Technology: 23 A-Grades, 10 Declining Trends

The Surface Story

Technology posted 23 A-grades out of 38 companies. That's 61% of the sector hitting our highest grade tier. Median FCF margin of 15.9% sits comfortably above the 12% threshold for a C grade. Debt levels average 5.1x FCF, which is manageable. By every headline metric, tech looks like the healthiest sector we cover.

But 10 companies are declining. Not just any 10 companies: six of them hold A-grades.

The Trend Problem

Microsoft. Declining. Panw. Declining. Qualcomm, KLA, Lam Research, Applied Materials, Cadence. All declining. All A-grades.

These aren't marginal performers coasting on past success. MSFT still prints a 21.2% FCF margin. PANW sits at 23.6%. QCOM hits 22.7%. These are companies generating serious cash relative to revenue. The problem is the direction.

When we last looked at technology in June, we flagged 12 declining trends. It's improved to 10, but the composition matters. The companies losing momentum aren't the obvious disasters. They're established names with real businesses. That's a different kind of warning sign.

Compare that to the 23 improving trends. NVDA leads at 41.8% margin, up and accelerating. Palantir sits at 31.7%, improving. AMD hit 14.7%, improving. Apple clawed back to 20.6%, improving after years of stagnation. Zoom recovered to 23.9%. Shopify pushed to 13.5%. Even some of the disasters are trending the right way: Intel, Snowflake, and Oracle are all improving from deeply negative territory.

The sector is splitting. Half the A-grades are getting stronger. The other half are weakening.

The Top Tier

NVDA's 41.8% margin isn't just best-in-sector. It's 10 points clear of second place and improving. That's the kind of dominance that doesn't show up by accident. Analog Devices holds 35.9% stable. Adobe sits at 33.3% stable. Palantir and Broadcom round out the top five, both improving.

These five companies average 34.6% FCF margins. The sector median is 15.9%. That 18.7-point gap tells you how bifurcated tech has become. The winners are printing cash at rates that make the rest of the sector look ordinary.

Verint (29.5%), Fortinet (28.6%), KLA (28.6%), Lam Research (27.5%), and Salesforce (26.2%) fill out the rest of the 25%+ club. Ten companies total clearing that threshold. Seven of them improving or stable. Three declining.

The Bottom Tier

Oracle: -42.3% FCF margin. Grade F. Somehow improving.

That's not a typo. Oracle burned cash equal to 42% of revenue in the most recent quarter. The company is improving from an even worse baseline, which raises questions about what baseline we're starting from. Intel sits at -14.0%, also improving. Snowflake at -10.3%, improving. Cloudflare at -8.8%, the only D grade in the sector, also improving.

The bottom five aren't all disasters on the trend front. They're disasters on absolute performance. Intel's improvement means going from burning 20% of revenue to burning 14%. That's progress, but it's still an F.

Atlassian rounds out the bottom at 1.0% margin, declining. That's the concerning one. A company barely breaking even on cash flow and trending the wrong direction doesn't have much room for error.

The F-grade club has nine members total. Five are improving. Two are declining. The improving ones matter more than you'd think. If Intel, Snowflake, or Oracle can flip from deeply negative to merely bad, that's a lot of capital potentially returning to the sector. If they can't, that's a lot of invested capital lighting on fire.

What the Distribution Reveals

Grade distribution: 23 A, 2 B, 3 C, 1 D, 9 F.

No middle class. Tech companies either generate strong cash flow or they don't. The sector has two B-grades out of 38 companies. That's 5%. TheC-grade tier has three companies: Cisco at 17.0% (declining), IBM at 14.4% (improving), and Marvell at 9.8% (improving).

Cisco's decline is telling. A 17.0% margin would be an A-grade in most sectors. In technology, it's a C because the balance sheet and trend knocked it down from a base B-grade. When a company with that kind of cash generation can't maintain an A, something shifted.

The sector is operating in extremes. You're either printing 20%+ margins and getting an A, or you're struggling to stay positive and getting an F. The companies in between are rare and mostly trending out of that middle zone one direction or the other.

Debt Isn't the Problem

Average debt-to-FCF of 5.1x is high but not crushing. For context, that's about half what utilities carry. Technology companies can service that debt as long as the cash keeps flowing. The risk isn't the absolute debt level. It's what happens when margins compress and cash generation slows.

Six A-grades are declining while carrying meaningful debt loads. If those trends persist, debt ratios rise without the companies taking on new debt. That's when downgrades accelerate.

The improving trends tell a better story. When 23 companies are trending up, debt ratios naturally compress. Cash covers interest payments with room to spare. The 5.1x average feels manageable as long as the improvement cohort stays larger than the decline cohort.

What This Means

Technology looks healthy because the winners are dominant. NVDA, ADI, ADBE, PLTR, and AVGO are posting margins that carry the sector average. The bottom tier is burning cash but mostly improving. The middle tier barely exists.

The concerning part is the declining A-grades. When established, profitable companies start trending the wrong direction, that's early-stage weakness. It doesn't show up in the headline metrics yet because the margins are still strong. But direction matters more than absolute levels when you're trying to figure out what happens next.

Twenty-three A-grades sounds great. Six of them declining sounds like a problem forming. Watch how that balance shifts over the next two quarters. If the declining cohort grows, the sector's median margin starts compressing. If the improving trends hold, tech stays in the top tier of cash-generating sectors.

Right now, it's both at once.