The Next Episode
In this edition of the Smart Investor newsletter, we spotlight the company turning screen time into a global platform. But first, let’s review the latest news and developments.
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Portfolio News and Updates
❖❖ Alphabet’s (GOOGL) stellar earnings report last week included data on Google Cloud’s backlog, which nearly doubled sequentially to $462 billion. Investors are now getting some details on that growth, which appears to have been notably boosted by Google’s deal with Anthropic.
In April, the tech giant announced the expanded partnership with Anthropic and Broadcom (AVGO), giving Anthropic access to roughly 3.5 GW of next-generation TPU capacity. The TPUs are designed by Google, co-developed and supplied by Broadcom, and provided to the Claude maker through Google Cloud infrastructure. Alphabet has also committed to invest up to $40 billion in the AI startup, deepening its bet on Anthropic despite competing with it on GenAI models. Last week, media reports revealed another part of that agreement that hadn’t been made public until now: Anthropic has committed to spend $200 billion with Google Cloud over the next five years, beginning in 2027. This amount has contributed over 40% of the Cloud backlog disclosed to investors in earnings report.
This deal is basically a long-term rent agreement, covering both cloud capacity and TPUs – and the $200 billion price tag makes it the largest commercial lease in the history of computing. Through the deal, Anthropic gets guaranteed access to massive computing power – reportedly up to 5 GW of server capacity, an extraordinary scale for AI training and running large models. The same dynamic, albeit at a smaller scale, exists between the Claude maker and Amazon’s (AMZN) AWS, one of Anthropic’s biggest compute suppliers and investors.
High-capacity compute is one of the most acute scarcities for companies developing and operating AI models. The “dash for capacity” is behind both the enormous hyperscaler capex flowing into AI infrastructure and the acceleratingly large lease deals across the industry. For context, total hyperscaler capex – cited at over $700 billion for 2026 alone – is running at about 2% of GDP, historically unprecedented levels. At the same time, just two companies, OpenAI and Anthropic, are responsible for over half of the roughly $2 trillion of the combined revenue backlog at AWS, Google Cloud, Microsoft’s (MSFT) Azure, and Oracle’s (ORCL) OCI.
❖ In other news, two leading U.S. private equity firms, Blackstone and KKR, are in talks with Google to provide hundreds of companies in their portfolios with access to Google’s AI models, including Gemini and other Google Cloud AI tools. This mirrors Google’s existing deals with Vista Equity, Thoma Bravo, and CVC, but on a potentially much larger scale given Blackstone and KKR’s size. The move would give Google a massive new customer pipeline, accelerate AI revenue growth, and strengthen its competitive position against OpenAI and Anthropic, both of which are pursuing similar partnerships with private equity firms.
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❖❖ According to a Bloomberg report, Apollo Global Management and Blackstone are in discussions to provide approximately $35 billion in private credit financing to Broadcom (AVGO) to fund the ramp-up of custom AI chip business for its major customers. If completed, this would be the largest private credit deal in history, cementing private credit industry’s role as a key financial engine for the AI buildout and further strengthening AVGO’s leading position in customer-driven silicon development.
Broadcom is a leader in co-designing and manufacturing custom AI accelerators tailored to specific clients’ needs (as opposed to off-the-shelf chips like Nvidia’s GPUs). The company expects AI chip sales to surpass $100 billion in 2027, driven by massive deals with Google, Meta Platforms, OpenAI, and others.
As the AI buildout accelerates, so does the custom silicon push, spurred by NVIDIA (NVDA) GPU shortages, enormous price tags on these chips and systems, and customization efficiencies. As in many other cases, Google started early, developing its first TPUs back in 2015 as a side project. Other tech leaders followed suit, and by the end of 2023, every hyperscaler had at least one proprietary AI chip in production. The custom silicon boom doesn’t necessarily mean NVIDIA’s doom – the chip leader is expected to continue dominating in GPUs – unavoidable for LLM training and other tasks – for years to come; besides, the size of the total chip market is expanding at breakneck speed as AI technology continues to progress and spread.
