5 Stocks Just Got a Huge Warning — I’d Only Buy 2

AppLovin has fallen more than 50% this year, even though its revenue, profit, and free cash flow have continued surging. Fair Isaac Corporation, well, they've lost more than a third of its value while earnings are still growing above 30% and its operating margins approach 50%. Meanwhile, we have Apple that's close to record territory and trades at approximately 35 times forward earnings despite offering considerably slower growth. Now, these moves look completely different, but they're connected by one increasingly important market warning. The cost of money has changed. So, today I'm testing Apple, AppLovin, Broadcom, FICO, and Arista against that new reality, and every stock that we cover today is going to receive a clear buy, hold, or avoid verdict. But, despite the quality of these businesses, there are only two that I would actually buy today. But, before we examine these companies, we're going to listen to how Wall Street describes this latest sell-off. We can see in just the last few days many companies are down significantly because it captures exactly why valuations suddenly matters again. >> This Maker Break Hour begins with stocks down, yields up. That really is the story as the market grapples with the move in interest rates today. Here's the scorecard with 60 to go in regulation. I'll show it to you there. Fair amount of red led by the NASDAQ, which is not surprising either given growth stocks tend not to like rising rates. Chips are lower, the momentum trade [music] cooling certainly today. There's Nvidia off by more than 2%, but Micron down substantially as is SK [music] Hynix. >> Now, that matters because this is not simply about whether earnings are growing. It's about what investors should pay for those earnings when the long-term yields keep on rising. So, we're going to begin today with the market warning that's connecting all five of these companies. And we can see that since the end of 2019, the Nasdaq's risen almost 200% comfortably beating the S&P 500 and the Dow. And the decisive separation it began around the launch of ChatGPT. Now, this was not built on imagination alone. Technology revenue is growing far, far faster than most sectors. While the broader S&P 500 it's still delivering healthy double-digit growth. But investors, they've essentially normalized paying much more for every dollar of future profit. Since 2020, the index has averaged roughly 22 times forward earnings. And the valuation becomes harder to defend when the 30-year Treasury offers more than 5% with no optimistic revenue forecast, no customer risk, and no execution risk. And interestingly, this is not uniquely American. Long-term borrowing costs are rising across the UK, France, and Japan. Investors globally are demanding more compensation for time, inflation, and government debt. And the 30-year US yield, well, it's reached its highest region since 2007. That directly raises the discount rate we should apply to cash flows arriving 5, 10, or even 20 years from now. And to understand whether this is temporary or a genuine new regime, listen to how Ed Yardeni, who coined the phrase bond vigilantes, frames the current range. >> Uh I'm concerned. Um I I've been thinking that the 10-year bond yield uh is back to normal. And normal being 4 to 5%. Uh that was the range that we had before the great financial crisis. And so, when we uh look at how far back you have to go to see bond yields at the current levels, you're basically going to an to a period which I think was much more normal than what we had between the great financial crisis and the great virus crisis. But now there's grounds for clearly worrying that maybe it'll go above my range. I don't think it will. I think at 5% they'll have plenty of buyers as we saw in 2023. >> That is the key conclusion from the clip. 4 to 5% may not be a temporary shock. It could simply be the return of a more historically normal cost of capital. And look, if that's true, then an 8% discount rate cannot automatically be treated as conservative. For highly valued growth companies, moving from 8 to 10% can erase enormous amounts of apparent upside. So, it's why every DCF that we use today will be stress tested. I won't simply accept the green intrinsic value box here when the majority, in fact, of the value depends on a distant terminal calculation. Now, there is also, however, an important counterargument. Rising yields often accompany stronger economic growth, and stronger growth can allow excellent companies to outgrow multiple compression. Here's that bullish argument stated clearly, because we need to test it rather than ignore it. >> I think it's fleeting. I think it's fleeting. In the really short term, you can get a sell-off, especially with with tech stocks up a lot in the last few years. But ultimately, when you study the long history of the change in