Power Positioning
In this edition of the Smart Investor newsletter, we examine the stock of a company that serves as a backbone of AI infrastructure and the cloud economy. But first, let’s dive into the latest portfolio news and updates.
1
Portfolio Updates
❖ RTX (RTX) subsidiary Raytheon has secured a $646.5 million contract through its Naval Power division to continue producing AN/SPY-6 radars for the U.S. Navy. This marks the fourth option exercised under a broader $3 billion contract signed in 2022, which spans five years. The new order adds four radars, bringing the total under procurement to 42 units. The SPY-6 radar significantly extends the Navy’s detection range, giving crews more time to respond to threats.
The deal follows closely on the heels of another major award: Raytheon Missiles & Defense recently received a $1.1 billion contract to produce additional AIM-9X Sidewinder short-range missiles. It is the largest contract to date for the program, boosting annual production to 2,500 missiles. A joint initiative between the U.S. Navy and Air Force, the AIM-9X is also deployed by more than 30 allied nations. Deliveries under the contract are expected through October 2028, with manufacturing distributed across more than 20 sites in the U.S., Canada, and Germany.
❖ Microsoft (MSFT) continued its climb after hitting a fresh record on Friday, which propelled it past Nvidia and into first place in terms of market cap. The software giant’s stock has been clocking in gains as analysts heaved praise over the acceleration in Azure and AI-related revenue growth, with strategic investments in AI infrastructure supporting impressive revenue and earnings momentum. Azure’s revenue soared 33% last quarter, well ahead of estimates, with AI services accounting for nearly half of that growth. According to Goldman Sachs, Microsoft’s cloud revenue could more than double by 2029.
❖ Broadcom (AVGO) has pulled back after earnings, giving back a modest portion of its nearly 80% rally over the past two months. The decline appears driven by profit-taking, as the chip giant delivered a solid fiscal Q2 report and upbeat guidance, but didn’t exceed the market’s loftiest expectations. Revenue and EPS for fiscal Q2 beat analyst estimates, though not by a wide margin. Guidance for the current quarter also came in modestly above consensus, reinforcing the company’s strength but leaving little room for an upside surprise.
That said, Broadcom continued to validate its AI-driven growth narrative, highlighting strong momentum in its AI-related business lines. AI chip revenue surged 46% YoY, while AI networking revenue surged more than 170%. In contrast, non-AI semiconductor revenue fell 5% YoY, weighed down by softness in the industrial and wireless segments. Looking ahead, Broadcom projects total fiscal Q3 revenue to grow 21% YoY, with AI semiconductor revenue expected to soar by 60%, underscoring AI’s rising share of the company’s growth engine.
Additionally, Broadcom’s infrastructure software segment, bolstered by the VMware acquisition, reported a 25% year-over-year revenue increase. With 87% of top customers having transitioned to the VMware Cloud Foundation (VCF) subscription model and full transition expected in the next 12-18 months, the shift is significantly contributing to double-digit annual recurring revenue growth.
❖ Qualcomm (QCOM) rallied on analyst support – with Bernstein saying that the market underappreciates the company’s growth potential – and on a favorable reaction to its M&A activity. QCOM announced the acquisition of UK-based chipmaker Alphawave IP for approximately $2.4 billion, a move aimed at expanding its reach beyond mobile into AI and data center technologies. The announcement comes just a few days after the mobile chip leader acquired Autotalks, a company that specializes in vehicle-to-everything (V2X) communication. With Autotalks now on board, Qualcomm plans to speed up the rollout of connected and automated driving systems globally while adding to its Snapdragon Digital Chassis lineup, which is already used by several automakers.
❖ BlackRock (BLK), Vanguard Group, and State Street are being sued by Republican state attorneys general who allege the firms colluded to cut coal production through coordinated ESG strategies, while at the same time holding stakes in coal producers and profiting from the resulting rise in energy prices. The lawsuit claims their involvement in climate-focused alliances, like the Net Zero Asset Managers initiative, led to lower coal supply and higher costs for consumers, all while boosting the firms’ investment returns. The DOJ and FTC have backed the suit, saying the coordination may violate antitrust laws. The firms deny the allegations and are asking a federal judge to throw out the case, calling it both legally flawed and factually inaccurate.
