Well Into Power
In this edition of the Smart Investor newsletter, we spotlight the company putting turbines behind the cloud.
We are not selling any stocks today, as a global rout in semis – driven by a valuation and expectations reset – is clouding the picture, while the earnings avalanche and caution ahead of the Fed decision further complicate the setup.
But first, let’s review the latest Smart Portfolio developments.
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Portfolio News and Updates
❖❖ Alphabet (GOOGL) Alphabet delivered one of the strongest operating quarters in Big Tech. Though the stock dropped post-earnings as investors initially focused on negative quarterly free cash flow and the capex guidance raise, analysts and industry insiders offered strong support, and dip buyers quickly emerged as markets worked through those concerns and returned to Alphabet’s historically strong underlying business results.
Revenue rose 24% year-over-year to $119.8 billion, while operating income climbed 30% to $40.8 billion – a clean sign that the core business is accelerating. Headline profit looked even more dramatic, with net income nearly quadrupling, but that was inflated by unrealized gains from Alphabet’s investment portfolio, including stakes in major technology and AI names – including Anthropic, SpaceX, Arm Holdings, and others. Those gains should be stripped out when judging the quarter’s operating performance, but they should not be ignored altogether. This is still GOOGL’s money – a strategic piggy bank sitting on the balance sheet and offering valuable optionality even if management may never need to crack it open.
The more important point is that AI spending is already showing up in the business. Google Cloud revenue surged 82% to $24.8 billion, Cloud operating income more than tripled to $8.8 billion, and Cloud backlog reached roughly $514 billion. Search also remained strong, rising 17%, while YouTube ad revenue reached $11.1 billion – close to Netflix’s total quarterly revenue, before even counting YouTube subscriptions.
The market’s key initial concern was capex. Alphabet spent $44.9 billion in the quarter – double the prior-year period’s amount – pushing quarterly free cash flow to negative $5.9 billion – the company’s first negative free-cash-flow quarter since the IPO. However, Alphabet’s cash generation remains strongly positive, with trailing twelve-month operating cash flow above $185 billion and trailing twelve-month free cash flow still above $53 billion. The company also spooked the market by raising its 2026 capex outlook to $195-205 billion, similar to Amazon’s spending plans and well above Microsoft and Meta. In the AI race, this level of investment is necessary: the leaders have to run fast just to keep their place.
Bottom line: the market punished the spending curve, not the quarter. Alphabet is trading near-term free-cash-flow comfort for AI infrastructure scale, and the operating results suggest the payoff is already becoming real.
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❖❖ While Alphabet’s elevated spending is expected to further its AI ambitions over the long term, it could translate into an immediate gain for its partners, particularly Broadcom (AVGO), as the vast majority of GOOGL’s capex goes to hardware and infrastructure. Moreover, on its Q2 earnings call, Alphabet explicitly said the capex raise is necessary to expand capacity to keep up with demand – meaning it intends to speed up infrastructure buildout, directly benefiting AVGO.
Alphabet is Broadcom’s largest AI chip customer, and the partnership between the two giants has been expanding and deepening for years. AVGO supplies Google with networking chips and helps develop its custom silicon.
Google’s Tensor Processing Units, or TPUs, are helping drive Google Cloud revenue growth of 82% year-over-year. Accelerating Cloud demand implies that downstream demand for Broadcom could also be accelerating. Moreover, while historically TPUs have been used mainly for internal purposes, Google said it received its first revenue from external TPU sales in Q2. As the company begins to sell TPUs to third parties – with the ramp-up expected in 2027 – it could be a substantial growth driver for AVGO as well.
❖ In parallel to collaborating with Google, AVGO continues to deepen the relationships across its partner network. In recent developments, the company signed an MOU with Samsung to expand collaboration on memory and foundry technologies for next-generation AI infrastructure. The companies estimate the collaboration at more than $200 billion through 2030.
Broadcom designs high-value custom ASICs, networking chips, and AI accelerators, but does not manufacture them itself. Securing long-term access to leading-edge foundry capacity and advanced HBM from a major producer is strategically valuable, reinforcing Broadcom’s position as a key enabler of AI infrastructure.