rates versus the change in equities, there really isn't a statistically significant relationship, because usually ultimately, if yields are high, it's because growth is good. And if growth is good, tech stocks and the stock market can can do well. >> So, the conclusion is not that every growth stock must fall. Is it growth now has to do more work? A company growing 30%? Yes, it can still succeed. But 100% it cannot succeed at any price. And we can see that the demand behind AI infrastructure remains extraordinary. Meta's estimated compute capacity rises several fold through 2030, with inference, training, and spare capacity all requiring additional power and networking. And then at the same time, we've got hyperscalers. They're taking an increasing share of worldwide critical IT load. That supports the long-term opportunity for companies like Broadcom and Arista Networks that we're going to cover today. And you've also got the end market revenue is beginning to arrive. Anthropic reportedly reached a $65 billion annualized revenue run rate. That's ahead of OpenAI's reported 40 billion. And it's worth noting the speed of the acceleration. It's difficult to overstate. We're going to take a listen to the reported numbers before we decide whether the investment cycle is merely speculative. >> That's right. I mean, it's showing up in the revenue numbers. And we do have a new glimpse into Anthropic's revenue growth ahead of its IPO. Anthropic, from what I'm hearing, topped $65 billion in annualized revenue. This was as of the end of July. That would be up about 7x year-over-year. This is according to two people familiar with the company's financials. Anthropic, also from what I'm hearing, shared some of this intel with existing investors in an update over the weekend. And for context, ARR back in May was around $47 billion. And then you look at all of last year, Anthropic brought in less than $10 billion in sales. >> And the conclusion there is straightforward. Genuine customers are spending genuine money. The AI boom has moved beyond the promise, but revenue at the model providers does not guarantee equal returns for every supplier. And we can see the token expenditure, well, that rose sharply and then began retreating. It can reflect lower unit costs and improving efficiency, but it also means investors should not blindly extrapolate peak spending. And we do also have a new reading, which is more severe. The index has returned close to its late 2025 low. AI users can keep expanding while the cost of delivering each unit collapses. Meanwhile, we've our professional investor sentiment, it's close to the bullish end of its historical range. This is not a market already priced for widespread disappointment. Retail sentiment, well, it's less extreme, is sitting around neutral to modest greed. But Robinhood's behavior shows younger investors have started taking profits rather than automatically buying every single dip. Let's listen to why that change caught Robin Hood's attention, and then we'll apply the same discipline to each of the five stocks today. >> Um we start Sorry, at the end of July, we saw 2 weeks of of net selling. And as I was telling you, when you look at the average age of our customer, which is early 30s, they're almost always net buyers. I mean, they're in that phase where they're going to have a long investment duration, so they're they're accumulators of stocks, generally speaking. So, when we saw that, that caught our attention. Um and you know, I think there's a little bit of nervousness. I mean, you guys been covering it in quite quite a bit of detail about some geopolitical things, but also yields and and what that's going to mean for the market in general. >> Now, that doesn't mean retail investors expect a crash. The conclusion is subtler. After enormous gains, we can see that year-to-date, in fact, investors have finally asked him whether each position still deserves its current weight in their portfolio. And well, that's exactly our task today. For every company, we're going to test business quality, expected growth, current valuation, and what the DCF assumes. And we're going to begin with the largest and most recognizable company on the list today. That's Apple, with the share sitting around $310. It's gained around 14% this year. And their latest quarter, it was genuinely excellent. Revenue reached $109 billion. That was up 16% year-over-year. Net profit, that reached around $30 billion. And iPhone revenue, we can see $54 billion. That was up 22%. Mac revenue up 29% year-over-year. Services up 12. And the long-term transformation is visible here. Services revenue has more than doubled since 2020 and now provides recurring high-margin income alongside the enormous iPhone franchise. We can also take a look at free cash flow. That's reaccelerated above $100 billion. Few businesses anywhere can generate this amount of