❖ Alphabet’s (GOOGL) stock has been on fire recently, after its developer conference revealed multiple AI-related innovations, and as other positive news flow in. Thus, Alphabet’s drone unit, Wing, will help Walmart to expand its drone delivery capabilities. Since launching the service in 2021, Walmart has already completed over 150,000 drone deliveries, but this new expansion marks its most ambitious move yet. Millions of customers across Atlanta, Charlotte, Houston, Orlando, and Tampa will now be eligible for airborne grocery deliveries, broadening access far beyond prior test regions. The partnership with Wing brings advanced autonomous drone logistics into Walmart’s same-day delivery ecosystem, reinforcing its push to outpace Amazon in fulfillment innovation.
❖ CrowdStrike (CRWD), along with its cybersecurity peers, is expected to benefit from a new policy development. President Donald Trump signed an Executive Order to strengthen the nation’s cybersecurity. By directing the federal government to prioritize “secure software development” and enhance defenses against foreign cyber threats, the Executive Order signals increased cybersecurity spending across U.S. agencies. CRWD already has a strong public sector presence and FedRAMP authorization, making it well-positioned to win more government contracts as security requirements tighten. CRWD’s threat intelligence and AI-based detection capabilities position the firm well for the government’s focus on “foreign cyber threats.” In addition, the order emphasizes replacing legacy frameworks, which is expected to lead to the adoption of modern, cloud-first, zero-trust solutions – CrowdStrike’s home turf.
❖ Taiwan Semiconductor Manufacturing Company (TSM) reported a 40% year-over-year increase in May revenue, driven by strong AI chip demand from clients like Nvidia and Apple. Although revenue declined by about 8% from April, analysts dismissed the monthly fluctuations, focusing on the fact that the world’s largest contract chipmaker reported its best May on record. In the first five months of this year, TSMC’s revenues surged by nearly 43% from the same period in 2024. Despite uncertainties created by the Trump administration’s tariff policies, TSMC has left unchanged its forecast that the company’s sales in 2025 will grow by about 25%. Moreover, CEO C.C. Wei stated that the company expects record profit in 2025, despite facing geopolitical, tariff, and foreign exchange risks – citing soaring AI demand that continues to outpace supply.
❖ IBM (IBM) announced that it is building Starling, the world’s first large-scale quantum computer designed to run without errors. The computer is slated to be launched by 2029 and will be housed at IBM’s new quantum data center in upstate New York. According to the company, Starling will be able to perform 20,000 times more operations than current quantum computers and is expected to handle complex tasks like drug discovery, supply chain optimization, semiconductor design, and financial risk analysis.
1
Portfolio Stocks Under Review
❖ We are placing Leidos Holdings (LDOS) under review. Despite strong Q1 2025 results, reaffirmed full-year guidance, robust fundamentals, and strategic positioning, the stock has declined – underperforming both the S&P 500 and its industry peers. This downturn contrasts with the broader market’s performance and LDOS’s historical resilience, prompting a thorough evaluation of its role in our portfolio.
LDOS has demonstrated robust financial performance in Q1, reporting revenue increase of 7% year-over-year and a ~30% surge in EPS. The company’s $46.3 billion backlog reflects sustained demand for its services in defense, cybersecurity, and IT modernization. Recent contract wins, including a $205 million Defense Threat Reduction Agency (DTRA) task order in May 2025 and a $390 million National Security Agency (NSA) contract in April 2025, underscore its entrenched role in national security. Moreover, the Trump administration’s emphasis on national security and defense spending aligns closely with LDOS’s NorthStar 2030 strategy, which prioritizes digital modernization, artificial intelligence, and cyber capabilities. This strategic alignment positions Leidos to capitalize on long-term growth opportunities in a sector critical to federal priorities.