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❖❖ NVIDIA (NVDA) has expanded its partnership with SK Group, the parent of South Korean memory chipmaker SK Hynix, in a $500 billion initiative focused on AI factories and next-generation memory technology.
The strategic collaboration builds on the previously announced multi-year memory supply and co-development agreement with SK Hynix. It now also includes a commitment by SK Telecom, an SK Group company, to build a massive 2-gigawatt AI factory in South Korea, targeting a 2027 launch.
The facility will use NVIDIA’s Vera Rubin systems and DSX platform – a complete AI factory blueprint – along with accelerated computing systems equipped with SK Hynix’s HBM4 memory. SK Hynix will also collaborate with NVIDIA to co-develop and optimize next-generation AI memory solutions to meet evolving AI infrastructure demands.
❖ In parallel, NVIDIA is reportedly in talks with OpenAI to provide a backstop of up to $250 billion to help fund OpenAI’s plans to lease a massive new AI data center. The financial guarantee, backed by NVIDIA’s investment-grade credit rating, would enable OpenAI to raise debt for a 10-gigawatt data center campus in Ohio. The project is being developed by SB Energy – a SoftBank subsidiary and one of OpenAI’s key investors – in partnership with the U.S. Department of Energy.
Media reports indicate that NVIDIA and OpenAI are also discussing separate financing of up to $350 billion in chip purchases for the same site, which could push total project costs past $500 billion and make it the largest data center ever planned.
❖ On Monday, NVIDIA announced the Open Secure AI Alliance, a major initiative to build open-source AI cyber-defense tools and position open-source models as security assets rather than threats. The coalition already has 37 members, including SpaceX, Palantir, Microsoft, Cisco, CrowdStrike, and Palo Alto Networks.
The move follows two recent developments: the rise of strong open-weight models such as Kimi K3 from Chinese firm Moonshot AI, and the recent incident in which an OpenAI agent went rogue during internal testing and breached Hugging Face systems. Hugging Face was unable to rely solely on leading U.S. frontier (closed) models for defense and instead used a self-hosted open-weight Chinese model, among other tools.
Open-model critics – including closed-model makers such as OpenAI and Anthropic – argue that open models, many of which originate in China, pose potential national-security risks. In contrast, members of NVIDIA’s initiative contend that open models “democratize defensive capabilities,” with the Hugging Face incident illustrating that any sufficiently advanced AI system can present a security threat.
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❖❖ Teledyne (TDY) delivered a record Q2, with sales up 9.8% year-over-year to $1.66 billion and non-GAAP EPS up 20.8%, both significantly above expectations. Orders reached an all-time high and exceeded sales for the 11th straight quarter, lifting funded backlog to roughly $5.0 billion and supporting strong revenue visibility.
Digital Imaging led the quarter, with sales up 12.7% and organic growth of 11.9%, driven by infrared detectors and subsystems for space, airborne, maritime, and counter-UAS applications. Growth was also broad-based across Aerospace & Defense Electronics, Engineered Systems, and Instrumentation, although Instrumentation margins were pressured by mix. Cash generation remained strong, with free cash flow rising sharply and net leverage falling to about 1.1x.
Teledyne also raised its 2026 outlook. Management now expects revenue of more than $6.53 billion, implying roughly 7% year-over-year growth, while non-GAAP EPS of $24.45-24.65 points to roughly 12% growth at the midpoint. The raised outlook reflects confidence in backlog conversion, defense demand, unmanned systems, space, and continued execution across its high-reliability sensing and electronics portfolio, although management remained cautious on the back half of the year given difficult fourth-quarter 2025 comparisons in Digital Imaging and ongoing supply-chain uncertainty.
Stifel, Jefferies, and Barclays raised their price targets after the report, citing the beat-and-raise quarter, record orders, 9% organic growth, and stronger FY26 guidance.
Beyond the quarterly numbers, Teledyne continues to deepen its role in mission-critical marine systems. Its Raymarine and FLIR Marine businesses signed a five-year partnership with the RNLI, the UK’s largest lifeboat service, to upgrade lifeboats with electronic chart systems, radar, ship-control technology, and thermal imaging cameras.
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❖❖ RTX (RTX) stock surged after the company delivered a strong beat-and-raise quarter, showing broad momentum across defense, commercial aerospace, and engine services.
