Constructing Growth
In this edition of the Smart Investor newsletter, we examine the stock of a global leader in technical design and engineering software. But first, let’s dive into the latest Portfolio news and updates.
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Portfolio Updates
❖ Texas Pacific Land Corporation (TPL) has experienced a notable decline in its stock price since its inclusion in the S&P 500 index on November 26th. Significant stock volatility is common for companies newly added to major indices, as portfolio managers adjust their holdings to reflect the index’s new composition. Beyond that, TPL’s 230%+ surge this year prior to the inclusion brought its valuations to extended levels, likely adding to investor anxiety, which was already high given the increased volatility in oil prices (although prices don’t affect TPL’s royalties, they do impact investor sentiment). Although we are watching the developments closely, our concern is alleviated by the heavy buying of TPL’s shares by the company’s insiders over the past month.
❖ Diamondback (FANG) declined in the past month, displaying a trend similar to those of its peers in the industry. The stock was impacted by declining crude oil and natural gas prices, which hit investor sentiment toward energy stocks. However, Wall Street analysts are bullish on FANG’s prospects. The stock has a consensus “Strong Buy” rating with an average price target implying an upside of over 38% in the next 12 months.
Notably, four analysts reduced their PTs on the stock in the past month, with only one top Wall Street house upping the target. However, the reductions came as a part of industry wide adjustments in the Energy sector, while the PT hike by Raymond James was company-specific. In fact, the increase was based on FANG’s strategic acreage trade to enhance its position in the Midland Basin, increased oil production estimates, and reduced capex forecast.
In addition, Goldman Sachs resumed coverage of Diamondback with a “Buy” rating and a PT implying significant upside to current levels. GS said that FANG offers a prudent capital allocation strategy focused on per share growth in shareholder returns, which will continue to create shareholder value. Moreover, its recent acquisition of Endeavor Energy presents significant improvement in inventory, providing increased opportunities for capital efficiency gains. We at Smart Investor believe that FANG can generate a significant alpha to the broader energy sector stocks, though we will be following the developments closely for potential signs of trouble.
❖ Amazon (AMZN) is successfully rising to the competition posed by Chinese e-commerce platforms with its “Haul” section, targeting budget-conscious shoppers with extremely discounted items shipped directly from China. The company said that this initiative has already garnered millions of unique visits since its launch in November.
In other company news, Amazon Music and Universal Music Group have recently expanded their global partnership to enhance content offerings and artist engagement. This partnership is expected to strengthen Amazon Music’s position in the competitive music streaming market by offering subscribers a richer and more immersive experience.
In yet additional news, AMZN was included in Citi’s “Top Picks” across the Internet sector, along with Meta and DoorDash. Additionally, JPMorgan analysts have named Amazon one of their top large-cap top stock picks for 2025. The list also includes Meta, Spotify, and Alphabet (GOOGL).
❖ Alphabet (GOOGL) has countered the U.S. Department of Justice’s (DOJ) November remedy proposal, arguing that it overreaches the scope of the original case and Judge Mehta’s ruling. The counter remedy proposal is perceived as a more modest approach than the DOJ’s original proposal. Google emphasized that its market dominance is due to the quality of its services, not coercion or limited alternatives. The remedy case is set for trial in April, with a decision expected in August 2025.
In other company news, Alphabet-owned Wing has partnered with DoorDash to deliver food orders via drones from two malls in the Dallas-Fort Worth Metropolitan Area. The collaboration is part of a broader strategy to expand drone delivery services. For Alphabet, it is another step in expanding its non-core revenue streams, strengthening its position as an innovator in autonomous delivery and logistics, and showcasing the company as a leader in cutting-edge solutions.
❖ Broadcom (AVGO) continued its strong upward momentum, driven by analyst upgrades and heightened optimism around its AI business. UBS recently increased its AI revenue estimates for Broadcom by 20% for fiscal 2026 and 40% for fiscal 2027, reflecting expectations of accelerated growth. In addition, UBS significantly raised its price target for the stock.
Jefferies analysts have also identified Broadcom as their top chip stock pick for the upcoming year, highlighting the company’s expertise in developing custom AI chips, particularly application-specific integrated circuits (ASICs). These ASICs are becoming increasingly critical to AI applications, with growing complexity and volume driving Broadcom’s top-line potential.
