Cloud Delivery
In this edition of the Smart Investor newsletter, we spotlight a global tech leader powering the world’s commerce, cloud, and media – compounding scale, intelligence, and profitability across its digital empire. We’re not selling any stocks this week, as heightened market anxiety continues to distort reactions to earnings and business developments. But first, let’s review the latest Smart Portfolio developments.
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Portfolio News and Updates
❖ Microsoft (MSFT) posted fiscal Q1 2026 earnings that beat Wall Street’s expectations, powered by growth in its Azure cloud business. Total revenue came in at $77.67 billion versus $75.49 billion expected, up 18% year-over-year. Operating income rose 24% to $38.0 billion, while non-GAAP net income rose 22% to $30.8 billion. Adjusted EPS surged past the consensus of $3.67 to $4.13, increasing 23% year-over-year.
GAAP EPS rose “just” 13% to $3.72, depressed by OpenAI investments. This line is now expected to reverse course over time, as contractual revenue streams ramp up and investment valuations mature under the new agreement with the ChatGPT creator, giving MSFT a stake valued at $135 billion. Additionally, OpenAI commits to purchase an incremental $250 billion of Azure cloud services under this new long-term contract.
Microsoft achieved an operating margin of 49%, reflecting efficient cost management amidst increased AI investments. The company also reported soaring commercial bookings growth of 112%, highlighting strong customer commitment and adoption of Microsoft’s offerings, particularly driven by Azure demand.
Microsoft Cloud, which includes all the company’s cloud-based services, saw its revenue reach $49.1 billion in FQ1, marking a 26% increase year-over-year. Intelligent Cloud segment revenue, which includes Azure and other cloud services, jumped by 28% to $30.9 billion, as demand continued to exceed supply on the back of the ongoing capacity constraints. Azure revenue was up 40% from a year ago in the first quarter. Although this growth was above the consensus of 38%, it was lower than the most optimistic call on Wall Street, prompting a “sell the news” reaction post-release.
Meanwhile, MSFT’s commercial remaining performance obligations (RPOs) across all its business segments soared 51% to $392 billion, with a weighted average duration of two years. The company’s RPOs are largely driven by its cloud backlog, and its size – more than 12x the Intelligent Cloud revenue – is truly astounding, serving as a visible display of the demand strength.
During the quarter, the giant spent nearly $35 billion on capital expenditures – up 74% year-over-year and nearly $10 billion above expectations – including data center leases and other AI infrastructure. Despite this heavy investment, MSFT still sees a capacity crunch, which continues to constrain Azure’s growth. As a result, Microsoft changed its stance from the previous quarter, when it said capex would be lower in the second half of the ongoing fiscal year. CFO Amy Hood said that to catch up with soaring demand, investments need to grow further: “Total spend will increase sequentially, and we now expect the FY26 growth rate to be higher than FY25.”
That notion likely spooked investors, who are still struggling to digest the enormous amounts of money flowing into AI and cloud infrastructure projects over the past several quarters. Microsoft CEO Satya Nadella revealed that the company plans to increase its total AI capacity by over 80% this fiscal year and expects to roughly double its total data center footprint over the next two years.
Following the capacity extension theme, Microsoft announced a $9.7 billion, five-year deal with an Australian neocloud provider, IREN. The agreement gives MSFT access to systems built on Nvidia’s GB300 AI GPUs and Dell’s compute infrastructure, which will be installed at IREN’s facility in Texas. The deal helps Microsoft bypass bottlenecks in obtaining next-generation AI chips at scale, and is expected to accelerate AI service delivery cycles and provide headroom for expansion. This agreement is one of the largest and most consequential AI infrastructure contracts signed in 2025, addressing the acute supply-demand tension in cloud-based AI compute.
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❖ Alphabet’s (GOOGL) Q3 2025 results smashed even the most optimistic expectations, sending shares soaring. The Magnificent Seven pack member logged in record quarterly revenue of $102.3 billion – crossing the $100 billion mark for the first time and rising 16% year-over-year. Google Search, YouTube ads, Google subscriptions, platforms and devices, and Google Cloud each delivered double-digit growth.
Operating income rose 9%, and the operating margin was 30.5%. Excluding the $3.5 billion EU fine, operating income increased 22% and operating margin was 33.9%, thanks to strong revenue growth and cost efficiencies. Net income jumped 33% and EPS surged 35% to $2.87 – far above the consensus of $2.26. Free cash flow soared 38.7% year-over-year.
Google’s Search revenue grew 14.5% year-over-year, decisively dismissing any lingering doubts about AI’s threat to search income. YouTube’s ad revenue rose 15%, and total advertising revenue – which includes search and YouTube ads among others – increased by 12.6% year-over-year to $74.18 billion. The company now has over 300 million paid subscriptions, led by Google One and YouTube Premium.
Google continues to hold a near-monopoly position in web search. This dominant position is what drives the company’s main revenue generator, digital ads, which is now supported by AI features like AI Overviews and AI Mode that not only help retain users but also drive incremental query growth and improved user engagement. Moreover, as agent-driven web browsing takes off, controlling Chrome with its multibillion-user base is vital for benefiting from agent-led commerce activity and adjacent advertising, unlocking a new growth vector.
AI momentum is accelerating, with Gemini integration, major cloud partnerships, and robust capital investment fueling leadership across GOOGL’s business lines and validating the company’s “full stack” approach to AI integration. In addition to topping leaderboards, Gemini now has over 650 million monthly active users, while its token usage of 7 billion per minute for its API business is around that of leading frontier models such as OpenAI’s ChatGPT. GOOGL is expected to release Gemini 3 in December with a major update to its flagship AI model.
