From Mainframes to AI
In this edition of the Smart Investor newsletter, we examine the stock of a key player in enterprise IT. We are not selling any stocks today as earnings results continue to come in and the markets are still in flux. But first, let’s dive into the latest Portfolio news and updates.
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Portfolio Updates
❖ Cisco Systems (CSCO) reported a strong set of results for its fiscal Q2 2025, beating analysts’ revenue and earnings estimates. The company also raised its fiscal third-quarter and full-year revenue and EPS guidance.
CSCO’s strong financial performance continues to be driven by significant demand for AI infrastructure. In FH1 2025, AI-related orders have reached approximately $700 million, with expectations to surpass $1 billion by year-end. This surge is largely due to increased investments from hyperscalers in AI and cloud networking equipment. In addition to its focus on AI infrastructure, Cisco’s security segment has experienced substantial growth, notably from its acquisition of Splunk.
Following the blockbuster results, Cisco increased its dividend by 2.5% and expanded its stock repurchase program by $15 billion. Analysts from nearly all leading Wall Street brokerages hiked their price targets on CSCO, with some saying that even the raised guidance is still conservative relative to the company’s expected revenue and earnings growth trajectory.
❖ Howmet Aerospace (HWM) also surpassed analysts’ expectations for Q4 2024 revenue and earnings, with its EPS, FCF, EBITDA, and EBITDA margin reaching records. The company experienced strong demand in all of its end markets, with revenue growth in commercial aerospace segment a primary growth driver. Following the results, the company announced a 25% dividend increase.
Looking forward, HWM projects continued growth with 2025 revenues expected to increase by 8% at midpoint of the guidance range, compared to the previous guidance of 7.5% growth. Free cash flow for 2025 is expected to surpass $1 billion, aiming for approximately 85% conversion of net income. Analysts from Truist, Susquehanna, JPMorgan, and others, raised their price targets on HWM, saying that the company has the potential to continue exceeding guidance.
❖ Microsoft (MSFT) plans to invest $700 million in Poland by June 2026 to expand its hyperscale cloud and AI infrastructure in the country as well as working with the Polish army to create a framework to strengthen national cybersecurity. This follows a previous $1 billion investment initiated in 2020, culminating in the launch of a data center in 2023 to provide cloud services to businesses and government institutions.
❖ Alphabet (GOOGL) has also doubled down on its Polish investments. The search and AI giant signed a memorandum with Poland to advance AI applications in sectors like energy and cybersecurity. In 2022, Google invested nearly $700 million to acquire and develop The Warsaw HUB, transforming it into a major center for Google Cloud operations in Europe.
❖ Uber Technologies (UBER) is taking legal action against DoorDash, accusing the food delivery service – which competes with Uber Eat – of using unfair business practices to gain market dominance. The lawsuit alleges that DoorDash pressures restaurants into exclusive agreements that require them to use DoorDash for their delivery services.
❖ Berkshire Hathaway (BRK.B) has revealed significant changes in its portfolio for the fourth quarter of 2024. Warren Buffett’s holding company bolstered its stakes in Occidental Petroleum, nearly doubled its holdings in Domino’s Pizza, and acquired a large stake in Constellation Brands. Berkshire also increased its positions in Pool Corporation and Heico. At the same time, Berkshire Hathaway reduced its positions in several other companies, including Bank of America, Citigroup, and Capital One Financial. Notably, the conglomerate exited its investment in Ulta Beauty entirely. Despite previous reductions, Berkshire maintained its substantial stake in Apple, which remains its largest holding, valued at over $75 billion.
❖ According to media reports, Broadcom (AVGO) and Taiwan Semiconductor Manufacturing (TSM) are in talks to divide Intel into two distinct entities and purchase them separately. Insiders say Broadcom is interested in Intel’s chip design and marketing division. Meanwhile, TSM is considering taking control of some or all of Intel’s factories, possibly teaming up with U.S. investors to receive regulatory approval.
Meanwhile, according to a Reuters report, chip producers with U.S. operations that were eligible for funding and tax breaks under the U.S. CHIPS and Science Act – including TSM and Intel, among others – are now on high alert. The White House is reassessing the agreements, which could affect deals established under previous administrations and impact major semiconductor firms.
❖ Oracle (ORCL) has been named a Leader in the 2024 Gartner® Magic Quadrant™ for CRM Customer Engagement Center for its Oracle Fusion Cloud Service. This recognition marks the 12th consecutive time Oracle has received this honor.
