Well, we finally did it. We made it through the most
important earnings week of the season.
The biggest companies in the market reported earnings over
the past five days and overall it was OK, but there was
definitely some winners and some, well, companies that
didn't do quite as well. In this episode, we'll be going
over the biggest earnings of the week and giving an earnings week
recap. We're going to be taking a look
at Amazon. Amazon is up around 7% today.
It's been touching $200 per share.
Investors really liked this earnings.
We're going to be diving into it.
I'm going to be spending some time going over the fundamentals
of Amazon, what's changing in the business, Some things that
they're doing that I expected them to do, and then some things
that they're doing that I did not, I did not expect them to
do. So I'll be reviewing Amazon.
We also have Meta. Meta's actually trading a little
bit lower following earnings. It's up a little bit today, but
it's down from 590 before its earnings report.
What did investors see in Meta's report that's causing them to
take a bit of a breath? We're going to be looking at it.
Booking Holdings is a very large position in my main portfolio.
They reported earnings this week and the company's just a rocket
ship. This one is out of control.
It has gone up so much. It went up 6% the day after
earnings, and then it's up another 1% today.
It's up to $4700 per share. It's moving up to $5000 per
share. We'll be looking at the simple
reality of why Booking Holdings continues to surge.
Apple also reported earnings, and despite a revenue and
earnings per share beat, the stock is trading slightly lower.
Following earnings. We'll be looking at the story of
Apple and why I'm not quite as bullish on this company as I
once was. And then finally, we get to
Microsoft. They reported earnings and the
stock is likewise down a little bit since their earnings report.
We're seeing a slight recovery today, but overall investors
again are taking a bit of a breather in Microsoft and we'll
be looking at why. So we have a number of companies
to look at, a lot to get to in this episode.
Let's go ahead and start off now.
Before we jump into the companies, I first want to just
do a quick mention. We've had a lot of people try
out the earnings calendar on qualtrim.com.
This is the website that I completely own and that I
develop. And this is a new feature that
lays out the entire week before you, both the companies
reporting earnings before market open and after market close.
You can simply look week by week.
It loads in all the icons and it just looks really good, really
simple. There's also a dark mode, which
again, looks really good. And then you can click on any
company. You can see the earnings
projections, you can see the revenue estimates.
You can see all of this data historically and a nice little
calendar. I rolled out that feature on
Monday and the response has just been incredible.
Hundreds of new people have tried out the feature.
They've joined the Patreon, they've been using Qualtrim.
The feedback overwhelmingly has been super positive.
The reason I bring it up is, first of all, I appreciate all
of you trying it out. I think you're going to love it.
But for those of you that are still not convinced, you're on
the fence about it, if you join today, you get the entire month
of November as a free trial. So now is the time to try it.
If you're just interested, want to try it out, you have nothing
to lose. Now, let's go ahead and jump in.
The first thing I want to do is I have not done a portfolio
update for a while. And this is important because a
lot of the companies that I talk about, a lot of the companies
that I'm doing coverage of and giving my analysis on are ones
that I'm heavily invested in. I'm not someone that's just a
commentator of stocks. I don't just give opinions on
them. I am an investor and I have
nearly all of my money invested in these companies that I talk
about. For example, one of my
portfolios is called the Story Fund.
This is my secondary portfolio. It's not quite as big as the
passive income portfolio, but this one's focused more on
explosive growth potential, a little bit more upside focused
and less defensive, but it shares a lot of similarities to
the passive income portfolio. I invest in highly concentrated
positions on world class companies.
Now just to give a performance update on this portfolio, it's
done really well and the main driving forces behind it doing
so well is the concentration between two companies.
Now, at first glance, you might look at this portfolio and you
see some big tech names and you think that Joseph is just buying
the S&P 500 names. He's just basically investing in
the S&P 500 and naming it the Story Fund.
And a lot of hedge funds do just that.
