or fervent demand. It’s part of the AI trade, the AI story, and you will have some portion of index funds buying it because it’s going to be included in the Nasdaq 100, I think, 15 trading days.
So those are things to watch, and some of them are unprecedented. The price of a stock is set by the marginal buyer and seller. And also what’s frankly par for the course on an IPO, part of what you are hiring the investment banks to run the books for, is they can intervene in the market. They want to, let’s say, smooth out supply and demand over trading sessions and so forth, especially if they know that some more shares are going to come online or if there’s another buyer who’s going to take some of them out of circulation, etc. Can we use the old phrase: The market’s a voting machine in the short term and a weighing machine in the long term?
Where things stand today, the market conditions seem quite favorable for an AI-related stock, and I think there’ll be plenty of demand almost for the foreseeable. And again, they’re only floating a few percent of the company today, but there’s going to be supply, and it’s the explicit aim of some of the existing investors to liquidate or at least diversify their holding. Some of them been holding it for almost two decades. So that’s just something to bear in mind as the market unwinds. And basically what we conclude is at the IPO on the day of, I don’t see there being any margin of safety to that price, and it is more likely than not, in my view, that investors, especially long-term investors, will have an opportunity to buy at a better margin of safety.
Sekera: Got it. Well, thank you very much, Nic. I really appreciate your time. And I also really like in your article, too—so I think investors really, it would behoove them to read it on Morningstar.com—but in there, too, I think one of the big takeaways is: It’s not like we don’t believe in the company overall. When I look at a lot of the revenue forecasts you have out for 2035, in many cases, they’re multiple times greater than the amount of revenue this year. I think that additional clarity that you provide in the article, I think, will really help investors kind of encapsulate their own view as well as understand what it would take to actually get to what that market price is today.
Owens: Thanks, Dave. Thanks for having me.
Is PANW a Buy After Earnings?
Dziubinski: All right. Well, that was some good stuff. There’s a link in the show notes to Nic’s analysis on SpaceX for those of you who are interested.
All right, Dave, let’s get to some other new research from Morningstar, and we’ll start with one of your longtime favorite names in cybersecurity, and that’s Palo Alto Networks. Now, results came in pretty strong, and the stock, it initially rallied after hours, but then it kind of pulled back. What did Morningstar think of the results?
Sekera: From a fundamental point of view, like you said, it was pretty strong. I mean, revenue overall was up 31%. Specifically, the company called out their next generation annual recurring revenue of up 60%. Now, the operating margin was a little disappointing. It contracted 30 basis points, but at this point, I’m not all that concerned about that slight contraction. I mean, overall, when I read through our note, talked to our analysts, there’s really just no change to our investment thesis overall. In this case, when I’m looking at how the stock is trading, I think it’s really still being impacted more by that on-again, off-again trade.
The sentiment that we have between AI hardware versus software, still a lot of concerns out there that, over time, AI is going to disrupt or displace software overall. A lot of the days that you see the AI hardware stocks do very well, the software stocks all sell off and, conversely, when AI hardware doesn’t do so well and sells off, that’s when you see the strength in the software sector.
I don’t think it really had anything to do with the company results per se. I think it’s really just more about that thematic trading that we’re seeing in the marketplace. Overall, we actually increased our fair value. That was driven by an increase in both the short-term and medium-term growth forecasts specifically for their firewall business. Our analyst noted that he’s just looking for firewall demand to increase. As data centers are being built out, they need more and more firewall security equipment. So that’s a good tailwind for at least multiple quarters yet to come for this company.
Dziubinski: All right. So Morningstar’s new fair value on Palo Alto is now $285. Given that change in fair value, is the stock still a buy from your perspective?
Sekera: I just have to first just note here, even after this pullback, the stock is still up 50% year to date. Again, to some degree, some people probably just out there taking profit in this name. I don’t think that this is any big change in the trend in how this stock is going to trade. At this point, it is a 3-star-rated stock. It’s only a couple percent below fair value. Now, of course, we always prefer to have some sort of margin of safety. You really don’t get that margin of safety in this name right now. But at the same point in time, I’m a big fan of investing in the cybersecurity space overall. I think Palo Alto is one of the leaders here.