Google Cloud revenues increased 34% to $15.2 billion, led by growth in Google Cloud Platform (GCP) across core products, AI Infrastructure, and Generative AI Solutions. AI is a key growth driver: Google Cloud’s AI revenue grew over 200% year-over-year, and Cloud backlog reached $155 billion, soaring 82% year-over-year. The company signed more billion-dollar cloud deals in the first nine months of 2025 than in the previous two years combined.
Investments in AI infrastructure, including advanced chips like Nvidia’s GPUs and Google’s home-made TPUs, are meeting growing demand. After reporting a surge in Q3 capex to nearly $24 billion – an 83% year-over-year surge – the company chimed in with Microsoft’s pledge for increased capex, which is now expected to come in at $91-93 billion in 2025, versus analyst expectations of roughly $85 billion. Most of the spending targets massive data centers powering AI initiatives, reflecting surging demand from Google Cloud customers. CFO Anat Ashkenazi indicated that capital spending is expected to rise even further in 2026.
In addition to AI-led intrinsic growth, Alphabet said it recorded $10.7 billion in net gains on equity securities, partly from a private company widely understood to be Anthropic. The Claude AI maker recently announced a material expansion of its use of Google’s TPUs and Google Cloud services under a new deal worth tens of billions of dollars.
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❖ EMCOR Group (EME) shares dropped post-earnings despite a strong Q3 report. The specialty construction contractor achieved record revenue of $4.3 billion for the third quarter, up 16.4% year-over-year and slightly above estimates. Net income for the third quarter of 2025 was $295.4 million, or $6.57 per share – above the consensus of $6.54 and up 13.3% year-over-year. Total company RPOs reached a record $12.6 billion, marking a 29% increase year-over-year. Meanwhile, the network and communications RPOs – a segment serving data center buildout – hit a record $4.3 billion, almost double the previous year, with over 80% of RPO growth organic. However, operating margins narrowed to 9.4% from 9.8% last year due to amortization costs, lower profitability on certain projects in new geographies, and increased costs associated with complex projects, although offset by strong revenue growth and efficiencies in other segments.
Based on the momentum year-to-date, EME updated its full-year 2025 guidance, while adjusting for the anticipated sale of the U.K. business in Q4 and the acquisition of a U.S. mechanical construction firm to further strengthen its core markets. The 2025 revenue guidance range has been narrowed to $16.7-16.8 billion, from $16.4-16.9 billion, representing a ~$100 million increase at the midpoint. Additionally, the guidance for non-GAAP diluted earnings per share was narrowed to a range of $25 to $25.75, with an increase of $0.50 at the low end and $0.25 at the midpoint from previous estimates. The expected operating margin was also slightly lifted at the midpoint.
Despite the “beat and raise,” the updated revenue guidance disappointed, coming in line with what analysts already predicted. Coupled with worries that the stock has outran its growth potential after a surge of nearly 65% this year into earnings, this disappointment led to a knee-jerk sell-off. Analysts were mostly unfazed, with Baird lifting its price target to $713 from $703, calling the sell-off a “myopic” reaction. Stiefel Nicolaus cut the PT from $718 to $713, but maintained a “Buy” rating, saying that EMCOR’s underlying business remains strong, despite some near-term margin pressure, and the company is well-positioned to return to margin expansion.
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❖ Howmet Aerospace (HWM) delivered record third-quarter results, with sales and net income both climbing more than was expected and margins expanding significantly versus the prior year’s period.
The aerospace and transportation engineering solutions company clocked in total revenue of $2.09 billion, up 14% year-over-year, driven by a 24% jump in defense aerospace, 18% growth in industrial/other markets, and 15% increase in commercial aerospace revenues. Although commercial transportation sales were down 3% due to lower volumes and tariffs, strong results in other segments more than compensated for the decline. Operating margin expanded by 300 basis points, coming in at 25.9%. Adjusted EPS surged nearly 34% year-over-year to $0.95, compared to the consensus of $0.91.
HWM spent $600 million on buybacks during the three quarters of 2025 – $100 million more than in full-year 2024 – and hiked its dividend by 20% in August. Despite the outlays, net leverage improved to 1.1x, and S&P upgraded Howmet’s credit rating to “BBB+.” The company announced a $500 million debt offering to refinance existing notes, solidifying expectations for improved capital structure and lower interest expense going forward.
Howmet Aerospace also boosted its 2025 outlook and signaled further growth ahead into 2026. For the full-year 2025, the company sees revenue of $8.185 billion, EBITDA at $2.375 billion (with a 29% margin), EPS of $3.67, and free cash flow of $1.3 billion – all at midpoints. The company also generally outlined its outlook for 2026, with revenue expected to increase by about 10% to $9 billion, led by continued strong demand from data center expansion, as well as both commercial and defense aerospace segments. Analysts were impressed by the results and the outlook, with about a dozen increasing their price targets, and Truist upgrading its stance to “Buy” from “Hold.”
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❖ MasTec (MTZ) reported record revenue growth of 22% year-over-year, lifting the sales near $4 billion – ahead of the consensus expectations – with adjusted EBITDA growing 20% year-over-year to $374 million. Performance across all segments was robust, with the Communications segment’s revenue surging 33%, while Clean Energy and Infrastructure saw revenue grow by 20%, Pipeline increased by 20%, and the Power Delivery segment registered a 17% growth year-over-year.
