Google stock is on a tear after having their big I/O conference.
This is where they talked about what do you know, artificial
intelligence. And they mentioned artificial
intelligence, more than just a few times Ai and AI Ki KI
generative. A, i generated way I can really
be ia. Ia, ia, ia, ia, ia, ia, ia, ia,
ia, ia, ia uses AI to bring aiaiai.
This was all about Ai and Google showing that they're not going
to let Microsoft. Soft, run away with the AI crown
and you have to give it to him. It's working.
Google stock is up to 117 dollars per share.
It's actually gone on a great run after this conference.
Year-to-date, Google stock is up 31% and even this week, it's up
another eight point six. Seven percent after mentioning
aii over 100 times. It's a lot of investors are once
again, excited about Google, but we're going to be looking at
this conference and highlighting some of the creative ways that
Google's wrapping AI, into all their various products.
Some of them seem pretty cool. Now we also Have Disney at the
same time it reporting their earnings.
And investors did not take it too well even though Disney beat
their revenue and earnings per share estimate, they lost
subscribers for the second consecutive quarter in a row
they shed more subscribers and Disney as a company is facing a
lot of complex operational challenges.
So we're going to be going through looking at their
earnings report, seeing if we can make sense of it and we'll
be looking at some interviews where we can get some context to
some of the challenges Disney faces.
So as always, we have a lot to jump into in this episode a lot
too. Cover, if you haven't already,
make sure you subscribe to the channel and you hit the Bell
icon. That is completely free and you
get alerts whenever I upload. Now, what we're looking at here
is the passive income portfolio. This is my primary investment
account that I've tracked publicly.
So you can look back at any historical video on this
channel. What I plan on doing is trying
to beat the market by concentrating into a couple
positions companies that I think, will compound at a rate
faster than the market average. And we can take Google as an
example here, a lot of investors might be lost and trying Age of
the intrinsic value of a company.
But there's a couple indicators that I think are a very good
representation of it. The first thing is the revenue
of the company. Generally speaking, the more
Revenue accompanied has, the more, the intrinsic value goes
up. Pretty basic as Google has grown
its Revenue. The intrinsic value has also
grown of the company, but revenue is in and of itself.
Not the most important thing because revenue is not a
measurement of profitability. Earnings per share is a
measurement of ability. The EPS of a company is a great
indicator of the intrinsic, value of a company, as Google's
earnings per share have also gone up the intrinsic value of
the company has gone up. We look at the earnings per
share last year and they were four dollars and 59 cents per
share. Compared to back to 2002 when it
was only four pennies. When a company goes from four,
pennies in EPS to over $4, the intrinsic value of the company
has grown but I believe even better than the revenue and
earnings per share is looking at the cash flows of Company the
best indicator over all of looking at the intrinsic value.
Growth of a company is their free cash flow per share,
netting out there. Stock-based compensation per
share, I call this the adjusted free cash flow per share, and
what we see is intrinsic value growth over time of these, great
companies with Google, we see a similar Trend here.
They've gone from eight cents and free cash flow per share to
last you're having three dollars and 11 cents in adjusted free
cash flow per share, that is an incredible compounding.
In the past five years, they've grown their adjusted free cash
flow per share at a rate of twenty one point five, nine
percent. And keep in mind the adjusted
free cash flow factors in the dilution through stock-based
compensation. So even with Google being a
highly dilute of company issuing a lot of stock-based
compensation for their employees it's still growing its cash
flows at an incredible rate over 20% per year.
So although I don't currently hold a Google in the passive
income portfolio, I do have a small holding Of it in my growth
portfolio and Google has remained a company that I've
been continually bullish on. Now.
Let's go ahead and look at some of the things that Google has
been up to, they release this big I/O conference where they
really hammered down. All the AI Integrations they're
doing and we know right now that AI is both a very real thing,
but it's also a very common buzzword, every companies
wanting to get in on this AI gravy train.
So, let's see if what Google is doing is actually real.