So if you don’t have exposure to cyber, you want to get some exposure. You could certainly start a small position here at fair value, but I would just leave enough dry powder so that if it does sell off, then you can dollar-cost average into the name.
Or if you don’t want that single-stock exposure like we’ve talked about in the past, you could look to buy a cybersecurity ETF. The one that we’ve talked about in the past—the ticker’s bug BUG.
CRWD Still Looks Rich
Dziubinski: All right. Let’s stay with the cybersecurity theme for another minute or two. We had CrowdStrike report was down a bit after earnings. Morningstar raised its fair value estimate on the stock to $530. Unpack those results, what happened, and how the stock looks from a valuation perspective after earnings.
Sekera: Again, strong fundamentally. Revenue up 26%. In this case, their adjusted operating margin actually expanded by 5 percentage points. And again, their annual recurring revenue, what they call ARR, was up 24%. So again, very strong top-line growth. As you noted, we did increase our fair value. Really, that was just a matter of increasing the long-term profitability and growth estimates. Our analyst team, following the earnings and the conference call, they just have greater confidence in the AI strategy, AI-associated revenue here. For example, they talked about AI detection and response. ARR grew more than 250% sequentially. Having said that, after the fair value increase, it is still a 2-star rated stock, meaning that we think it’s trading on a risk-adjusted basis too far ahead of our long-term intrinsic valuation.
AVGO: Opportunity After Earnings?
Dziubinski: Broadcom stock was down more than 12% after reporting. Dave, what unsettled the market there? And then of course, what did Morningstar think of the results?
Sekera: The results themselves were fine. We thought they’re in line with what our own expectations were. We thought the company gave what we would consider good guidance for the July quarter. Management maintained their own outlook.
But I think right now we’re just in an environment specifically for AI stocks where good enough isn’t good enough. And in this case, because of that, the stock tanked. Everyone’s looking for companies to continue to keep increasing their own guidance, and that’s not what we saw here. In fact, our analyst thinks the company’s actually guiding pretty conservatively. The company had “more than a hundred billion in AI revenue for 2027.” Our own forecast is for higher revenue than that in fiscal 2027. And we’re looking for that to grow quite substantially. We’re modeling close to 200 billion in AI revenue in fiscal 2028. Now in this case, our analyst says he has a lot of confidence in those forecasts.
Based on what he can see out there, he says he has pretty high visibility based on the forecasted growth for Anthropic and open AI XPU ramps. So again, this is one where you’ve got a 40% compound annual growth rate for revenue over the next five years. Little bit of margin expansion on top of that gets you 46% earnings growth over the next five years on a compound annual growth basis. Stock, maybe it looks a little expensive here based on 2026 earnings estimates of 35 times, but based on our growth estimates for 2027, that drops to 21 times.
Dziubinski: So then Dave, given those forecasts and Morningstar’s valuation on the stock, is Broadcom attractive?
Sekera: It is. And in fact, I think this is still one of our top picks in the tech team’s list. It’s a 4-star-rated stock at a 37% discount. And this is one of those stocks, and we haven’t talked about it in the past, so maybe we should do a future show on what GARP means, and that’s “growth at a reasonable price.” And I think this really fits that definition when you look at the amount of growth that we’re modeling in over the next couple years, and look at, even though that P/E ratio might be relatively high on a forward basis based on this year, just how quickly that forward multiple comes down in 2027 and 2028.
BRK.B’s Buying Spree
Dziubinski: All right. Well, I’ve just made a mental note of that, Dave. Future show, GARP. Got it. OK.
One of your picks, Berkshire Hathaway, was in the news last week, after it actually made a couple of investments and put some of that massive cash stockpile to work. So first, Berkshire bought Taylor Morrison Home. So what are your thoughts on that acquisition?
Sekera: In the greater scheme of things, when you look at Berkshire and just the size of Berkshire, realistically, this really isn’t all that meaningful one way or the other. Now, as far as like Taylor Morrison, that’s not a company we covered, so I have no opinion specifically on the valuation there.
But I think what’s more interesting would be to try and know, was this a purchase because Greg Abel is now making a timing bet on homebuilding and the recovery there? Are they starting to see recovery in homebuilding here in the short term? Or is this maybe just a company where they’ve had their eye on it for a while? Homebuilding, of course, being somewhat in the doldrums, those homebuilding stocks having relatively low valuations. So maybe it’s just a matter of they wanted to buy this company for a while now and now they finally got the opportunity to do that.