Adjusted EPS came in at $2.48, compared to analyst estimates of $2.30, marking a 52% year-over-year increase. However, MasTec’s operating and free cash flow dropped sharply in the quarter, primarily because of increased working capital requirements and capital expenditures related to large project ramp-ups. Meanwhile, the infrastructure construction company revealed a record total backlog of $16.8 billion, up 21% year-over-year, driven by a 124% surge in the Pipeline Infrastructure segment’s backlog.
This strong backlog growth and new large project wins across all segments (including the recently announced second-largest project ever for MasTec won by its Power Delivery segment) support a strong multi-year outlook, while validating the increased investment in growing project activity and capacity expansion.
For the full year 2025, MTZ’s new guidance assumes 14% growth in revenue to $14.08 billion at the midpoint, above the previously guided range. However, a projected adjusted EBITDA of approximately $1.14 billion is at the lower end of the previous range of $1.13-1.16 billion, while still implying a 13% increase versus the prior year. Further down the road, the company forecasts double-digit revenue and EBITDA growth in Power Delivery and Pipeline through 2026. The management highlighted substantial “shadow backlog” (likely-to-be-signed contracts), providing additional visibility into future pipeline and supporting a robust growth outlook for 2027 and beyond.
While analysts were awed – with Stiefel, Truist, Mizuho, Baird, KeyBanc, and other raising price targets – investors fretted over the drop in free cash flow margin and the slightly tempered EBITDA outlook, leading to heavy profit taking. This disconnect between analyst stance and market reaction likely stems from overall investor anxiety amid volatile trading, as well as profit-taking after a 60%+ run-up in MTZ shares this year into earnings.
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❖ Uber Technologies (UBER) saw its stock drop sharply on Tuesday despite reporting a set of impressive quarterly results, as investors likely expected more following a 65%+ stock surge year-to-date.
Revenue grew 20% year-over-year to $13.47 billion, compared to the consensus of $13.28 billion. The company generated adjusted EBITDA of $2.25 billion (up 33% year-over-year) and free cash flow of $2.23 billion (up 6%). Net income attributable to Uber Technologies, Inc. was $6.6 billion, a surge of 154% from the prior year as this figure included a $4.9 billion tax valuation benefit and a $1.5 billion net pre-tax benefit from reevaluations of equity investments. As a result, the company’s GAAP EPS was $3.11, and adjusted EPS came in at a much lower level of $0.87, but still far above the expectations of $0.69. TTM free cash flow reached $8.7 billion, underscoring the strength of Uber’s cash-generative business model.
The increase in profit and revenue was driven by a notable rise in volumes, with booking and trip growth at records (outside of the post-pandemic rebound). Gross bookings rose 21% to $49.74 billion, with record audience and engagement growth of 17% and 4%, respectively, while average pricing remained flat. After three consecutive quarters of ~18% trip growth, Q3 saw a jump of 22% year-over-year in the number of trips delivered over the quarter.
These impressive results were led by the membership program, Uber One, which is driving increased orders for food and grocery deliveries in addition to its core ride-hailing services. This demand growth underscores the company’s successful program implementation, driving customer stickiness and cross-selling opportunities. Notably, Uber’s delivery segment experienced a 29% sales growth, outpacing the 20% growth in core ride mobility revenue.
Uber Technologies revealed two notable partnerships. The company is partnering with Nvidia to deploy the world’s largest Level 4 autonomous vehicle network, starting in 2027. The initiative plans to produce and scale up to 100,000 autonomous vehicles that will operate as part of Uber’s ride-hailing and autonomous delivery fleets. These vehicles will utilize Nvidia’s Drive AGX Hyperion 10 platform, an architecture designed specifically for Level 4 autonomy, along with Nvidia’s Drive AV software. This cooperation adds to the previously announced news on Uber and Nvidia’s “data factory” powered by Nvidia’s Cosmos world foundation model platform to process and curate data critical for autonomous vehicle AI training.
Additionally, Uber and Toast have entered a multi-year partnership to integrate delivery operations and marketing tools directly into Toast’s restaurant point-of-sale (POS) systems worldwide. For Uber, this partnership is a promising revenue growth driver with strategic restaurant delivery market expansion, improved customer engagement tools for merchants (translating to higher revenue from Uber Eats and related delivery), and opportunities to enhance Uber’s platform economics.
Looking forward, Uber forecasts Q4 2025 gross bookings in the range of $52.25-53.75 billion, above the $52.17-53.33 billion range projected by analysts, and representing 17-21% growth year-over-year. Adjusted EBITDA is expected to come in at $2.41-2.51 billion (versus $2.47 billion expected by analysts), which represents 31-36% growth. Despite all-around strength in the Q3 numbers and better-than-forecasted full-year outlook, guidance for the current quarter curbed investor enthusiasm, as bulls called for much stronger EBITDA growth in Uber’s busiest quarter of the year.
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❖ Leidos Holdings (LDOS) bucked the market’s bearish trend on Tuesday, surging after releasing a “beat and raise” report. The defense technology contractor easily beat analyst expectations, reporting record sales of $4.47 billion (up 7.1% year-over-year, +6% organic growth) and adjusted EPS of $3.05 (up 4.1%). LDOS also demonstrated strong operational performance with $711 million in operating cash flow and $680 million in free cash flow during the quarter.
