At the start of this year I came out with a video titled Big Tech
is Cheap. It was published right at the
beginning of the year, January 6, 2023, and in the video I made
the argument of Big Tech being very cheap.
At the moment, I think Big Tech is currently cheap and I want to
explain why. I went through all the different
companies fundamentals and financials and explained why I
thought each of them individually was selling for
cheap. We talked about Amazon, Apple,
Microsoft. We went over Google and Meta as
well. And after reviewing the
fundamentals and valuation of Big Tech, here is my conclusion.
Even by the numbers. These are pretty cheap companies
and they still have incredibly good core businesses, incredibly
economically powerful companies with strong market positions,
unlikely to be disrupted. I think they have a long runway
of growth and they're trading at valuations they haven't for
years. So my opinion, I think they're
cheap. Let me know you think.
So that was it. Pretty straightforward.
At the beginning of this year I thought these companies were
cheap and I said so loudly, but I didn't just say so.
I also bought into these companies heavily.
In my passive income portfolio. I own a very large stake in
Microsoft and Apple. Each of these companies is well
over a 10% position, so they're far over weighted from what the
index has. I also have a smaller, more tech
centered portfolio where I own a lot of Google, a lot of Amazon,
and even more Microsoft and a little bit more Apple.
These are companies that I'm heavily invested in.
When I'm doing research on companies, they continually pop
up as the best companies in the world.
So overall, I think you'd be hard pressed to find a bigger
advocate of buying big Tech than the Joseph Carlson Show.
I've been long Big Tech for a long period of time and I've
continually added to these companies a long dips,
especially when they get cheap, especially when they sell off.
That's the time periods where I've added the most to these
companies. But a lot has changed since I
released that video 10 months ago saying that Big tech is
cheap. One of the biggest things that's
changed is the price. Let's take Apple for example,
Apples year to date performance is a staggering 48%.
It's gone from $129 now up to 184.
Apple is a far more expensive company now than it was the
beginning of the year. Now Apples performance is
fantastic. It's market beating by a huge
extent, but it's beat out a little bit by Google.
This year Google beats out Apple by a few percentage points with
a 49% return year to date. That is incredible, and as good
as that is, it's beaten out by Microsoft's performance.
Microsoft is up a staggering 53% year to date.
It's gone from prices of $220 per share up to 367 now.
Even as good as Microsoft's performances, it's beaten out by
Amazon. Amazon is up 66% year to date.
This company was trading at around $80.00 per share
announced up to 142. Now of course, even outside of
big tech, we have the new entrance to the Magnificent 7.
In this case we have Tesla, which if you think Amazon's
performance has been good year to date, let's check out
Tesla's. Tesla's up 107% year to date.
It's doubled this year and it's hard to imagine that being
beaten by an even bigger company.
But here we have meta with an incredible recovery.
Meta beats out Tesla by wide margin, being up 165% year to
date. And of course we can't forget
about the last member of the Magnificent 7, NVIDIA, climbing
up a staggering 241% year to date.
NVIDIA now both say market cap bigger than Metas.
It is a $1 trillion plus company.
The reason that the S&P 500 is up 13 percent is simply because
of these companies. But with the incredible
performance they've had with their price increasing, that
does have implications on their valuation.
So I think it's time that we go back to this original question.
Yes, big Tech was cheap ten months ago, but is it still
cheap today? That's what we're going to be
discussing in this episode. Now of course, as always, we
have some other news we'll be covering as well.
This new demo by a company called Humane that made an AI
clip. We'll be looking at this Airy
demo. We also have Moody's down
grading EU s s credit to negative and we have the new
Disney movie, the Marvels struggling at the box office.
What does this mean for the Marvel Universe and for Disney's
content? We'll be discussing that as
well, so we have a lot to get to in this episode.
Let's go ahead and jump right in.
Just today, Dan Ives went on to CNBC and yet again reaffirmed
his opinion that big tech is still cheap.
Now it's the first, second derivative and we believe the
3rd and 4th are going to hit in 2024, which is what in my
opinion, the new tech bull market.
Has begun. Not only are they cheap right
now, but all of this AI stuff being intermingled into big tech
means that these companies are set for a brand new bull market.
They're going to have another big run.
Dan argues that because these companies have such massive
install bases of commercial clients, AI is going to help
them further their profits in the coming years from AN.