surplus cash with just so little capital intensity. In fact, return on capital invested has climbed to around 52%. Operationally, Apple is stronger than it was several years ago, not in any way weaker. And we can see their margins, returns, and cash generation earns an A+ profitability grade from Seeking Alpha. It's why Simply calling Apple has repeatedly been an incomplete argument. But the forward picture, that's less exceptional. Expected revenue growth, as we can see here, is roughly around 10%. Expected EPS growth, that's sitting around 16%. And when we take a look at what analysts are forecasting over the longer term, well, that's sitting close to 11. And bear in mind, this is all with Apple trading around 34 times forward earnings against a 5-year average that sits around 28. The dividend yield, that's also below its historical norm. So, all of these you could argue are pointing to a potential overvaluation signal, for which when we take a look at the blue tunnel from Simply Safe Dividends, pointing out intrinsic fair price, it sits above the upper end of the fair value. Another signal that it could be overvalued. Anything we always like to mention, Apple is a company that does historically trade at a premium, sometimes quite a wide premium. But other times, if you're lucky, like we saw in 2025, there was a period where it traded undervalued. And you can see that their multiple has expanded much faster than the underlying earnings base. At this price, investors paying a premium not only for quality, but also for an acceleration that still needs proving. And the DCF makes the challenge obvious with an 8% discount rate and 10% annual cash flow growth, intrinsic value it comes to $266. That's 14% below the current price today. And even the high case assumes 12% cash flow growth for a decade and only reaches around $306. That's slightly below the current share price today. And then we move to the reverse DCF. That requires around 12% annual growth, whereas Apple's 5-year keger sits at 2%. Their 10-year keger sits around seven. And Wall Street's average target offers only around 5% upside. That is unusually little compensation when long-dated government bonds themselves, well, they offer more than 5%. So, my verdict on Apple is avoid. Not because Apple is deteriorating, but because the price already reflects an exceptional future. Around $260, $270, the risk and reward become much more balanced. Apple demonstrates the episode's central lesson. A record quarter does not automatically create a buying opportunity when the valuation rose before the results arrived. We then move on to the second company which presents the opposite setup. That's AppLovin trading around $307. And we can note this down around 54% year-to-date. It's also trading pretty much at a 52-week low. But the business has not fallen 54%. Quarterly revenue has multiplied. Gross margin has climbed towards 88% and net margin is now sitting above 65% and profit increased $772 million in 2023 to more than 4 billion in 2025 with analysts expecting further substantial growth through 2028. And free cash flow per share, well, that's followed the same trajectory, rising from below $1 several years ago to now sitting comfortably above 10. And we can see that their latest growth statistics remain extraordinary. Trading revenue, that's up nearly 61%. EBITDA, that's up 76% and expected EPS growth, well, that's sitting around AppLovin receives an A+ on profitability. Gross margin incredible sitting at and free cash flow margin, well, that's near 47. So, why has the market erased more than half the company's value? Because when expectations are extreme, a tiny miss can change the entire narrative. Their second quarter revenue reached $1.9 billion. That's up 53% but missed expectations by roughly 20 million and their third quarter guidance was also fractionally below consensus. And their net income still increased 55% to 1.3 billion. Adjusted EBITDA rose 58% and the company produced 863 million dollars of quarterly free cash flow. Now, the collapse has reduced the forward earnings multiple to around 19 times. That is dramatically below its own recent history, while the earnings, they're still expanding rapidly. Now, when we take a look at the valuation, it's not optically cheap when we compare it, in fact, against the software sector on sales multiple but pretty much any multiple across the board. When we take a look, in fact, at the PEG, well, it's sitting at 0.59, below one. The earnings and cash flow multiples, they've also compressed sharply. And consensus places the PE near 15 times based on 2027 numbers, below 12 times, well, based on 2028. The danger is that expected EPS growth, well, it's anticipated to drop sharply, as we can see, by 2029. And the DCF, it produces $533. That's based on 10% growth rate as well as using an 8% discount rate. But unlike Apple, the result remains