Stable Connection
In this edition of the Smart Investor newsletter, we examine the stock of a leading U.S. telecommunications provider. But first, let’s dive into the latest Portfolio news and updates.
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Portfolio Updates
❖ According to media reports, President Trump directed his administration to evaluate levying tariffs on trading partners – including some EU countries, Canada, and India – that impose taxes and regulations on American tech companies. This move follows U.S. House Judiciary Chair Jim Jordan’s demand for EU antitrust authorities to clarify their enforcement of rules restricting U.S. tech firms. Jordan argued that the EU’s Digital Markets Act (DMA) appears to target American companies and that the bloc’s repeated imposition of large fines on U.S. tech giants effectively acts as a “European tax on American companies.” His letter comes amid reports that EU regulators plan to issue a substantial fine against Alphabet (GOOGL) for allegedly violating EU rules. Recently, executives from Alphabet and Meta Platforms voiced concerns that the EU’s strict regulatory approach to advanced technology stifles innovation. Meta has also been subjected to EU investigations and penalties.
❖ Salesforce (CRM) announced an expansion of its partnership with Alphabet (GOOGL) to provide businesses with advanced AI capabilities. Under this agreement, Salesforce’s customer relationship management software, Agentforce AI assistants, and Data Cloud will operate on Google Cloud’s infrastructure. Additionally, Salesforce’s customer support software will integrate with Google’s tools, enabling customers to utilize Google’s Gemini models to develop more intelligent virtual agents capable of handling complex tasks and accessing real-time data from Google Search.
❖ Microsoft (MSFT) shares declined after a TD Cowen analyst note raised concerns over AI infrastructure spending. The note revealed that Microsoft canceled U.S. data center leases totaling several hundred megawatts due to supply chain and power delivery delays. Some analysts suggest this also reflects a strategic shift in AI infrastructure planning, rather than just external constraints.
Meanwhile, OpenAI is moving some workloads to Oracle’s (ORCL) cloud under a new partnership, diversifying beyond Microsoft’s Azure. While this doesn’t necessarily reduce OpenAI’s Azure usage, it signals infrastructure diversification that could free up capacity within Microsoft’s data centers.
Despite the lease cancellations, Microsoft is still expanding data center capacity, particularly in existing availability zones, suggesting a strategic realignment rather than a pullback. The company has also reallocated international spending to the U.S. to bolster domestic infrastructure, though the extent of its global slowdown remains unclear.
TD Cowen emphasized that AI compute demand remains strong, with Alphabet (GOOGL), Meta, and Amazon (AMZN) continuing to grow AI-driven infrastructure investments. However, analysts remain uncertain whether Microsoft will replace the canceled capacity, raising questions about AI demand strength or potential data center oversupply.
Microsoft management denied any fundamental shift in strategy, reaffirming its $80 billion infrastructure spending target for the fiscal year ending in June. While acknowledging some adjustments, the company insists growth will continue across all regions. Jefferies analysts support this view, noting Microsoft regularly refines its forecasts to optimize investments.
Mizuho analysts argue that Microsoft is not canceling existing leases but may simply be slowing new lease agreements as part of a routine strategic adjustment. Over the last four years, Microsoft accelerated leasing faster than competitors, as it shifted towards a leasing model. The scaling back of new leases could signify a rebalancing of its owned-to-leased ratio rather than hinting at an AI infrastructure slowdown. Meanwhile, BofA analysts said that the tech giant “is not easing up on capex spending plans in any material way,” reallocating some spending and projects within its capex framework.
With AI stock valuations elevated and markets sensitive to hyperscaler spending shifts, investors reacted swiftly to TD Cowen’s report, triggering a sell-off in AI infrastructure and hardware stocks. However, differing interpretations from TD Cowen, BofA, and Mizuho suggest Microsoft’s move is likely a recalibration rather than an outright contraction, meaning AI infrastructure growth remains intact – just with a different resource allocation.
❖ Dell Technologies (DELL) stock fell on news that Apple’s massive $500 capex slated for the next four years includes plans to build a server factory in Houston to support its AI efforts. Apple’s entry into the AI race aligns with other major tech firms investing tens of billions annually in AI infrastructure. While this signals strong overall demand for AI hardware, Apple’s plan to manufacture its own AI servers could pose a competitive threat to existing suppliers like Dell, one of the two largest AI server makers in the U.S. along with Super Micro Computer.
