Welcome back everyone. Thanks for joining.
In this episode, we're going to be looking at five companies
that are on a dip. Five companies that are on sale.
Now. If you're anything like me,
you're a value investor and you're wanting to find very good
companies at attractive prices. It's the Terry Smith motto.
We want to buy good companies but we don't want to overpay.
The problem is, as you can see right here, we're looking at the
S&P 500 chart. Year to date, the S&P 500 is up
15.86 percent, 15% year to date. And then the QQQ, these tech
companies, they're up even more, 38% year to date.
Now if you're like me and you're looking at this, you're
thinking, wow, a lot of these companies have ran up in price
just this year. And it seems like yesterday they
were so much cheaper. So you're trying to find deals
in the market. What can we buy today that is on
a dip? Well, that's what we're going to
be talking about. I filtered for five companies
that are trading at a substantial dip, and I've ranked
them in order of the dip. Now, the way that we do this is
not just by my opinion, it's not just by me saying they're in a
dip. This is by a mathematical
equation called the 200 Day Simple Moving Average on
Qualtram. I've developed something called
the Dip Finder, and the dip Finder is a simple tool.
You enter in a watch list and then it takes your list of
companies and it builds a chart that gives you a visual
illustration of which companies are in a dip and which companies
are in a price surge. If they're in a price surge,
they'll be green above the X axis.
If they're in a dip, they'll be in the red below the X axis.
And then the percentage that it shows, whether positive or
negative, is based on the Simple moving average of 200 days
versus the current price of the company.
Now the 200 days simple moving average is a technical analysis
term to describe the momentum in a stock, whether it's negative
or positive. So if a company has a -200 day
moving average, that means Simply put that the price is
going down, the stock is becoming in a bigger and bigger
dip. If the momentum is positive,
then the stock is going up. So you have companies like
NVIDIA where this one has heavily positive momentum.
The stock has gone up like crazy this year.
Then we have other stocks that are in a dip.
So as I've been looking at my different watch lists and
looking at the different trading, I've been noticing the
companies that are in a price surge and the ones that are in a
price dip and these ones are in a substantial dip.
So I have 5 here and I've benchmarked them against the S&P
500 and the QQQ. So those last two ones that are
in the green, that's the benchmark.
That's where normal companies should be.
These companies are obviously in the red.
So let's go ahead and start off with company #1.
And you may have guessed it, #1 is Disney.
And keep in mind this is the smallest tip of the five, not
the biggest. So this is just number one.
It's going to get worse from here, but Disney's not looking
good. Disney has been trending down
ever so slightly since the beginning of the year.
It's down 5% overall. So technically this isn't really
that big of a dip. It's just down slightly.
Normally this wouldn't cause any alarm.
It wouldn't cause any concern. The problem with Disney is the
more that you zoom out, the worse the picture looks.
We zoom out to one year and it's down 25%.
Then we zoom out to five years, still down 25%.
That's really bad when you're still down that much in five
years. Then we zoom out to 10 years and
we have a 38% gain. A lot of companies had made that
gain just this year, so an entire decade lost.
Disney, in my opinion, is one of the most tragic companies to
have performed this poorly. I think it's especially sad
because so many retail investors, so many average
people, just normal people going about their day have invested in
Disney. We have families that have
invested in Disney because they they know the products.
We visited the parks, we've seen the movies, we've seen how
powerful the economics can be in this company.
We have lots of people that are parents that buy Disney stock
for their kids is kind of a starter stock, right?
We have lots of people that have exposure to Disney and the
performance has just been terrible.
Now the company is sitting at a 10 year low back to prices in
2013, Bob Iger has come back to save the company from something
that he largely started himself. He handed the company off to Bob
Chapek. It was a total disaster.
He took back over and he's trying to repair things.
So there's a couple things that's happening with Disney
that I think could possibly turn this company around and I want
to go through some of them Now. The first bit of news here, if
we go to the news section is there's reports that Disney is
in talks to spin off ESPN or at least make deals with ESPN.
