Welcome back everyone. Today on the Joseph Carlson
Show. The market's in the green.
It's doing well today. In fact, it seems like almost
every stock is in the green. We have the NASDAQ up 1%, the
S&P 500's up 1%, and even the Dow Jones is up 1.3%.
So green across the board, except for maybe one company,
one company in particular, which is of course Google.
Google has not done well recently.
I don't know if you've been following the stock price
closely of Google, but it has not kept up with the rest of the
market. In fact, if we just take a look
here, we have the S&P 500 up around 10% this year, the same
with the QQQ, and then we have Google up 7.6%.
So it's underperformed the market year to date, which is
interesting in and of itself because Google's a big tech
company. It's supposed to be leading the
market. Not only that, Google has also
gone down from $192.00 per share.
So right here it was one 93192 and it's gone all the way down
to the one 50s. So we have a price decrease of
22% over the past couple of months, 22% in Google.
A 22% decline in a stock is not just a correction.
This is a bear market. Google stock has entered into a
bear market as the rest of the stock market surging upwards.
So what's going on with Google? Why is the stock trading so
cheap and it's still continuing to trade down.
It's at a 17 Ford PE ratio. While the markets going up, this
stock continues to go down. We have a note here from
Qualtrum saying that Alphabet shares are trading lower after
the UK's CMA raised objections to the ad tech practices for
Google. That's one piece of news.
Of course, we can dive into this blockbuster antitrust case
that's just risen again. So they have that going on.
We also have is that Google may be losing its verb status.
The Gen. Z folk, the new kids, they're
now saying search instead of Google.
So we have a whole article here dedicated to Google losing its
status as a verb. But I don't think these are the
only reasons. I think there's more going on
with Google that we'll be looking at today.
So we're going to be diving in in this episode to the reason
that Google's going down in stock price.
When we look over all the data, this is what's causing it to go
down and what I believe will cause it to make a full
recovery. My prediction is Google will
eventually make a full recovery. And in fact, within a year, I
see it trading above 190 once again.
I'll be going over the reasons why Apple, of course, has their
new iPhone event where they went over all their new iPhones, all
the new features, everything that they're showing for the
future. Is this enough to cause and new
upgrade cycle? Is Apple going to be able to
accomplish that mission of causing people to once again
ditch their old iPhones and buy the new ones?
We'll see. And then finally, the Wall
Street Journal got its hands on some leaked Disney data that
reveals some financial metrics and KPIs and some strategies and
secrets from Disney. So we're going to take a look at
some of the specific numbers, like how much Disney Plus
actually makes or loses. This is interesting data.
So we'll be looking at that as well.
So we have a lot to get into in this episode.
All of this, of course, for free if you like this type of
content. Just make sure to like the video
and subscribe to the channel. Now let's go ahead and start off
by talking about Google here. Google's trading down today 1.3%
while the rest of the market races up.
And that makes a difference when you see this going on where the
Dow Jones is up 1.4%, the S&P 500 is up and the Nasdaq's up
and your stock going down. There's something specific going
on because you can't explain this just by general market
sentiment or by money flows. By equity flows, this means that
people are penalizing Google. The difference in performance
today is over 2%, meaning that on an average day where the
market's flat, this is as if Google's down 23%.
So this is a really red day for Google after previously, as of
market closed Friday, it had another very red day.
It was down 3% on Friday alone. So Google shares are getting
shredded right now. If we look at the biggest single
factor impacting Google today, it's the antitrust lawsuits,
it's regulation. If you recall, if we refresh
your memory here just for a minute, Google just went through
an antitrust case that they lost.
That's the one where the Department of Justice sued
Google for being an illegal monopoly, specifically by
defaulting everywhere. So they bought defaults on, of
course, Android and Mozilla and on Safari.
Apples was the big default. And basically when Google's
defaulted everywhere, they, they insulated themselves from
competition. That was the argument from the
Department of Justice, and they won that case.