Install based perspective. You look at Adobe, you look at
names like Oracle, you could Salesforce.
And of course, right now at the top of the mountain is, of
course Microsoft. So you look at what AWS are
doing, that's a huge monetization opportunity for
them. And I believe right now that's
the golden goose, that's what this is going after and we think
it's a trillion dollars of spend over the next decade.
It's going to hit the shores attack.
Now, I don't necessarily disagree with Dan Ives.
I don't think he's crazy with these assumptions.
It is true that a lot of money is going to be spent on AI, and
it's probably true that these companies will eat up the lion's
share of that spend. They do have massive install
bases and we've seen over and over again how quickly big tech
can grow their profits. And ultimately, Dan Ives
believes that the valuation is not as concerning because he
believes a lot of people on the sidelines of the stock market, a
lot of the bears that have been in hibernation are going to want
to jump back in. And I think right now a lot of
bears, they're coming out of hibernation mode and I believe
they go back in, in terms of what I view is just a tech.
That ultimately could be up 8 to 10% more going into year end.
And he finally asserts that the continued momentum in Big Tech
will bring it up another 8 to 10% this year, even before we
get into 2024. So Dan Ives as well as many
other investors are now very excited about Big Tech,
especially after this massive rally.
Seeing the stock price go up that fast draws a lot of
attention and inevitably draws a lot of FOMO.
That's why you get the momentum that you do in stocks, people
wanting to be part of the gains. If we take a minute and look at
the valuation of big tech and what's happened over the past
ten months, it paints a pretty alarming picture.
Let's take a look at Apples valuation.
The PE ratio has gone from a PE of 22 to a Ford PE of 28.6 from
a 22 to a 28 is an expansion in multiple.
Likewise the free cash flow yield of the company netted out
with stock based comp is 3.08%. Now that's OK, but just a year
ago it was 4.5. On a free cash flow basis you're
also getting much less than what you paid for a year ago.
Apple is undoubtedly far more expensive of a company this year
than it was last year. With Microsoft we can see the
same. At the start of the year, the PE
ratio was in the low 20s. Now it's 27.
The free cash flow yield adjusted for stock based comp is
1.95. It's now under 2%.
Microsoft is getting a heavy premium for being the AI king.
A lot of what Dan Ives is talking about when referring to
in the future. All of this AI spend is already
largely baked into this price. Google's one of the big tech
companies is often looked at as still sort of cheap.
On APE ratio it only trades at an 18 which granted it is far
less expensive than Apple and Microsoft so this one doesn't
look quite as bad. But when you look at the free
cash flow factoring out all the stock based comp, you get a free
cash flow yield of 3.31%. This is still not that cheap
even for Google. On a free cash flow basis Google
trades around the same price as Apple.
Met is another company that does a substantial amount of stock
based comp dilution. We look at the trailing PE and
it's out of 29. On a Ford PE, it's out of 15, so
it appears mostly cheap on a Ford PE basis.
But again, when we look at the free cash flow yield, at least
on a trailing basis, it's below 3%.
Meta itself is getting more expensive by the day.
Amazon has been consistently one of the most difficult companies
to value. That is because they usually
suppress their earnings power by reinvesting all of their cash
flow in the future properties. Amazon's free cash flow has been
negative over the past year as the company's done substantial
CapEx investments. So the valuation of this one
depends heavily on next year's cash flow.
Now terms of companies reliant on future growth, it only gets
more aggressive. Tesla is currently pricing in a
substantial amount of free cash flow growth in the future.
Tesla is being priced at a 29 four E ratio with a free cash
flow yield of only two 8%, meaning that right now the
company is heavily reliant on growing free cash flow in the
future. And the company with the most
aggressive assumptions of all is NVIDIA priced at a 39 Ford PE
and a free cash flow yield adjusted for stock based comp of
only .6%. NVIDIA bulls are assuming very
fast free cash flow growth and earnings growth and if NVIDIA
does not accomplish that, this company is dramatically
overvalued. Now look, when I review these
companies, I still come to the conclusion that there's some of
the best companies in the world. They are true compounders.
They are growing their earnings and free cash flow overtime.
So I still believe the quality of these companies is superb.