And I think that this is going to be a creative to the bottom
line of Disney. The truth is, when I look at
this right now, the big problem with Disney is that most people
look at the company as being the parks and the movies, when in
reality a lot of Disney's ESPN and cable TV, So a lot of it is
ESPN, but the problem is ESPN is being beaten up by big tech.
Apple's coming in buying Leono Messi.
We have Amazon diving in and buying all these all these
sports rights to football and everything.
But we have ESPN right now facing bigger competition than
they ever have in their history. So a big portion of Disney is
facing ever growing competition. And what Bob Iger is trying to
do in this situation is find any way to monetize ESPN as
possible. He considers ESPN not core to
Disney. It's it's just not part of the
magic flywheel of Disney. And I agree with Bob Iger.
I don't think ESPN's core to Disney.
If you look at the two products, I think that the parks and I
think the merchandise and the cruises and the Broadways and
the movies and the music, all of that is core to Disney.
But ESPN, that's kind of a side thing that seems like something
a big telecom company would own. Now if we actually go to the
source of this rumor, it's from a website called The
Information. They say that Amazon has had
early talks with Disney about working on streaming versions of
ESPN. It is developing, said people
familiar with the matter. The tech giant could offer the
service through one of its streaming offerings, helping to
expand its distribution while possibly also taking minority
stake in ESPN. So Amazon might invest directly
in ESPN. Such an arrangement could shore
up ESPN status as the biggest force in sports media.
This could also reposition the tech behemoth.
They're talking about Amazon hair, which has been trying to
make a dent in sports streaming as more friend than foe to ESPN
and it could weaken the sports league bargaining power.
So I really do like this deal. I like the ESPN is being
adaptive. I like that they're making deals
with big tech. I think that overall changes
need to be made because they are bleeding customers.
Profitability is going down and big tech are the ones that have
deep pockets. So I think this is a positive
move for Disney. I think it will help offset some
of the subscriber losses. This could be a catalyst to a
stock that's really beaten up right now.
Now if we look at some of the fundamentals of Disney, the top
line growth really shows no problems.
If I was to look at this in just isolation, it shows a high
amount of linearity. It's just going up in a straight
line virtually. Some of this has been
acquisition driven. So this hasn't been all organic,
but the revenue growth is there. Disney's seeing its revenue
growing. It's all the other metrics that
look really bad. We have the EBITDA that stalled
out back in 2018. It's starting to go back up a
little bit, but it's still not, not even close to there.
We have the free cash flow. You can see the same thing.
It's stalled out right here, 2017 through 2019, and then it's
still trying to be repaired. Here's the bottom line for
Disney. The cash flows are not where
they used to be, not even close. We can see this more visually
illustrated when we look at the full timeline.
Disney's cash flows are about where they were ten years ago.
So the stock price is where it was 10 years ago.
Over the fullness of time, companies really aren't going to
grow if their cash flows don't grow.
So we need cash flows to start accelerating and showing a line
of growth. Now if I zoom in over the past
10 years, this shows it even clearer.
We have right here from 2013 to 2022.
But in 2023, they're starting to move to profitability in a
bigger way. The streaming is getting closer
to profitability. They're pushing for more change
to instantly cut costs and raise profitability.
They've had a couple movies do OK, which has been helping out
Disney. So if I was to give it my best
guess of what the cash flows will look like in 2023, I think
it's going to be right around here, I think just under $4
billion. So I think we see about 3.63
point, $8 billion in free cash flow and then hopefully Disney
can raise that year over year up to five billion, 7 billion and 8
billion. I think it's going to be very
tough for them to get back to this $10 billion mark.
They are so far off from it and they face so much competition,
but they could get back up to 3.6 to 4 and then up to 6 and up
to seven. I really think that's
attainable. If they do that, the stock price
should start to head back into positive territory.