We don't see right now what the penalty could be.
So potentially Google could be broken up.
That's one of the the penalties that's on the table.
Well, now we have a new one. This is Round 2.
This is a completely different antitrust regulation or
antitrust lawsuit being thrown at Google.
And this time it doesn't have to do with search being defaulted.
This time it has to do with their ad place market.
So Google has not only one monopoly in defaulting search,
but now they're suggesting they have another one with their
control over the ad market. If we read over the details of
this new case, they say that the Justice Department's case is
alleging that Google has an unlawful grip on the market of
software being used to sell digital ads, known as ad tech.
When you go through the details here, they're suggesting that
Google is on two different sides of this market.
For example, Google owns the market, but then they're also
competing in the market. They're buying and selling ads,
and the Justice Department doesn't like that.
They both own it and compete in it.
They're suggesting that it's unfair and in fact, illegal.
The Justice Department has said that Google, quote, has engaged
in a campaign to condition control and tax digital
advertisement transactions over 15 years.
They say that this campaign was exclusionary, anti competitive
and mutually reinforcing. Google has said in response to
this, in preparation for this lawsuit, that quote, we will
show the ad buyers and sellers have many options.
And when they choose Google, they do so because our ad tech
is simple, affordable, effective, and in short, it
works. So you get the basic summary of
this new case. They're now not only a monopoly
for defaulting their search engine, they're also a monopoly
for having really good ad tech that everyone's using.
So now Google's trying to defend two different monopolies or
so-called monopolies. And you can argue the nuance and
differences between these monopolies and whether Google's
truly a monopoly or not, but that's an argument for a
different day. When it comes down to it, we're
investors. We're looking for where we can
make money. And the question is whether or
not Google's going to recover with all these lawsuits going
on. Can Google not only persevere
through all this regulation, but ultimately prevail and become
even more prosperous in the future?
We need to know whether or not this company can make a full
recovery, whether or not the stock price will go back up to
$200.00. And my argument today is going
to be that they will. I think that ultimately, I
believe all the unknowns, all the uncertainties today will be
looked back on as a buying opportunity.
I believe that Google will eventually recover because when
we look at these type of headlines, the Department of
Justice launching another lawsuit, these big, bold,
glaring headlines, that creates an emotional reaction in Google
shareholders. It causes people to want to sell
the stock and ultimately a lot of investors look at these
headlines over focusing on the fundamentals.
And I've seen this time and time again with Google, If we look at
the actual company and the actual fundamentals, we get a
much better idea of what's going on with this company and most of
the fundamentals. The actual cold hard data shows
that Google's in a much better situation and a much better
position than what the headlines would lead you to believe.
For example, we can look at the fares surrounding Google search.
If we cross out all other forms of revenue except for just
Google search, we see the growth trajectory over time.
You've been told to be scared about Google search, that there
is GPT search, there's perplexity, there's Bing AI,
there's no articles from Business Insider that Google's
not even a a verb anymore. People are just saying to search
things instead of to Google them.
But during all of that, all those scary headlines, Google
search has grown 14% year over year.
The revenue continues to grow. People are still using Google
Search despite all the headlines you see.
The data shows continued growth as of this most recent quarter.
It's not even slowing down in the most recent quarter.
We can take a look at YouTube, for example.
YouTube continues to grow and of course it does.
Everyone you know uses YouTube. You look at Google Network.
This is the part of the business that they're suggesting is a
monopoly for Google. And ironically, this is the only
part that's actually shrinking year over year.
So the Department of Justice is late to the game.
They're targeting a portion of the company that is not even
growing. We look at the subscription
business. This is a YouTube subscription,
YouTube Premium, This grew 14%. So we see good growth there as
well. We look at Google Cloud, which
I'll go into as the most interesting, important and
intrinsic growth path for Google.
And this is growing like crazy. It grew 28% year over year as of
the most recent quarter. So the most important part of
Google's business is growing nearly 30% year over year.