interesting even after applying strict assumptions. If we change the discount rate here to 10%, well, we can see the value comes to $367. And if we go one step further and take it to 11%, well, it's sitting at 316, still close to the current price. And let's go one step further and change things around. Let's say 9% on the discount rate and then change the growth rate to 5%. We can see the intrinsic price comes to $311. The market, as we can see overall, is pricing a dramatic slowdown rather than continued perfection. And as always, I wouldn't rely on Wall Street's 75% upside target. Targets adjust slowly, especially after a rapid collapse. The investment case works without requiring that number. So, going back to our initial DCF where we had a 10% growth rate and an 8% discount, it gives a margin of safety of 42%. And one thing to consider is the genuine risk are an opaque advertising algorithm, mobile gaming concentration, rapidly changing competition, and reportedly active SEC investigation. Now, no formal accusation has been made, but the uncertainty overall deserves a smaller position. My verdict for AppLovin is a buy, but this is a high-risk company. The numbers suggest the rerating's traveled much further than the operational slowdown. I'd buy the position gradually rather than assume the bottom is already established. I would say that AppLovin is the first stock today where the current cash generation, not an optimistic terminal value, provides meaningful support for the valuation. Now, before we continue, just to let you know that I release one weekly article covering severely undervalued stocks, what's going on in the market, as well as other interesting topics. You can click on the pinned comment below, sign up, and read all of these straight away. We then move on to Broadcom, which is another outstanding business, but its setup is less obvious. The shares we can see trading around $380 is up around 10% year-to-date, but recently retreating with the semiconductor sector. Now, most recent quarter, revenue reached $22.2 billion. That was up 48% year-over-year. Semiconductor solutions, well, that contributed 15 billion, while infrastructure software contributed another 7.2. And you can see that semiconductor revenue growth has accelerated from low single digits in 2023 to 79%. This is the clearest evidence that custom accelerators in AI networking are becoming material. I mean, we can also note gross profit was looking very strong, 15 billion operating profit just over 11, net profit sitting at 9.3, and Broadcom also generating more than 10 billion dollars of quarterly free cash flow. Also worth pointing out, we get another company with profitability sitting at an A plus, and that's supported by trailing EBIT margin that's coming out to 44%. EBITDA margin coming at 56%. And a free cash flow margin very strong coming at 36. Another strong thing to look at is their growth. We can see expected revenue growth sitting at 50% while expected diluted EPS that's coming out close to 60%. On growth alone, Broadcom appears less expensive than the headline multiple suggests. But the market, it already recognizes much of this. Broadcom trades around 33 times 27 earnings, above Nvidia and Qualcomm, although below AMD, Marvell, Intel, and Arm. And the forward P is nearest five-year average, but the yield has fallen far below its historical norm. Broadcom's transition from an income stock to a premium AI compounder. Where if we do take a look at the blue tunnel, we can see firstly, underlying metrics have really increased over the last 12 months, and it's sitting firmly in the middle, which could be considered a potential reasonable signal. Now, we can see with 15% cash flow growth and an 8% discount rate, the DCF comes out with a value at $157, offering around 21% upside. However, if we increase the discount rate, let's say 9%, the value drops to around $368. At 10%, well, obviously it falls further, but we can see it sitting at $306, which ultimately, when we come to look at the margin of safety, that disappears with just a modest change in the cost of capital. And at today's bond yields, it's not a theoretical concern. And Wall Street, their average price target is $528, but the range stretches from 216 at the lower end up to 675. The spread demonstrates how dependent the outcome is on sustained AI growth. So, Broadcom must also manage semiconductor cyclicality, hyperscale concentration, and the integration of its expanding software operations. 