But I think it’s interesting because the company has a number of other positions in homebuilding stocks. They own Clayton Homes. So this might be a case where maybe they actually have a little bit better insight than the market on the homebuilding sector.
Dziubinski: Oh, that’s interesting. They also have, I think, a couple of homebuilding stocks in the public portfolio, so it’ll be interesting to see if they do anything with those. All right.
Berkshire’s other big news this week was that it plans to invest an additional $10 billion in Alphabet GOOGL as part of Alphabet’s $80 billion announced equity raise. And Berkshire doing that will lift Alphabet up to about a 9.5% weighting in Berkshire’s portfolio. What are your thoughts on that one, Dave?
Sekera: Well, obviously, now Alphabet is a core holding in their public equity portfolio. I think this to some degree shows how management under Greg Abel is now more comfortable with investing in technology as opposed to, historically, they steered clear that under Warren Buffett. We’ll see if this is maybe a trend going forward. I also wonder, too, with Greg Abel taking the reins here relatively recently, I wonder if maybe he’s starting to feel some pressure to put that huge cash pile to work. This might be a case where we start seeing a lot more of these larger investments over the next couple of months.
Dziubinski: All right. Then just strictly from a valuation perspective, how’s Berkshire look today? Would you still consider it a pick?
Sekera: Yeah, I mean, in fact, you can’t be any more of a value stock than buying into Berkshire Hathaway. It’s a 4-star-rated stock, trades at a 7% discount. Now, a 7% discount may not necessarily sound like that much, but you have to remember, I think it’s like, what, a third of their portfolio is in cash. Cash is always worth 100 cents on the dollar. So the way I look at this, that 7% discount really should be attributed mostly to the private equity portfolio that they own. So that tells me you’re buying that private equity portfolio at a much larger discount.
Stock Pick: VZ
Dziubinski: All right.
Well, speaking of picks, it’s time for the stock picks portion of the program. Now, Dave recently published a new stock market outlook, and you can find a link to that in the show notes. Now, in that report, Dave’s suggesting that investors return to a barbell construction with their stock portfolios. And today, that means taking some profits in that AI-growth stocks portion of the barbell and investing the proceeds in value and energy.
Dave’s picks today are undervalued value stocks to buy to restore that balance in the barbell. Your first pick is Verizon. Run through the numbers on it.
Sekera: Yeah. And to be honest, it’s been a while since we’ve talked about Verizon. Now I can’t remember when we first started talking about the wireless sector, but it was three or four years ago, I think, at this point. And our pick originally was AT&T T, but then we swapped to Verizon after AT&T quickly moved up. I think the first time we recommended Verizon was on the July 2024 episode of The Morning Filter. We recommended Verizon a number of times in 2024 and in 2025. At this point, though, it still looks pretty attractive. It’s at a 15% discount, puts it in 4-star territory, still a very attractive dividend yield. It’s over 6% at this point. And again, medium uncertainty, narrow economic moat. So again, it’s just got all of those traditional value play metrics that we’re looking for.
Dziubinski: Yeah. I mean, it definitely lands in that large-value part of the style box and, again, has that great dividend yield cushion. Why else do you like it for the barbell in particular?
Sekera: Again, traditional value play. I mean, fundamentally, results—they’re just kind of chugging along. Company is certainly not a fast grower. We don’t expect it to be a fast grower. But when I look at our model here, I think it’s still on the conservative side. If I look at the top line, our revenue five-year compound annual growth rate is only 2.4%. So essentially, maybe just kind of the Fed’s 2% inflation target plus a little bit.
Earnings, we’re looking for a compound annual growth rate of 8.3% because we are looking for margin expansion over the next five years. Now I have to admit, our original investment thesis is probably playing out more slowly than what we expected. I mean, the wireless business is still very competitive. We expect it to remain competitive. We are looking forward to it become more of an oligopoly over time. So essentially there’s really only the three main wireless providers out there today.