When I look over the revenue by segment, I don't see anything to
suggest panic. So in the revenue line items, I
don't see a problem with Google. Now there is some concerns about
different financial metrics of Google, specifically the free
cash flow of the company. If we look at my investment
philosophy and the biggest drivers of intrinsic value,
intrinsic value meaning the value of the stock, what the
stock price will trade up to. I define the biggest drivers of
intrinsic value as three separate things, one of them
being organic revenue growth. This is revenue growth just
through price increases or more customers, more volume, not
revenue growth through doing dilutive acquisitions or buying
things with debt. So organic revenue growth is a
main driver of intrinsic value. Another one is free cash flow
per share growth. When free cash flow per share
starts to grow, typically the intrinsic value of a company's
going up. And then the last one is the
predictability improving. Predictability improving means
that the company's becoming more predictable.
The the Moat is expanding, the durability and predictability of
the company is improving. When we look at Google, they're
missing a couple of these. First of all, as we've already
outlined, the predictability is not really improving.
If anything, the predictability is getting a little worse as we
have all these recent lawsuits now.
The predictability will improve once these lawsuits are
unsettled, once we know whether or not Google's being broken up,
once we can get all these big question marks behind us,
predictability improves and so does the intrinsic value.
But the other one that we could look at is the free cash flow
per share. Now we have the free cash flow
here on a trailing 12 month basis.
This shows you it not on a per share basis, but just on a total
nominal basis. Google over the last 12 months
generated $60.7 billion in free cash flow.
When we look at this with a stock based comp view, we know
that they have a lot of dilution here, so they're diluting a lot
to pay all of this talent, all of these engineers at their
company. When we break this down further
on a free cash flow per share basis, you can see the issue
here. When I zoom into the past 10
years, you can see it clear. Google stock price goes up when
the free cash flow per share goes up.
From 2019 to 2021, the free cash flow per share went from $2.00
to $5. Let's go ahead and take a look
at the stock price. We can go back 10 years here.
From 2019 to 2021, the stock price went from 62 dollars, $65
to 140. The free cash flow per share
doubled over this time period. The stock price doubled.
Very simple. We go back to the free cash flow
per share and we take a look at what's happened since 2021.
You can see it very clearly here.
I can draw a line. The free cash flow per share has
been entirely flat since 20/21. It was $5 and 19 cents the most
recent quarter on a trailing basis, it was $4.87.
So it's about the same. It's around $5 per share in free
cash flow. Then we go back to the price
chart. Here we can take a look again
where is the price since 2021? The price is completely flat.
The free cash flow per share is flat.
The price is flat. Very simple math.
Remember, a company needs to have these three things to have
the stock price increase in any meaningful or sustainable
amount. We have organic revenue growth.
So we have one ingredient here, but we do not have the
predictability improving. Google's predictability has been
ebbing and flowing. I would say it's been going down
a little bit. And we also have free cash flow
per share not growing, but it's just staying the same.
So the stock price ultimately is staying around the same.
So the formula here is very simple.
For Google stock price to go back up to 190 or above $200 per
share, the free cash flow per share needs to go back up and
the predictability needs to improve a little.
We need the lawsuits and the uncertainty to get further
behind us. Once we get a little bit more
clarity, predictability improves and that helps the stock price
out. And then ultimately, the free
cash flow needs to go back up. Now, how does Google's free cash
flow go back up? Well, the formula here is very
simple again. So you take the operating income
of the company and you subtract out the CapEx expenditure.
Now, the problem is, as Google has been earning more and more
in operating income, they've also been increasing the amount
of CapEx. So the free cash flow is not
growing in line with their operating income.
To illustrate this, we can take a look at their expenses.
We go down to expenses here. We filter by the CapEx.
You can see the enormous expansion of CapEx.
It's going up like crazy. The most recent quarter, Google
has spent $44 billion in CapEx over the trailing 12 months.