They're closet index investing, meaning that they take investors
money, they manage their portfolio, they charge a fee,
and they basically recreate the S&P 500 so that their
performance never looks all that bad.
Now that's a thing that exists and a lot of people do that, but
this is not the case with My Portfolio.
This is not a closet index or anything close to a closet
index. First of all, the S&P 500 has
500 companies. This has five companies.
So we're down to one 100th of the amount of companies in the
S&P 500. The level of concentration is
nowhere close to the S&P 500. The next thing that I'd point
out is not only is a concentration level completely
different, but also the top two holdings, just Amazon and
Netflix make up for a combined 60% of this portfolio.
So if we look at the pie here of my total portfolio, this is all
of it. This is 100%.
Just this portion right here, right here all the way to right
here is Amazon and Netflix. You see that it makes up over
50% of the portfolio. Just these two companies have a
massive waiting. Netflix is not 32% of the S&P
500 or the QQQ. Amazon is not 33% of the S&P 500
or the QQQ. So even though I think the S&P
500 is great and the NASDAQ is great, don't be mistaken, this
portfolio does not resemble them.
It's nothing like them. The limited amount of holdings
and the extreme concentration make for a very differentiated
portfolio. And also when we look at the
results, the results are very different.
For example, Netflix this year is currently outperforming both
the S&P 500 and the QQQ by a very large extent.
It's up currently 62% year to date.
That's around double the S&P 500 and QQQ.
Amazon likewise is outperforming both the S&P 500 and the QQQ by
a wide extent this year, currently up 33% year to date.
When we compare that with the S&P 500, the S&P 500 is up 21%,
the QQQ is up 21%. So both of these are having
around 21% returns. Both of my main holdings are
outperforming that which overall leads to a wide range of
outperformance this year. When I look year to date on a
money weighted return, this portfolio is up 32%.
Since I haven't made any significant contributions to the
portfolio this year, the money weighted return is the same as
time weighted return. So I have 32% returns this year,
while both the S&P 500 and QQQ are at 21%.
Even when we zoom out a little bit further, we can zoom out to
the one year period. This portfolio is up 50% over
the trailing year. If we compare that again to the
S&P 500, that is 35% to the QQQ that is 36%.
So this portfolio is outperforming both of them by a
decent margin over the past year and over the year to date since
inception. We're also doing really well
beating out both the S&P 500 and the QQQ.
When I chart this out against the S&P 500, this is what it
looks like. The ticker symbol SPY, which is
the S&P 500 is in red and the story fund is in blue.
Now there's a big long story behind this.
During this time period in 2022 and 2023, it was a mess.
I I made a couple mistakes as well as a lot of my core
holdings like Netflix and Amazon sold off dramatically.
So I was underperforming during those time periods.
But with some good investments, especially buying more Netflix,
this portfolio has been roaring back with a vengeance.
And now we have a firm lead by a decent margin.
The story funds total returns is 59.34%.
If we benchmark that against the S&P 500, it's at 45 point 2%.
So we're now above the index by around 14%.
Now again, I've said many times in this portfolio that the
returns and the outperformance are linked to Netflix and
Amazon. The waiting in those two
companies are determining the outcome of this portfolio and
whether I meet my goal of outperforming the S&P 500 by the
end of 2025. The goal since the very
beginning, when I started this a couple years ago, was to
outperform the benchmark index, the S&P 500, from from the start
point to the end of 2025. Since then, so far, it's above
the S&P 500 and the QQQ when I calculate the returns overall.
It hasn't been the case the entire time.
In 2022, we were behind by a huge degree, but with Netflix
and Amazon both having the epic recovery that they've had, the
returns have soared since 2022. I've said for a while that I'm
willing to hitch my performance on these two companies because I
think they offer a great deal of asymmetric risk.
They had ample upside, limited downside, and I believe they're
highly predictable companies that aren't getting the credit
they deserve. By Wall Street, by analyst.
Netflix was basically left for dead.