Growth continued to be led by defense systems, energy infrastructure, and health/civil segments, with robust contract wins supporting the outlook for further strong growth. Key contract awards included a $2.2 billion, seven-year intelligence community contract, a $760 million NASA subcontract for astronaut health and performance services, and a $370 million Defense Health Agency contract. In Q3, Leidos reported net bookings of $5.9 billion, resulting in a book-to-bill ratio of 1.3 – i.e., new bookings were 30% higher than billed revenue. The total backlog reached a record of $69 billion, reflecting a 21% year-over-year increase. The funded backlog also reached a record of $9.1 billion, having surged 24% year-over-year. This robust backlog and contract wins underscore Leidos’ solid positioning in defense, intelligence, and government sectors for future revenue growth.
Despite the government shutdown, LDOS’s surging backlog and strong multi-year earnings visibility have allowed the company to raise its 2025 earnings and margin guidance, while maintaining its revenue and cash guidance. Full-year sales guidance remains in the range of $17.00-17.25, and operating cash flows at approximately $1.65 billion. Adjusted EBITDA margin is now forecasted to rise at 13.5%+, versus the earlier expectation of around 13.3%. Adjusted EPS is now penciled in at $11.45-11.75, up from $11.15-11.45. The Leidos board also declared a 7.5% higher cash dividend of $0.43 per share. Management said it is optimistic regarding the future quarters’ performance, given Leidos’ alignment with the priorities of the administration and the company’s ability to provide “smarter and more efficient” defense technology solutions.
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❖ Pfizer (PFE) beat revenue and earnings expectations, continuing the trend seen over the past several quarters. Sales came in at $16.65 billion versus $16.50 expected, while adjusted EPS was $0.87, far above the consensus of $0.63. While these results are lower than last year, the decrease was widely expected as the company continues to see lower demand for its Covid-19 vaccines and antiviral drugs. However, CEO Albert Bourla’s cost-cutting initiatives, new product launches, and stable demand for established drugs helped offset the prolonged phase-out of Covid-related sales.
The U.S. pharma giant increased its EPS guidance for the second consecutive quarter. While revenue guidance for the full-year 2025 was maintained at $61.0-64.0 billion, adjusted EPS outlook was lifted to $3.0-3.15 (from the previous guidance range of $2.9-3.1), above the consensus of $3.0 at the midpoint. PFE said it is on track to deliver approximately $7.2 billion in overall anticipated net cost savings from the ongoing cost improvement initiatives by the end of 2027, driving productivity gains and cost margin expansion.
Meanwhile, the Pfizer-Metsera saga has escalated. A reminder: in September, the pharma giant announced that Metsera – a U.S. private company that showed progress on its pipeline of the GLP-1 anti-obesity drugs – agreed to be bought by Pfizer for up to $7.3 billion. PFE has made an offer after its own efforts to create a top-tier weight-loss pill had a major setback. However, despite the signed agreement, Danish pharma behemoth Novo Nordisk swooped in with an unsolicited counteroffer worth up to $9 billion before the Pfizer deal could be finalized.
Metsera declared the Novo Nordisk bid a “Superior Proposal,” saying it will accept it unless Pfizer matches the higher price. However, PFE sued, claiming that despite the notably higher bid, Novo’s proposal isn’t superior since its chances of clearing anti-trust regulations are negligible. That’s because Novo Nordisk already dominates the obesity market with Ozempic and Wegovy, making it an aim for scrutiny – while Pfizer was already granted an early clearance by the FTC. Besides, the U.S.-based PFE alleges that Novo plans to capture and kill a nascent American competitor before it gains the support of Pfizer in an illegal attempt by a company with a dominant market position to suppress competition. To sum it all up, the parties likely face a long legal battle, with the outcome unclear at this point.
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❖ Arista Networks (ANET) delivered strong financial results for Q3 2025. Revenue surged 27.5% year-over-year to $2.31 billion versus the expected $2.26 billion, with a non-GAAP gross margin of 65.2%. The Americas accounted for nearly 80% of revenue, with international sales contributing around 20%. Net income margin stood at 41.7%. Adjusted EPS rose 25% year-over-year to $0.75, topping expectations of $0.72 and extending Arista’s long track record of double-digit growth and consistent consensus beats stretching back to at least Q2 2021.
Looking ahead, Arista expects Q4 revenue in the range of $2.3-2.4 billion, slightly above consensus at the midpoint, with a non-GAAP gross margin of 62-63% and operating margin of 47-48%. For the full year 2025, the company projects revenue of $8.87 billion, up roughly 27%. Arista anticipates its campus networking segment will generate $750-800 million, while AI data-center revenue is targeted at a minimum of $1.5 billion.
This robust trajectory is forecast to continue next year. For 2026, Arista targets $10.65 billion in revenue – an estimated 20% year-over-year increase – fueled by expanding AI networking capabilities and strategic investments in geographic expansion and product innovation. Gross margin is expected at 62-64%, and operating margin at 43-45%, reflecting the investment cycle required to drive growth. Management remains optimistic about strong demand from cloud providers, AI data centers, and enterprise campus networks, all powered by accelerating AI infrastructure buildouts. In 2026, Arista’s AI networking revenue is projected to jump 70% from 2025 to reach $2.75 billion, making AI a major growth driver. Strategic partnerships with Nvidia, AMD, OpenAI, and others will continue to support a broad AI ecosystem.