Adjusted sales rose 14% year-over-year to $24.7 billion, with organic sales up 16%, while adjusted EPS climbed 21% to $1.89 – both well ahead of expectations.
The defense side was especially strong. Total backlog reached a record $289 billion, up 22% year-over-year, while Raytheon booked nearly $20 billion of orders in the quarter. Demand remains elevated for Patriot, missiles, radars, and air-defense systems, including RTX’s first U.S. Patriot GEM‑T production order in more than 30 years and a $1.8 billion Navy contract extension for SPY‑6 radars.
Pratt & Whitney also showed real recovery progress. RTX is prioritizing material flow into MRO shops to reduce grounded aircraft, with PW1100 aircraft-on-ground down 25% year to date, MRO output up 43%, and turnaround times improving 23%. At the same time, GTF demand remains intact, with more than 800 orders and commitments this year.
RTX raised its 2026 outlook across the board. The company now expects adjusted sales of $95-96 billion, implying roughly 8% year-over-year growth at the midpoint, while adjusted EPS of $7.10-7.25 points to about 14% growth. Management also lifted its organic growth target to 8-9% and raised the lower end of its free cash flow outlook to $8.5-8.75 billion, reinforcing that the quarter’s strength is flowing through to the full-year outlook.
Several analysts raised their price targets after the report, citing RTX’s backlog, defense demand, Pratt recovery, Collins margin opportunity, and stronger free cash flow outlook.
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Under Review
❖❖ We are keeping Palantir Technologies (PLTR) under review. The business remains one of the clearest software beneficiaries of the AI cycle – with AIP adoption, U.S. commercial momentum, government demand, and a growing agentic-AI product stack still supporting the long-term thesis.
The stock’s recent behavior has improved. Over the past month, PLTR has outperformed the Nasdaq-100 and Nasdaq Composite, partially repairing the earlier weakness that first pushed us to review the position. That rebound reduces the pressure to sell before earnings, especially with the Q2 report expected on August 3.
At the same time, the bar is now higher. Oppenheimer expects a solid beat-and-raise, with strong checks across U.S. commercial and government demand. That supports holding into the catalyst, but it also means investors may demand more than “good” results. Palantir still trades at a demanding valuation, and the stock needs earnings to confirm that growth, guidance, and free cash flow are moving fast enough to justify the premium.
The free-cash-flow trajectory is especially important, given management’s ambitious long-term targets and the market’s debate over whether traditional valuation models are too conservative for PLTR. If Q2 confirms accelerating U.S. commercial growth, resilient government demand, stronger guidance, and a positive stock reaction, PLTR can remain in the Smart Portfolio. For now, we are holding the position under review. If earnings fall short, guidance disappoints, free-cash-flow signals weaken, or the stock fails to respond even to strong results, we may exit.
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Portfolio Earnings and Dividend Calendar
❖ The Q2 2026 earnings season is in full swing, and many Smart Investor portfolio holdings are scheduled to reveal their quarterly results this week. Amphenol (APH), Vertiv (VRT), Generac (GNRC), and Microsoft (MSFT) will reveal their quarterly results today, while EMCOR (EME), Amazon (AMZN), MasTec (MTZ), and ASE Technology (ASX) are scheduled for tomorrow, July 30. nVent (NVT) will release its earnings on July 31, while Sterling (STRL) and Palantir (PLTR) are slated to report on August 3. Arista (ANET) and Energy Transfer (ET) will report on August 4, while Eli Lilly (LLY) and AppLovin (APP) are expected to release their quarterly results on August 5.
❖ The ex-dividend date for Morgan Stanley (MS) is July 31.
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New Buy: Baker Hughes Company (BKR)
The AI boom is breathing new life into one of industry’s oldest workhorses: the gas turbine. As data centers strain available grid capacity and energy security drives another wave of LNG investment, the machinery long associated with pipelines and industrial plants is becoming essential to the digital infrastructure buildout. Baker Hughes stands at the center of that convergence. Its global oilfield franchise remains a formidable source of scale and cash flow, while Industrial & Energy Technology is shifting the company toward longer-cycle growth built on turbines, compressors, and decades of aftermarket service. The acquisition of Chart Industries extends that platform into cryogenic and thermal-management systems, widening its reach across data centers, LNG, nuclear, and carbon capture. That combination makes Baker Hughes an unusual hybrid – a century-old oilfield leader whose industrial machinery is becoming increasingly central to the world’s scramble for dependable power.