It was a company that nobody wanted anything to do with a
couple years ago, and if you bought that company at the
Lowe's, the returns have been astronomical since those lows.
I wish I bought more of it, but I bought enough to make a big
difference. With Amazon, we saw the same
thing. It wasn't long ago that Amazon
was trading below $100 per share.
We look at the chart here, just over the past five years, it was
down to $93.00. In 2023.
Not even two years ago, this company was worth less than half
it is today. And investors that bought it
during this time created a lot of alpha for their portfolios.
So as we look at these companies reporting earnings, many of them
I've already built large positions in, I'm benefiting
from the rise in the stock price, but I still have the
question of whether or not there's more to go or whether or
not these reports were good, whether it's time to sell or to
buy more. When I look at Amazon, we can
take a look at what happened over the past.
First of all, Wall Street likes to report stock is up around 6
to 7%. It's bouncing around just below
$200 per share. It's seen a lot of resistance
there, but I think eventually it's going to surpass $200.
There's a couple driving factors with Amazon that will continue
to lift the stock higher and higher.
Let's go ahead and just take a look at the report and see those
driving factors. First of all, the total revenue
growth of the company. Looking at this over a long term
basis, you can see that it's really consistent.
It's had times where it's gone up a little bit more than usual,
but the revenue growth was 11% overall.
We see it right there. That green 11 percent is the
compounded annual growth rate over the past year.
They simply grew 11%. Now, that doesn't really share
what's actually going on with Amazon because Amazon is a vast,
complex company. It's it's just a behemoth.
There's so many different parts to it that you want to dig down
a little bit more to see what this 11% growth actually
entails. When we do that, we have the
Amazon revenue by segment, which is a KPI where I look at the
earnings report and then I break out all the segments of Amazon
and chart it on a stacked bar chart.
This just gives it a better visualization than the actual
earnings report. If we go to the earnings report,
we can look at the same data right at the end.
It's right around. Let's take a look right here.
So these are the exact same numbers.
This is where I get it from. But we have them charted out
right here in visual format. And again, when we look at this,
we have the 11% combined growth with all of the bars, every
segment of the company. But if we start crossing out the
low margin parts of the business, if I was just to say I
want to cross out all the low margin parts and only focus on
the high margin parts, we cross out first party online sales.
That is the products that Amazon list.
It's like toilet paper, toothpaste and batteries.
These are very low margin items. There's fierce competition.
They're not making a lot of money and profits from their
first party sales. They're not making I think any
money from physical stores, at least not enough to to really
pay attention to physical stores like Whole Foods have profit
margins of around 2%, maybe 4% of its Whole Foods and a bit
more expensive, but overall very, very slim razor slim
profit margins. So we cross that out.
Then we look at the other segment which is experimental
and actually loses money in most cases.
And that leaves us with the high profit margin portions of the
business. Third party seller services.
This is where you can store stuff in Amazon's warehouses and
they charge you by the amount of items you're storing.
This is where they pick items for you.
They do. They deal with customer service
for you. They fulfill by Amazon Prime,
meaning they're running the entire logistics for you,
selling your product. That's high margin.
They get to charge the sellers for all these services.
They don't make money just by the the price of the sale.
We have advertising super high margins.
I estimate it's above 50% margins.
We don't know for sure because they're not disclosing it, but
come on, advertising is high margin across the board.
If you look at YouTube, you look at Google, you look at Meta, and
we have reason to believe that Amazon actually has higher
margins than all those other companies because Amazon's are
direct listing items in a sales website.
There's nothing that could get higher margin than that.
You're paying for direct sales conversions there, extremely
trackable. We have reason to believe that
Amazon has very, very high margins with their advertising.
Now, this also includes other things like Amazon Prime Video.
They simply threw ads on everyone and everyone just
accepted it. That was amazing.
Netflix can't do that. Netflix can't say all of our
subscribers are going to have ads or they'd all throw a fit.