Despite the solid beat on revenue and earnings – driven by AI and cloud demand momentum – Arista’s stock fell in after-hours trading, pressured by a broader tech sell-off and the company’s cautious guidance. Investors seemingly expected a bolder outlook from the leading supplier of Ethernet switches and cloud-networking software to hyperscalers like Microsoft and Meta Platforms. The conservative Q4 guidance stands in contrast to management’s highlighting of the unprecedented scale in AI network demand, which should act as a strong tailwind for Ethernet switching and related services. After a strong pre-earnings run, the stock’s “priced-for-perfection” setup left investors disappointed with the tight Q4 margin guidance and in-line revenue outlook.
While near-term margins face pressure from rising competition, higher costs, and expanded capacity investments, Arista remains well-positioned to sustain above-market growth and increase its share in AI data-center and cloud-networking markets. Analysts maintain high confidence in the company’s strong execution, resilient fundamentals, and long-term growth potential.
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Portfolio Stocks Under Review
❖ We are keeping Keysight Technologies (KEYS) under review, as the stock performance still seems to lag the company’s strong fundamentals, despite the recent rebound that helped it outpace the S&P 500. A reminder: we have added KEYS to the Smart Portfolio on October 1, building our investment case on the company’s pivot to AI infrastructure, 6G research, and quantum computing.
Keysight is the world’s largest provider of electronic design and test solutions, serving as a critical enabler of innovation across communications, aerospace, automotive, AI, and emerging fields like quantum. While commercial deployment of quantum computing remains years away, KEYS’s AI-enabling tech has already become a meaningful contributor, expanding faster than the company overall, as the company’s measurement and validation tools are also deeply embedded in the AI hardware value chain, supporting accelerator, processor, and memory performance in systems designed for training and inference.
As a result, analysts view Keysight as one of the main beneficiaries of surging AI-related investments. Hyperscalers are currently spending a record high 60% of their operating cash flow on capex, with data center and AI infrastructure expansion not likely to slow anytime soon. Goldman Sachs has recently named KEYS a top pick for tech capital expenditure and R&D in 2026, boosting the growth outlook.
After trading sideways – and at times downward – from mid-May to mid-October, the stock staged a volatile but strong recovery, rising on overall industry optimism and several company-specific news, particularly its active role in advancing quantum engineering technologies.
At Nvidia’s semi-annual tech festival, the GTC conference, the AI chip leader announced a collaboration with Keysight aimed at developing hybrid quantum-AI computing. The partnership will be built on Nvidia’s NVQLink architecture – an advanced high-speed interconnect designed to couple quantum processors with AI supercomputers – and KEYS’ Quantum Control System, which integrates with NVIDIA’s CUDA-Q software platform to support hybrid quantum-classical systems.
Moreover, in end-October Keysight revealed the Quantum System Analysis tool – a breakthrough Electronic Design Automation (EDA) solution enabling quantum engineers to simulate and optimize entire quantum systems at the system level. The tool, integrated into Keysight’s Advanced Design System 2026 platform, further cements the company’s leading role in the development of the next-generation computing innovations combining quantum and AI technologies.
Still, the stock remains volatile, torn between a favorable outlook and worries over its relatively high valuation – which was behind Jefferies’ decision to downgrade KEYS from “Buy” to “Hold.” The firm said that Keysight is a high-quality business, but the current valuation already reflects mid-single-digit organic growth expected in the next couple of quarters, limiting further upside potential for investors. Despite the boost from continued technological advances and positive business developments, these higher-than-sector-median valuations – even if they are not that high compared to peers – are driving investors to take profits after every significant gain in the stock.
Keysight Technologies’ next earnings report, scheduled for November 24, may provide a new re-rating benchmark if it succeeds to awe investors with significantly better-than-expected results. A small earnings beat probably wouldn’t suffice, given the market anxiety over stock valuations. KEYS has never underperformed EPS consensus, but its latest three quarterly reports – the ones that reflected its return to growth, no less – have been met with muted market reaction.
While we are convinced that Keysight’s long-term potential is strong and is expected to expand further as the company continues to embed itself into AI and next-tech value chains, its stock may continue on its volatile sideways trend in the near term unless a catalyst presents itself, driving our decision to keep it under the magnifying glass.
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❖ We are keeping Cisco Systems (CSCO) under review despite its recent stock outperformance on the back of a batch of positive news and improved market sentiment.
CSCO is actively reinventing itself – moving from a networking incumbent to a key player in enterprise AI infrastructure. Its scale – 35 million devices and 1 billion clients – and unified hardware, software, and cloud stack create a strong foundation for AI workloads. Innovations such as Cisco Data Fabric and Splunk Federated Search for Snowflake highlight its push toward a unified AI-ready data architecture. The Splunk integration is showing growing synergy, contributing significantly to its security business, which has seen spectacular growth.
The company introduced over 20 new AI-centric products recently, focusing on networking and security solutions that integrate AI capabilities. CSCO revealed its new Silicon One P200 chip and the Cisco 8223 router system, designed specifically to address the intense AI workload traffic between data centers. These solutions enable synchronization of geographically separated AI clusters – an essential capability as AI compute demands outgrow single data center capacity. The unified chip architecture combining routing and switching within a single chip meets strong hyperscaler demand, significantly reducing power consumption and simplifying network design. This gives Cisco a competitive edge in the AI data center interconnect market.
Last week, the company unveiled N9100 – the first data-center switch developed by Cisco based on Nvidia’s advanced Spectrum-X Ethernet switch silicon. The N9100 switch delivers immense bandwidth, high scalability, and exceptional performance, supporting AI backend and frontend networks for large-scale AI workloads. It supports flexible operating systems and fits neocloud and sovereign cloud architectures. Additionally, CSCO announced the Cisco Secure AI Factory with Nvidia, which addresses key AI security concerns and regulatory compliance needs, as well as the Nvidia Cloud Partner-compliant architecture offering, supporting massive GPU deployments and AI data-center scalability. These advances align with key growth drivers – AI infrastructure, secure cloud deployments, and telecom innovation – which are expected to contribute to Cisco’s top-line acceleration and strengthen its competitive position.