We should see it trending upwards back to 100 back to
1:15. So it's difficult to say if this
is the dip to buy. I think the biggest risk you run
with Disney buying it here is you have kind of the case of
AT&T and Verizon, a big bloated company that really doesn't go
anywhere for a long period of time.
You buy basically a value trap. That's the risk you run with
Disney. But I think that the chances of
that are a minority. I think it's 2030% chance that
it's going to be a big value trap.
I think more than likely over the next couple of years, I
could see Disney trading higher than it is today.
So Disney's dip #1 being 12% below the 200 day moving
average. We move on to dip #2, which is
14% below the 200 day moving average, which is technically a
significant dip. This is Nike.
Yes, Nike. And as you can tell, I'm someone
that I love Nike. I wear Nike clothes.
I like Nike products a lot. I think they're high quality.
I love the logo and the branding and the history of the company.
I even like how it was founded, how they competed with Adidas.
I just like the company overall and I continue to support it.
No, I'm not sponsored by them. Never have been sponsored by
them. I'd love to be, but
unfortunately I'm not that much of an athlete.
So let's go ahead and dive into Nike and see why this company,
this legendary company with immense brand power is on such a
technical dip right now let's go ahead and take a look at what
this dip actually looks like year to date.
Nikes down 16.34%. Now let me remind you, the S&P
500 is up 16%. So we have 33% underperformance
relative to SPY this year, greater relative
underperformance against the QQQ.
This is massive underperformance by one of the world's best
companies and we can really see this right here, the peak in
2021 like so many companies and now it's back down to prices
that are so much lower. And remember in these type of
cases when the magic has gone away from these great stocks,
when the price is really flattened down to five year
lows, that's a usually a great time to start accumulating a
position in a world class company.
So let's go ahead and see what's happening to Nike.
The first thing that I want to mention that Nike's facing.
Like many other companies, I did an entire episode on how your
returns are being stolen, literally by thieves.
They're stealing away your returns.
Nike merchandise is being stolen at every step of the way, from
the freight that ships it over, from the ocean to the warehouses
to fulfillment centers to logistics centers to the retail
outlets. Every step of the way, organized
crime is stealing from Nike. So they're having to invest a
lot into preventing theft. And those investments weigh on
the margins and profitability of the company.
With both a Nike and Disney, it's not the revenue that's
being hit. The companies are growing
revenue with tremendous levels of linearity, meaning it's
literally going up in a straight line.
Look at how linear that is. It's almost like a perfect
straight line. We can zoom in over the past
decade. This is what it looks like.
Do you see any problems with this revenue at all?
Nothing. For 1/4 it went slightly lower
during a literal pandemic. A single quarter was it.
Nike recovered much faster than most companies.
So there is nothing, absolutely nothing wrong with their
revenue. The problem comes in with the
margins, with the actual profitability metrics.
Their margins are being squeezed, one of them being
theft, and their investments into security eats away at their
bottom line. Another thing that's a problem
for them is extra inventory. See, these companies have to
order a lot of goods and then they have to get rid of them.
If they have extra inventory, they have to mark it down to get
rid of it. And this is a big problem for
Nike. So Nike had to do a lot of
markdowns in their products. They had to sell a lot of their
products in places they don't normally sell, like Costco's and
Costco's have very low margins. So to get rid of all of this
inventory, it hurt their profitability.
But if we look at this now, we look at the free cash flow here,
this is over the past 10 years, we can see that it's still not
that bad. We're having some decent cash
flow. So it doesn't look terrible.
We flip this to annual and look at it, it looks like it's
basically on track. We can look in the past ten
years, we can look all time. That doesn't look too bad,
doesn't it looks like Nike's growing their free cash flow
over time. And then if we look at the free
cash flow yield of the company, I think it looks pretty good.
The free cash flow yield is 3.19%.
The stock based comp adjusted free cash flow yield is 2.7, so
a little bit more expensive there.