It's the best in their class. But then we get to the question
evaluation. I can't say with exact precision
what every single one of these companies is worth, but I can
say with a high degree of confidence that the price of
these companies this year has raced up far faster than their
intrinsic value and that should cause long term investors to be
cautious. Now, being cautious may mean
different things to different people.
When I speak of being cautious, that doesn't mean to race out
and sell all of your big tech holdings.
That's certainly not what I'm doing.
I could lock in a lot of gains and sell out of these positions,
but that also puts you in a difficult position.
When you sell out a big tech, you're basically betting against
the S&P 500. You're excluding yourself from a
massive portion of the overall earnings in the economy.
So much happens within Apple and Microsoft and Meta.
There's so much commerce going on with those companies.
Having no exposure to them whatsoever puts you in a dicey
territory where eventually you may want to get back in.
When I'm cautious, rather than selling out, I simply hold back
on my buys. I wait for better opportunities
to grow my position. So right now, for all of these
companies, for Amazon, for Microsoft, for Apple, for meta,
for NVIDIA, for Tesla, I consider these companies a hold.
I consider some of them at the verge of being overvalued, and
if they do push up in value further, I may trim my positions
to some extent. For example, Microsoft is up to
$367 right now. It's trading at a higher PE
ratio, a higher multiple. If the company raced up even
further above $400.00 this year, I would look to trim my
position. I would still invest in the
company. I would still be bullish on its
fundamentals growing over time. But I feel that this is the
natural course of investing. Momentum is the most powerful
force in the market for a reason.
When investors see companies like Apple or Microsoft making
50 and 60% gains in a single year, they want to be a part of
it. They don't want to miss out, so
they buy into the company, pushing up the price ever and
ever higher, and eventually this can lead to stock prices being
substantially above their intrinsic value.
Stanley Druckenmiller has addressed this very specific
phenomenon before. He says, I'm not going to lie to
you, my first boss had a saying the higher they go, the cheaper
they look. There's something weird and I
know everyone watching this has this experience.
It doesn't make any sense, but when a security goes up, every
bone in your body wants to buy more of it.
And when it goes down, you're fighting and making yourself not
sell it. It's just the nature of the
beast. You can call it the nature of
the beast or the psychology of investing.
The higher they go, the cheaper they look.
If we're disciplined investors, we can't get wrapped up in
momentum. As for me, I'm proceeding with
caution right now. I'm not adding anymore to my big
tech companies and I won't add more until the valuation comes
down. Now moving on, I have to respond
to this new demo of this AI clip product.
This is interesting for a couple different reasons.
First of all, the product itself is very interesting and I
actually think pretty cool. But this is also interesting
because of their demonstration. The demo video here is just a
bit different. This is the Humane AI pin.
It's a stand alone device and software platform built from the
ground up for AI. This demo video's 10 minutes
long and he talks like that the entire time.
There's no fluctuation, there's no voice variance.
It's just this low, monotone, almost ASMR voice.
And then I have to point out that it does have some Apple
vibes. Feels a little bit like they're
mimicking early Steve Jobs. It comes in three colour ways.
Got Eclipse, Lunar and Equinox. This is what I love seeing in
these demos. It comes in three colour ways,
Eclipse, Lunar and Equinox. You could just say the product
comes in black, white and Gray now.
The battery booster powers a smaller battery inside the main
computer and this is how we achieve our all day battery
life. So if you ever exhaust the
booster, you just reach into your pocket or bag and hot swap
it. This is a perpetual power system
that allows you to use your AI pin for as long as you want.
They really seem to be copying the Apple playbook here instead
of just saying you can carry around an extra battery.
It's called a perpetual power system.
Doesn't that sound much better? And your engagement comes
through your voice, touch gesture or the laser ink
display. So you can talk to this thing,
or you can have it project onto your hand.
OK. Got my clock, whether the date.
If I tilt my hand up got nearby, it tells me everything that
might be around me and where I am at the same time.
It seems pretty cool. It has a little projection thing
that goes on your hand and that's like a control system for
it. Or you can just tap the device
itself and ask it a question directly.
Ultimately what this presentation is is ChatGPT
connected to your chest. That's basically what the device
is. In fact, the system itself costs
$700.00, and then it's an additional subscription for
$24.00 per month. I believe the reason you have to
pay for that additional subscription is because you're
paying for that ChatGPT, or whatever model they're using.