Amazon Prime Video is just included as part of your overall
membership. We have subscription services,
stuff like Audible and Twitch subscriptions, all the different
subscriptions they sell. And then we have Amazon Web
Services, which they do disclose the margins of.
We'll get to that, but they're also very high.
Now the moral of the story here is when we just filter by the
higher margin portions of the business, the growth rate of
Amazon increases. It goes from 11% overall to 14%.
The importance of this is that it means that the high margin
portions of the business are taking total market share over
the business's revenue. Amazon is becoming a higher
margin business over and over and over again.
Every quarter margins are stepping up.
When I'm investing in a company, I'm looking for three different
things. I'm looking for long term stable
revenue growth. I'm looking for long term stable
margin expansion and I'm looking for an entry point that I can
get in at a good price. Amazon has presented all three
of those. They have a long term stable
revenue growth. They have long term stable
margin expansion. And of course, if you bought the
company over the past two years, you had a decent price to get
in. So this company has a great
story going forward and with this most recent quarter, that
story continues to play out. But then we get into
advertising, which is arguably much higher margin than even the
third party seller services. So the 3P seller services is a
great business. Advertising is a way Better
Business, and this is growing at 18%.
Huge growth from advertising. The run rate for this is going
to be above $60 billion soon. And then we get to the crown
jewel of Amazon, the biggest, most important part of this
company by far, which is Amazon's web services.
When we look at this, it grew 19%.
Now some people will point out that Amazon Web Services is
growing a little bit slower than Google Cloud and Azure.
In fact, Google Cloud is growing really fast at 35%.
AWS is only growing at 19%. Isn't that concerning?
Isn't Amazon's web services losing market share to Google
Cloud and Azure? While it's true they are losing
market share, we need to look at the total size of these
businesses. Google Cloud is nowhere close to
Amazon's web service in size or scale.
We're measuring like two different things.
They're not even in the same vicinity at this point.
Let's go ahead and just take a look here.
If we look at AWS, again, we look at the total revenue of
this business. We can look at it over the past
quarter, it was $27.4 billion. That is a run rate of $110
billion per year. We type in Google, we go to
Google Cloud and we look at the scale of the Google Cloud
business. Google Cloud did $11 billion in
revenue, the total run rate of which is $44 billion.
So it is true that Google Cloud is chipping away.
They're building a good business.
They're gaining market share technically, but we also need to
keep in mind that Google Cloud is around 1/3 the size of AWS.
So it has a long ways to go before it becomes anywhere
comparable to AWS. Now I want to go to a couple
parts of the report that I thought were very strong and
some parts of the report that I thought were a little bit
weaker. Just looking at the numbers
here, The strong part of the report is the earnings growth
over 100% per year. So explosive upside earnings per
share growth, and they beat on their earnings per share and
their revenue estimate. They also gave very good
guidance for next quarter. But where we get into the story
where it looks a little bit weaker is the free cash flow.
I've been predicting this year that Amazon will have explosive
free cash flow growth. But when we look at it, it did
explode from 2022, going down all the way to $30 billion in
the negative on a trailing basis all the way up until last
quarter. It was $48.34 billion over the
trailing 12 months. But now we see the free cash
flow taking a break. The free cash flow number was
not great this quarter. In fact, when we just look at
this quarter in and of itself, they only posted $3.35 billion
in free cash flow. This was below where it was one
year ago. So we had a natural decline in
free cash flow this quarter year over year.
What gives? What's going on with Amazon?
This is the year of explosive growth with margin expansion,
with free cash flow is hitting numbers of $75 billion.
So what's going on? What's going on is AIAI this
year is out of control. It's very real.
It's changing companies inside and out in very meaningful ways.
Over 25% of the code written at Google is written by AI.
That's meaningful. That's not fake.
That's not buzz. That is a meaningful change to a
company. And I have to believe that
Amazon's finding a lot of ways to integrate AI as well as serve
it to other customers because of AI and how important this is.