Despite these strengths, several factors appear to drive LDOS’s recent stock decline. On May 28, 2025, Leidos acquired Kudu Dynamics for approximately $300 million in cash, marking its first acquisition in over two years. Although the deal aims to enhance LDOS’s AI-enabled cyber capabilities – a high-growth area – integration risks and potential short-term earnings dilution may be causing investor caution. The market may be awaiting concrete evidence of operational synergies and revenue contributions before fully endorsing the acquisition.
Analyst opinions remain mixed. While several Wall Street brokerages raised their price targets – confirming their “Buy” ratings – Baird downgraded the stock to “Hold” from “Buy,” citing a challenging booking environment and increased uncertainty in the federal contracting space. Additionally, a recent market shift back toward growth and technology stocks may further marginalize defensive names like Leidos, limiting near-term upside potential. Without a clear trigger to reverse the decline, LDOS may struggle to regain short-term momentum in the current environment.
Nevertheless, LDOS retains significant long-term potential. The company’s alignment with national security priorities, bolstered by the administration’s focus on defense and cybersecurity, positions it well for sustained demand. Its strong backlog and recent contract wins attest to operational resilience, while the Kudu Dynamics acquisition could enhance its competitive edge in AI and cyber markets over time. Moreover, LDOS’s valuation metrics suggest the stock may be undervalued, offering an opportunity for patient investors.
We will provide a comprehensive update on our stance within the next few weeks, as additional information becomes available. In the meantime, we remain committed to ensuring our portfolio aligns with our long-term quality and growth objectives.
1
Portfolio Earnings and Dividend Calendar
❖ The Q1 2025 earnings season is over, but one important Portfolio holding – Oracle (ORCL) – is scheduled to post its fiscal Q4 2025 results today, after the market closes.
❖ The ex-dividend dates for TSMC (TSM), Leidos Holdings (LDOS), Amphenol (APH), and Salesforce (CRM) are coming over the week to our next report.
w
New Buy: Vertiv Holdings (VRT)
Vertiv Holdings designs, builds, and services critical digital infrastructure that powers data centers, communication networks, and commercial and industrial environments worldwide. The company plays a central role in enabling always-on, scalable IT ecosystems, offering a full suite of thermal management, power systems, and IT management solutions. Its technology is foundational to hyperscale, colocation, enterprise, and edge computing deployments, with growing relevance amid the global expansion of artificial intelligence and cloud infrastructure. Vertiv’s integrated approach spans hardware, software, and services — positioning it as a key infrastructure partner for the most demanding compute environments. With a long-standing focus on operational resilience and engineering innovation, the company continues to deepen its presence across North America, EMEA, and Asia-Pacific. As digital capacity scales globally, Vertiv remains embedded at the core of next-generation compute and connectivity.
1
Powering the Pivot
Vertiv’s origins trace back to the former Network Power business of Emerson Electric, a legacy player in industrial and infrastructure technology. In 2016, Platinum Equity acquired the business and rebranded it as Vertiv – marking the beginning of its independent trajectory as a pure-play digital infrastructure company. This transition laid the groundwork for a sharper strategic focus on data center, communication, and edge computing infrastructure. In early 2020, Vertiv went public through a merger with GS Acquisition Holdings, a SPAC backed by Goldman Sachs – accelerating its access to growth capital and public market visibility.
Over the past five years, Vertiv has undergone a significant transformation – emerging as a global leader in data center thermal management, power systems, and integrated infrastructure solutions. A combination of internal reinvestment, operational restructuring, and external partnerships has reshaped the company’s market standing. It has consistently outpaced the underlying growth of the industry, benefiting from secular trends in AI, cloud computing, and distributed workloads.
A key turning point came with the formal adoption of the Vertiv Operating System (VOS), a company-wide framework focused on lean execution, productivity leverage, and customer-centric innovation. This operational reset allowed the company to expand margins while scaling production across global regions. Concurrently, VRT executed a regional diversification strategy – building out U.S. and Mexico-based manufacturing capacity to mitigate tariff exposure and improve proximity to hyperscale and enterprise clients.