So in the full trailing gear, they've spent $45 billion in
CapEx. That is incredible.
That's a company that's no longer capital light or highly
efficient. This is a company that takes
significant, significant investments to run.
So even though they're growing in their operating income,
they're earning more money organically.
They're throwing a huge portion of that money back into CapEx.
So the reason the free cash flow per share has been trending down
for Google for the past four quarters is because the CapEx
has been trending dramatically up for the past four quarters.
And that leaves me with a couple questions.
First of all, the biggest question is what is all this
CapEx for and are they going to get really high returns on it?
Because I don't mind Google sending an enormous amount on
CapEx if they're going to get really good returns.
They get a high return on capital employed and all these
investments pay off. This money's well spent.
So what is all this CapEx being used for?
The biggest hint that Google gave us was in their earnings
call, they spoke directly about the CapEx.
If we bring up their recent earnings reports here, their
earnings transcripts, we bring up Q2.
This is most recent one. We can search this page and just
search CapEx. And this brings us right to it.
With respect to CapEx, our reported CapEx in the second
quarter was 1313 billion, once again driven overwhelmingly by
investment in our technical infrastructure with the largest
component for servers followed by data centers.
Looking ahead, we continue to expect quarterly CapEx
throughout the year to be roughly at or above Q1 CapEx of
12 billion, keeping in mind that the timing of cash payments can
cause variability in quarter reported CapEx, Google spending,
all of this increase in CapEx on Google Cloud.
And again, I believe that Google Cloud is the most meaningful,
best part of Google as a business.
Google Search is supporting the stock right now.
It's the profit Center for the company.
But Google Cloud is the new growth path for this company.
Google's in 3rd place behind Azure and behind AWS, but it
still has a very meaningful business.
In the most recent quarter, it did $10 billion.
So this is above a $40 billion run rate, growing 30%.
On top of that growth, if we look at the ROI they're getting,
the actual profits they're getting, it's now moved firmly
into profit mode as well. For a long period of time,
Google Cloud was losing money. This is the operating margins
over time. So any chart going down means
they're losing money. Now that they're going up means
they're making money. This is now at 11 percent.
I think these operating margins will continue to climb up to
30%. And this is happening while
Google's making significant investments in their cloud
infrastructure. And ultimately, when we look at
the free cash flow and we hash out these questions of how much
Google needs to spend or how much they're spending right now,
I think ultimately the amount that they need to spend on
technical infrastructure will slow down.
The amount of CapEx needed to run this business will normalize
over a period of time. You can see that throughout
history, the CapEx requirements of Google go through these huge
growth modes where they spend a lot more money and then they
stabilize, they normalize and in some cases, they even go down a
little bit. And if that happens again in the
future, if we get through this huge CapEx investment cycle into
cloud and eventually it normalizes, it slows down and it
stabilizes and Google continues to grow their revenue, then the
free cash flow per share growth will follow instead of going
down, it'll trend right back up. If we have that free cash flow
per share growth, that'll be another intrinsic value driver
for the company. The final one will be the
predictability improving, which I believe will happen around the
same time. I think over the next year or
so. Predictability is going to
improve as we get ahead of these lawsuits, and the free cash flow
per share growth will improve as the CapEx spend normalizes.
So looking over Google and my position in the company, I'm
still bullish on it. And in fact, if it continues to
trade down like it is, I'll be adding to my position for the
first time in well over a year. So this is a company that I'm
making a bet on. I have around $32,000 invested
in this one, so a significant portion in Google.
But I wanted to share these thoughts because I think this
company right now is a buy. Now moving on, we get to Apple's
highly anticipated Apple event, and this is where they're
supposed to reveal all new iPhones and other devices.
And this one in particular, they said they're going to be talking
about the Apple Watch, the Airpod, and the iPhone.