We expect over time they’ll compete less on price, compete more on other types of factors in the wireless business. As such, we are looking for that margin expansion. Today, that stock only trades it at 9 times forward P/E multiple based on what we’re expecting for earnings this year. And, like I said, you’re still picking up over a 6% dividend yield.
Stock Pick: TMO
Dziubinski: All right. And your second pick this week is from a sector that’s considered defensive, and that’s healthcare. The stock pick is Thermo Fisher Scientific. So give us the highlights on this one.
Sekera: Thermo Scientific is a 4-star-rated stock. Trades at a 14% discount. Not much of a dividend—well under 1%, but I would also note the company does use a lot of its free cash flow to buy back their stock. I think, on average, they buy back 1% to 2% of the outstanding stock every year, and they do use other free cash flow to make smaller tuck-in acquisitions.
So again, you may not necessarily be getting anywhere near the dividend yield you would like to, but again, this is a company that’s always used their free cash flow very wisely. We rate the company with a medium uncertainty, and it does have a wide economic moat.
Dziubinski: Now the healthcare sector overall is undervalued. Why do you like Thermo Fisher specifically above other stocks in the sector?
Sekera: I mean, personally, I followed for Thermo a number of years. I’ve always thought that it’s just been a very high-quality company. If you look to the price/fair value chart on Morningstar.com, and if you look over the past decade, there’s only been a couple of opportunities where you could buy this stock at that discount at that margin of safety that got you into that 4- or 5-star territory. So in this case, it’s a large-cap value stock in the healthcare sector. Company sells scientific instruments, lab equipment, diagnostic consumables, life science reagents.
Again, to me, it’s a very defensive type of name. Now, this was a 5-star pick in mid-2025. Stock from there ran up 50%, got it well into 3-star territory. And over the past couple of weeks, it’s now given back some of that rally. To some degree, I think this is just a story where the market for whatever reason just isn’t interested.
It’s not an exciting growth story right now, but the results were fine for the first quarter. Guidance may be a little subdued on China weakness. That wasn’t necessarily a surprise to us. And again, when I look at our forecasts going forward compared to what this company has performed at in the past—looks conservative to me. Our five-year compound annual growth rate is only 5.5%. We’re looking for some margin expansion as things normalize. Our earnings five-year compound annual growth rate is 11.6%. And if you look at the multiples, pretty reasonable in my mind, 19 times this year’s earnings, 16 and a half times next year’s earnings.
Stock Pick: DUK
Dziubinski: Well, your next stock pick is Duke Energy. It’s from another sector that’s traditionally been considered defensive, which is, of course, utilities. So tell us about it.
Sekera: It’s currently a 4-star-rated stock. Trades at a 7% discount, has a 3.5% dividend yield. We rate the company with a low uncertainty and a narrow economic moat.
Dziubinski: Now the utility sector is fairly valued, and Duke’s a little bit undervalued. Besides that relatively attractive valuation, what else do you like about Duke?
Sekera: First of all, Duke is the largest regulated utility by market cap. We think that they’re generally located in very favorable regulatory environments. And one thing I like about this one versus some of the other utility stocks is a lot of the other utility stocks are still an overvalued territory. I mean, a lot of them have come down from where they were earlier this year, but they’re still not attractive because we think that there’s too much growth that’s being priced into those stocks based on AI.
In this case, Duke is not an AI play. Most of its jurisdictions, we think, are in areas where AI data centers are not being built, but they have very good demographic growth profiles. So if you look at their business, I think over a third of their business is in North Carolina, another quarter of it is in Florida, 12% in South Carolina.
So all states that’s seeing population and demographic growth. The other areas they’re in are like Indiana, Ohio, and Kentucky. This is just a story between improving rate regulation, improving operational execution. We are forecasting at the very high end of management’s 5% to 7% annual earnings growth guidance.
Stock Pick: O
Dziubinski: All right. Next pick is a real estate investment trust. It’s Realty Income. Give us the key metrics on it.
Sekera: Realty Income is a 4-star-rated stock at a 20% discount to our fair value, 5.4% dividend yield. We rate the company with a low uncertainty and no economic moat. But in this case, I’m not concerned about no economic moat because there’s very few REITs, very few real estate plays, that we do assign an economic moat.
Dziubinski: Now, real estate’s having a decent year, but the sector overall is trading below Morningstar’s fair value. Given that, why is your pick Realty Income specifically?
