VIDEO: Why We Bought More Microsoft, Axon

In today’s Portfolio video, Chris Versace discusses the multiple moves the Portfolio made so far this week, including Tuesday's action to add shares of Axon (AXON) and Microsoft (MSFT) .

As part of that conversation, Chris explained why the Portfolio chose to act when it did and not sooner. Chris shared what’s else the Portfolio will be looking for and assessing when three other holdings — Welltower (WELL) , Dutch Bros (BROS) and Arista Networks (ANET) — report their quarterly results this week.

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At the time of publication, TheStreet Pro Portfolio was long AXOn, MSFT, WELL, BROS and ANET.

Transcript

CHRIS VERSACE: Hey, everyone, Chris Versace here. It is Tuesday, February 10 in the market. Even though it's off its highs for the day, it is still in the green rather nicely. We shared some of the drivers behind that in our opening comments this morning. One of the big ones for us and for the portfolio, of course, was the simply stellar number put up by Taiwan Semiconductor, which simply reinforced the notion that AI data center demand remains robust.

We can parse the comments from Taiwan Semi's earlier guidance for the current quarter but also other data points from the likes of Micron and even Qualcomm's guidance that the January strength at Taiwan Semiconductor, again, was largely due to robust demand for AI and data center. That also happens to back up the step up in hyperscaler spending dollars for 2026 that we and others have been talking about.

Put it in a nutshell, it keeps us supportive, positive, constructive, bullish, call it what you want on the portfolio's chip positions. But rather than keep going on about that, I do want to review some of the moves that we made over the last few days and talk about some of the names and earnings that we have coming over the next couple of days.

So with that, yesterday, as you probably saw, we stepped into the shares of SuRo Capital. Why did we do this? Well, multiple fronts led us to do this, including the recent pullback in the shares. But when we think about the rebound in core, we've shares and SuRo continuing to monetize that position, especially what it shared with us that it monetized in the December quarter, that really paves the way for additional dividend payments in the coming quarters, including the current one.

At the same time, we are continuing to watch open AI raise even more capital, stepping up its valuation. And just a reminder to you that the last time that we saw SuRo Capital update its net asset value per share, well, that was back in November before open AI had closed its capital raising round that placed it around $500 billion.

Remember, the time stamp for SuRo's portfolio was the end of September, even though it reported in November. So it didn't reflect that $500 billion, still at $300 billion. Now, we're talking about a number around $800 billion when they close the current round. So the thinking is that we should see a step up in net asset value at SuRo Capital from OpenAI just when it reports the December quarter and then another step up sometime in the first half of the year.

Then we talked about the prospects as well and the alert for other positions in SuRo's portfolio to go public, given the positive outlook for the IPO market in 2026. We'll continue to track it, but here's the thing, folks. When we step in and actively buy shares of SuRo capital, we know that they tend to move.

And if you can get in early enough with us around the trade, boy, that's great. Sometimes, though, you might want to wait a day or two. Let things cool off. We have noticed that the days we make trades in the shares, we see a tremendous amount of volume. And then over a couple of days later, there might be a little give back to give you a better buying opportunity.

But make no mistake, as we look out from where we are today ahead in 2026, we see a number of positive things ahead, a number of positive catalysts as well for the shares of SuRo Capital. Today, we stepped into more shares of Axon and Microsoft. We know that these stocks have been hard hit. We know there have been a lot of questions on this.

And when we look at the fundamentals for Axon, a lot of what we've been talking about from what first attracted us to the shares remains in place, arguably accelerating given AI adoption but also body camera adoption. We've shared the signals with you on Saturdays and such.

So those are what keep us positive in that positive mix shift towards those businesses. Really, the backend services business should continue to drive margin improvement. For us, the story will really center on that continued mix shift but also the increase in total contract value as I pointed out in the note.

This morning, before Axon shares opened up, the share price was back where it was in late 2024, when the average recurring revenue was far smaller than it is as of the September quarter. And the total contract value was also significantly smaller. So we can understand it being a high beta stock, a lot of uncertainty in the marketplace, but it's times like this that we like to step in and use that short-term pain for our long-term advantage.

There was a question, and I'll tie this to Microsoft. OK. Great. Stocks rebounded a little bit. Why didn't we strike sooner? And the bottom line on this is that all the old Wall Street adage, you don't want to catch a falling knife. We wanted to see the shares bottom. We wanted to see volume pick up.

And I answered this in the trade alert, we wanted to see one of the technical indicators, the MCID start to turn up. That combination gives us a sense that, OK, the shares have bottomed. They're finding their footing. We could see them rebound. They potentially could rebound quickly. They may not rebound quickly at all, but from our perspective, the risk reward in making the move today with Axon, and as I shared in the alert regarding Microsoft, it is compelling.

We continue to see both benefiting from the AI, not only adoption but expanding usage in their respective end markets. Microsoft in the enterprise. Remember, it's predominantly a AI data center cloud enterprise company at this point in Axon, in public safety, but also other areas tangential to that in the international and the federal markets.

We are inclined to be patient shareholders with both of those as these reasons for owning them continue to play through. Now, I wanted to shift, as I said, and talk about what's coming this week. We do have quarterly results after today's close from Welltower. We also have quarterly results from Dutch Bros and Arista Networks.

So with Welltower, again, they report after the close today. This company really sits at the heart of one of the pain points for our aging of the population theme. We've talked about it, but a quick reminder, not only do we have the demographic tailwind that is the aging population, but you have the pain point that is a senior housing shortage. And that shortage is only expected to grow in the coming years. That, in our view, really positions Welltower extremely well.