Broadcom’s strategic positioning in the AI infrastructure market has placed it alongside top AI leaders like Nvidia. With AI infrastructure continuing to expand, Broadcom is poised for substantial growth and stronger competitive advantage.
❖ Microsoft (MSFT) plans to integrate AI models from other companies into Office 365 Copilot to lessen its reliance on OpenAI, potentially lowering costs and improving performance for enterprise customers. This decision signals a strategic move to enhance margins and competitiveness in the AI space, while also diversifying its AI partnerships to mitigate risks associated with overdependence on a single provider.
In other news, MSFT continued to witness analyst upgrades, with three top Wall Street analysts upping their price targets on the stock in the past week. One of them, Loop Capital, said that consensus PTs underestimate Microsoft’s potential due to the impact of high capex investments in GenAI initiatives, which temporarily weigh on earnings. However, Loop believes Microsoft’s strong positioning in AI and its overall market leadership justify a significant valuation premium over its large-cap software peers.
❖ Oracle (ORCL) saw its stock dip after Monness analysts downgraded it to “Sell,” citing concerns about its ability to fend off stiff competition in the public cloud industry and questioning the company’s financial flexibility in light of its plans to dramatically expand capex. Monness’ downgrade contrasts with the actions of other top-rated Wall Street houses, such as Wolfe Research, Argus Research, Morgan Stanley, and others, who raised their price targets on ORCL in the past month.
Moreover, UBS listed Oracle among its top picks for 2025, forecasting 50%+ cloud infrastructure growth for the next several years, which should drive revenue growth acceleration. According to the bank’s analysts, ORCL’s cloud growth will be driven by strengthening AI-related infrastructure demand from existing customers, CPU-based customer migrations from on-premises systems, and database migrations enabled by multi-cloud partnerships with Azure, AWS, and Google Cloud. Catalysts include new datacenter launches, additional AI customer wins, and deployment of AI clusters in 2025.
❖ Uber Technologies (UBER) saw its stock rebound in the past week, helped by positive analyst assessments. Thus, Oppenheimer analysts said they view the recent sell-off as a “buying opportunity,” citing the company’s potential to regain U.S. mobility share and benefit from future Robotaxi collaborations. In addition, Analysts from Evercore ISI and Goldman Sachs have named Uber as a top large-cap pick for 2025, dismissing concerns about autonomous vehicle competition and highlighting Uber’s potential for sustainable growth.
❖ Workday (WDAY) was added to the S&P 500 Index effective prior to the opening of trading on December 23rd. The stock experienced increased volatility around the inclusion date, with declines likely attributed to profit-taking following its substantial rally in the second half of the year.
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Portfolio Stocks Under Review
❖ Arch Capital Group (ACGL) remains under review as we witness contrasting developments around the stock. As a reminder, we placed it in the “review” bracket following the stock’s strong decline from its peak in October, which was likely caused by pressures on the larger insurance-stock universe and investor profit taking following its strong run this year through mid-October, when it reached an all-time high.
Analysts from leading Wall Street firms rate Arch Capital a “Buy” with an average price target implying an upside of over 30% in the next 12 months. However, last week, Jefferies analysts reduced ACGL’s price target, citing caution on commercial line insurance due to less favorable conditions and uncertainties in that segment. However, the firm maintained a “Buy” rating on ACGL, reflecting confidence in the company’s ability to capitalize on improving trends in personal lines and its strong overall position in the property and casualty insurance sector.
In positive developments for ACGL stock, the company renewed its $1 billion share repurchase program, allowing for buybacks through open market or privately negotiated transactions. As of September 30, 2024, the full $1 billion remained available, with no common shares repurchased in Q4 2024. ACGL’s stock jumped on the announcement. However, we plan to continue watching the stock closely, ready to sell if there is a hint of trouble.
❖ GE Aerospace (GE) remains under review. One of the Smart Portfolio’s longest-held stocks, it had been our star performer until mid-October, when it reached an all-time high. Since then, the stock has been under pressure, both from the general Industrial sector underperformance over that period, and due to investor worries – based on market dynamics and company-specific issues like supply chain constraints – that GE shares may have outrun their fundamentals.
Trump’s plans to slash government spending have weighed on firms like GE. However, GE’s low exposure to the U.S. government’s defense spending should alleviate these concerns. The company derives about 16% of its revenues from defense-related activities, with the lion’s share of the total – over 70% – coming from services, a recurring, resilient, and higher-margin source of revenue.