❖ RTX (RTX) was awarded an additional multi-million-dollar contract by the Danish Defense Armed Forces for ELCAN Specter DR dual role sights. The NATO Support and Procurement Agency (NSPA) is overseeing this contract. In addition, the company received a $322.5M modification to contract for the Tube Launched Optically-Tracked Wireless Guided weapon system from the U.S. army.
❖ Texas Pacific Land (TPL) reported its fourth-quarter and full-year 2024 financial results on February 19th. In Q4 2024, the company recorded a net income of $118.4 million, or $5.14 per share, with total revenues of $185.8 million. Notably, oil and gas royalty production hit a record 29.1 thousand barrels of oil equivalent (Boe) per day during the quarter.
For the full year 2024, TPL delivered record revenues and net income, with total revenue growth of nearly 12%, primarily driven by a 33% increase in its water segment. Despite headwinds from declining oil and gas prices, the company achieved record free cash flow and shareholder returns, distributing $376 million through dividends and share buybacks, the highest in its history.
TPL expanded its royalty acreage and surface assets throughout 2024 and plans to continue this strategy in 2025. The company projects capital expenditures of $65 million to $75 million for fiscal 2025. As part of its long-term growth initiatives, TPL is exploring next-generation opportunities and is constructing a produced water desalination test facility, which could further strengthen its water services segment and industry positioning.
Overall, the company’s results highlight effective operational strategies and diversification efforts, particularly in its water business. Following these outstanding results, TPL increased its dividend by 37%, reflecting confidence in its financial strength and growth outlook.
❖ Diamondback (FANG) announced its fourth-quarter and full-year 2024 financial results on February 24th. In Q4 2024, the company reported adjusted net income of $3.64 per share, significantly above forecasts, with total revenues of $3.71 billion, surpassing analyst expectations of $3.55 billion. The company’s average daily oil production during this period surged by 74% from 2023.
For the full year 2024, Diamondback achieved adjusted net income of $3.6 billion, or $16.57 per diluted share. Net cash provided by operating activities totaled $6.4 billion for the year. The company invested $2.9 billion in capital expenditures, allocating $2.6 billion to drilling and completions, $221 million to infrastructure and environmental initiatives, and $14 million to midstream operations.
In Q4 2024, Diamondback generated free cash flow of $1.3 billion and adjusted free cash flow of $1.4 billion. For the entire year, free cash flow was $3.6 billion, with adjusted free cash flow reaching $4.0 billion. These robust financials enabled the company to increase its base annual dividend by 11%, reflecting confidence in its operational performance and commitment to shareholder returns.
❖ Berkshire Hathaway (BRK.B) shares hit an all-time high on analysts’ post-earnings upgrades. In Q4, Warren Buffett’s holding company reported a 71% year-over-year surge in operating earnings that rose to a record of $14.5 billion on strength in the company’s large insurance operations and higher investment income. Insurance underwriting profits surged 302% from a year earlier to $3.4 billion, while investment income rose by 46% to $4.1 billion, reflecting sharply higher cash balances.
For the full year 2024, operating earnings were $47.4 billion, up approximately 27% from 2023. This growth was bolstered by strong results in the insurance sector, notably GEICO, despite 53% of Berkshire’s 189 operating businesses experiencing a decline in earnings. The record profit added to Berkshire Hathaway’s cash pile, which rose to $334 billion at the end of the year, an all-time high. The company didn’t buy back stocks since May 2024, reflecting the strength in Berkshire shares during 2024.
In his annual letter to investors, Warren Buffett said that despite a record cash position, the majority of Berkshire’s funds remains invested in equities, with the company planning to continue this course “forever,” preferring U.S. stocks. Buffett said that “Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned.” In his letter, Buffett acknowledged the upcoming leadership change, confirming that Greg Abel is set to succeed him as CEO.
❖ PayPal (PYPL) Investor Day on Tuesday highlighted several strategic initiatives and financial targets. The company introduced PayPal Open, a unified merchant platform integrating tools like Braintree, Complete Payments, and Hyperwallet, allowing seamless third-party service integration. It also announced partnerships with Verifone for enterprise payment solutions and J.P. Morgan Payments to launch Fastlane, a one-click checkout system in the UK and Europe.