The big problem with the company in terms of the valuation is the
Ford P/E because they are taking on losses from marking down
products. So we look at the earnings per
share chart. This is where things get a
little dicey with Nike and we see a bit of a concerning trend
here. So we can see it over time and
we can see the long term growth path of Nike.
A lot of good linearity there. Looks like it's just going up
over time. Then we see what's happening
more recently. Let's zoom into the past 10
years. We see it growing over the past
nine years. And then for some reason this
year, every single quarter is going lower.
We have the four most recent quarters in earnings per share,
93 cents, 85 cents, 79 cents, 66 cents.
That is the problem right there. The most recent trend is that
it's going negative. Now in my opinion, I think
they're going to turn this around.
If you're looking at the company right now on a future earnings
per share basis based on the next 12 months, it's going to
look really expensive because it's going to take more than a
year for Nike to turn this around.
So based on next year, the company looks pretty expensive.
But I think the longer term, outside of one year, I can see
Nike returning to its normal growth path in earnings.
When that happens, I think the stock is going to get a really
good bump. So we had Disney and number one
with a 12% dip, we have Nike and #2 with a 14% dip.
Then we move on to #3, a 15 1/2 percent dip.
And the company this time is PayPal.
Now the first thing I'll mention with PayPal is I already did a
pretty indepth valuation on this company and if you haven't seen
it, I would recommend watching that first.
It's on my other YouTube channel.
It's the video that literally says PayPal right on the
thumbnail. And I walked through three
different scenarios of projecting out the next five
years of cash flows. I give a return distribution
chart and what it shows. The basic conclusion for this
company is that even in the kind of worst case scenarios, the
worst realistic case, it's not too bad.
You just get subpar returns. So the downside with PayPal, by
my estimate is, is not too terrible.
I don't think that investors are going to have a lot of downside
buying at this price because if we look at the dip here, it's on
a technical dip with its 200 day moving average, it's down 18%
year to date, so it's down big, while the S&P 5 hundreds up big.
Then we have the past year it's down 39% or 33% rather the past
five years it's down 34% and it went all the way from $300.00
per share now all the way down to $61.00 per share.
The trouble with this type of company is it's tricky.
A lot of people were saying that PayPal is the cheapest it's ever
been. It's on a dip.
When the company was $90.00 per share, they're saying that it's
it's the easiest dip ever by the company now and now and from
$90.00 to $61.00 and it's even gone down as low as $50.00.
So you want to be careful with these type of companies.
Just because the company's gone down in price does not mean it
won't go down lower and in many cases momentum carries these
stocks lower and lower. But if we look at the absolute
valuation of the company, it is trading at a 15 Ford P/E ratio.
Right now the market multiple of just your average company is
around 19 Ford P/E and the S&P 500.
So it's actually trading below the S&P 500.
This company is cheaper than the rest of the market.
So a lot of the analysis here is, do you think the S&P 500 is
going to grow faster than PayPal?
If you do, this company deserves to trade at a cheaper multiple.
But if you think PayPal is a better company, higher quality
and it will grow faster, then buying it at a price cheaper
than the S&P 500 makes a really good relative bet.
We have another valuation metric here.
The free cash flow yield of the company is 5%.
Now a lot of investors focus in on this, but remember this is
not a true indicator of the valuation of the company because
the traditional, the traditional definition of free cash flow is
just looking at the cash from operations minus the CapEx.
It does not factor in the expense of stock based comp.
When we look at that, we can see that stock based comp eats up
around 1/3 of the cash flows and that is a real cost to the
investors. So you want to factor in this
stock based comp. When we factor in the stock
based comp, the company's trading at a three percent,
3.22% free cash flow yield, which I think is a true
reflection of their valuation right now.
So we have a company trading below the S&P 500 at a 15 Ford
P/E and it's trading at a really decent free cash flow yield of
3.22%. But the big question with PayPal
is growth, economic growth in the company and this is what I
struggle with, with this company.