These developments directly benefit Smart Portfolio holdings Synopsys (SNPS), which controls the chip design IP market in duopoly with Cadence Design, and TSMC (TSM), the sole high-volume producer at the most advanced nodes globally.
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❖❖ Microsoft (MSFT) announced general availability of Agent 365 – a unified control plane that lets enterprises discover, govern, and secure AI agents across Microsoft 365, partner ecosystems, AWS Bedrock, and Google Cloud. New capabilities include cross-cloud registry sync, local agent discovery (e.g., OpenClaw), and Windows 365 for Agents as a managed runtime. The cross-cloud inventory capability is notable, as it acknowledges that agent sprawl will not be confined by platform boundaries.
The platform directly tackles Shadow AI, where unmanaged AI agents proliferate outside centralized oversight. This is a growing enterprise concern as AI adoption accelerates faster than traditional IT can manage. Microsoft is positioning Agent 365 to discover, monitor, and govern these “shadow” agents, turning them into visible, controlled, and auditable assets.
Analysts view this as a significant strategic moat: rather than just competing to build agents, MSFT is aiming to become the default governance layer for multi-vendor agentic AI, similar to how it established Azure Active Directory as the enterprise identity standard. Strong ecosystem support and seamless integration for M365 customers should drive adoption and open new revenue streams in the fast-growing enterprise AI market, reinforcing Microsoft’s leadership in enterprise AI infrastructure.
❖ In other news, media reports indicate that Microsoft has already recouped more than double the capital it invested in OpenAI. While the tech giant’s total investment in the AI startup reached $13 billion, the revenue generated from the partnership has already exceeded $30 billion. This income is primarily driven by the “rent” paid for OpenAI’s massive compute usage through Azure, as well as Microsoft’s revenue from its AI-powered products (such as Copilot, GitHub, and others) that use OpenAI’s models. The takeaway: The partnership has been exceptionally profitable for Microsoft in terms of revenue, even before accounting for its equity stake in OpenAI or its long-term strategic advantages. Although the relationship has evolved, with certain exclusivity terms regarding models and cloud usage being retired, the commercial bond remains strong.
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❖❖ The FDA has proposed a new rule that would exclude tirzepatide and semaglutide – the weight-loss and diabetes medicines – from the 503B bulks list, effectively shutting down large-scale pharmacy compounding of these blockbuster drugs. Semaglutide is a component in Ozempic and Wegovy, made by Novo Nordisk, while Tirzepatide is found in Mounjaro and Zepbound, developed and sold by Eli Lilly (LLY). The GLP-1 components have been on FDA’s shortage list since 2022, opening the door to pharmacies and drugmakers to produce cheaper copies in bulk. Both Novo and LLY expanded production and shortages were solved by the end of 2025, allowing the regulator to curb the gray-market channel that diverted demand from branded supply. This is a major win for the GLP-1 giants, and particularly for Eli Lilly, whose Tirzepatide has already been stealing significant share from Novo thanks to superior weight-loss results. That market-share and revenue growth (56% year-over-year in Q1 2026) is now receiving support from the regulators, with closing of the compounding loophole further strengthening LLY’s pricing power and market dominance.
❖ In other news, Eli Lilly’s new oral weight-loss pill called Foundayo, launched soon after the FDA’s expedited approval on April 1, is rapidly gaining popularity. The once-daily pill is the first small-molecule GLP-1 drug, acting in a similar way to the well-known injectables. It is competing directly with Novo Nordisk’s recently approved oral Wegovy pill, but has an advantage over it: LLY’s Foundayo can be taken at any time of day, with or without food or water – unlike Novo’s oral semaglutide, which has restrictions.
❖ In yet other news, Eli Lilly said it will invest an additional $4.5 billion in two of its facilities in Lebanon, Indiana, pushing its capital expansion since 2020 beyond $21 billion. Lilly’s evolving pipeline, as well as anticipated demand for its medicines, prompted this additional commitment. This strategic investment is aimed at increasing the supply of its highly successful GLP-1 medicines and establishing its first dedicated genetic medicine manufacturing facility, signaling long-term growth and market leadership aspirations.