Let me give a brief update of everything they went over in
this event. First of all, they came out with
a new Apple Watch Series 10 with a bigger screen and thinner
design. They made it so that the Apple
Watch Ultra 2 now comes in black, and they talked a lot
about the Apple Band. So they have a brand new band,
looks really stylish. It's all black.
These are little iterative updates, but I guess if you're
looking to get one, this might convince you.
Another thing they talked about is that the Apple Watch can now
detect sleep apnea, and this is the first thing they spoke about
in terms of healthcare. I've said years and years now
that Apple is a healthcare company and they're going to
become a bigger and bigger healthcare company.
When you think of healthcare, you might think of
pharmaceuticals. That's not the only part of
healthcare companies. There's many companies like
Medtronic that make medical devices.
Apple is now a medical device company.
The Apple Watch is just another example of that.
It literally can diagnose you with heart issues and now it can
diagnosis you with sleep apnea. So these are good additions to
Apple and I think they're going to continue going down this
route of healthcare. They also announced the Apple
Airpod Max with USBC charging and it comes in all different
color ways. I think that Apple, they do the
strategy where if they don't have a lot of real changes to
the product, if it's just like a difference in charging it, then
they they open up new colors. It's kind of their go to.
If we don't have some big ground breaking change, let's offer a
bunch of different colors because colors are really
important. Apple's a great marketing
company. Apple also announced new
Airpods, the Airpod Fours that have noise cancellation and
better sound. Now of course, we know that
Apple's going to be coming out with incremental updates in
their Airpods because it's one of their most profitable, best
selling devices ever. But in this case, they also came
out with a software upgrade for the Airpods.
That is a huge step. They have now a clinical grade
hearing test that you can perform with the Airpods on your
iPhone. So you can Simply put the
Airpods in, do the hearing test. You tap if you hear a sound, you
don't tap if you don't. And they can judge what you're
hearing is if you have any hearing loss based on the
hearing loss. They can also work as hearing
aids. Now, the Apple Airpods are like
hearing aids to people that have hearing loss.
And I think this is more meaningful than it looks.
We know that hearing tests are easy to do.
You can go to a local hearing clinic and get a hearing test.
And you can also get hearing aids, although they're very
expensive, you can in most cases get those covered by insurance.
So people don't have a lack of access to hearing aids or
hearing tests. But yet they highlight that 80%
of Americans have not gotten a hearing test in the past five
years. Because most people don't want
to deal with it. They don't want to deal with
hearing aids. They have a stigma attached to
them. So if you're wearing hearing
aids and they wrap around your ear, people are going to be
looking at that. And there's a social stigma with
the Apple Airpods now acting as a clinical grade hearing aid.
People that have some hearing loss could put them in act as
though they're just using their Airpods, but now they have
better hearing. So it's a way of treating a
hearing condition without dealing with the stigma
associated with hearing loss. This is another big way that
Apple's getting into healthcare. It's not just with the Watch
now, it's with the Airs. Now when we get to the iPhone,
of course, they announced the iPhone 16 with a faster
processor. They went over the specs and
like Apple always does, it's so much faster than the previous
version every single time. Most of us know about that.
We know that every phone's going to be faster.
So that's not the biggest take away.
Apple needs to put in some other goodie, some other thing besides
just a processor update in each of their phones, Some reason to
justify mentally buying the new phone.
In this case, they went with a new button.
They slapped a new button onto the right side of the phone,
which is called the camera control button.
Now they really talked this up like it's this big deal, like a
massive new innovation. The button has two different
pads. It's easier to press.
It has haptic feedback. It can be pressed halfway or all
the way. It can be held down or double
tapped. It's a really versatile button.
So they didn't put a lot of energy into this button.
I just don't think that this is enough to make the jump.
I think it's a good addition. I actually think people really
like having a dedicated camera control button, but it doesn't
seem like this in and of itself is going to make a lot of people
move from the iPhone 15 to the 16.