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The Long Rotation
Baker Hughes grew from two inventions that helped modernize oil drilling. Howard Hughes Sr. patented a two-cone rotary drill bit in 1909, while Reuben Baker developed tools that made well casing safer and more reliable. Their companies expanded alongside the global oil industry before merging in 1987, combining Hughes Tool and Baker International into Baker Hughes.
The company’s modern shape emerged from a second combination. In 2017, Baker Hughes merged with GE Oil & Gas, adding turbomachinery, compressors, subsea equipment, digital systems, and downstream technologies to its oilfield-services base. GE initially controlled the new company, but reduced its voting interest below 50% in 2019. The business then reclaimed the Baker Hughes name and adopted the BKR ticker, positioning itself as an independent energy-technology company spanning far more of the value chain.
The strategic break became clearer in 2022, when management merged four product companies into two segments: Oilfield Services & Equipment (OFSE) and Industrial & Energy Technology (IET). The reorganization placed the traditional well-focused operations in OFSE and grouped gas turbines, compressors, LNG systems, industrial equipment, digital tools, and lower-carbon technologies inside IET. This simplified structure also made the company’s shift toward longer-cycle, higher-margin industrial markets easier to see.
Portfolio rotation accelerated in 2025 and 2026. BKR acquired Continental Disc to expand pressure-management and flow-control products, formed a joint venture with Cactus for surface pressure control, sold its Precision Sensors & Instrumentation business, and agreed to sell Waygate Technologies. The moves released capital from less central operations while sharpening the portfolio around rotating equipment, flow control, production optimization, and energy infrastructure.
The defining step came with the acquisition of Chart Industries, completed in July 2026. The deal marked the most consequential step yet in Baker Hughes’ long evolution beyond oilfield services. Chart became the company’s third segment, extending the industrial platform built through GE Oil & Gas into cryogenic, thermal-management, and gas-handling technologies serving a wider range of energy and infrastructure markets. With the acquisition, Baker Hughes entered a new phase – still rooted in the oilfield, but increasingly shaped by LNG, rising power demand, and long-cycle industrial technology.
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The Power Cycle
Baker Hughes reaches energy infrastructure from the wellhead to the power plant. OFSE covers the full life of an oil and gas asset – drilling and evaluation, completions and intervention, production systems, subsea equipment, and decommissioning. Its global footprint and technical depth make it one of the few providers capable of integrating services across complex projects. That scale supports a durable franchise, although work remains tied to operator spending and individual wells, leaving OFSE exposed to commodity cycles, disruptions, and budget changes.
IET is increasingly defining Baker Hughes’ future. Its turbines, compressors, generators, and modular systems help liquefy and transport natural gas, power industrial facilities, and keep critical equipment operating. Large equipment awards also create an installed base for spare parts, upgrades, monitoring, and service agreements that can last 10-20 years. This lifecycle model gives BKR a recurring revenue stream and makes reliability, engineering knowledge, and field support as important as the original equipment sale.
AI infrastructure is opening a major new outlet for BKR’s expanded capabilities. Data centers need dependable power faster than constrained electrical grids can often provide, pushing developers toward behind-the-meter generation. Baker Hughes is adapting its Power Systems operation to serve this emerging market with modular turbine packages that can be deployed quickly, scaled across large campuses, and supported throughout their operating lives. The opportunity extends well beyond supplying the original equipment: controls, monitoring, training, spare parts, upgrades, and long-term maintenance deepen BKR’s involvement after installation. As demand shifts from isolated projects toward standardized, multi-site programs, the company is building a more repeatable operating model around data-center power – one capable of supporting sustained equipment sales and an expanding base of higher-margin service revenue.