Partnerships with Nvidia, Microsoft, and sovereign AI players like HUMAIN reinforce Cisco’s role in the global AI buildout. UAE Stargate – a part of the massive $500 billion UAE AI data center infrastructure project, where CSCO is a key tech partner alongside Nvidia and Oracle – has nearly completed the first 200 megawatts of the planned multi-year 5-gigawatt capacity project. The recently announced collaboration between NetApp and Cisco, integrating NetApp’s AFX architecture with Cisco Nexus switches, enhances their joint infrastructure solutions with disaggregated storage and advanced networking that efficiently power AI workloads, reinforcing their leadership in AI-ready enterprise data infrastructure.
On October 27, CSCO announced an expanded cooperation with an Emirati AI investment firm, G42, to deliver secure, end-to-end AI infrastructure in the UAE, directly supporting construction of the flagship 1GW Stargate cluster as part of the broader U.S.-UAE AI Acceleration Partnership. Under the extension, Cisco – acting as a technology integrator in the project – will power, connect, and secure a large-scale AI cluster deployed by G42, featuring advanced AMD MI350X GPUs alongside high-performance networking, firewalls, optics, and observability tools.
The extended collaboration embeds Cisco as a trusted partner in high-value, sovereign AI infrastructure roadmaps, and establishes its technology standards as foundational in the region, locking in market share. It accelerates Cisco’s go-to-market initiatives across both public and private sector clients, with cross-selling opportunities for AI-enabled security, automation, observability, and management platforms. Moreover, the partnership reinforces CSCO’s influence in the global AI Infrastructure Partnership (AIP) alongside major industry players, ensuring it benefits from multi-billion-dollar investments and the AI infrastructure boom across the Middle East. As such, Cisco is positioned to benefit from significant revenue growth by powering and securing large-scale regional AI clusters, supplying AI-ready servers, networking hardware, and security appliances for data centers. As the lead technology integrator for multi-GW clusters, Cisco secures deep infrastructure contracts, expanding recurring revenue streams for its advanced services and maintenance.
These innovations and partnerships already have and are expected to continue to serve as important catalysts, leading some industry analysts to declare CSCO a “must-hold stock” in the AI era. However, most of the incremental income additions are expected over the medium to long term, with the next few quarters’ revenue and earnings seen rising steadily but not spectacularly. Still, analysts are growing acceleratingly positive, with Raymond James and UBS recently upgrading the stock from “Hold” to “Buy,” saying that its gigantic AI order backlog of $2 billion is slated to grow further on the back of surging infrastructure demand, strong momentum in security, and large-scale refresh cycles.
We are inclined to hold CSCO in the Smart Portfolio, but want to observe the reaction to its next earnings report in mid-November to see whether market participants are prepared to wait for the expected longer-term benefits amid moderate near-term growth.
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Portfolio Earnings and Dividend Calendar
❖ The Q3 2025 earnings season is past its peak but still rolling, with Jones Lang Lasalle (JLL) reporting today and the quarterly releases from Parker Hannifin (PH), KKR & Co (KKR), and Cisco Systems (CSCO) scheduled for next week.
❖ The ex-dividend dates for Parker Hannifin (PH), Howmet Aerospace (HWM), Pfizer (PFE), International Business Machines (IBM), and Visa (V) are coming over the next week.
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New Buy: Amazon (AMZN)
Amazon.com is a global commerce-tech powerhouse spanning online retail, digital media, logistics, and cloud infrastructure. It operates the world’s largest online marketplace, the leading third-party seller platform, and one of the top cloud-services providers – a rare combination of scale across both consumer and enterprise ecosystems. Amazon’s fulfilment network, Prime membership base, and infrastructure footprint give it unmatched operational reach. With its blend of retail distribution, cloud platforms, media, devices and voice assistants, Amazon occupies a central role in how goods, data, and entertainment flow in the digital age.
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Investor Note: We previously held Amazon.com in the Smart Portfolio, but sold it back in May based on several reasons – primarily uncertainty around U.S.-China trade tensions weighing on the e-commerce outlook, and its underwhelming cloud-revenue results compared to other hyperscalers. Time has shown that the decision to sell in early May was the right one, as from the sell date up to the latest earnings release on October 30, AMZN delivered roughly the same gain as the S&P 500 but with much higher volatility. Now, after reviewing the latest earnings report details, we believe it is time to re-enter.
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The Everything Empire
Amazon’s journey began in 1994 when Jeff Bezos launched what was initially an online bookstore in Bellevue, Washington. From the outset, the ambition was broader – to create an “everything store” built on a digital platform and vast fulfillment footprint. Through the 2000s and early 2010s, Amazon expanded into music, video, electronics, and cloud infrastructure – each move stacking layer upon layer of capability and reach. The creation of Amazon Web Services (AWS) in 2006 quietly seeded what would become one of the world’s dominant cloud platforms.