Strategic M&A has also played a role in extending Vertiv’s technological footprint. In 2021, it acquired E&I Engineering, a global provider of switchgear and busway systems, enhancing its electrification portfolio. Two years later, it added UK-based CoolTera – a specialist in liquid cooling solutions – to strengthen its thermal management capabilities for high-density compute environments. In 2024, Vertiv followed up with the acquisition of chiller and heat-recovery technologies from BiXin Energy – broadening its position in energy-efficient cooling, particularly for AI and HPC workloads. These transactions have supported both top-line expansion and deeper penetration of fast-growing infrastructure verticals.
Vertiv is now recognized as one of the most influential suppliers in the data center ecosystem. Its reference architectures are increasingly embedded in AI buildouts across colocation, hyperscale, and sovereign cloud environments. With a robust order backlog and a global customer base, VRT has repositioned itself from a legacy infrastructure player to a mission-critical enabler of digital capacity – operating at the intersection of energy, thermal, and compute infrastructure. This transformation is still underway, but the foundation has been firmly laid.
1
Core Systems, Critical Growth
Vertiv operates at the heart of the digital infrastructure stack, providing power, thermal management, and integrated hardware-software solutions to data centers, communication networks, and industrial environments. The company addresses a total addressable market (TAM) estimated at over $70 billion, spanning hyperscale and colocation data centers, edge computing, and enterprise-grade IT infrastructure. As demand for computing capacity accelerates – driven by AI, cloud workloads, and digital services – VRT’s systems are increasingly mission-critical.
The business is structured across three primary geographies: the Americas (58% of sales), Asia-Pacific (22%), and EMEA (20%). Vertiv generates approximately 80% of its revenue from products such as uninterruptible power systems, switchgear, cooling units, and integrated racks, while the remaining 20% comes from services and spares – a segment that provides both margin support and recurring revenue visibility.
A core driver of recent and anticipated growth is the rapid buildout of hyperscale AI infrastructure. VRT is deeply embedded in this ecosystem, with its cooling and power systems used in high-density AI data centers deployed by leading hyperscalers and sovereign cloud operators. The company is a reference partner for NVIDIA’s GB200 and GB300 NVL72 platforms, and recently delivered a complete prefabricated AI infrastructure solution for Italy’s sovereign AI initiative.
These engagements reflect a strategic pivot toward scalable, AI-specific infrastructure deployments – a trend still in its early innings. Unlike general-purpose cloud buildouts, AI facilities demand significantly higher power densities, thermal precision, and integration speed – pushing infrastructure requirements beyond legacy norms. As compute intensity scales, Vertiv’s ability to deliver modular, high-capacity systems positions it for sustained demand growth across both public and private AI deployments.
Importantly, Vertiv’s manufacturing and sourcing strategy has been redesigned to withstand geopolitical volatility. Less than 10% of Vertiv’s U.S.-bound supply chain depends on China, and the company has aggressively shifted production to North America. Most systems delivered to the U.S. are now manufactured in Mexico under USMCA-qualifying conditions, with additional capacity investments underway to further localize production. This insulation from trade shocks provides a strategic advantage over those competitors who are more exposed to Asia-based supply chains.
Beyond hyperscale, VRT is expanding its footprint in the colocation and enterprise segments, as well as supporting edge infrastructure tied to telecom, smart manufacturing, and public sector initiatives. The company has also seen early traction in sovereign AI deployments in Europe and Asia, where demand is rising for on-premise, regulated compute capacity. Combined with long-term relationships across the cloud provider and data center developer landscape, Vertiv is positioned to benefit from both volume and complexity growth – with infrastructure scaling deeper into power and cooling intensity over time.