LNG provides the other major growth pillar. Baker Hughes supplies the compressors, turbines, modular liquefaction systems, controls, and aftermarket services used across large export terminals and floating LNG vessels. This broad role gives the company exposure to every stage of the infrastructure cycle – from new facilities and capacity expansions to upgrades that improve the efficiency of existing plants. Once its equipment is installed, BKR can remain involved for decades through maintenance, spare parts, monitoring, and modernization. The result is a business that benefits from the current wave of LNG construction while steadily expanding the long-term service base that will outlast it.
Management is expanding turbine and generator capacity through 2029, which could support nearly $5 billion of annual Power Systems revenue at full utilization – roughly three to four times the 2025 level. Chart widens the opportunity further by adding thermal management, air and gas handling, and complementary service capabilities. Data centers and gas infrastructure offer the clearest near-term cross-selling paths, while geothermal, nuclear, carbon capture, mining, and space provide longer-term options.
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Orders of Magnitude
Baker Hughes’ Q2 results contained two very different stories. Revenue slipped 2% year-over-year to $6.742 billion, largely because of the Precision Sensors & Instrumentation (PSI) and Surface Pressure Control (SPC) divestitures, yet adjusted EBITDA rose 2% to $1.231 billion and adjusted EPS increased 2% to $0.64, with both revenue and earnings beating consensus. Adjusted EBITDA margin expanded 70 basis points to a record 18.3%, as productivity, pricing, cost reductions, and favorable foreign exchange absorbed lower volumes, an unfavorable mix, and inflation.
The widening gap between the two segments explains that resilience. OFSE remained the weaker half of the portfolio: revenue fell 5% to $3.451 billion, EBITDA declined 11% to $605 million, and margin contracted from 18.7% to 17.5%. The SPC transaction contributed to the decline, while Middle East disruption, inflation, and softer activity added further pressure. At the same time, IET generated essentially flat revenue of $3.291 billion, but stronger backlog pricing and better execution lifted EBITDA 16% to $678 million and expanded margin by 280 basis points to 20.6%. The industrial portfolio is therefore improving Baker Hughes’ earnings quality even before its newest orders begin converting into revenue.
Orders provided the clearest view of where the financial mix is heading. Total bookings surged 49% year-over-year to $10.501 billion, producing a 1.6x book-to-bill ratio, while IET orders more than doubled to a record $7.088 billion. Power Systems alone secured $2.6 billion of orders covering 2.7 gigawatts, with approximately $2.2 billion tied to data centers. The awards included 76 turbines for Dynamis and an initial Kodiak project supporting approximately 1 gigawatt under a framework that could eventually reach 1.8 gigawatts. New LNG work spanning Venture Global’s CP2 project, Cheniere’s Sabine Pass expansion and fleet upgrades, and another Golar floating facility showed demand extending across new terminals, existing plants, and offshore capacity.
That activity lifted remaining performance obligations by $4 billion sequentially to $40.1 billion, including $37.1 billion within IET, up 19% year-over-year. The backlog provides substantial visibility, although long manufacturing cycles mean that a meaningful share of recent gas-equipment orders will reach revenue only after 2027. Capacity expansion, turbine availability, and disciplined project execution will determine how efficiently that demand becomes earnings.
Free cash flow strengthened to $1.109 billion from $239 million a year earlier, although advance and milestone payments amplified the quarter’s conversion. Full-year 2025 free cash flow of $2.732 billion provides a more reliable indication of the company’s underlying cash-generating capacity. The June balance sheet was temporarily enlarged by financing raised ahead of the Chart acquisition, leaving $15.727 billion of cash and $15.479 billion of long-term debt before the deal consumed much of that liquidity. Management expects free cash flow, $325 million of targeted annualized synergies, and proceeds from the planned Waygate sale to return leverage to its 1.0-1.5x target within 24 months. That path appears manageable, but it depends on timely integration, synergy delivery, and sustained cash conversion.
Management’s current outlook remains conservative, calling for a modest near-term decline while excluding Chart. A combined forecast is expected before Q3 earnings, giving investors a clearer view of the enlarged company. In the short term, backlog conversion, stronger IET pricing, recovering OFSE activity, and the first Chart contributions should support improving momentum. Over the longer term, turbine-capacity expansion, multi-year data-center programs, continued LNG investment, and a growing installed base should create a much larger stream of equipment and service revenue. Chart adds further upside through cross-selling, broader exposure to thermal and gas-handling markets, and $325 million of targeted annualized synergies. The opportunity is substantial, though its timing will depend on supply availability, disciplined execution, and successful integration.