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❖ ❖ Howmet Aerospace (HWM) surged following a stellar Q1 report and a wave of analyst praise accompanied by price-target hikes. The company smashed expectations across the board with total revenue up 19% year-over-year, reaching $2.31 billion, and adjusted EPS soaring 42% to $1.22. Adjusted EBITDA margin reached record 32% with EBITDA of $740 million, up 32% year-over-year. Adjusted operating income surged 36%, with margin expanding by 350 bps to 28.8%. Free cash flow also hit a record high of $359 million. Key revenue growth drivers were Gas Turbines, up 39% driven by data center electricity demand, and Commercial Aerospace, up 20% year-over-year, with all segments registering strong expansion.
Management raised 2026 guidance, now expecting revenue of $9.65 billion at the midpoint (up 17% from 2025), adjusted EBITDA of $3.06 billion (up 27%), and adjusted EPS of $4.94 (up 31%). Free cash flow is expected to arrive at $1.75 billion at the midpoint (up 22%) with conversion of roughly 90%, and 2026 capex is seen at about 5% of revenue.
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Portfolio Stocks Under Review
❖ ❖ We are keeping Oracle (ORCL) under review, as the investment case continues to evolve on the back of AI-driven catalysts while investor sentiment remains volatile.
Oracle’s accelerating execution across AI applications and enterprise software remains at the core of the bull thesis. The company continues to expand its agentic AI ecosystem across finance, supply chain, HR, customer experience, and corporate banking, while pushing deeper into autonomous enterprise workflows. ORCL’s broader enterprise franchise also remains solid, with continued leadership positions in areas such as warehouse management and supply chain software, increasingly enhanced with embedded AI functionality.
At the infrastructure level, the narrative continues shifting from speculative AI spending toward execution and monetization. Recent hyperscaler earnings broadly reinforced the view that AI infrastructure demand remains exceptionally strong across the industry, helping support Oracle’s positioning as a secondary hyperscaler and overflow compute provider. The company’s $553 billion RPO backlog remains central to the thesis, while upfront customer commitments, customer-supplied hardware, and partner-backed infrastructure increasingly help offset the capital intensity of ORCL’s AI expansion.
The company also continues expanding its infrastructure footprint and strategic relevance. The Michigan AI data center financing has now formally closed, reinforcing confidence that major Stargate-related projects are moving into execution rather than remaining conceptual. Meanwhile, Project Jupiter in New Mexico continues advancing, strengthening Oracle’s position in large-scale AI infrastructure and power management. ORCL also secured a classified AI contract with the U.S. DoD, adding another layer of validation around the company’s role in secure government and defense infrastructure.
The multicloud strategy is becoming increasingly important as well. Oracle continues deepening partnerships with AWS and Google Cloud, reinforcing a platform-agnostic positioning where OCI increasingly acts as a data and AI layer across multiple ecosystems instead of competing solely as a standalone cloud provider. Strategically, this broadens its addressable market and reduces dependence on any single customer or platform. Importantly, ORCL today is far less of a single-customer story than it was just a year ago, with expanding exposure across hyperscalers, enterprise workloads, and government demand.
At the same time, the financing debate has not disappeared. Oracle’s AI buildout still requires enormous capital commitments, and the company’s debt-funded expansion continues to make investors uneasy. Reports around pressure on bank balance sheets and the scale of future funding needs reinforce that execution, financing discipline, and deployment timing remain critical variables.
That said, Wall Street sentiment continues to improve. Recent analyst upgrades and price target increases increasingly frame ORCL as a foundational AI infrastructure provider, with growing confidence that consensus cloud and earnings expectations may still be too conservative. Several analysts now argue that the market is underestimating Oracle’s long-term earnings power if even a portion of its backlog converts successfully into recurring AI-related revenue.
All in all, the fundamental story continues to strengthen, supported by improving monetization visibility, expanding multicloud relevance, and continued infrastructure execution. However, ORCL currently appears to trade increasingly in line with broader AI infrastructure sentiment and overall market risk appetite. With the AI infrastructure trade remaining powerful while geopolitical headlines around the Iran war continue driving rapid shifts in market sentiment, we prefer to keep ORCL under review until the broader macro picture becomes at least somewhat clearer.