❖ Dell Technologies (DELL) saw its stock rise sharply after Bloomberg reported that the company is close to securing a massive contract worth over $5 billion to provide servers optimized for AI to Elon Musk’s xAI. The deal reportedly involves Dell supplying servers equipped with Nvidia GB200 chips to xAI.
Meanwhile, as Dell’s FQ3 2025 earnings date approaches on February 27th, some analysts express their concern that the company may provide lower-than-expected guidance for FY 2026. Thus, according to Morgan Stanley – who reduced its price target recently – Dell is well-positioned in terms of FQ3, as well as for the ongoing fiscal quarter, but faces uncertainties amid its ongoing transition to AI-focused products. Dell has a tendency to provide overly conservative outlooks, but given the current choppy markets, this time it may not be well-received.
On the other hand, Citi analysts are optimistic, maintaining their high PT on Dell’s stock. This positive view is based on rising demand along with improving supply capabilities, as well as the expected profitability improvements, driven by its AI server offerings. Citi expects Dell’s long-term growth to outpace industry average, despite some short-term challenges.
❖ Diamondback Energy (FANG) has signed an agreement to acquire private West Texas oil producer Double Eagle. The transaction, valued at approximately $5 billion, comprises 6.9 million shares of Diamondback’s common stock and $3 billion in cash. This acquisition will add about 40,000 net acres in the Midland Basin to Diamondback’s portfolio, enhancing its position in the Permian Basin. The deal is expected to close on April 1, 2025, pending customary closing conditions and regulatory approval.
❖ Charles Schwab (SCHW) released its monthly activity report. Company highlights for the month of January 2025 include a 75% year-over-year increase in core net new assets, and a 21% increase in total client assets. New brokerage accounts opened during the month rose 18% YoY.
In other company news, TD Cowen upgraded SCHW to “Buy,” significantly raising its price target (to $103 from $88). The firm believes that the company can display stronger fundamentals and earnings growth ahead under its new leadership. TD Cowen expects Schwab’s EPS to grow faster than the broader market. At the same time, Barclays reiterated its “Buy” rating on Charles Schwab with a PT of $96, while Truist Financial maintained its “Buy” rating with no price target.
❖ According to media reports, U.S. Defense Secretary Pete Hegseth plans to reduce the Department of Defense’s budget by 8% over the next five years. While the memo reportedly being drafted for Hegseth specifically targets reductions in excessive bureaucracy and spending on programs related to climate change and DEI, the overall goal is to reallocate funds toward the defense priorities of the Trump administration. The new priorities focus on reducing U.S. military involvement abroad, particularly in Europe, and reallocating resources to counter China’s growing influence. The shift in spending priorities could potentially affect Portfolio companies Howmet Aerospace (HWM), GE Aerospace (GE), and RTX (RTX).
Howmet Aerospace is expected to be the least impacted thanks to its extensive commercial aerospace segment, responsible for nearly 60% of total revenue and displaying fast growth. HWM’s strong performance in the commercial aerospace market provides a buffer against potential reductions in military spending.
As a key supplier of aerospace engines and components, GE’s defense segment could face challenges due to possible budget reductions. However, the administration’s emphasis on efficiency and cost-cutting, led by Elon Musk’s DOGE, may open avenues for companies offering innovative, cost-effective solutions. GE’s ongoing investments in advanced technologies could position it favorably to adapt to these shifting priorities. Apparently, GE is optimistic regarding its further prospects, having conveyed its confidence last week through a nearly 29% dividend hike announcement.
Meanwhile, RTX – a major supplier of military equipment and services – could experience significant impacts if defense budget cuts are implemented. However, increased defense spending by allies, encouraged by the administration, could present new opportunities for international contracts. Thus, the Trump administration is urging partners such as the EU and India to buy more weapons and defense equipment from the U.S. Additionally, RTX’s diversified portfolio, including a strong commercial aerospace segment, may provide resilience against domestic budget fluctuations.
❖ Arista Networks (ANET) reported robust financial results for Q4 and the full year 2024. In Q4 2024, revenue reached $1.93 billion, marking a 25.3% increase from the same quarter in 2023. The adjusted EPS for this period were $0.65, up from $0.52 in the previous year, surpassing analyst projections of $0.57.