Leading Wall Street firms rate GE Aerospace a “Strong Buy” with an average price target implying an upside of over 26% in the next 12 months. According to analysts, recent worries about aftermarket services growth are overblown, and GE remains fundamentally strong with robust prospects in both the aftermarket and OE segments. The company’s strong performance in Q3 and a hike to its full-year EPS and cash flow guidance are a testament to this strength.
We believe that GE remains a solid investment, which took a hit along with the broader industry and was impacted by investor anxiety as a result of the stock’s price appreciation. However, we plan to follow the company news closely for a while to see whether the sentiment has improved.
❖ We are placing NICE (NICE) stock under review for a possible sale following a strong negative market reaction to an analyst downgrade, suggesting continued downward momentum for the stock. The negative investor sentiment in the near term may outweigh NICE’s strong long-term return potential.
Last week, Jefferies analysts downgraded NICE from “Buy” to “Hold,” reducing their price target by $15. Jefferies believes that consensus estimates for NICE’s cloud revenue growth in 2025 are overly optimistic, especially in light of intensifying competition. In addition, analysts said that the upcoming CEO transition at NICE introduces potential uncertainties, saying that the leadership change could impact the company’s strategic direction and execution.
On the other hand, NICE was highlighted by Morgan Stanley as one of its top picks in the Communication software sphere. The firm recently raised its price target on NICE, citing the anticipated reacceleration in the industry’s stocks, which favors companies with “accelerating growth stories or extreme free cash flow support.” NICE’s strong fundamentals and growth prospects position it well to benefit from these trends. We plan to closely monitor the stock to determine if it can break its recent downward momentum.
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Portfolio Earnings and Dividend Calendar
❖ The Q3 2024 earnings season is over, and no Smart Portfolio companies are scheduled to release their quarterly results until mid-January.
❖ The ex-dividend date for GE Aerospace (GE) is December 27th.
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New Buy: Autodesk (ADSK)
Autodesk, Inc. is an American multinational software corporation headquartered in California. It develops and sells software for architecture, engineering, construction, manufacturing, media, and entertainment industries. ADSK is a global leader in technical design and engineering software, known for its flagship AutoCAD and Revit products. It dominates the market for 3D design, modeling, and visualization tools, holding a leading position in the architecture, engineering, and construction software sectors worldwide.
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History of Intelligent Design
Founded in 1982, Autodesk revolutionized the design industry with its flagship product AutoCAD. Over the years, it expanded into 3D design and engineering software, serving architecture, construction, manufacturing, and media industries.
Key business developments over the past half-decade include the acquisition of Innovyze in 2021, enhancing water infrastructure modeling capabilities, and Spacemaker in 2020, which introduced AI-driven generative design tools for urban planning. In 2022, Autodesk strengthened its virtual reality and 3D animation offerings with the acquisitions of The Wild and Moka Studio, respectively.
ADSK continued its strategic acquisitions in 2023, acquiring UNIFI to bolster Building Information Modeling (BIM) capabilities and FlexSim to enhance factory design tools with advanced simulation technology. In 2024, the company expanded its media and entertainment portfolio by acquiring the PIX business of X2X for secure content collaboration and Wonder Dynamics, creators of Wonder Studio, a cloud-based AI-driven 3D animation platform.
In recent years, Autodesk has focused on transitioning its business model to subscriptions, expanding cloud-based solutions, and integrating cutting-edge technologies like artificial intelligence (AI) and machine learning (ML) to automate design processes. These initiatives have driven revenue growth, improved recurring revenue streams, and bolstered market cap expansion.
The shift from perpetual licenses to a subscription-based framework has significantly increased Autodesk’s financial stability, with recurring revenue now exceeding 95% of total revenue. This model provides predictable income, deepens customer engagement, and enhances satisfaction by offering flexible options and continuous updates, enabling Autodesk to grow its user base and optimize revenue per customer.
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Blueprint for Innovation
Over the past five years, Autodesk has steadily increased its R&D investments to drive innovation and sustain its competitive edge in design and engineering software. R&D expenses rose from ~19.5% of revenue in 2020 to over 25% in 2024, emphasizing its commitment to staying ahead in a competitive market.