Sekera: Well, like you said, I mean, real estate has actually been very quietly having a very good year. If you look at the Morningstar US REIT Index, it’s up almost 10% year to date. I think this is just one of those ones where it’s been an undervalued sector, but it has been so overshadowed by the media focus on AI that people really haven’t been paying attention to it.
Now in this case, Realty Income has been one of our go- to picks for a long time in the REIT sector. The company has what we consider to be defensive characteristics. The type of leases that they sign are called triple net leases. So essentially they can directly pass through any of their own inflationary cost increases directly to tenants. They’re also very long leases, so that does lower the risk of near-term lease reductions. Very broadly spread out.
I think they have over 15,000 tenants. Generally, they’re very service-oriented retail type of tenants. So the largest type is convenience stores; that’s over 10% of their retail base. Then you have grocery stores for 8%, dollar stores for 7%, drug stores, maybe 6% to 8%, quick service restaurants, home improvement. So again, these in my mind are very defensive type of tenants. I’ve talked about for years now how I prefer still steering clear of urban office space. Fundamentally, performance is in line. Last quarter, re-leasing spreads were up 3.4%, leases to new tenants up 7.5%. We’ve seen the company make what we consider to be some pretty sound acquisitions at reasonable cap rates, and the stock’s only trading at 13 and a half times price to funds from operations.
Stock Pick: DVN
Dziubinski: All right. And your final pick this week is from the energy sector. It’s Devon Energy. Give us the highlights.
Sekera: Devon is a 4-star-rated stock at a 16% discount, 2.5% dividend yield. Although I would note that they have what’s called a fixed plus variable dividend model. As oil prices are high and they have more free cash flow, they will pay a variable dividend on top of that fixed dividend. Now we do rate it with a high uncertainty, which, of course, in the energy sector and being an oil producer is not surprising, but we do rate it with a narrow economic moat based on their cost advantages.
Dziubinski: Talk a little bit about why energy may still be attractive this year, given current events, and then explain why Devon is your pick specifically.
Sekera: Well, if you remember coming into the year in our 2026 outlook, we noted that energy was one of the most undervalued sectors and as part of the original barbell strategy we started the year off with, in the value sector, we highlighted energy as being one to overweight.
Then, on the March 30 episode of The Morning Filter, it was when we recommended to start selling those energy and those value stocks to be able to reinvest into the growth category, specifically tech and AI, because value had done very well at that point. It was up 3% to 4%, whereas growth stocks and AI and tech stocks had really gotten hammered, and it was just at that point the valuations were telling us to change that barbell into being overweight growth stocks. Now, at this point, we have seen energy stocks sell off, off of their highs. Energy prices, oil prices, still above $90 a barrel.
So we’re now at the point where some of these energy stocks are starting to look attractive again. I think this is one where Devon has long been that go-to pick here. I mean, originally it was Exxon, but once Exxon moved into 3 stars, we moved to Devon. And we’ve talked about this one many times in the past. I don’t think there’s a lot of need to cover old ground.
I think, in my mind, this is more about managing your portfolio positioning than it is about Devon specifically. In this case, I think you can repurchase the stock here cheaper than where we had recommended to sell it at the end of March, beginning of April. And in this case, if we do have a resolution with Iran in the near term and oil prices fall, I still don’t think they go right back to preconflict type of levels.
I think it’ll take a while for oil prices to normalize. And in our model, I mean, we still look for oil prices well below even where they were preconflict levels. So I think you still have a margin of safety in this name even when oil prices come down. In the meantime, if there’s no resolution for a while, oil prices maybe move up higher as we start using up more and more storage and inventory. This would be the one that I still think has that upside potential to get back to its highs, if not even go higher from there.
Dziubinski: All right. Well, thank you for your time, Dave, and have a wonderful break. We will miss you. Viewers and listeners who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. Now, we hope you’ll join next Monday for The Morning Filter podcast at 9 a.m. Eastern, 8 a.m. Central.
Next week, Dave and I already have a special episode for you, our audience, in the hopper. We’ll be talking about core stocks to buy at the right price. But until then, please like this episode and subscribe and have a great week.
Sekera: Arrivederci.