Now the interesting thing is all three of these companies have
something in common. All three of them have resilient
revenue growth. They're all growing their top
line, but it's the profitability, the margins of
the company that are coming under stress.
That was the case with Disney. They were growing revenue.
That was the case with Nike. They were growing revenue.
And that's the same thing with PayPal.
We look at PayPal all time since 2014.
Does this have any glaring issues right here?
Can you really highlight a problem?
Sure. It's had times where it's ebbed
and flowed a little bit. I guess it's slowing down a bit
to 7%. That's still decent, That's
above, that's above GDP revenue growth.
So this isn't where the problem is.
The problem with all of these companies that are really
struggling is the profitability of the company.
If we look at the free cash flow, while the revenues going
up over time, the free cash flows are not going up.
And this is I think the biggest red flag for me with PayPal.
If I look at the past 10 years, this is what it looks like.
We can zoom into the past five years.
So this is quarterly, the past five years.
Now if we take out this one outlier here, we have an outlier
for whatever reason, but we remove that out of the picture,
we get a clean picture of what the cash flows look like on a
quarterly basis. It's almost literally flat for
the past five years straight. So why is the revenue going up
for PayPal, but the profitability remaining flat?
Typically when you have companies where their economics
get worse over time, that is a result of increased competition.
So if we look at PayPal, they offer Venmo and then their
PayPal transfer services. You can buy products online
using PayPal Checkout. Now, I don't know if you're like
me, but when I go online and I'm shopping, if I'm on my phone, I
use Apple Pay. It is so incredibly easy to use.
I don't have to type anything into the website and I use Apple
Pay already. I trust Apple with that
information. They have brand value and trust.
Apple Pay has been an increasing competitor to PayPal with online
transactions. PayPal seven years ago existed
at a time where they were one of the only options to pay for
things online. And now there's more ways than
ever to pay for things online. So what I see is maybe the
primary reason why this company struggling is an increase in
competition. I think that that fact is
undeniable and it will be interesting to see how this one
does. So that is dip #3, PayPal.
So we have Disney in a 12% dip under their 200 day moving
average, Nike at 14%, We have PayPal at 15.5%, and then we
have the next one, Ulta Beauty at -15.75% below the 200 day
moving average. This is a pretty significant dip
for such a great company. Ulta Beauty does not get enough
credit. This stock is incredible.
It really is an incredible stock and it's one of those sleeper
stocks where it's one of the biggest winners over the past
decade. But most people really have no
clue. They've never heard of it
before. Aside from just being some
retailer. In the past decade, Ulta has
given 302% returns. This company is an absolute
beast. It's a great growth story.
It's a economically sound company.
But if we look year to date, we can see that we're we're running
into some trouble. It's selling off a bit.
It used to be at 5, about 550 up here and now the company's
trading at what it's trading at 4:07.
So from 5:50 to 4:07 there, we get our dip.
Let's go ahead and take a look at what's causing this dip for
Ulta and what we see in the future of this company.
First of all, when I look at what's causing this dip, it can
be a number of factors, but I think the biggest reason why is
overall market uncertainty, interest rates going up, people
being fearful of a recession and them not wanting to own
retailers. Ulta Beauty is a retailer that
sells a lot of beauty products, makeup and hair products, all
that type of good stuff. Now, if there's market
hesitancy, if people don't want to own these type of companies,
that might be an opportune time to jump in.
If you don't agree with the market that we're going to go
through a huge recession, another thing I'd like to point
out is this is a beauty company. Can you spot the recession on
the chart? A little game I like to play,
Where's the recession In this chart, we did have one of the
worst financial crisis is ever in the history of this country,
but yet back in 2009, right here, 2007 to 2009, I can't see
it. If you were just reliant on this
chart to see trouble, you would not be able to identify it.
Ulta continually grew throughout the recession.
They open up more locations. They remained profitable.