Financially, PayPal reaffirmed its 2025 guidance, projecting 5%+ gross profit growth and 6%-10% adjusted EPS growth. The company expects low-teens or higher adjusted profit growth by 2027 and aims for 8%-10% annual branded checkout payment volume growth.
Wolfe Research considers these projections above medium-term expectations, citing potential upside to consensus estimates and confidence in PayPal’s growth trajectory. Wolfe analysts praised PYPL’s intention to grow operating expenses at less than half the rate of gross profit growth and its higher EPS growth aspirations.
❖ Cisco (CSCO) announced plans for an expanded partnership with Nvidia to provide AI technology solutions to enterprises. This expanded partnership benefits CSCO by strengthening its position in the AI-driven enterprise networking market. By integrating Nvidia’s Spectrum-X platform with its own networking, security, and digital resilience solutions, including Splunk, Cisco enhances its competitive edge in high-performance AI infrastructure. This collaboration makes Cisco’s solutions more attractive to enterprises needing low-latency, high-efficiency AI networking, driving demand for its products and services. It also future-proofs Cisco’s technology stack by aligning with Nvidia’s AI advancements, positioning the company as a key player in AI data center connectivity and multi-cloud environments.
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Portfolio Stocks Under Review
❖ RTX (RTX) remains under review despite recent string of good news – as detailed in the “Portfolio News and Updates” section above – and strong analyst support. The stock was placed under review due to potential defense budget cuts under the Trump administration, warranting further evaluation.
❖ 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. As a manufacturer of engineered components and customized technology solutions, ITT relies on steel and aluminum as key raw materials. The imposed tariffs are expected to increase the costs of these materials, potentially impacting ITT’s production expenses and profit margins.
It’s important to note that the full impact of the tariffs will depend on various factors, including ITT’s ability to mitigate increased costs through supply chain adjustments, pricing strategies, or operational efficiencies. Additionally, potential retaliatory measures from trade partners and overall market conditions will play a role in shaping the company’s financial outlook. Therefore, ITT remains in focus until we gain a clearer picture of the policy developments and their impact on the company.
❖ We are keeping Dell Technologies (DELL) in the “Under Review” list at least until Dell reports its earnings tomorrow, with a specific focus on the company’s guidance.
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Portfolio Earnings and Dividend Calendar
❖ Smart Portfolio companies continue to release their earnings results. EMCOR Group (EME) will announce its results today, before the market opens, while Salesforce (CRM) is scheduled to report after hours. Dell Technologies (DELL) and Autodesk (ADSK) are expected to release their quarterly results tomorrow, February 27th.
❖ The ex-dividend date for Interactive Brokers (IBKR) is February 28th, while for Texas Pacific Land (TPL) it is March 3rd.
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New Buy: Verizon Communications (VZ)
Verizon Communications, Inc. provides telecommunications and technology services, focusing on wireless connectivity, broadband, and enterprise solutions. The company operates the largest wireless network in the U.S., delivering mobile, internet, and cloud-based services to consumers, businesses, and government clients. Verizon emphasizes 5G deployment, network security, and digital transformation, supporting industries from healthcare to finance. Its enterprise solutions include IoT, cybersecurity, and managed network services. As demand for high-speed connectivity and edge computing grows, Verizon continues to expand its infrastructure and service offerings to meet evolving digital and business needs.
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Expanding the Network
Verizon Communications was established in 2000 through the merger of Bell Atlantic and GTE, forming one of the largest telecommunications companies in the U.S. Since then, it has expanded its services and infrastructure through acquisitions, technology investments, and partnerships.
VZ has focused on strengthening its network for over 15 years, building a strong competitive position. Its 4G LTE network covers more than 99% of the U.S. population. The company has received the J.D. Power award for Wireless Network Quality 32 consecutive times, more than any other provider, reinforcing its reputation for reliability.
Verizon has played a key role in 5G deployment. It launched its 5G mobile network in April 2019, initially in 30 cities, using millimeter-wave spectrum for high-speed connectivity. By October 2020, it expanded nationwide through dynamic spectrum sharing. In early 2021, Verizon invested $52.9 billion in mid-band spectrum to improve 5G coverage and performance.