Over the past five years, the pace of transformation has accelerated. Amazon deployed its scale and logistics muscle into new fields such as healthcare, grocery, and global streaming media, acquiring MGM Holdings in 2021 to strengthen its content library and reinforce its membership ecosystem. The company simultaneously made major inroads into advanced technology infrastructure – AWS built custom silicon through its Annapurna Labs acquisition, and by 2025, its Graviton4 chips deliver up to 600 Gbps network bandwidth, underscoring the cloud unit’s hardware edge. The firm also invested heavily in generative AI and chip design, signaling its shift from pure platform growth toward deeper technological control and stronger margin leverage.
At the same time, Amazon has sharpened its global footprint. Its online marketplace and third-party seller ecosystem now span dozens of countries, its logistics network integrates air, ground, and robotics, and its satellite-internet initiative – Project Kuiper – aims to bring broadband to underserved regions while supporting next-generation connectivity. These moves converge to create a virtuous cycle: cloud infrastructure benefits from logistics scale, logistics scale is powered by fulfillment technology and data, and global reach gives Amazon a structural advantage across commerce, cloud, and services.
Growth has not come without weight – heavy capital commitments, regulatory scrutiny, and intensifying competition continue to test the company’s agility. Yet Amazon’s story remains one of relentless expansion, technological evolution, and ecosystem integration. From books to bytes, from storefront to super-scale cloud and logistics network, Amazon now forms a foundational layer in how goods, data, and services move through the global economy.
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The Cloud Trade
Amazon.com is the world’s most extensive digital enterprise – a platform that connects global consumers, creators, and businesses across commerce, cloud, and computing infrastructure. What began as an online bookstore has become a diversified ecosystem spanning e-commerce, logistics, entertainment, cloud services, and artificial intelligence. Each segment now reinforces the others, creating a self-sustaining engine of scale, data, and innovation that defines the modern digital economy.
Roughly half of AMZN’s total revenue stems from its e-commerce and subscription businesses, which include the core online stores, third-party marketplace, Prime memberships, and physical retail. This division remains the company’s public face and largest consumer touchpoint, strengthened by deep automation and one-day fulfillment networks. Investments in robotics, same-day delivery, and grocery expansion have driven efficiency gains and higher basket sizes even as competitors crowd the space. Amazon’s marketplace model – where third-party sellers now represent more than 60% of units sold – converts retail scale into platform economics, allowing the company to collect high-margin service and advertising fees on top of transaction volume. Amazon’s platform holds about 40% of the U.S. e-commerce market, and about 15% of the global online retail market.
Amazon Web Services (AWS) contributes roughly 17-20% of total company revenue but generates the majority of operating income, underscoring its central role in Amazon’s profit engine. AWS remains the world’s largest cloud provider, supporting customers in 38 regions and 120 availability zones, with further expansion underway. The segment is entering a new growth phase driven by generative-AI infrastructure demand. Recent developments – the seven-year, $38 billion partnership with OpenAI, new fiber and subsea cable projects with Verizon and trans-Atlantic partners, and the deployment of Project Rainier, Amazon Nova, and Bedrock upgrades – illustrate how AWS is positioning itself at the center of the global AI compute race. Trainium3 and Blackwell-based clusters are set to power both internal workloads and third-party AI platforms, providing a durable tailwind for cloud revenue through 2026 and beyond. AWS holds approximately 30% of the global cloud-infrastructure market, with the second runner-up, Microsoft’s Azure, sitting at around 20%.
Amazon’s advertising business, now exceeding $50 billion in annualized sales, has emerged as a structural growth engine in its own right. Its share in AMZN’s total revenue has been steadily rising over the past two years, reaching about 10% in Q3 2025. Fueled by Prime Video ads and live-sports programming, it offers high margins and rising share within the digital-ad market. The company’s share in the U.S. digital ad spending has already reached about 15%, and is expected to increase further at a fast clip. This segment connects Amazon’s consumer and cloud ecosystems, converting retail traffic and streaming engagement into monetizable data.
Strategic investments reinforce the empire’s reach. Amazon’s multibillion-dollar stake in Anthropic – the AI startup now projecting exponential revenue and cash-flow growth – reflects its foresight in aligning capital with emerging infrastructure demand. Each of these growth vectors is supported by a cultural reset underway inside the company: a leaner, faster organization built for scale and experimentation. With foundational businesses that span the digital economy’s entire stack – from retail and logistics to cloud, data, and intelligence – Amazon enters its next phase not merely as a marketplace or a service, but as the connective infrastructure of global commerce and computation.
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Prime Numbers
Amazon’s third quarter of 2025 underscored how scale, discipline, and reinvestment converge into a business still finding new gears. Net sales rose to $180.2 billion, up roughly 13% year over year on a constant-currency basis and modestly ahead of analyst expectations. It marked Amazon’s fifth consecutive quarter of revenue beats, extending a pattern of steady acceleration across its core franchises.
Operating income came in at $17.4 billion, weighed down by one-off items – notably a $2.5 billion FTC settlement and $1.8 billion in severance costs. Adjusted for these one-time items, the figure would have been above $21 billion, signaling genuine margin expansion beneath the surface. Adjusted EPS came in at $1.95, ahead of the $1.57 consensus and up 36.4% year over year – the eleventh consecutive quarterly beat, underscoring steady operating leverage across Amazon’s mix of retail, cloud, and advertising.
AWS remained the company’s financial engine, delivering 20.2% year-over-year revenue growth – its fastest pace in nearly three years – to reach $33 billion, ahead of analyst estimates near $32.5 billion. Backlog rose to about $200 billion, providing clear forward visibility and validating demand for Amazon’s new generation of AI-centric infrastructure. Operating profit from AWS continues to account for the majority of Amazon’s total earnings, and management described the segment as entering “a durable expansion phase.”