That's a very good track record. We actually ran into more
trouble with Ulta during the store closures.
They sent all their employees home.
They still paid them while they weren't working.
The company treated their employees excellently.
That hit their revenue a little bit, but Ulta was in such a good
situation, they still made it through the 2020 COVID pandemic
without much trouble. Now again, we look at these
other metrics here. I just want to study the history
of this company for a minute, look at the free cash flows of
Volta since around 2003. We're a little shaky, but this
wasn't a problem with the company.
If you look back what they were doing, they were reinvesting
this cash flow at very high rates of return.
So all the extra cash they had, they put in the CapEx.
The CapEx at that time was opening up new locations,
decorating the stores, building the buildings, opening up the
new locations required a lot of cash.
So that whole time period wasn't a lack of profitability.
They weren't struggling there. They were just using all of
their cash flows to open up new locations and scale and scale
and that was wise choice by them.
Then we see when they start to get the bigger scale and we see
those economies of scale start to work in from 2016, the free
cash flow has steadily gone up. Free cash flow is a little bit
more volatile than earnings, but not that much.
So this is great free cash flow. Since the company doesn't have a
lot of developers or programmers.
You don't need PHD's to run an Ulta store.
They don't have a lot of stock based comp.
They can pay these employees hourly, they pay them well, but
as a result we have a very minimal amount of dilution.
Look at this amount of stock based comp compared to the free
cash flow, 43,000,000 versus 1.17 billion, 47,000,000 versus
887,000,000. So the company's becoming more
efficient overtime, less dilution proportionate to their
cash flow. Now we look at the earnings per
share of the company and I'm going to swap over to quarterly
hair so we can see this on a more granular basis all time.
This is what it looks like. Again, I can't even see the
recession on the chart. It really is impossible to tell.
They're really having any trouble at all.
They grew earnings substantially from 2007, seven cents per share
up to $0.37 per share in 2011. So big EPS growth throughout a
recession and I think that's because they're in the beauty
category. We look at this one and it
continues to grow with great linearity.
It's actually accelerating growth over time.
The only thing that's a blemish on their record is something
that's a once in a lifetime, hopefully once in a lifetime
thing, which was complete closures of stores nationwide.
We're not going to do that again.
We can't afford to do that. So when we look at this, if we
fill in the gap here, which I think is fair for Ulta, this is
an unlikely one in a lifetime occurrence.
It looks like purely linear growth.
And even to this day, the last couple of quarters have not been
bad. Maybe their guidance isn't quite
what investors want, but this still looks great.
I don't see any problems fundamentally with this company,
even on a quarterly basis. The returns on capital employed,
which is basically the returns they're getting for reinvesting
back in their business, continue to increase, going from 6% per
quarter, so about 25% per year. Now it's gone all the way up to
around 11% per quarter. So now they're up to 44% per
year on their ROCE. This is a really good growth
over time. We look at the gross margins of
the company, they're very flattish.
They're not increasing a whole lot, but they are going up a
little bit over time, 1% gain over the past decade.
We look at the operating margins, again, very flattish,
not substantial growth, but we're going from 1011% to around
15%. It's headed in the right
direction. We look at the profit margin,
the same thing, slightly higher profit margins because of
scalability. So we see this company actually
scaling in many cases better than some tech companies.
Now another thing I was looking at when I was looking at why
Ulta was selling off, I was actually diving into this
company and doing some renewed research on it and I was
interested to see are they losing market share against
Amazon or Walmart or other places to shop for beauty
products. So what I did was I I brought up
the teen survey from Piper Sandler.
This is a well done survey. It's a respected one, which just
means they use a lot of survey science, right?
They don't just do this haphazard, they do proven
techniques to prove what teens are doing, what their shopping
habits are like. And this is from fall of 2019,
so 2019. This is what the survey shows
when we look at top beauty destinations.
Ulta's number one with 38% Okay, 38% market share from teens with
Ulta. Then what I did was I Fast
forward to modern day. This is the 2023 Piper Sandler
survey and I wanted to see how things changed over time.