79% segment growth will inevitably normalize. Now, going back to the 8% discount rate, when we take a look, margin of safety sits at 17%. So, my verdict overall is a hold or watch rather than buy. I become more interested around $350 to $365, where a 9% discount rate begins offering an actual margin of safety. We can highlight very quickly at the 9% level. It's not sitting too far off today's price. We're talking a premium, but very small, around 3%. Broadcom, though, ultimately may deliver the strongest business performance of all five companies, but at $380, the prospective return is not yet strong enough to become one of today's two purchases. We then move on to Fair Isaac Corporation, which provides the episode's most unusual opportunity. Their shares are trading above $1,000 after falling around 36% year-to-date, and we can also note pretty much half from their all-time high, sitting around $2,000. Yet, their scores revenue has accelerated dramatically. The latest quarter reached around $459 million, up 41% with business-to-business scoring revenue rising 49%, and you can see their operating margins climb from the low 20s historically around 47% annually, while their current trailing EBIT margins above 50%. Now, FICO, another one that earns an A+ profitability grade, 85% gross margin, incredible 34% when we talk about the net income margin, and 32% on the free cash flow. Let's not forget about their return on total capital sitting at 54%, and this is all while their growth looks strong as well. Revenue was up 24% year-over-year, expected to climb 19% moving forward. EPS, that's anticipated to grow over 30% and we can see that free cash flow, that's anticipated to grow around 25. And operating cash flow, that's reached $1 billion while the valuation placed on that cash generation has collapsed from its 2024 peak. And when we talk about valuation, well the forward P on a non-GAAP basis, that sits around 25. Compare that with their five-year average that sits at 44, you're talking about a 43% discount. And then the forward PG, another one today that sits below one, we're talking 0.91. And consensus reduces the P to roughly 20 times on 2027 numbers, 17 on 28, down to below 14 on 2029 if expected earnings arrive. Now, the overall share price collapse did follow a small revenue miss and guidance that came below Wall Street's expectations, but not an overall collapse in the underlying business. However, much of the scores growth came from substantially higher mortgage origination pricing. It makes the durability of this growth more controversial than the headline number suggests. And you've also got capital allocation which introduces another risk. FICO spent more than $3 billion repurchasing shares during the first nine months of fiscal 26, including an enormous accelerated program. Now, one thing to note is that these purchases were partly debt funded and total debt has risen towards $5.6 billion while cash is sitting at only around $248 million. Now, buying back stock can be powerful when the valuation is low, but aggressively borrowing after years of multiple expansion, it reduces financial flexibility if regulation disrupts the pricing. And honestly, the regulatory threat is now real for FICO. US housing agencies are allowing Vantage Score 4 alongside FICO 10, introducing competition into a market that operated like a near monopoly. Now, the DCF today, it begins with around $1 billion dollars flow. That's based on analyst expectations. We've used a 10% growth rate and an 8% discount rate. Intrinsically, we get $1,237. At 9%, when we bring that into the picture, the value falls to $969. And current price sits between both of those outcomes. So, this is not a huge DCF margin of safety, but bear in mind when we use the 8% discount rate, we are also in fact using the lower growth rate of 10%, which is below both 5-year and 10-year CAGR. So, you could argue that we've already been fairly conservative. That in itself gives a margin of safety of around 13%. But, what makes FICO attractive is the combination of a historically compressed multiple, 30% earnings growth, and exceptional margins, not the base case DCF by itself. Now, Wall Street, they see around 37% upside over the next 12 months. Although the target range is extremely wide again, we can see 700 at the lower end, 1750 at the upper end. Again, I treat this as context rather than the investment thesis. So, my overall verdict is a gradual buy, preferably below $1,000. At 1078, I begin small because regulatory competition and leveraged buybacks prevent this from being what I'd say as a low-risk stock. So, this is today's second purchase, a dominant, exceptionally profitable company whose multiple has fallen much faster than its earnings power, provided investors respect the new risks. We then move to the final company, which may have the best operating results of the list today. Arista Networks trade around $193, and it's up around 47% year to date. We can also see both Wall Street and Quant give it a very strong buy rating, 4.7 out of five for Wall Street, 4.9 by Quant. It's a weaker buy rating from Seeking Alpha, 3.7 out of five. And Arista Networks is a company that you could call very, very reliable. They have outperformed expectations over the last 40 quarters, both on a revenue