They've identified it as a key area of investment to grow.
And of course, they need the server capacity and GPU capacity
to serve themselves and all their various customers.
And as we look at the CapEx, the CapEx from Amazon, there was
once a time where I thought the CapEx of Amazon would go down a
bit. I thought that it would actually
cool down and and flatten out a little bit.
And that's just not the case. It's just not the case anymore.
When we look at the CapEx over time, they hit their highs in
2021 as they're expanding their huge fulfillment network,
building out all these buildings and buying more trucks and
everything that they have to buy for employees.
Those are CapEx investments. And then it started to go down
as they were unwinding that investment cycle, but then AI
came along. Jassy believes that this is a
core area of investment for the future of Amazon.
I agree with him and they're aggressively investing.
Look at this step up in CapEx every single quarter.
Last quarter it was 22.62 billion dollars, 22 billion in a
single quarter. That number's astronomical.
What company spending $22 billion in CAPAX in 1/4 except
for Amazon? I had to double check this
number. I went into the earnings report,
we get to the statement of cash flows, hair.
We look at the most recent quarter, the past three months
in 2024 and there it is. It's the correct number, $22.62
billion in CapEx. So even though Amazon is having
a huge step up in their operating income, operating
income year over year went from 21 billion to 26 billion, their
CapEx went up even more causing their free cash flow to go down.
So while we look at these numbers and provide some context
here underneath this rather disappointing free cash flow
number and the free cash flow seem like they're taking a
break. We have better context here
knowing that there is a very healthy business underneath
this. Their income from operations
continues to rise dramatically year over year, lockstep.
They're generating more cash from their current operations
running their business. So the only reason that Amazon's
free cash flow has taken a breather this quarter and is
down a little bit year over year is because of a deliberate
decision to invest directly in AI.
This is a choice. This is something that they're
choosing to do. Amazon management could easily
generate $10 billion of free cash flow this quarter and
deliver that to investors via dividend and buybacks.
They could do it every single quarter of their choosing, but
they're not doing that. They believe the key areas of
investment in artificial intelligence back into CapEx.
Buying GPU's from from Jensen Wong, buying it from NVIDIA is a
better route to go. Amazon has a great track record
of investing in the future and getting a high return on their
CapEx investment. And I have no reason to believe
that artificial intelligence will give them a low return.
So I had a thought going into this year that Amazon's free
cash flows would explode, and they have exploded.
They've caught up a lot. I mean, look at the difference
between this year and last year. But my expectations were a
little bit higher than what they're probably going to do.
I thought on a trailing basis, for the full year of 2024, they
would deliver around $75 billion of free cash flow.
And it looks like they're not really on track to do that.
If I was to give an estimate, I think it's probably going to be
a little bit lower. Fifty, $60 billion, not quite up
to that $75 billion mark. So on a free cash flow yield
basis, Amazon may look more expensive when you factor in
what they're doing, the investments they're making,
their operating income and the health of the business.
This doesn't make me feel any worse about the company.
I think this one is on track to take a breather with their free
cash flow, make these big investments in AI before the
next leg up. And I believe strongly, once we
see the returns of the investments they're making this
quarter, over the next year or two, we're going to have another
seismic step up in free cash flow like we've had this year.
At this point, I think it's eventually inevitable for Amazon
to surge above $200 per share. The company has strong earnings
growth, a consistent track record of earnings.
The free cash flow is growing year over year and they're doing
key investments for the future. They're well positioned with
many service portions of the business and they trade again at
a decent valuation. Today.
Most people believe that they're undervalued, and I'm one of
those. I still think that Amazon has
ample upside. I believe the company is going
to be like Google, worth 220 or above.
When we look at what the banks did, what the analysts did after
this report, basically all of them upped their price targets.