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Portfolio Earnings and Dividend Calendar
❖ The Q1 2026 earnings season is well past its peak, but several Smart Investor Portfolio holdings are scheduled to reveal their results in the coming week. Cisco Systems (CSCO) will report today, while Keysight Technologies (KEYS) is scheduled for May 19, and Nvidia (NVDA) is expected to release its high-impact report on May 20.
❖ The ex-dividend date for Jabil (JBL) and Eli Lilly & Co (LLY) is May 15.
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New Buy: Netflix (NFLX)
Netflix, Inc. has become one of the defining companies behind the global shift from traditional television to internet-based entertainment, building a platform that combines content production, distribution, and audience engagement at massive scale. The company delivers a broad mix of original and licensed programming across series, films, documentaries, animation, live events, and international productions, serving viewers directly through an increasingly diversified streaming model. Its business blends creative development with technology infrastructure, recommendation algorithms, and global reach, allowing content to travel across markets faster and more efficiently than under the legacy studio system. As media consumption continues moving toward on-demand viewing and globally recognized franchises gain strategic importance, NFLX holds a powerful position within the evolving entertainment landscape – not only as a distributor of content, but as one of the companies actively reshaping how entertainment is financed, produced, and consumed worldwide.
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Prime Time Shift
Netflix began in 1997 as a DVD-by-mail rental company created to challenge the inconvenience and pricing structure of traditional video rental stores. The business initially competed through logistics and subscription pricing, but the real turning point came a decade later, when the company shifted aggressively toward internet streaming. Netflix did not invent streaming video, but it became the company that transformed streaming into a mainstream global entertainment model, fundamentally changing how television and film content were distributed and consumed.
That transition reshaped the media industry over the following decade. As traditional broadcasters and cable networks continued relying on linear television economics, NFLX pushed deeper into direct-to-consumer distribution, recommendation algorithms, and original programming. Early investments in proprietary content eventually evolved into a global production engine capable of creating regional hits that could travel internationally at scale.
The company that exists today, however, was largely shaped over the past five years. The pandemic period accelerated streaming adoption worldwide, but it also intensified competition as nearly every major media company launched its own platform. Rather than retreating, Netflix used that period to strengthen its content pipeline, expand international production capabilities, and increase localization efforts across Europe, Asia, and Latin America.
At the same time, the competitive landscape began shifting in Netflix’s favor. The aggressive streaming expansion pursued by legacy media groups, particularly Warner Bros. Discovery and Disney, exposed the difficulty of balancing declining linear television businesses with the heavy capital demands of streaming profitability. As parts of the industry pulled back on content spending and consolidated operations, NFLX entered a more disciplined phase with greater scale, stronger margins, and a more globally diversified subscriber base.
Strategically, the company broadened beyond its original subscription model. Netflix launched its advertising-supported tier, expanded into live programming and sports-adjacent events, and moved further into gaming through internal studio development and acquisitions such as Night School Studio. Technology investments also accelerated, including broader use of machine learning and generative AI tools across content discovery, localization, production workflows, and advertising infrastructure.
What emerged from this evolution is not simply a streaming service, but a vertically integrated global entertainment platform – one built around scale, direct consumer relationships, and the ability to adapt faster than much of the legacy media industry it disrupted.
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Stream of Power
Netflix operates at the center of the global transition from linear television to internet-based entertainment, but the company increasingly resembles a broader media platform rather than a traditional streaming service. What began as on-demand video distribution has evolved into a vertically integrated entertainment ecosystem spanning content production, discovery, advertising, live programming, gaming, and mobile engagement – all connected through a single direct-to-consumer platform designed to maximize viewing time, retention, and monetization.
Despite its scale, NFLX still appears far from saturated globally. Management estimates the platform accounts for only about 5% of worldwide TV viewing and has penetrated less than 45% of its addressable broadband household market. Internationally, that leaves substantial room for expansion, particularly across Asia-Pacific and Latin America, where streaming adoption and monetization continue rising. Even in the U.S. and Canada – Netflix’s most mature region – the company still benefits from the ongoing erosion of traditional cable television and continued migration toward streaming-based entertainment consumption.