It might be another goodie if you're all the way back on the
12 or 13. The biggest features that Apple
released that will promote upgrades from 1 device to the
next is not the hardware, but it's the software.
It's the artificial intelligence.
Apple has new visual intelligence that can actually
look at the screen. It can look at what you're
doing, and you can tell Siri to do certain things with what
you're currently viewing. Not only can it look at the
screen, but it can look through the camera, like the lens, the
outdoors. And you can ask Siri questions
based on that, or you can ask ChatGPT.
So Apple is leveraging its massive platform to default all
these different options of ChatGPT or Google to enhance
Apple's platform. And this is what they spent a
lot of time on. All the new hardware upgrades
for Apple's new iPhones are specifically to allow for all
the new AI capabilities, specifically the contextual
awareness of Siri Siri's not just like a random ChatGPT.
Siri's going to know the context of everything on your device.
And Apple emphasized over and over again that all of that
context is private. It's on device, it's local, it's
not stored anywhere where someone else can be peeking at
your iPhone and what you're doing.
So Siri has all the context of your text messages, your
history, your journal entries, your notepad, your voice memos,
your photos, and everything. Siri can filter through all
sorts of historical data, can retrieve information.
It's like having a personal executive assistant where you
can say, hey, find me all those photos from this different trip
and send it to this person and Siri will do that for you.
The contextual awareness of this new AI is a single biggest
selling point of these new phones.
So overall, the iPhone gets the most attention with these
events. And I think it's true the AI and
contextual awareness is a really big deal, but that was somewhat
expected. The storyline that I think needs
to get highlighted more with Apple is that this is becoming
the biggest healthcare company in the world.
They are now a medical device company with the Apple Watch and
the Airpods. They're becoming more medically
enhanced. The Apple Watch is a fitness
device, a heart rate monitor, a sleep apnea detector, and soon I
think it will be a glucose monitor.
The Apple Airpods are now hearing aids that are clinically
proven to detect hearing loss. So all of their devices and
peripherals are now becoming healthcare.
So I think overall when I look at this, I like the changes
Apple's doing. I like the progress they're
making. I don't think anything here was
too ground breaking. Overall, this was a solid event.
I don't know if it's enough to spark a massive upgrade cycle,
but I think it's enough to keep the stock where it currently is.
Now moving on, we get to the news that Disney recently had a
massive data leak. And in most cases, when a
company has a big data leak, I don't think there's anything too
interesting. Usually companies do share the
best information publicly about the companies.
They track them in public disclosures and KPIs.
But in this case, Disney did leak a couple things that I
thought were were noteworthy. Disney Genie has become a
massive profit Center for the Disney park.
If you recall back in the day, Disney would allow you to get
fast passes. That's what they were called.
Then Disney decided to make an app and monetize the fast pass.
They turned it into Disney Genie.
The leaked files indicate that the passes generated more than
$724 million in pretax revenue between October 2021 and June
2024. So this is the reason that they
push Disney Genie so hard. They're making hundreds of
millions of dollars from this one incremental change.
I think that this is another way that Disney has nickel and dime
people in the park, but it seems to be working.
The other big revelation in this leaked report was the specific
profitability of Disney Plus. Now, Disney releases their
direct to consumer product line and you see how much they make
from direct to consumer, but they do not break it down from
Disney Plus specifically in this leaked report.
We know that Disney Plus generated more than 2.4 billion
in revenue in the March quarter. That amounts to around 43% of
the revenue the company reports and its direct to consumer
entertainment business. If we look at that and compare
it to Netflix, we can see that Netflix in the last quarter
generated 9.53 billion. So the Disney Plus streaming
service is around 1/4 of the size of Netflix currently.
This shows us how far ahead Netflix actually is in the
streaming business. Now, of course, there's more to
this leaked document. There's how they handle
different political events as well as how they promote and
compete against companies like Netflix.
I looked through it and there's not anything I thought was too
interesting. So that's going to be it for
this episode. If you like this type of content
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