For the entire year, Arista achieved a record revenue of $7 billion, reflecting a 19.5% increase compared to fiscal year 2023. The company reported a non-GAAP gross margin of 64.6% and a non-GAAP net income of $2.91 billion, or $2.27 per diluted share.
Looking ahead to Q1 2025, Arista anticipates revenue between $1.93 billion and $1.97 billion, exceeding analyst expectations of $1.90 billion. The company forecasts adjusted gross margins around 63% and an operating margin of approximately 44%. Additionally, Arista has revised its full-year 2025 outlook, now projecting revenue growth of 17%, up from the previously estimated range of 15-17%, and maintains its commitment to gross margins between 60-62%.
Analysts expect that in 2025, ANET will continue benefiting from customer investments in AI infrastructure. Arista’s major customers include Microsoft, Meta Platforms, Oracle, and Alphabet. In 2024, the company’s cloud and AI division experienced significant growth, with contributions from this segment reaching 48% of total revenue, primarily driven by Microsoft and Meta.
❖ Matador Resources (MTDR) reported its financial results for the fourth quarter and full year of 2024. In Q4, revenue rose 16.5% year-over-year, while adjusted EPS declined by 9.1% YoY but still surpassed analyst expectations.
For full-year 2024, Matador posted $3.43 billion in revenue, up 22.2% from 2023, while adjusted EPS came in at $7.42, reflecting a modest 2.3% decline YoY. Both metrics were in line with analyst estimates. The company also achieved record average daily production, with oil output surging 32% and natural gas production rising 26% from 2023.
Looking ahead, Matador projects 2025 revenue between $4.12 billion and $4.40 billion, signaling continued growth momentum. The company has allocated $1.2 billion toward exploration and development. Following strong results, Matador also announced a 25% increase in its quarterly dividend.
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Portfolio Stocks Under Review
❖ We are placing our recently acquired stock, RTX (RTX), under review, due to the likely impacts from the Trump administration’s potential defense budget cuts, as detailed in the “Portfolio News and Updates” section above.
❖ We are keeping ITT (ITT) under review despite strong Q4 2024 results and the following multiple analyst price-target upgrades. Our caution is primarily driven by President Trump’s recent announcement of a 25% tariff on all steel and aluminum imports, effective March 4, 2025. This could significantly impact ITT, raising material costs and potentially compressing profit margins. Although ITT remains a robust and profitable corporation, external developments such as tariffs may lead to stock underperformance.
❖ We are keeping Dell Technologies (DELL) in the “Under Review” list. Although its stock seems to have shaken off the “sticky” investor negativity that depressed the stock in the previous weeks, we believe it would be prudent to closely follow the developments at least until Dell reports its earnings at the end of the month. We will specifically focus on the company’s guidance, as detailed in the “Portfolio News and Updates” section above.
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Portfolio Earnings and Dividend Calendar
❖ Smart Portfolio companies continue to release their earnings results. Texas Pacific Land (TPL) is scheduled to report today after hours. Berkshire Hathaway (BRK.B) and Diamondback (FANG) are expected to release their results on February 24th, while EMCOR Group (EME) and Salesforce (CRM) are scheduled to report on February 26th.
❖ The ex-dividend date for Microsoft (MSFT) is February 20th, while for RTX (RTX) it is February 21st.
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New Buy: Hewlett Packard Enterprise (HPE)
Hewlett Packard Enterprise Company provides IT solutions focused on cloud computing, networking, and data storage for businesses and government clients. HPE is one of the leading players in the global edge-to-cloud market. The company helps organizations manage workloads across on-premises and cloud environments, with an emphasis on hybrid cloud, AI-driven analytics, and high-performance computing. HPE’s offerings support a range of industries, from finance to healthcare, by improving data management, automation, and security. As technology shifts toward AI and cloud-based infrastructure, HPE continues to adapt its portfolio to meet evolving enterprise needs.
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Loading: The Next Chapter
Hewlett Packard Enterprise was formed in 2015 after Hewlett-Packard split into two companies, with HPE focusing on enterprise computing, cloud solutions, and IT infrastructure. Over the past decade, HPE has expanded through strategic acquisitions, research and development, and investments in emerging technologies, reinforcing its position in hybrid cloud, AI, and high-performance computing.