The core business remains subscription streaming anchored by original programming, licensed content, and globally distributed franchises. Titles like Squid Game, Wednesday, Stranger Things, and Bridgerton have demonstrated Netflix’s ability to produce globally scaled cultural hits capable of driving engagement across regions and languages. Increasingly, the company is extending successful intellectual property through spin-offs, live experiences, merchandising, and cross-format engagement rather than treating content as one-time releases.
That shift matters because NFLX increasingly shifts its focus from raw subscriber additions to engagement depth, monetization per user, retention quality, and ecosystem expansion. Advertising sits at the center of this transition. The ad-supported tier already represents the majority of sign-ups in supported markets, giving Netflix access to more price-sensitive consumers while simultaneously creating an additional monetization layer on top of existing viewing engagement. Unlike traditional television advertising, Netflix controls the entire ecosystem – viewer data, recommendations, content discovery, ad delivery, and engagement analytics – allowing it to combine subscription economics with targeted advertising infrastructure inside the same platform.
The company is also broadening engagement beyond scripted streaming. Live programming has become a major strategic priority, with more than 70 live events airing during the first quarter alone. The World Baseball Classic in Japan became Netflix’s most-watched program ever in the country and drove the platform’s largest sign-up day in the Japanese market. WWE Raw, NFL holiday games, MLB events, and selective sports partnerships further expand Netflix’s real-time engagement strategy while supporting advertising growth without fully inheriting the economics of traditional sports networks.
Gaming, podcasts, and mobile-native discovery features represent another layer of expansion. Management increasingly frames games not as standalone revenue drivers, but as retention and ecosystem tools capable of extending intellectual property and increasing user engagement across devices. Podcasts and vertical-video discovery similarly aim to broaden NFLX’s role in everyday media consumption beyond traditional evening television viewing.
Underpinning all of this is scale. Netflix has invested more than $135 billion into films and television over the past decade, reinforcing its position as one of the industry’s largest global content and distribution platforms. Recommendation systems, AI-enhanced personalization, advertising infrastructure, and viewing-data advantages further strengthen the ecosystem effect.
Competition remains intense, and the competitive landscape itself has broadened. Netflix now competes not only against Disney+, Amazon Prime Video, and traditional broadcasters, but also against YouTube, TikTok, gaming ecosystems, and other platforms competing for entertainment time and attention. Amazon perhaps illustrates the distinction best. Amazon operates a broad horizontal ecosystem spanning commerce, cloud, logistics, devices, and entertainment, with video functioning as one component inside Prime. NFLX, by contrast, is increasingly vertically integrated around entertainment specifically – combining content, engagement, advertising, live programming, discovery, and monetization inside a single focused platform.
The next phase of growth will likely depend most of all on deepening monetization, expanding engagement layers, and strengthening Netflix’s role as a default entertainment destination across devices and formats. That opportunity comes with rising complexity as the company simultaneously scales advertising, live sports, gaming, AI integration, podcasts, and international content ecosystems. Still, Netflix enters that phase from a position of outstanding strength – global scale, strong engagement, growing pricing power, expanding monetization channels, and one of the deepest content and distribution infrastructures in modern entertainment.
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Unlimited Screen Time
Netflix’s financial profile increasingly reflects its transition from subscriber-led expansion toward monetization-driven scale. Growth remains strong, but the story is no longer purely about adding members. Pricing power, advertising, engagement depth, and operating leverage are now doing much of the heavy lifting – and the numbers increasingly show it.
That shift was evident again in Q1 2026. Revenue rose 16.2% year-over-year to $12.25 billion, ahead of guidance and extending a broader pattern of execution, with NFLX beating on revenue and adjusted EPS in seven of the last eight quarters. Operating income increased 18% year-over-year to roughly $4.0 billion, while operating margin expanded to 32.3% from 31.7% a year earlier, reinforcing Netflix’s ability to scale profitability alongside revenue growth. Diluted EPS surged 86% year-over-year to $1.23, helped in part by the Warner Bros. Discovery breakup fee, which contributed approximately $2.8 billion through “interest and other income.”