Advertising, meanwhile, proved the second pillar of growth, advancing 22% year over year to $17.6 billion. Now roughly 10% of total revenue, the business carries higher margins than retail and continues to gain share within the digital-ad market, approaching 15% in the U.S.
The retail engine also ran more smoothly. North American and international commerce grew faster than forecasted, supported by automation, grocery expansion, and the fastest delivery speeds in Amazon’s history – evidence that efficiency investments are translating into steady volume and service gains even in a mature business.
Capital spending reached extraordinary levels, with roughly $125 billion planned for 2025 and an increase expected in 2026. Free cash flow has temporarily compressed to about $15 billion, but management frames this as an intentional reinvestment cycle rather than erosion. Much of the outlay is directed toward logistics automation, high-density data centers, and GenAI infrastructure – the foundation for future leverage rather than near-term restraint.
Those AI investments are beginning to pay off. Amazon’s multiyear, $38 billion deal with OpenAI and its stake in Anthropic – whose revenue growth has outpaced its larger rival and is projected to reach double-digit billions by 2027 – are already contributing to AWS demand and utilization. New product families such as Project Rainier, Amazon Nova, and Bedrock updates have translated technical innovation into monetizable cloud services, confirming that AI is no longer a cost center but a revenue engine.
Guidance reflects confidence without complacency. For the holiday-driven fourth quarter, Amazon expects revenue between $206 billion and $213 billion, above the consensus midpoint, with operating income of $21 billion to $26 billion. Analysts view the outlook as both credible and conservative, anticipating continued top-line growth and modest margin expansion through 2026 as heavy investment begins to yield operating leverage. After years of building, Amazon’s numbers now show the empire’s infrastructure turning into compounding cash flow – proof that scale and intelligence can coexist as a strategy, not a trade-off.
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Delivering Alpha
Amazon’s peer set spans the full spectrum of its hybrid empire. Microsoft and Alphabet anchor the cloud and AI comparison – both competing directly with AWS in hyperscale infrastructure and enterprise workloads. Meta reflects Amazon’s rising strength in high-margin digital advertising, where its flywheel of commerce data and media reach is reshaping online marketing economics. Walmart provides the retail counterweight, offering perspective on fulfillment efficiency, consumer scale, and pricing power in an increasingly automated marketplace. Together, these four frame Amazon’s valuation across its three defining engines – cloud, commerce, and advertising – capturing the breadth of a business that now sits at the intersection of technology and global consumption.
Among these giants, AMZN has delivered the second-strongest stock gain over the past year, trailing only the surging Alphabet. Year-to-date, its 14% advance places it squarely in the middle of the pack. Despite the solid run, analysts still project about 20% upside for the “Strong Buy”-rated stock – a view reinforced by roughly two dozen price-target hikes following the upbeat Q3 results.
Amazon’s valuation remains moderate by large-cap tech standards, with some analysts describing it as “the most undervalued of the Magnificent Seven.” While trading above the Consumer Discretionary sector median – where it historically resides – AMZN’s multiples now align more closely with Technology-sector norms as AWS and advertising scale.
Relative to peers, the stock screens as inexpensive, trading at or near the group averages across trailing and forward P/E, EV/EBITDA, and Price/Cash Flow, and sitting well under the mean on both trailing and forward Price/Sales and EV/Sales. Its forward PEG ratio of 1.8x is in line with the technology-sector average, suggesting that the market may still be discounting its growth trajectory.
Like most tech peers, Amazon has not yet initiated a dividend. Unlike many, it isn’t a consistent or aggressive buyer of its own shares. The company reinstated its repurchase program in 2022 after a long pause, authorizing $10 billion, with about $6 billion still unused. Over the past twelve months, Amazon repurchased roughly $1.4 billion in stock – modest given its scale and free-cash-flow strength. Management has reiterated that buybacks remain a “flexible tool,” while capital allocation continues to prioritize AI infrastructure, fulfillment capacity, and logistics expansion – signaling discipline and long-term focus over short-term stock support.
With margins widening, cloud and ad growth re-accelerating, and capital discipline intact, Amazon enters 2026 with momentum across every engine that defines its value – with the market’s discount to its true earnings power looking increasingly unsustainable.
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Investing Takeaway
Amazon stands at the crossroads of global commerce, cloud infrastructure, and digital advertising – a rare combination of scale, innovation, and structural growth. Its model blends high-margin businesses like AWS and advertising with a revitalized retail engine that’s faster, leaner, and increasingly automated. Strategic investments in AI, from infrastructure to partnerships, are reshaping both capability and earnings power, while disciplined capital allocation keeps expansion purposeful rather than bloated. Amazon’s evolution from retailer to digital utility is largely complete; what remains is the market’s recognition of that shift. For investors seeking durable growth, operational leverage, and exposure to the technologies defining the next decade, Amazon offers an enduring, high-conviction opportunity – one built not just on dominance, but on reinvention.
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Smart Investor’s Winners Club
The 30% Winners Club represents stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Markets have been volatile, and the Club has lost a member, MTZ, to the post-earnings anxiety. Now the Winners are down to 17 stocks: AVGO, GE, ANET, EME, TSM, HWM, APH, ORCL, IBKR, PH, VRT, CRWD, GOOGL, IBM, RTX, UBER, and BK.
The first contender for the Club’s entry is now LDOS with a 28.39% gain since we purchased it on May 14. Will it enter the ranks of the Winners, or will another stock outrun it to the finish line?
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