The company’s Autodesk Construction Cloud platform has strengthened its presence in the booming construction technology market and become a key driver of growth in its Architecture, Engineering, and Construction (AEC) segment, which accounts for 45.5% of total ADSK revenue. Tools like AutoCAD, Revit, and the Construction Cloud have solidified Autodesk’s dominance in AEC. AI-powered features have further enhanced its status as a preferred provider as firms adopt digital technologies for project delivery and sustainability. Notably, AutoCAD commands over 40% of the global computer-aided design (CAD) software market.
In manufacturing, Autodesk’s Fusion 360 platform, with its AI-driven generative design, enables optimized designs that reduce material usage and costs. This has particularly appealed to small and medium enterprises (SMEs) seeking cost-effective, high-quality solutions, boosting Autodesk’s presence in CAD and computer-aided manufacturing (CAM) markets.
AI has also fueled Autodesk’s growth in media and entertainment. Tools like Maya and 3ds Max, which integrate machine learning for automated animation and visual effects, have cemented their status as industry standards for 3D content creation.
Autodesk has forged strategic partnerships to enhance its technological capabilities and broaden its market reach. Collaborations with industry leaders like Microsoft and Google play a key role in this effort. Autodesk has integrated its design tools with Microsoft’s HoloLens for mixed reality solutions and connected Autodesk Construction Cloud with Microsoft 365 for seamless project information management. Similarly, its partnership with Google Cloud optimizes rendering services for media and entertainment, while integrations with Google Workspace enable project teams to manage documents, spreadsheets, and calendars directly within the Autodesk platform. These alliances, along with other partnerships with major firms such as Cadence and Capgemini, strengthen Autodesk’s position across diverse industries.
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Strong, Profitable, Growing
Despite numerous acquisitions and increased R&D investments, Autodesk maintains robust financial health, with a modest net debt-to-equity ratio and a strong liquidity position. The company holds significant cash and short-term investments, which substantially offset its liabilities. Consequently, Autodesk earns more interest on its cash holdings than it pays on its debt. This balance sheet strength is underscored by its investment-grade credit ratings: “BBB+” from S&P and “Baa2” from Moody’s.
Autodesk also excels in capital efficiency and profitability metrics. Its ROA ranks in the top quartile of software industry peers, while its ROE is among the industry’s top performers, in the top 5%. Additionally, the company’s gross, operating, free cash flow, and net profit margins remain strong, placing Autodesk among the most profitable firms in the high-margin software sector.
Over the past five years, Autodesk’s revenues have grown at a CAGR of almost 13%, while EPS has risen by nearly 15%. However, growth has moderated in the past two years due to post-pandemic normalization (following a spike in software demand during lockdowns), macroeconomic challenges dampening capital spending, and stabilization in end-market cycles. Furthermore, as the transition to subscription-based services matures, the initial rapid growth from customer migration has largely materialized, leading to a more stable revenue trajectory.
To counter these trends, Autodesk has implemented strategic initiatives aimed at improving operational efficiency and financial performance. The company is transitioning to a new transaction model, focused on increasing sales and marketing efficiency, reducing redundancies, and enhancing customer experience. The shift to annual billings for multiyear contracts is expected to drive stronger free cash flow and revenue growth, creating a more resilient financial foundation.
Moreover, Autodesk’s investments in cloud infrastructure, platform development, and AI position it ahead of its peers. These advancements enable the company to deliver more integrated and valuable solutions, further enhancing revenue and earnings potential. The Autodesk Construction Cloud continues to exhibit significant growth, driven by strong customer adoption, and is poised to play an increasingly central role in the company’s earnings growth.
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Turning Transitions Into Triumphs
Autodesk reported its fiscal Q3 2025 results on November 26th, exceeding analyst consensus estimates for both revenue and EPS. The company also raised its revenue and EPS guidance for Q4 and full-year fiscal 2025, surpassing analyst projections for these periods.
Despite these positive results, Autodesk’s stock declined post-earnings. This reaction can be attributed primarily to the stock’s recent run-up and the unexpected announcement of a new CFO, which introduced uncertainty. Additionally, the ongoing transition to a new transaction model and annual billing for multiyear contracts created noise in billings and revenue recognition. Concerns about a lack of visibility on fiscal year 2026, starting February 2025, further contributed to investor apprehension.
However, analysts remain optimistic. Several leading Wall Street brokerages reaffirmed or raised their price targets for the “Buy”-rated ADSK. For instance, Rosenblatt noted that Autodesk is already benefiting from its new direct billing model, which contributed approximately 1% to Q3 growth and supported the company’s improved FY 2025 revenue and operating margin outlook. Mizuho analysts highlighted a rebound in free cash flow and anticipate accelerated growth in the next fiscal year.