basis as well as an earnings per share. In fact, their most recent quarter, they out performed EPS beating fact 15% revenue 7% on a year-on-year basis earnings per share up 40% revenue up 38 and revenue is growing above 32% both on a year-to-date basis as well as forward expectations. Expected EBITDA 34% forward EPS growth anticipated 31 and 1/2 and again another very strong profitable company sitting at an A+. I'd say it's exceptional. You've got 63% gross margin, 43% EBIT margin, 38% net income margin, free cash flow margin sitting at 37% and the balance sheet holds more than $13 billion of cash and investments with effectively no debt. Return on capital, well that in fact exceeds 22% and their second quarter revenue surpassed $3 billion for the first time rising 38% EPS increased around 40%. And management raised expected 2026 revenue growth to around 40%. Unfortunately though, investors are paying heavily for the numbers. We can see 47 times forward non-GAAP basis. When you compare that to their five-year which also looks high in isolation, that's 24% richer. And then you take a look at the forward PG, that in fact exceeds two 2.1. Again, both higher than the sector as well as their own historical. And you can see the same for the other metrics price to sales sitting at 19. Price to book 14. EV to sales sitting over 18. And this all matters because long-term expected EPS growth is close to 22%. The multiple assumes today's unusually strong growth persists for much much longer. And you can see what consensus are anticipating 38% growth in 26, 25 in 27, 24 in 28, the same again in 29. And based on this, the multiple sits around 24 times 2029 numbers. And perhaps you can argue there are already subtle signs of pressure. Their gross margin it actually declined from 65.2% to around 63% year-over-year. And that's partly reflecting customer mix and large client discounts. And their customer concentration is also substantial. Two customers represented 26% and 16% of 2025 revenue, 42% combined with prior filings identifying Microsoft and Meta. And the concentration is helping Arista today because hyperscaler spending is extraordinary. It becomes dangerous if one customer delays an AI deployment or changes network architecture. And the DCF that we have today for ANET, well, we can see we use a 15% growth rate, 8% discount rate, coming to $216 indicating 13% upside. And if we change this to say around 10%, well, we can note there's no margin of safety overvaluation signal. In fact, we notice a 29% premium. If we go to around 9%, well, still overvaluation, still no margin of safety, a 9% premium. And even using the original numbers at 8% growth with 15% growth rate, it's not too dissimilar from what's already been priced in by the market. So, we're talking overall an 11% margin of safety. And Wall Street they're forecasting 25% upside, $242 price target, range 185 low end to 289 on the upper. So, Arista, it's almost perfect, but that's precisely the problem. At 47 times earnings, almost perfect become the minimum requirement rather than the upside case. So, if we take a quick run through Apple, well, when we looked at that, that was an avoid at today's valuation. The business is exceptional, but at 35 times a multiple and aggressive reverse DCF, it leaves very little room for disappointment. Apple loving, that's a buy, although a higher risk one. The share price decline has traveled much further than deterioration in revenue, earnings, or even the cash flow. Broadcom, that's a hold or watch. I love the company, but at $380, the apparent DCF upside disappears when the discount rate moves from 8 to 9%. I call FICO a gradual buy and it becomes particularly attractive below $1,000. Its valuations compress dramatically, although regulation and debt-funded buybacks, they do require caution. And then Arista Networks, that's an avoid at the current price. The company may continue delivering spectacular results, but the valuation already demands the outcome for many, many years. The broader lesson is not the rising yields automatically end the bull market, is that the hurdle rate has changed and excellent businesses must now compete with genuinely attractive risk-free returns. And when the market trades at historically elevated multiples, the biggest risk is often not a bad company, is paying a price that already assumes the good company never disappoints. Now, let me know your thoughts in the comments, which of these five you'd buy today, whether AppLovin's collapse represents an opportunity or the beginning of a more serious slowdown. And if you found that useful, consider subscribing. I analyze businesses, valuations, and assumptions every single day. And don't forget to sign up to the free weekly newsletter. Again, we drop one every single week covering severely undervalued stocks. More importantly, have a great day. I'll see you all on the next one.