In recent years, Verizon has pursued acquisitions and partnerships to strengthen its market position. In September 2024, it announced plans to acquire Frontier Communications for $20 billion. The deal, still under regulatory review and expected to be finalized by the end of the year, would significantly expand Verizon’s fiber network and broadband services.
Verizon has also pursued strategic partnerships to enhance its technological capabilities. In May 2024, it teamed up with AST SpaceMobile to develop direct-to-cell satellite connectivity, improving coverage in remote areas.
In January 2025, VZ launched Verizon AI Connect, an integrated suite of solutions designed to help businesses deploy AI workloads at scale. As part of this initiative, Verizon has partnered with Vultr, a global GPU-as-a-Service and cloud computing provider, to enhance its AI capabilities. This collaboration enables Verizon to leverage Vultr’s GPU infrastructure, facilitating efficient AI model deployment across Verizon’s extensive network infrastructure.
Through these efforts, Verizon has continued adapting to industry shifts and technological advancements. With a market cap exceeding $184 billion and annual revenues nearing $135 billion, VZ ranks #31 on the 2024 Fortune 500 list.
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Coverage Map
Verizon Communications operates across the United States through two primary segments: Consumer and Business, each contributing significantly to revenue.
VZ’s Consumer segment provides wireless and wireline communication services to individual customers nationwide. Offerings include wireless voice and data services, internet access, and video services. In 2024, the segment generated approximately $102.9 billion, or over 76% of total sales. By year-end, it reported 115.3 million wireless retail connections and 10 million broadband connections, including 7.1 million fiber-optic Fios internet connections.
The Business segment serves SMEs, large enterprises, and government entities with wireless and wireline services. Its portfolio includes networking products, data security solutions, and IoT services. In 2024, it generated approximately $29.5 billion, or about 22% of total sales. The segment ended the year with 30.8 million wireless retail postpaid connections and 2.3 million broadband connections.
Beyond segment differentiation, VZ’s revenue model is diversified across service and product offerings. In 2024, service and other revenues accounted for approximately 83% of total revenue, while wireless equipment sales made up the rest. This structure provides a stable income stream from subscription-based services while supplementing growth through device sales.
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Connected Revenue
Verizon Communications navigated a competitive 2024 with a modest 0.6% revenue increase, reaching $134.8 billion, driven by strategic pricing and rising wireless demand.
The Consumer segment grew 1.2% year-over-year, fueled by a 3.1% rise in wireless service revenue in Q4 and a record-breaking net addition of 1 million postpaid mobile and broadband subscribers in the quarter. For the full year, VZ added nearly 2.5 million postpaid subscribers, marking its strongest growth in over a decade. The Business segment saw a 2% revenue decline, though Q4 wireless service revenue rose 3.4% on strong mobility and fixed wireless additions.
Verizon continued aggressive debt reduction, cutting $10.6 billion in unsecured debt and improving its net unsecured debt to adjusted EBITDA ratio to 2.3x, down from 2.6x earlier in the year. This bolstered financial flexibility while maintaining shareholder returns.
Free cash flow rose 5.9%, despite a slight decline in cash flow from operations. Verizon projects 2025 FCF between $17.5 billion and $18.5 billion, slightly below analyst expectations, as it ramps up high-speed internet expansion and 5G investments.
Profitability remained solid, with full-year EPS jumping to $4.14 from $2.75 in 2023. Adjusted EPS landed at $4.59, slightly down from 2023, while Q4 adjusted EPS beat analyst expectations at $1.10. Wireless service revenue hit $20 billion in Q4, up 3.1%, while equipment revenue remained stable. Notably, the company reported a net income of $17.5 billion for 2024, an increase of nearly 51% from 2024.
Looking ahead, Verizon expects 2025 wireless service revenue growth between 2% and 2.8%, with flat to 3% adjusted EPS growth, as it integrates Frontier Communications, expands satellite partnerships, and advances AI infrastructure.
Analysts viewed VZ’s 2024 results and 2025 outlook positively, highlighting the rebound in mobile and broadband subscriber growth as a key driver of revenue and cash flow. The company is well-positioned to leverage AI opportunities, including mobile edge computing, while 5G expansion and AI-driven efficiencies enhance performance and support emerging technologies like autonomous vehicles, smart cities, and remote healthcare. Strategic moves, such as launching Verizon AI Connect and acquiring Frontier, further strengthen its fiber network and service offerings, reinforcing its long-term growth potential.