Overall, I honestly thought this was kind of cool, and I like
seeing companies come out with new devices like this.
I think the biggest problem I have with potentially using a
device like this is I almost never like talking to my phone.
I don't like speaking into it because I noticed that a lot of
times I'm around other people. If I want to check something
real quick, I don't want to be tapping on my chest and speaking
into a device while I have friends around or other people
around. It just seems a little odd.
So I prefer having a display rather than having it primarily
through audio or through a hand projection.
But I think this gives you a glimpse of what the future is
going to look like. There's going to be a lot of
interesting devices released soon.
Now moving on, we have the big news that came out Friday after
market close. the United States credit rating outlook was
changed to negative by Moodys. Overall, there's three main
credit rating agencies. The two big ones are S&P Global
and Moodys. And then there's the 3rd place
one, which is Fitch. Both S&P Global and Fitch have
already removed the United States from the highest credit
rating possible. Now we have Moodys threatening
to do the same thing with this downgrade.
Moody's Investor Service signaled it was inclined to
downgrade the nation because of wider budget deficits and
political polarization. So Moody's hasn't officially
downgraded the US, but it's putting the US on notice.
Then, unless these things improve, unless budget deficits
improve and political polarization improves, it's
going to be downgraded eventually.
And let me first say that I agree with this move from
Moody's and I agreed with it from SMB Global, I agreed with
it with Fitch. I think it's necessary that the
United States gets treated like any other institution.
As the United States grows in its amount of debt, it becomes
less credible. This chart clearly illustrates
the problem. The orange line is the
cumulative debt growth. So that's the debt going up over
time. And the blue line is the
cumulative real GDP growth. Now, debt growing overtime is
not an issue if your income grows as well.
In fact, if your income growth outpaces the debt growth, that's
not a problem at all. Ever since around 2009, the GDP
growth has far trailed the debt growth, and every single year
the debt and the deficit are accelerating.
Here's an even more specific breakdown of the trailing year.
The underlying US budget gap doubled in the past year alone.
Expenses are increasing at an incredible rate, and same with
the deficit. To complicate this problem,
nobody in charge wants to address it.
Biden officials rejected Moody's shift to negative outlook
pointed to Republican dysfunction.
So rather than coming up with specific solutions, they're
pointing the finger to the other side.
At the same time, the current batch of Republican candidates
seemingly never talk about the debt.
They don't act as though it's a pressing issue.
So my hope is with all of this that the downgrade from Fitch
and SP Global and Moody's moving this to negative will put
further emphasis on it. I think it's good to have
greater focus and pressure on this issue, and hopefully that's
what it accomplishes. Now finally, we have some good
news and bad news. The bad news is if you're a
Disney investor, the new Marvel's movie did not perform
well. It was the worst performing
opening weekend of a Marvel movie ever with only $47
million. If we put that in context with
the other lowest gross Marvel movies, we can see the
scoreboard right there. We have the marvels at 47
million above The Incredible Hulk, Ant Man, Captain America,
Thor and the Eternals. Now, film analyst said.
The initial prediction saw the film opening at between 75
million and 80 million domestically, but those figures
have shrunk to a range between 60 and 65,000,000.
Ahead of Friday's opening, this movie is going to make a lot
less than previously expected. Now, I said that this is both
bad news and good news. This is bad news.
If you're invested in Disney and you want every single film to
perform well for you. That might be a little bit of
negative news. But I think overall that this is
good news. It may force Disney to focus on
something other than superhero movies from the Marvel Universe,
and it may finally waken them up to the fact that people are
getting a little bit Marvel fatigue.
This is something that's been happening year after year after
year, and Disney does not seem to get the message.
They're coming out with dozens of more Marvel movies, more
superhero movies, more movies where people have flashy hands,
can fly across the screen, can throw each other through
buildings and brick walls with zero consequences.
And for a lot of people that I think were at one point, Marvel
fans, I think right now they're just getting fatigued.
They're over it. This movie has a 6.1 rating on
IMDb. That's pretty low for a Disney
movie. People are tired of seeing the
same CGI story over and over and over again.
They want original storytelling. So I think the glass half full
here is that maybe, just maybe, if they continue to have low
performance of churning out the same Marvel movies, they'll
change plans and at least make them more unique, more
rememberable with original stories.
That's all for this episode. See you in the next one.