Even excluding this one-time benefit, the underlying trajectory remains strong. Netflix entered 2026 with more than 325 million paid members globally, while management reported improving retention across all regions despite recent subscription price increases. The company now measures performance through engagement quality and monetization efficiency rather than subscriber additions, reflecting the maturation of the streaming business into a broader platform model.
Advertising is becoming a meaningful contributor to that transition. Management expects ad revenue to roughly double year-over-year to approximately $3 billion during 2026, supported by rapid scaling of the ad-supported tier, which already represents the majority of sign-ups in supported markets. The advertiser base expanded more than 70% year-over-year to over 4,000 advertisers, while programmatic advertising is expected to exceed 50% of non-live ad revenue. Combined with continued pricing actions, management expects the advertising business to become an increasingly important earnings and margin driver over time.
Cash generation remains one of Netflix’s defining strengths. Q1 free cash flow nearly doubled year-over-year to roughly $5.1 billion, while operating cash flow exceeded $5.2 billion. Management raised full-year 2026 free cash flow guidance to approximately $12.5 billion, supported partly by the WBD termination fee and continued operational momentum. Netflix exited the quarter with approximately $12.3 billion in cash and cash equivalents against roughly $14.4 billion in gross debt – a considerably stronger balance-sheet position than many traditional media peers.
Content investment remains enormous. Content assets reached approximately $33.4 billion as of March 2026, while streaming content obligations stood near $24.1 billion. Yet scale increasingly offsets those costs. Netflix’s operating-margin profile now materially exceeds most legacy entertainment competitors, reflecting a streaming-native operating structure and the growing benefits of global distribution leverage.
Guidance suggests management expects the momentum to continue. Netflix maintained full-year 2026 guidance for 12-14% revenue growth and a 31.5% operating margin despite continued investment into advertising infrastructure, gaming, AI capabilities, live programming, and international content ecosystems. Q2 guidance implies another quarter of double-digit growth, though management expects content amortization and investment spending to remain weighted toward the first half of the year before easing later in 2026.
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Stay Tuned
Netflix increasingly sits between traditional media and platform-style digital entertainment, making peer selection less straightforward than during the early streaming era. Disney remains the closest large-scale operating comparison, combining global streaming distribution with franchise-driven content economics, though its broader exposure to parks, linear television, and legacy media creates a more diversified – and slower-growing – profile. Warner Bros. Discovery offers the clearest direct streaming and studio overlap, particularly through Max and its deep content library, but also highlights the contrast between Netflix’s focused operating model and the heavier leverage, restructuring, and legacy-TV pressures facing much of the traditional media industry. Spotify provides a different kind of comparison altogether: a subscription-driven engagement platform built around recurring revenue, personalization, advertising expansion, and monetization layering. Together, these peers frame NFLX not simply as a streaming company, but increasingly as a scaled entertainment platform monetizing attention, engagement, and global content ecosystems.
Those structural differences have also shaped how investors treated the group over the past year. Spotify’s steep drop reflects the broader multiple compression affecting premium engagement-driven subscription platforms. Disney posted only a modest decline as a lower-expectation turnaround and stabilization story, supported by parks and improving streaming profitability. Meanwhile, WBD’s outsized rally came from a deeply discounted legacy-media asset rerating through consolidation speculation, deleveraging hopes, and improving sentiment around Max.
At the same time, Netflix’s roughly 20% decline over the past year reflects a reset in how the market values its underlying business. By mid-2025, NFLX had become one of the market’s favored premium growth platforms, supported by expanding margins, accelerating advertising expectations, strong free cash flow, and post-password-sharing momentum – with the valuation increasingly implying sustained high-growth expansion despite the company’s already massive scale. As growth normalized and the company increasingly shifted from subscriber expansion toward monetization and engagement economics, the stock entered a more difficult transition phase – from hyper-growth streaming leader toward scaled entertainment platform. That repricing appears to have stabilized more recently, with NFLX recovering more than 15% from its late-March 2026 lows. Wall Street has also turned increasingly supportive, with the average analyst price target implying more than 32% upside for the Strong Buy-rated stock.