We have JP Morgan moving their price target from Amazon from
2:30 up to 250. Goldman Sachs moved it from 2:30
up to 240. Bank of America raised it from
2:10 up to 230. Telsey raised it from 2:15 to
2:35, and same with Jeffries and Baird and TD Cohen, all of them
raising it up 10 or $15. They already had a price target
around 220. Now every analyst is raising it
to around 2:40. And this is what analysts do
after the price already moves, after Amazon already jumped 7%,
after the company will report great earnings, they're going to
move their price targets up more and more.
But I think we're going to see more continuation of this
overtime. Now moving on, we get to Meta.
They reported earnings this week as well, one of the key
companies too, and they actually fell a little bit after earnings
around 3 or 4% in the red. The stock went from around 590
to around 57. And if you're a Meta investor
and you're looking at this report, I would not be upset.
If I had held Meta for the past couple of years and I was way in
the green and I saw this report, I would think it's no biggie.
After all, Meta is one of the better performing companies.
This year it's up 64%, so if it goes down a few percentage
points, come on, you're not going to be upset about that.
When I look at the earnings report from Meta, it was also
strong across the board. I thought it was a great report.
The only weakness and the reason that Meta traded down was for
two reasons. First of all, the family daily
active people. This is the KPI that we track in
Qualtrum because it's really an important metric for Meta.
It's basically just how many people use their apps, one of
their family apps everyday. So daily active users.
If you log on to Facebook, if you log on to Instagram, if you
log on to Reels at least once a day, then you're going to end up
in this number. On a year over year basis, they
had an increase of 4.78%, which is impressive to me because I
look at these numbers and the most recent quarter they had
3.29 billion people use their apps every day.
That's insane. That's just insane.
There's no other way to say it. That's like half the world using
their apps and they're still growing.
How do they do it? I don't know.
They're just there's more people spawning everyday that use their
apps like it's like a video game or it's like Orcs and Lord of
the Rings just spawning out of the ground that sign up for Meta
apps. I don't know any other way to
say it there. There is 3 billion people plus
using their apps and they're still growing the daily users.
Now, the most recent quarter, it only grew by a couple 100
million. That's what investors are a
little bit disappointed on. To me, that's ridiculous.
Meta has half the world using their apps.
To expect it to grow much from here I think is unreasonable.
But either way, they continue to grow it, which is incredible.
The other part of this report where investors were a little
bit concerned just slightly, was that Meta hired more employees.
They recently just did a big year of efficiency.
They really cut down on their employee count.
Mark Zuckerberg laid off a bunch of people.
He did it in a nice way. He found them new jobs.
He paid a huge severance for them, so they're taken care of.
But he really got rid of a lot of employees.
And after it went down, they hired like 9000 new employees
this most recent quarter. So that's a little bit of an
interesting decision. They basically fired a ton of
people and now they're starting to hire them back.
I think investors are a bit confused about that.
And then the other thing they mentioned on the call that was a
bit concerning to Meta investors is that they mentioned CapEx is
going up a lot, but they're not going to disclose specifically
how much. So they kind of gave us a big
question mark saying we're going to be spending a lot of money on
CapEx. We're not going to tell you
exactly what it was. The combination of hiring more
employees, increasing the amount of CapEx to an unknown number,
and a little bit of a slowdown in the daily active people
caused Meta investors to take a little bit of a breather.
But again, these are like these aren't a big deal to me.
Meta overall is super strong. The free cash flows are
incredible. They continue to grow year over
year. The company is getting the stock
based comp under control as well.
I looked at this report and I didn't see much wrong about it
trading down a couple percentage.
When they're up this much, it's not a big deal and the company
remains at a decent valuation now.
Next up, we have Booking Holdings, which also reported
their earnings this week and they were great.
The stock was up 7% after hours on the day and then another 1%
today so booking has just been a rocket This company has really
taken off it's exceeded my highest expectations.
This is a company that I bought this year I just bought it a
couple months ago right here around 34135 hundred.