1
Booked and Building
Vertiv continues to deliver strong financial performance, driven by surging demand for AI infrastructure and disciplined execution. In Q1 2025, the company reported net sales of $2.04 billion, up 24% YoY, surpassing analyst expectations of $1.94 billion. Organic revenue growth came in slightly higher at 25%. Adjusted diluted EPS rose 49% to $0.64, beating the consensus estimate of $0.61. This marked Vertiv’s ninth consecutive EPS beat and fifth straight revenue beat.
Adjusted operating profit reached $337 million, up 35% YoY, with operating margin expanding 130 basis points to 16.5%. Order momentum remained robust, with trailing twelve-month orders up approximately 20% year-over-year. Backlog grew 10% from the end of Q4 2024 to $7.9 billion, up 25% from the same period last year. Q1 bookings increased 13% YoY and 21% sequentially, resulting in a book-to-bill ratio of 1.4x – indicating that VRT received 40% more in new orders than it delivered in revenue during the quarter. That’s a strong signal that demand is outpacing supply, and it contributes to the record backlog, setting the stage for future revenue growth.
Cash generation was another standout. Adjusted free cash flow surged 162% YoY to $223 million, reflecting improved profitability and disciplined working capital management. On the balance sheet side, Vertiv achieved a key milestone: in March 2025, Fitch upgraded the company’s credit rating to investment grade (BBB–), citing consistent earnings growth, deleveraging progress, and robust cash flow.
For full-year 2025, Vertiv raised its net sales outlook by $250 million at the midpoint to $9.33-9.58 billion, and reaffirmed adjusted EPS guidance of $3.45-3.65. At the midpoints, this implies revenue growth of nearly 38% and adjusted EPS growth of over 52% versus 2024, a sharp acceleration fueled by AI-related infrastructure demand and expanding margins.
Tariff exposure remains a watch item. Management noted margin pressure from U.S. tariff changes and regional mix effects, particularly in Asia. However, VRT is actively mitigating this through its supply chain restructuring, including expanded operations in Mexico under USMCA trade protection. The company expects these steps to progressively offset tariff headwinds over the coming quarters.
With accelerating backlog, operating leverage, and a now-investment-grade balance sheet, Vertiv enters the rest of 2025 with strong financial momentum and strategic flexibility to support long-term infrastructure demand.
1
Valued for Velocity
Like many technology and tech-adjacent stocks, VRT surged from 2023 through early 2025, driven by the intensifying AI infrastructure narrative. The stock reached an all-time high on January 23, 2025, after gaining over 180% in the preceding 12 months. This was followed by a sharp decline, driven by a combination of market-wide volatility stemming from tariff headlines and substantial profit-taking after a stellar run. However, when the market rebounded from its tariff-induced doldrums in early April, Vertiv’s stock outpaced broad indexes and industry peers alike – a move further amplified by its exceptional Q1 earnings report.
With a beta of 1.73, VRT is inherently volatile, which made the decision to add it to the portfolio a difficult one. After careful consideration, however, we concluded that its long-term growth potential justifies the short-term jolts it has – and likely will – continue to experience.
This earnings growth potential also helps justify the premium at which Vertiv trades relative to both the Industrial and Technology sector median TTM and forward Non-GAAP P/E ratios. When compared to peers in the infrastructure and electrical equipment space, the valuation story becomes more nuanced. VRT ranks toward the top of the peer range on P/E and EV/EBITDA, but stands closer to the median on Price/Cash Flow and both forward and trailing EV/Sales.
In contrast, Vertiv trades significantly below large-cap peers on the forward PEG ratio. This combination – a high P/E but low PEG – is a textbook indicator of a GARP (Growth At a Reasonable Price) profile. That case is underscored by VRT’s actual and expected growth across revenue, EBITDA, free cash flow, and EPS – each advancing dramatically faster than the sector averages.
VRT performs occasional buybacks. In November 2023, the company authorized a $3 billion buyback plan extending through December 31, 2027. However, the company’s only repurchase under this authorization was in Q1 2024, when it bought back ~$600 million worth of shares – about 2.4% of its outstanding shares. During the Q1 2025 earnings call, management noted a “zero in the share repurchase column” of the cash flow statement, citing a strategic choice to preserve liquidity amid tariff-related uncertainties.