This view is also supported by valuations that increasingly reflect earnings power at scale rather than expectations of hyper-growth expansion. NFLX is now trading at a significant discount to its own historical metrics – roughly 35% below its 5-year average on non-GAAP earnings, more than 20% lower on EV/EBITDA, and nearly 80% below its forward Price-to-Cash-Flow average. Peer comparisons further reinforce the setup, particularly given Netflix’s superior margins, monetization efficiency, and free cash flow generation, while its growth profile remains stronger than all but Spotify. NFLX’s forward P/E is roughly in line with Spotify while trading at a slightly lower forward EV/EBITDA multiple. Its premium to Disney and WBD appears justified by stronger growth expectations, higher profitability, and a cleaner balance-sheet profile. On Price-to-Cash-Flow, NFLX now trades near Spotify despite generating materially higher free cash flow margins. Meanwhile, its forward PEG ratio of roughly 1.14x remains modest in absolute terms and sits below the broader Communications sector median, suggesting a valuation increasingly supported by earnings momentum and operating execution rather than elevated optimism alone.
Netflix’s capital allocation policy increasingly balances reinvestment in the core business, balance-sheet flexibility, and shareholder returns through buybacks. After years of prioritizing aggressive content investment, the company is entering a phase where annual share repurchases could rival or even exceed its roughly $20 billion planned content spend for 2026 – reflecting a more mature business model, substantial free cash flow generation, and management confidence in the long-term value of the business.
Following NFLX’s aborted WBD bid, the company approved a new $25 billion share repurchase authorization in April 2026, on top of the existing program that still had roughly $6.8 billion remaining at the end of March. With no fixed expiration dates or mandatory quarterly repurchase targets, Netflix retains considerable flexibility around the pace and scale of future buybacks. The company repurchased approximately $9.13 billion of stock during 2025 and added another roughly $1.27 billion during Q1 2026 alone, reducing its share count by more than 3% over that period.
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Investing Takeaway
Netflix is increasingly evolving beyond its original identity as a subscription streaming platform into a broader entertainment ecosystem built around engagement, monetization, and global content scale. Its advantage no longer rests solely on subscriber growth, but on the ability to deepen monetization across advertising, live programming, personalization, and long-duration viewer engagement. As the business matures, the model is becoming less dependent on breakout growth phases and more anchored in operating leverage, recurring cash generation, and platform economics. Competition remains intense, but NFLX increasingly operates from a position of scale, financial flexibility, and global reach that few entertainment companies can match. Following the recent valuation reset, the stock now appears increasingly aligned with the company’s underlying earnings power and long-term monetization trajectory rather than elevated growth expectations alone.
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New Sell 1: Citizens Financial (CFG)
We are selling Citizens Financial Group after a strong operational run because the macro backdrop for regional banks has materially deteriorated, reducing the near-term risk-reward despite continued execution by management. CFG remains one of the strongest franchises in the regional banking space, but the environment that supported the original thesis has shifted.
Operationally, the company continues to perform well. First-quarter revenue rose 12% year-over-year to $2.17 billion, while EPS increased 47% to $1.13. NIM expanded to 3.14%, fee income grew 11%, and the Private Bank continued scaling into a meaningful earnings contributor, generating returns on regulatory capital above 25%. Expense discipline also improved, with positive operating leverage and a lower efficiency ratio supporting profitability expansion.
In many respects, the original investment thesis played out as expected. Citizens successfully moved beyond balance-sheet repair and into earnings acceleration, supported by margin expansion, fee growth, and improving capital returns. The Private Bank, previously viewed as a longer-term investment, is now contributing meaningfully through deposit growth, fee generation, and EPS accretion. Analysts broadly acknowledged this progress, with firms such as DA Davidson and Baird raising price targets following earnings.
The issue now is not company-specific – it is macro-driven. Regional banks are increasingly facing a “higher for longer” environment that appears more durable than previously expected. Inflation data continues to run hot, with April consumer prices rising 3.8% year-over-year, the highest level since mid-2023. The rising oil prices tied to renewed geopolitical tensions and the stalled U.S.-Iran ceasefire have added another inflationary pressure point. Escalating inflationary pressures amid continued job-market strength are signaling no rate cuts in 2026, driving the KBW Bank Index to extend its decline.