Well, wouldn't you know, we have Ulta Beauty at the very top like
it was before, but in this case it's 41%.
So what's going on here? Ulta Beauty has a bigger market
share of teens today than they did back in 2019.
So when I look at this, I'm trying to come up with a bear
case for Ulta. I'm trying to come up with a
downside. The downside is recession, but I
can't see a recession on the charts throughout history.
I can't see a recession in 2009 in the earnings per share.
I can't see it in the free cash flows of the company.
So recession doesn't seem like it's that big of a concern.
We have market share and competition forces, but they've
gained market share. They've gained substantial
momentum over competitors over the past four years.
So competition, recession concerns, I don't know what's
wrong with Ulta. I don't know why this company
selling off. So with Ulta being on a dip
where it's 16% below the 200 day moving average, while the S&P
500 is 6% above and the QQQ is 13% above, I think that it's
time that investors could start looking at Ulta.
I think potentially right now it's a pretty good deal.
Now moving on to the final dip. This one's the biggest.
This one surpasses all the other ones.
Dip #5 is Paramount, which is down 21% below their 200 day
moving average. This company has been a disaster
of a stock. This is one of the ones that
Berkshire Hathaway, under Warren Buffett's control, bought a
portion into this company and Warren Buffett was asked why did
you buy Paramount? And then Warren Buffett
proceeded to respond with 5 minutes of why Paramount and
especially streaming is a bad business going on about how the
actors and the producers make all the money, the shareholders
get robbed in the situation. And then the interviewer was
like, okay Buffett, but why did you buy the stock?
And he goes, well, we'll see what happens.
He did not give an answer. Now, you can try to fill in the
blank there, but I think it was just a simple mistake.
I think that Buffett bought into the company thinking it was a
little bit of value. Sometimes he buys value traps.
Buffett is not immune to making bad investments.
He's done so before. Luckily, this was a smaller
position in Berkshire, so it's not really going to damage them
long term. But if we look at Paramount
right here, here's the dip. We had this right here, which is
not a glitch. This isn't incorrect data.
The price went from $23 to $15 or $17.00 in a single day
because of a bad earnings report.
Subscribers slow down, they have huge losses and basically all of
their divisions, even their movie division, they're saying
that next year they're going to be profitable, but so far it's
just been tough for Paramount. They can attract subscribers.
They can gain subscribers at an incredibly unattractive price.
For Paramount, they're not making enough money per
subscriber. So they're gaining subscribers
and numbers, but they're not profitable because this content
costs a lot to make. Now, when I look at the
streaming world and I try to assess which companies I think
will do really well and which ones will do poorly, when I look
at Paramount, I see this one as an afterthought in streaming.
So think about sitting down on your couch on a Sunday evening
and you want to turn on a good series to watch.
You might open up Netflix. That's a lot of people's first
go to, I believe Another one is Max, which is HBO's new
streaming service. So we have Netflix, we have Max,
which I think are two of the anchor streaming services.
They're what people check most frequently.
Then we have Amazon Prime Video. Most people have that already
because they're paying for Prime for shipping and other benefits.
So we have 3 anchor services there, but then you get out to
the other ones, there's some Peacock, you have that as well.
That's another streaming service from NBC.
And then you have Paramount. Paramount is fighting in place
of like Hulu and Disney Plus and kind of the 4th and 5th tear
ones on the list. So when you look at Paramount,
in my opinion, this streaming service is a bit of an
afterthought. So I believe that they're in an
undesirable position, being the 4th or 5th tear in the streaming
ranking, and that makes it very difficult to have substantial
pricing power. They have a couple good series,
they have Yellowstone and they have these other ones that
they've tried to leverage. But even the creators of
Yellowstone have realized that they have all the control and
they're forcing them to pay them huge amounts of money for their
show. So the economics are under
pressure as well. All of this has culminated to a
stock that has not been doing well.