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The Hybrid Engine
Baker Hughes requires a hybrid peer lens because its earnings model now spans two markets. SLB, formerly known as Schlumberger, and Halliburton provide the clearest benchmarks for its global oilfield-services core, while TechnipFMC captures the long-cycle subsea equipment and project-execution side. GE Vernova is a strategic benchmark for the gas turbines, generators, installed-base services, and data-center power opportunity reshaping BKR’s growth profile. Together, they provide a clearer framework for valuing a business whose industrial-power exposure is growing faster than its legacy oilfield identity suggests.
BKR has gained roughly 30% over the past year, with essentially all of that advance occurring year to date. It trails all four peers over the past year, while its year-to-date return nearly matches SLB, exceeds Halliburton, and remains below TechnipFMC and GE Vernova. More important is where returns could go from here. BKR combines the cyclical recovery potential of an oilfield leader with faster-growing exposure to data-center power, LNG, and industrial infrastructure. As IET becomes a larger earnings contributor, capacity additions unlock more deliveries, and Chart generates synergies and cross-selling opportunities, growth and margins could accelerate beyond current expectations. That improving mix could also attract a stronger valuation, giving BKR two potential sources of outperformance – rising earnings estimates and a gradual industrial-power rerating.
BKR trades at 24.2x forward non-GAAP earnings and 12.3x forward EBITDA – a premium to legacy oilfield peers that looks increasingly justified by the direction of the business. Baker Hughes combines the peer group’s highest gross margin with expected EBITDA growth that comfortably outpaces SLB and Halliburton, reflecting IET’s rising contribution and superior profitability. Its valuation also remains reasonable relative to TechnipFMC, with a similar forward earnings multiple and a lower forward EBITDA multiple. GE Vernova shows how highly the market can value a faster-growing power platform, although BKR remains at an earlier stage of that transition, with OFSE still representing roughly half the business and Chart integration just beginning.
As the portfolio shifts further toward industrial technology, data-center power, and LNG, growth and profitability could exceed current expectations – making today’s multiples less demanding than they initially appear. Wall Street supports that view, rating the stock a Strong Buy, with the average price target implying more than 25% potential upside.
Baker Hughes’ capital return strategy centers on returning 60-80% of free cash flow to shareholders through a combination of dividends and buybacks, while maintaining balance-sheet strength and funding growth. Although BKR’s dividend yield of 1.61% is well below the Energy sector average, the modest dividend keeps its payout ratio low, preserving more cash for post-acquisition deleveraging. For that reason, buybacks have been paused in the near term, although BKR retains approximately $1.3 billion under its open-ended share-repurchase authorization. As the balance sheet normalizes, the unused authorization gives BKR scope to resume buybacks, adding another potential source of shareholder returns alongside the dividend.
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Investing Takeaway
Baker Hughes is emerging as a rare bridge between traditional energy services and the infrastructure needed for a power-hungry economy. Its oilfield franchise supplies scale and cash, while IET’s turbines, LNG systems, and lifecycle services move the business toward longer-cycle, more resilient earnings. Record orders, planned capacity expansion, and Chart’s thermal-management platform give that shift a much larger runway. Successful backlog conversion, operational execution, and Chart integration could strengthen margins, accelerate deleveraging, and turn BKR’s industrial transformation into durable earnings growth and a valuation rerating. Meanwhile, the market still prices BKR much closer to oilfield peers than to pure power leaders. That gap, combined with visible demand and improving IET profitability, creates an attractive entry before the transformation fully reaches reported revenue.
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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.
A global selloff in semis and AI infrastructure has push NVT and CRDO below the threshold, reducing the Club ranks to 24 stocks: GE, AVGO, ANET, HWM, TSM, EME, APH, IBKR, PH, VRT, CRWD, ASX, PANW, MTZ, CSCO, GOOGL, BNY, ATI, KEYS, RTX, STRL, MS, JBL, and JPM.
The first runner-up is now NVT with a 26.39% gain since purchase. Will it return to the Winners’ circle, or will another stock outrun it to the finish line?
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