That backdrop matters because the valuation argument has changed. Earlier in the cycle, CFG traded at a meaningful discount while earnings power was recovering. Today, valuation is more in line with other high-quality regionals, meaning the stock no longer offers the same margin of safety if macro conditions worsen or earnings growth slows. Analysts have also cautioned that continued execution is critical, particularly given lingering CRE exposure, provisioning concerns, and uncertainty around whether private banking growth can fully offset pressure in other areas of the franchise.
Citizens remains a high-quality regional bank with arguably one of the strongest operating profiles in the group. But in the current environment, the setup has become less favorable. We are stepping aside for now and will revisit the stock once the macro picture for regional banks becomes clearer.
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New Sell 2: Regal Rexnord (RRX)
We are selling Regal Rexnord after a strong operational stretch. The near-term setup has become less favorable, even as the long-term thesis continues to strengthen. The company is executing well, but the valuations now reflect much of that progress, while the broader macro backdrop for industrials has deteriorated materially.
The latest earnings report was objectively strong. First-quarter revenue rose 4.3% year-over-year to $1.48 billion, adjusted EPS beat expectations, and order momentum remained robust, with enterprise orders up 8.5% and backlog rising 6.7% sequentially. Automation & Motion Control continued to benefit from strong data center, aerospace, and automation demand, while management raised its 2026 revenue growth outlook to approximately 4.5%.
In many respects, the original thesis played out exactly as expected. RRX is increasingly positioning itself deeper inside the AI and automation infrastructure stack, with growing exposure to data centers, electrification, and industrial automation. The business mix is improving, portfolio quality is rising, and long-term margin expansion opportunities remain credible. Analysts such as Baird and Barclays continued raising price targets following earnings, pointing to durable secular tailwinds and strong execution.
The issue now is the balance between expectations, valuation, and macro risk. Despite the enthusiasm around AI infrastructure and automation, underlying revenue growth remains relatively modest. Revenue has stayed roughly flat on a trailing basis around $6 billion, while analysts project only low-single-digit annual growth going forward. At the same time, several legacy industrial end markets remain weak, including off-road machinery and residential HVAC. The company is also navigating ongoing mix shifts that are strategically positive long term, but currently pressure margins and earnings conversion.
This matters more in today’s environment. Inflation has accelerated to its highest level since 2023, expectations for 2026 rate cuts have diminished, and renewed geopolitical tensions surrounding the Iran conflict are increasing uncertainty around supply chains, energy prices, and input costs. Industrials broadly have come under pressure, but RRX appears more exposed than several other Smart Portfolio holdings because margins are already contending with tariff pressures, mix changes, and higher input costs.
The earnings release itself also revealed some growing tension beneath the headline beat. While revenue guidance increased, GAAP EPS guidance was lowered meaningfully below consensus expectations, free cash flow guidance declined sharply from 2025 levels, and analysts trimmed forward EPS estimates despite maintaining generally positive long-term views. Meanwhile, short interest has risen sharply, signaling rising skepticism around how much future upside is already embedded in the stock’s price.
RRX remains a high-quality industrial company with a stronger long-term thesis than before earnings. But its near-term risk-reward setup appears less attractive in the current macro environment. We are stepping aside for now and will revisit the stock if valuation becomes more compelling and the broader backdrop improves.
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Smart Investor’s Winners Club
The Winners Club represents stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Markets have seen strength in some pockets and weakness in others, but the Club member count remained unchanged at 25 stocks: AVGO, GE, EME, TSM, HWM, ANET, VRT, APH, IBKR, MTZ, STRL, ORCL, GOOGL, PH, ASX, KEYS, JBL, CSCO, CRWD, ATI, BK, NVT, MS, RTX, and PANW.
The first runner-up is now SNPS with a 28.98% gain since we purchased it a little more than a month ago. Will it break into the winners’ circle, or will another stock outrun it to the finish line?
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