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Steady Signal
After several years of stagnation, Verizon’s stock experienced a notable uptick in 2024. Despite a decline from October’s peak following a slight Q3 revenue miss, VZ’s price return over the past year was approximately 10%, with significant gains post-Q4 results and outlook. Including dividends, the total return was nearly 18%.
Verizon Communications is one of the market’s highest-yielding dividend payers, with a current yield of 6.3%. In October 2024, VZ increased its quarterly payout for the 20th consecutive year, marking the longest string of uninterrupted dividend increases in the U.S. telecom sector. The company’s commitment to increasing shareholder return demonstrates its confidence in its cash flow and long-term prospects.
Despite improved share performance, VZ appears undervalued by all accounts. It trades at a significant discount to the Communication Services sector average, though comparisons may be skewed by high-growth stocks within the sector. Importantly, Verizon’s valuation metrics are among the most attractive compared to its peers, while offering similar revenue growth rates and a superior dividend yield. Discounted cash flow models suggest VZ is undervalued by nearly 70%, presenting an outstanding value proposition.
Analysts generally rate Verizon as a “Buy,” though price targets vary. The average target suggests an 8.2% upside (for price return only), though some such as Tigress Financial, are projecting over 25% growth in the next 12 months. In any case, with markets in the grip of uncertainty and previously fast-rising technology stocks experiencing notable declines, VZ’s low-Beta stock offers a key benefit for long-term investors: stability and downside protection.
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Investing Takeaway
Verizon Communications is a leading U.S. telecommunications provider, operating the country’s largest wireless network and a growing fiber broadband business. Its focus on 5G expansion, AI-driven network optimization, and enterprise solutions positions it well in an evolving digital landscape. The company continues to strengthen its infrastructure through strategic acquisitions and partnerships while maintaining a disciplined approach to capital allocation. Its high-yield dividend and stable cash flow make it an attractive option for income-focused investors. Despite recent share price gains, Verizon remains undervalued relative to peers, offering both defensive stability and long-term growth potential. With investments in next-generation connectivity, AI, and fiber expansion, Verizon is positioned to benefit from increasing demand for high-speed, reliable communication services across consumer and enterprise markets.
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New Sell: Matador Resources (MTDR)
Matador Resources Company is an independent energy firm specializing in the exploration, development, production, and acquisition of oil and natural gas resources in the United States. The company’s primary operations are concentrated in the Delaware Basin, with additional activities in the Eagle Ford and Haynesville shales. It also offers midstream services, including natural gas processing and oil transportation.
Matador delivers exceptional long-term earnings growth and consistent free cash flow generation, while maintaining strong capital discipline. In 2024, Matador achieved a 33% increase in revenue, while EPS experienced a slight decline, both metrics aligning with analyst expectations. The company reached record average daily production, allocating $1.2 billion toward further exploration and development. Looking ahead, Matador projects continued revenue growth for 2025 and has announced a 25% dividend hike.
Moreover, top Wall Street analysts maintain a “Strong Buy” rating for MTDR, with an average price target indicating a potential 45% upside from the current price. Notably, company insiders have been buying the stock, signaling confidence in the company prospects.
Despite all these positives, Matador’s stock has been stuck in a downward loop year-to-date. Although many of its peers also saw declines, current investor sentiment towards MTDR is downright bearish. As there are no company-specific negative developments, we believe that the stock has been punished for Matador’s plans to significantly increase capex, which could have spooked investors amid overall market anxiety. We will certainly revisit this oil champion when market conditions stabilize, but for now we view selling MTDR as a prudent step.
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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 were a sea of red over the past week, and our Winners’ ranks have lost one of its members as CRM fell under the threshold. Now, our exclusive club includes 12 stocks: GE, AVGO, ANET, TPL, ORCL, TSM, HWM, EME, IBKR, PH, APH, and ITT.
The first contender is now CRM with a gain of 23.31% since purchase, closely followed by IBM with a gain of 22.59%. Will one of them close the gap, or will another stock outrun them to the finish line?
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Disclaimer
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