In recent years, HPE has accelerated its transition toward an edge-to-cloud model, which processes data closer to its source (at the “edge”) before integrating with cloud computing. This reduces latency, enhances security, and improves AI-driven decision-making—key advantages in enterprise IT. The 2020 launch of HPE GreenLake, HPE’s “as-a-service” cloud platform, has been a major growth driver, enabling businesses to scale IT infrastructure with flexibility and lower costs.
HPE has also pursued high-performance computing (HPC) and AI, acquiring supercomputing leader Cray in 2019 and securing major contracts, including a $2 billion deal to build AI infrastructure for research institutions. In 2023, HPE introduced Frontier, one of the world’s fastest supercomputers, strengthening its AI footprint. More recently, in 2024, the company launched ProLiant Compute XD685 servers, designed for large-scale AI workloads, and advanced liquid cooling solutions to optimize AI server efficiency.
Strategic M&A has fueled growth, with acquisitions like Athonet (2023) to expand private 5G capabilities and Morpheus Data (2024) to enhance its multicloud automation and orchestration solutions within HPE GreenLake. Additionally, in November 2024, HPE introduced HPE VM Essentials (VME), a unified virtualization management solution for hybrid environments.
As cloud adoption and AI demand grow, HPE continues to invest in hybrid cloud, AI-driven computing, and high-performance infrastructure, ensuring its relevance in the evolving enterprise technology landscape.
HPE is the largest U.S. computer manufacturer by revenue, primarily leading in enterprise computing, including servers, storage, and networking solutions. The company is also recognized as a prominent player in the HPC computing industry and is a key competitor in the hardware industry. With a market cap exceeding $28.5 billion and annual revenue (TTM) surpassing $30 billion, HPE is ranked #147 on the 2024 Fortune 500 list.
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Anchored Across the Enterprise
Hewlett Packard Enterprise operates across four core sectors: Compute, Hybrid Cloud, Intelligent Edge, and Financial Services. The Financial Services division, making up 10.5% of revenue, provides leasing and financing options to support enterprise adoption of HPE’s solutions.
The Compute segment, HPE’s largest, generates 55% of total revenue and includes general-purpose servers, AI-optimized servers, and HPC. HPE holds 14.6% of the global server market, competing with major players such as Dell and IBM. To expand its share, the company is investing in AI-optimized servers like ProLiant Compute XD685 and advanced liquid cooling solutions for enterprise AI workloads.
HPE is a leader in exascale computing, the next generation of HPC systems capable of performing at least one quintillion calculations per second. It ranks second globally, with 23% market share, behind Lenovo. Notably, HPE built four of the world’s ten fastest supercomputers, including Frontier, the current world leader. Its Cray EX systems, designed for exascale computing, leverage direct liquid cooling to manage extreme power and heat demands.
The Hybrid Cloud segment, accounting for 19% of revenue, focuses on cloud infrastructure and management, where HPE competes with AWS, Microsoft Azure, IBM, Dell, and Cisco. Despite strong rivals, HPE has gained traction with GreenLake, its pay-as-you-go cloud platform for hybrid and on-premises solutions. The 2024 Morpheus Data acquisition enhanced GreenLake’s multicloud automation capabilities.
Intelligent Edge, which includes networking and edge computing, contributes 13% of revenue, with HPE holding 15.5% of the market. A slowdown in networking demand led to a revenue decline, but HPE remains focused on AI-driven networking solutions. To strengthen this segment, it proposed a $14 billion acquisition of Juniper Networks, though the deal faces regulatory scrutiny.
HPE generates over 36% of its revenue in the U.S. and has been reducing its exposure to China by selling stakes in joint ventures. With lower China exposure than competitors, HPE holds a strategic advantage amid U.S.-China trade tensions and regulatory risks.
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Rewiring for Growth
Hewlett Packard Enterprise entered 2025 with strong financial momentum, benefiting from surging demand for AI computing and disciplined financial management. In fiscal year 2024, the company reported $30.1 billion in revenue, up 3.4% year-over-year, with a particularly strong fourth quarter, where sales grew 15% to $8.5 billion, a record high.
While AI-driven demand fueled growth, a shift in revenue mix affected overall margins. The Compute segment, HPE’s largest, saw server sales surge 32% in Q4, reaching $4.7 billion, driven by high-performance AI infrastructure. However, Compute’s lower-margin nature weighed on overall profitability, with the company’s gross margin narrowing to 30.8%, a 400 basis point decline from the prior year.