I believe my average price cost is around there and now the
stock trades at 4700. So it's gone up $1000 just over
the past few months. And I believe that's a
combination of a couple different things.
First of all, I believe it was just undervalued here.
So starting off with a great company that's undervalued is a
good starting point. But they've also posted great
earnings. The company continues to execute
and even deliver. When people think that things
are going to slow down. People are concerned about
vacationing, they're concerned about restaurants, they're
concerned that the consumer is going to slow down.
But when I look at things, I don't see that at all.
I don't see the consumer slowing down.
I see them going on vacation, booking out trips to Europe over
and over again. People want to have experiences.
People are inheriting a lot of wealth.
They want to spend that money on experiences.
They're sick of COVID, they're sick of staying inside, they're
sick of doing the same thing. People want to see things.
This company makes money as the largest online travel agency.
They have a basic monopoly in Europe.
So there is somewhat of a tollbooth gateway from US to
Europe and vacations. And that's a very profitable
situation to be in. In fact, the European Union has
defined them as one of the only monopolistic companies in all of
Europe. Now there's a lot of metrics we
can look at with booking holdings.
For example, if we look at the 12 months, we can look at the
gross bookings, it looks strong. Nice growth path overall.
We look at the room nights sold. This is the amount of bookings
that they get, and you can see the trends here.
We had the COVID dip. A lot of people stopped going on
vacation. Ever since then, it's steadily
reclaimed where it was headed before.
So overall, the business is healthy.
People are booking rooms now literally more than ever.
This is an efficient business that's highly profitable.
It's cheap to run and makes a ton of money.
For example, when we compare the free cash flow against the stock
based comp, the stock based comp is a fraction of the free cash
flow. That's a wonderful thing to have
a company that generates this much profit and it doesn't get
diluted away. That amount of free cash flow
generation means that they can deliver that money to the
investors in a very efficient manner.
They can deliver it through buybacks and dividends.
This shows you the capital that they're returning to the
investor every quarter. In the most recent quarter, they
returned a total of $2 billion back to the investor, 1.7 by
buyback, .3 by dividend. And this wasn't a unique
quarter. Almost every quarter they're
returning around 2 plus billion dollars back to the shareholder
and they're using most of that to buy back shares.
The share count declined by 6% year over year.
That's a massive decline. Most companies that try to do
buybacks can only decline the share count by 1 to 2%, lucky if
they get up to 3% because most of them dilute a lot with stock
based comps. So they're buying back that
dilution. In the case of Booking Holdings,
they don't do a lot of dilution, they're only doing buybacks.
So when we look at the total share count, the numbers here
are wild. We look at this overall and you
see the constant decline in share count.
They're buying back stock hand over fist and that's all this
story is. A company that's highly
efficient, generates a lot of free cash flow, uses that free
cash flow to buy back their shares, and I think they're
going to continue doing it. The valuation is not nearly as
attractive now is when I first bought in because of the stock
price rise over the past few months, the yield has gone down
from an 8% yield to around a 5% yield now.
I still think it's attractive. I still don't think this
company's overvalued, but it's no longer a still.
Now moving on, we get to Apple. They also reported their
earnings this week and they did beat on the top and bottom line,
but the stock still fell a couple percentage points.
This is one that I was a little bit on the fence of as well.
Apple has some challenges. Again, the biggest thing I look
for when buying new positions in new companies, when I'm trying
to make extra returns, alpha returns, I'm looking for
companies that can grow revenue steadily above inflation, above
the market for a long period of time, as well as ones that can
expand margins predictably for a long period of time.
Then I'm looking for good entry points on those companies.
With Apple, we have a company, the revenue growth is looking a
little sluggish. I'll be honest here, it looks a
little slow when we look at it on a trailing basis, this is
what it looks like. 2% growth is not really growth given the
inflation we've had. So the revenue's flat, but it's
starting to pick back up a little bit.
The revenue by segment looks like this getting very flattish.