Now if we look at the revenue and we zoom in let's say over
the past three years to get a more granular look at this, it
looks like it's growing slightly, not a lot of growth,
but we are seeing growth. The problem comes in with the
profitability, much like Nike, much like Disney, much like
PayPal, we're seeing top line growth, but the profitability
leaves a lot to be desired. Over the past five years, the
EBITDA has gone from 1.5 billion, one billion per quarter
down to the negative -1 billion flat $93,000,000 in EBITDA lost
last quarter, 630 million three quarters ago.
Now the thought here is that they're going to be profitable
in 2024 and they're screaming and the EBIT is going to swoop
back upwards. But right now it doesn't paint a
pretty picture. We look at the free cash flows,
this looks even worse. We can erase a little bit of the
history and just go to the past five years.
This is a horrible free cash flow view.
It just looks awful. PayPal looks better than this.
At least PayPal is consistently in the positive.
But what we're getting with Paramount is negative free cash
flow after negative free cash flow quarter after quarter.
So I look at all of these profitability metrics, we can
throw a net income. Looking over the past five
years, this looks no different. It's going in the negative and
the earnings per share, maybe the most important one, also
looks really bad going in the negative.
Again, they have said that it's going to swing back positive in
2024. So they have guidance long term
that looks positive. But remember, the executives can
say whatever they want. Of course they believe they're
going to earn money in 2024, but they're facing competition that
does not care about their projections.
Netflix and Max do not care about the profitability of
Paramount and they're going to compete fiercely with them.
Now if we look at the valuation of it, the cash flows look a lot
different than the P/E ratio of the company.
The cash flows look horrible. They're negative right now,
negative free cash flow yield because the cash flows are
negative. So of course that makes sense
there. We can't really value the
company based on cash flows right now.
But when we look at the P/E ratio, because of their analyst
projections of the next 12 months of earnings, it's trading
at a 13 PE, which if that's accurate, the company is very
cheap. The commodity multiple meaning
the price of company trades at if you think there's going to be
no value creation whatsoever is around 13.
So this company's trading at a commodity multiple.
Investors are pricing it right now as though it's basically a
static company that's not really going to create value or destroy
value. That's what it's priced as.
So if your thesis is that Paramount will create a lot of
value over the next five years, it is dramatically undervalued.
In that case, it is a buy. But if you think the Paramount
is going to continue to struggle to create any real value and
it's not really going to destroy value either than it's priced
appropriately today. When I look at this and I
compare this against the other companies, I still don't like
Paramount. I still rather own Netflix and I
do own Netflix today. So I'm coming at this from a
bias perspective. I really think that Netflix is
in such a more enviable position.
Netflix is projected to, they're just gushing cash flows at this
point. It's literally just a cash flow
beast. Paramount is not at that point.
So while I think there is a case for Paramount, if you're a deep
value investor trying to buy the cheapest companies and hope for
a turnaround story, this might be a good play.
And for whatever reason, Buffett owns it.
So you have that as well. But I don't base my buys off of
super investors. I won't buy it just because
Buffett owns it. I think Netflix is far better.
Netflix is the one I own now in terms of these five companies
that are all on a dip, the one that I think is currently the
best value and the one that I'm the most attracted to buying
today is Ulta. I think the company's
fundamentals look the best. I think it's in a very enviable
position. I've not seen any weakness in
their fundamentals whatsoever. And I think any predictions of
doom and gloom because of economic turmoil in the future
is likely to have minimal impact on Ulta compared to other
companies. So in terms of what I may buy
out of these five companies on a dip, I'm leaning more towards
Ulta than any others. But I also think that there's a
case to be made for Disney, for Nike, and for PayPal.
The one that I would avoid personally is Paramount, but
that's my thoughts. Let me know if you agree or
disagree. I hope you enjoyed this overview
of five companies on a dip and I'll see you in the next one.