While this strategic pause in buybacks reflects Vertiv’s prudent approach to capital allocation in a complex macroeconomic environment, the company continues to compensate its shareholders through dividends. VRT initiated its dividend program in late 2020, and has consistently increased its dividend payouts since then. Although its dividend yield of 0.11% is tiny compared to the sector average, a very modest payout ratio and surging cash flows drive the estimate for dividend growth for years to come.
1
Investing Takeaway
Vertiv is a mission-critical infrastructure platform powering the next generation of AI, cloud, and high-density compute environments. Having evolved from a legacy industrial unit into a global leader in data center thermal and power systems, the company now sits at the center of secular infrastructure demand. Vertiv’s embedded role in hyperscale and sovereign AI buildouts, combined with supply chain agility and operational leverage, positions it for sustained growth. Its product-service mix, expanding backlog, and margin trajectory support a high-visibility runway. Despite strong share performance, Vertiv still trades below growth-adjusted valuations of large-cap peers. With accelerating free cash flow, rising investor credibility, and exposure to structural digital expansion, Vertiv offers an underappreciated GARP opportunity – one that balances volatility with deep fundamental strength and long-cycle relevance.
1
1
New Sell: Verizon Communications (VZ)
After a thorough review, we have decided to sell Verizon from the portfolio. Despite the FCC’s approval of its $20 billion acquisition of Frontier Communications, market skepticism remains. Although the deal is designed to expand Verizon’s fiber footprint – especially in underserved and rural areas – analysts question its ability to deliver meaningful revenue growth. We at Smart Investor also believe the acquisition’s value is questionable.
The acquisition, valued at $20 billion (including debt), has been criticized for the premium paid, given Frontier’s minimal revenue growth and relatively small fiber footprint. Some argue that the deal does little to enhance Verizon’s competitive position in a market increasingly driven by innovation and scale. The decision to shift away from DEI programs as part of the acquisition’s terms may improve cost structure, but it does not address the core issue of strategic stagnation. Recent robust stock sales by company insiders, including the CEO, underscores the lack of conviction in holding the stock further.
Verizon’s strategic focus appears misaligned with industry trends. The company’s focus on bundled wireless and broadband services, while stable, risks falling behind as competitors pivot toward high-growth sectors like AI and data centers. The company’s emphasis on integrating Frontier’s fiber assets into its existing portfolio may yield operational synergies, but it lacks the transformative potential needed to reassert Verizon’s relevance in a market repricing toward platform-driven growth. Meanwhile, industry peers are capitalizing on AI and data center opportunities, leaving Verizon vulnerable to long-term underperformance.
Verizon’s fundamentals remain stable, with solid Q1 2025 results, including better-than-expected revenue and robust free cash flow. However, the company continues to face headwinds, such as the loss of 289,000 postpaid phone subscribers in Q1, reflecting ongoing price competition and churn pressures. At current levels, VZ trades at a forward P/E of 9.3, below its long-term average, but valuation alone isn’t sufficient to stabilize the stock, let alone support a rebound. With no immediate catalysts to re-accelerate subscriber growth or expand margins, we see limited upside. Moreover, the ongoing market rotation toward growth and tech stocks further diminishes the appeal of defensive, dividend-rich names like Verizon.
In conclusion, although Verizon provides income stability through its high dividend yield, its strategic and operational challenges outweigh its defensive merits. We view it as prudent to sell the stock and reallocate the funds to companies with stronger earnings potential.
1
1
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.
Markets have ebbed and flowed, and our Winners list has expanded, now holding 13 stocks: GE, AVGO, HWM, ANET, EME, TSM, ORCL, APH, TPL, IBKR, PH, CRWD, and IBM.
The first contender for the Club’s entry is now UBER, with a 20.77% gain since purchase. Will it gain this rite of passage, or will another stock outrun it to the finish line?
1
1
|
1
1
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.