So when they report, in addition to the usual metrics, EPS, revenue, that kind of stuff for the quarter and for guidance, what else will we be focusing in on? Occupancy rates and pricing but also Welltower's plans to divest its outpatient medical portfolio. They announced this back in October. They said that they were going to remove about 296 properties, and they thought that-- sorry, 296 properties, that's for its outpatient medical portfolio.

Target time for that mid 2026. So we want a nice status update on that. We also want a status update on the acquisitions that they announced back in October, Barchester Healthcare in the UK, Amicus Senior Living Styles in Canada. How are they instilling the Welltower discipline, the Welltower system into those acquisitions? And where are we on that? What's the progress and margin impact both in the current quarter but really, what's the target for 2026?

Again, continue to see a multiyear tailwind behind the shares of Welltower. We're inclined to be patient owners. And if we need to raise our price target based on the outlook, we're inclined to do so. Dutch Bros, that company is going to report after Thursday's close. That would be February 12.

For a company that doesn't make a lot of noise. I will say that today, there was an interesting little tidbit out that they are expanding their CPG or consumer packaged goods effort. You've seen this from Dunkin' Donuts. You've seen this from Starbucks. It really refers to being able to buy Dutch Bros coffee in grocery stores.

They announced this strategy last year with one of the largest packagers of CPG coffee, so arguably find it following a time tested playbook for this. But even though it's an expanding footprint and the announcement today, including landing at Amazon and some Albertsons and some Walmarts, and I expect we'll see more on this front over time, the reality is this is not a key driver behind why we are shareholders in Dutch Bros.

You know the reason. It is the footprint expansion from west to east. And in 2026, we can add the rollout of their expanded food offering. So when the company reports, we are expecting them to say that they will be adding a significant number of new shops in 2026.

We have previously said that they need to step up the footprint expansion to hit their target of 2,029 shops by 2029. So we expect that. That is a key part of the story. At the same time, where are they in the rollout of this new food offering? Our thinking is that just like we saw at Starbucks, it should drive higher attach rates and higher tickets, that's higher revenue.

And we also want to pay close attention to what they say about pricing and input costs. We have talked about how dairy is a much bigger input cost for coffee shop companies. Dairy prices are moving the right way. We've also checked recently on coffee prices, and the spot price is falling really off, really taking a bit of a tumble since mid to late January.

And now, spot coffee prices are lower than they were at any point in the year ago quarter. So we'll be interested in what they have to say about that. I think those could be some nice margin levers. And again, here too, based on what we learn, we will adjust our price target as needed, potentially even revisit our rating.

Finally, Arista Networks, they are also going to report after the close on February 12. The backdrop here is rising CapEx levels for AI, data center, and cloud are going to drive demand for the company's networking solutions. As we saw last week, the big hyperscalers in particular are stepping up significantly their 2026 CapEx.

But remember, there will be others in and around that. There are a number of data center companies outside the big guys, Equinix, Digital Realty, private companies like Raging Wire, Sabey Data Centers, and others. So it's that aggregate amount that we want to watch. Yes, Arista Networks does have a close relationship with Microsoft and Meta, and we know their spending is going higher. That alone should be a positive force in their guidance.

Now, when they report, Arista Networks, what will we be focusing in on? Comments about backlog, visibility, but the last time they reported, they shared a particular statistic, and this is the one that we want to get an update on. What they said back when they reported their September quarter results is that not only did they increase their 2026 revenue, but they also increased it for their AI revenue target.

In November, they flagged, for this year, 2026, 2.75 billion from what it calls AI aggregate revenue. That is up from the target of $1.5 billion in 2025. So here we are several months later. We know hyperscaler CapEx is rising. We want to see that 2.75 billion number 2026 move higher.

I would say that based on what we've seen again from those hyperscalers, we should. The one thing we want to be mindful of, though, is there can be some capacity constraints when it comes to data center construction, everything from chip capacity in the industry to the ability to build servers and power.

So we'll be tempering expectations on that. But make no mistake, we should see those key figures for Arista Networks move higher. On the power front, we will have more to say on this when we're done reviewing the earnings call from Duke Energy. They reported this morning. I touched on it in our opening comments with Duke saying that they have the biggest capital spending plan out there, 1.03 billion over the next few years.

We want to see exactly what's the outlook for that, what are the gating factors, how much of that spending will be in 2026, when does that capacity come on stream. That will help us balance multiyear expectations for data center demand. And what Duke has to say also flows through not just to Arista Networks and the chip companies, but also to, if you think about it, connecting the dots, United Rentals as well.

If they're bringing additional capacity building new plants to generate electricity, you need construction equipment to do it. It's right in the United Rentals wheelhouse, but Duke Energy is just one electric utility. We do have Dominion Power. We do have others coming.

Much like my comment about capital spending from Amazon, Google, Meta, Microsoft, we want to look at them individually, but we also want to get a sense of what the aggregate number is. The same thing applies for these public electric utility. So you'll be hearing us talk a lot more about that, connecting the dots back to the portfolio.

And yes, the biggest beneficiary in the portfolio of ramping up public electric utility spending, you guessed it, Eaton shares. Coming up later today, we will have some additional comments on the December retail sales report, which on its headline was flattish, only up about 2% year over year.

But as you know, we like to connect the dots back to several positions in the portfolio. I will tease and say that what we saw in those numbers, boy, oh, boy, sure confirms that Costco continues to pick up consumer wallet share. All we need to do is compare that December retail sales report against Costco's December sales and their December comp sales. But we'll have more on that, and we'll touch on a few other things as well. Thanks for watching. We'll be right back with more content. Stay tuned.