Meanwhile, the post-earnings dip has reduced Autodesk’s valuation, presenting an attractive entry opportunity. Although ADSK continues to trade at a premium relative to the Technology sector’s average multiples, its current valuation is approximately 20% below its long-term historical averages. ADSK also trades below its peers’ average valuation. Analysts argue that Autodesk warrants a premium valuation due to its dominant position in high-growth industries, successful integration of cutting-edge technologies, and superior operational efficiency and profitability.
Autodesk’s total return potential is further supported by its shareholder-focused capital deployment strategy, including share buybacks. Over the past three years, the company reduced its share count by about 5 million shares, mitigating dilution and enhancing medium-term EPS. The company recently expanded its active share repurchase program, increasing authorization by $5 billion in November, bringing the total to $10 billion. In fiscal 2025, Autodesk has already repurchased $444 million worth of shares, demonstrating its commitment to returning value to shareholders while maintaining flexibility in capital deployment.
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Investing Takeaway
Autodesk, Inc. is a global leader in design and engineering software, excelling in architecture, construction, manufacturing, and media industries. The company’s shift to subscription-based services ensures financial stability and predictable cash flows. Strategic investments in cloud, AI, and automation drive innovation, while a robust acquisition strategy strengthens its market leadership. With top-tier profitability metrics, a growing cloud platform, and expanded share buybacks, Autodesk delivers shareholder value. Despite near-term noise, its dominant position in high-growth markets and ongoing operational efficiency make ADSK an attractive investment for long-term value creation and a compelling addition to the Smart Investor Portfolio.
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New Sell: Abbott Laboratories (ABT)
Abbott Laboratories is an American multinational company that develops, manufactures, and markets a broad range of healthcare products, with a focus on medical devices, diagnostics, nutrition, and branded generic pharmaceuticals.
ABT is considered the most diverse healthcare company in the world in terms of business lines. Its portfolio spans nutrition products, diagnostics, medical devices, and branded generic pharmaceuticals, allowing the company to cover the healthcare spectrum from prevention (via optimized nutrition) to detection (via diagnostic testing) to treatment (via medical devices and medications).
The company is a significant player in each of its four primary business segments, with its divisions competing successfully against larger, more specialized firms. Abbott maintains strong financial health, capital efficiency, and profitability metrics. Over the past several years, it has demonstrated steady revenue and earnings growth.
However, some analysts, including Mizuho Securities, argue that Abbott’s stock is overvalued. They highlight that the company’s earnings growth has been slowing due to increased competition and regulatory challenges. This high valuation could limit the stock’s near-term upside, particularly given uncertainties in the healthcare sector following the reelection of Donald Trump.
On the one hand, potential deregulation under Trump’s administration could streamline approval processes for medical devices and diagnostics – key areas for Abbott – allowing for quicker time-to-market for new products and bolstering competitiveness. On the other hand, increased competition would require Abbott to accelerate innovation and improve cost-effectiveness to maintain its position. Additionally, bipartisan support for addressing high drug prices may pose challenges for the company’s pharmaceutical segment if pricing reforms are enacted.
Deutsche Bank analysts have also pointed out increasing competition in Abbott’s medical device segment, particularly in cardiovascular and neuromodulation. Long-standing competitors such as Medtronic, Boston Scientific, and Stryker, as well as newer entrants like Bayer, AbbVie, and Johnson & Johnson, pose ongoing challenges.
JPMorgan analysts further noted that regulatory issues, including ongoing investigations and audits by regulatory agencies, may weigh on Abbott’s stock price and profitability.
While we believe that over the longer term Abbott Laboratories is well-positioned to adapt to evolving regulations and address competitive pressures, its current vulnerability to market sentiment – stemming from its high valuation – suggests caution. Given these factors, we believe it prudent to sell the stock.
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Despite the volatility in the markets in the past few days, our exclusive club’s ranks remained unchanged except for the movements within the Winners’ cohort, still including 16 stocks: AVGO, GE, ANET, EME, TSM, ORCL, TPL, HWM, PH, APH, IBKR, ITT, PYPL, CRM, KKR, and PNR.
The first contender is still AMZN with 27.57% gain since we purchased it on September 11th. Will it close the gap, or will another stock outrun it to the finish line?
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Disclaimer
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