For the past number of quarters, 7 to 10 quarters, it's been
mostly flattish. When we break this down, there's
different segments of the company that's growing.
The most important part is the services.
This is the Apple insurance, the App Store, their tollbooth.
They have the 30% tax that they take and this is growing, but
it's only growing by around 12 to 13%.
So even the most important service part of the company's
not posting the strongest growth anymore.
That's concerning for me as an investor in this company because
if you have slow revenue growth, that's a concerning thing for a
stock. Stocks don't tend to move up a
lot revenue and the company overall stays relatively flat.
The other thing that we can look at though is maybe the margin
expansion story. In the case of Apple, this is a
story that's non existent. Apple has right now around 31%
operating margins and they're just not growing.
The operating margins are staying the same.
They're not improving. And year over year we see them
go a little bit up, maybe like 1/2 percentage point, but just
not enough to be meaningful. The operating margins are likely
where they're going to be for a long period of time.
How is Apple expecting to grow the operating margins?
The services business, their highest operating margin
business, is facing a lot of headwinds.
There's pressure to price lower, to not charge 30%, but to
instead charge 15 or 10%. So they have pressure on their
most highest margin portion of their business, as well as they
have pressure from Google to stop paying Apple the $20
billion or $25 billion a year to be the default search engine.
If they lose that agreement, that could be another thing that
pressures the margins of Apple. So overall, I look at this
company and I just see a story of flattish operating margins
and flattish growth. Now, the Moat is still
resilient. Apple's still making the best
products. They're buying a lot of shares
back, so they increase their free cash flow by share to a
small extent. But again, when you have slow
revenue growth and you have no margin expansion, there's only
so much you can do. Amazon's growing revenue much
faster while growing their margins much faster.
They're exercising far more operating leverage.
They're a more immature company in their growth arc.
Apple still trades at a rather high PE ratio, a 34 PE, a 3%
free cash flow yield. This is at the higher end of
where this company has traded over the past decade.
So it's a company that's both being priced with a lot of
expectations and right now I just don't see the growth
profile. This is why I've been trimming
Apple over the past year, why I've been continually selling
more and more of this company. I've made a lot of money with
the stock. I love Apple products, I'm a fan
of the company. I've made around $35,000 in the
stock so far. But paying attention to the
story of a company is important, and I personally don't believe
that AI advancements in the iPhone are going to be enough to
drive substantial growth in this company.
Now finally we get to Microsoft. They also reported earnings this
week. My thoughts going into this one
were pretty simple. Fundamentally, Microsoft is an
incredible company, but it's trading out of lofty valuation.
So we have the combination of great fundamentals, lofty
valuation that typically means that the stock can beat on their
earnings and revenue, but still trade flat or down.
And that's exactly what this company did.
They beat it on the top and bottom line like Microsoft
almost always does. They beat by a decent margin,
but the stock still traded down 20-30 bucks.
Not an unexpected outcome. Overall, the report was
excellent. Microsoft did everything they
said they're going to do and more.
There's no problems with the past three months.
The reason that Microsoft traded down 4% is a combination of the
price being rather high and their expectations they gave of
next quarter being a little soft, being a little bit weaker
than expected. The numbers are slightly on the
low end of what the analysts were expecting.
Fundamentally, this doesn't change the business, doesn't
change the Moat, doesn't change the qualities or the fact that
this company will continue to grow lockstep year after year
after year. There's just slight ebbs and
flows in the growth rate, but overall we have a very healthy
Microsoft trading a range that I consider to be around fair
value. Now that's the recap for this
week. Once again, if you haven't tried
out Qualtrim and you haven't tried out the earnings calendar,
it's a brand new feature. A lot of people are trying it
out. They love it.
If you join today, you get the entire month for free.
You've got nothing to lose with the free trial.
In addition to Qualtrim in the entire suite, you also get a
Discord. You get exclusive content, a lot
of fun things, so try it out if you haven't.
Other than that, I'll see you in the next episode.