Other segments had a mixed performance. Hybrid Cloud, anchored by the GreenLake platform, saw 18% annual growth, maintaining its position as a key driver of recurring revenue. Financial Services, which provides leasing and financing for HPE’s technology, remained stable, supporting IT adoption among enterprise clients. However, Intelligent Edge, which includes networking and edge computing, declined amid weaker demand, partially offsetting gains elsewhere. Despite the shifting revenue mix, HPE remained financially strong, with low debt levels and investment-grade credit ratings, providing flexibility for long-term expansion.
Liquidity remains a key strength, with HPE generating $2.1 billion in FCF in FY 2024, reinforcing its ability to fund innovation and shareholder returns. The company has focused on disciplined capital allocation, ensuring that investments in AI, cloud, and HPC align with profitable growth opportunities. This strategy was underscored in February 2025, when HPE announced the first shipment of its NVIDIA Blackwell-based AI computing system, the GB200 NVL72, designed for large-scale AI deployments. Analysts view this development as a strategic move to meet the growing demand for advanced AI infrastructure, potentially boosting HPE’s revenue in the coming quarters.
Looking ahead, HPE has provided optimistic guidance for fiscal 2025. The company anticipates mid-teens percentage revenue growth in the first quarter compared to Q1 2024. Adjusted earnings per share (EPS) are projected to be between $0.47 and $0.52, reflecting operational efficiencies and strong demand for AI and cloud solutions. Notably, adjusted EPS increased by 12% in the past two quarters year-over-year, following three quarters of decline, primarily due to improved margins in the Compute segment and cost management initiatives.
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Cash Flowing, Shares Growing
In fiscal year 2024, HPE returned $826 million to shareholders through dividends and share repurchases, underscoring its commitment to shareholder value. The company has maintained a consistent dividend policy over the past eight years. While the pace of payout increases has been modest, HPE’s dividend yield stands at 2.43%, almost 4x the Technology sector’s average. With improving revenue, earnings growth, and a strong cash position, along with a moderate payout ratio, analysts project continued dividend growth.
HPE has exercised moderation in its buyback policy, focusing on growth promotion and strategic acquisitions over share price support. The company repurchased approximately $151 million worth of shares in FY 2024, a modest amount compared to many of its peers. Still, in August 2024, HPE’s board increased its existing share repurchase authorization to $10 billion, providing flexibility for future buybacks.
It seems that HPE doesn’t need to support its stock, as its performance has been strong with gains over the past 12 months approaching 50%. However, despite this strong share price appreciation, the stock remains very attractively valued, trading at a significant discount to the broad Technology sector’s average and its industry peers. Additionally, based on discounted cash flow models, HPE appears undervalued by about 40%, making it a strong value proposition.
Several analysts have opined that HPE represents one of the most affordable AI plays in the large-cap universe. HPE’s strategic focus on AI and high-performance computing, including the shipment of its first NVIDIA Blackwell-based AI computing system, places the company in a prime position to capitalize on growing demand in these sectors. This initiative is expected to contribute positively to revenue growth in the coming quarters.
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Investing Takeaway
Hewlett Packard Enterprise is a key player in enterprise IT, offering a broad portfolio across computing, cloud, networking, and AI infrastructure. Its focus on AI-driven computing and high-performance systems positions it well in a rapidly evolving digital landscape. HPE’s hybrid cloud platform continues to gain traction, while its leadership in high-performance computing supports demand for AI workloads. The company balances innovation with financial discipline, maintaining strong cash flow, a healthy balance sheet, and a measured capital return strategy. Despite significant share price appreciation, HPE remains attractively valued, with analysts highlighting it as one of the most compelling AI investments in the large-cap space. With continued investment in AI, cloud, and data infrastructure, alongside disciplined capital allocation and shareholder-friendly policies, HPE is poised for sustainable growth and long-term market leadership in enterprise technology.
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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.
The markets have ebbed and flowed, but our Winners’ ranks remained unchanged, still including 13 stocks: GE, AVGO, ANET, TPL, ORCL, TSM, EME, HWM, IBKR, PH, APH, ITT, and CRM.
The first contender is still AMZN with a gain of 26.23% since purchase, followed by IBM with a gain of 25.12%. Will one of them close the gap, or will another stock outrun them to the finish line?
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