The first thing that they mention is using AI in Gmail
interface. 2017, we launched smart reply, short responses,
you could select with just one, click next game, smart compose,
which offered writing suggestions as you type.
You remember this in Gmail, right?
Where you start typing the sentence and then it fills it in
with a white text. It is so accurate, a lot of
times I'm, I'm typing an email and I'll be typing halfway
through a sentence and it will know exactly what I'm going to
type. So, I just hit Tab and fill in
the rest of it. Some cases, I'll change it.
But this is a feature that I've used many times, they've been
used in workspace or 480 billion times in the past year alone,
consider the vastness of Google's reach.
I say I've used this feature a number of times and then they
mentioned that it's been used over 180 billion times in the
last year alone. This is the scale that Google
works at every single thing they do every feature.
They push, they have to think of it in terms of tens of billions
of uses. And now that the Much more
powerful generator model. We are taking the next step in
Gmail with help me, right? Let's say, you got this email
that your flight was canceled, the airline has sent a voucher,
but what you really want is a full refund, you could reply and
use help me right? Just type in the prompt of what
you want, an email to ask for a full refund hit, create and a
full draft appears. As you can see, it conveniently
pulled in flight details from the previous email.
So, we have prompt generated text here.
You say you want it to draft this email and then it does its
initial draft. This is basically what barred
and chat GPT do. So they're just integrating that
same Tech into the emails but the way that they do it is
really intelligent. Look at where they take it from
here and it looks pretty close to what you want to send.
Maybe you want to refine it further.
In this case, a more elaborate email my increase the chances of
getting the refund that's got to feel good for Sundar.
He's been he's been having a tough time getting bullied
around with Microsoft for a bit and having having an audience
reaction where they're clapping and he's releasing this great
feature. It's got to be a good feeling.
I will say I agree with the audience here.
I think that this is an incredibly powerful feature and
not only that but I also think it's practical a lot of the
Things that people working in Tech, think is cool, is
sometimes not the most practical stuff.
It's really deep integrated stuff that not many people are
going to be able to use and it's not really that practical but
the way that they've implemented this seems very very easy to use
and very practical having it be able to elaborate in email is an
incredible feature. One of the biggest problems in
email or any text-based. Communication is you lactone,
you lack context? You're too direct with an email,
it can come off as rude. So having a button to elaborate
the text and recreate it in different ways.
Puts you in the role of reviewing, the email over
viewing it and seeing if it relays the proper tone and
context more than actually taking time, to construct the
email and I can't stress this point enough of practicality and
ease of use a better feature. A superior feature may not have
as much success because it's difficult to use.
It's more complex and it's more confusing.
So, every Ingle thing they do has to be simple and easy to
understand but I think once again they nailed this aspect of
it, even if the text generation isn't the best and it's not
quite as good as chat GPT, the fact that it's so easy to use.
And it's already integrated into email creates a moat.
That's very difficult to beat four other competitors outside
of tech and investing culture. A lot of people aren't familiar
with AI to this level of it. And I think this is going to be
a little bit of a shock to a lot of people that use email
day-to-day. Now, the next thing they go over
is Maps. Google is incompetent.
Titian, with apple over Maps. Apple used to be way behind
Google, but they've really caught up over the past couple
of years so we can look at what Google's doing to try to race
ahead since the early days of street view, a is stitched
together, billions of panoramic images so people can explore the
world from their device. At last year's I/O we introduced
immersive view which uses AI to create a high-fidelity
representation of a place. So you can experience it before
you visit Now, we are expanding that same technology to do.
What Maps does best help you get where you want to go?
Google Maps, provides 20 billion kilometers of directions every
day. That's a lot of trips, imagine
if he could see your whole trip in advance with immersive you
for routes, now you can whether you're walking cycling or
driving. So the calling this immersive
view for routes and it basically takes you on a journey of The
route that you've outlined before even gone through that
route click on immersive you for out and it's an entirely new way
to look at my journey. I can zoom in to get an
incredible bird's eye view of the Rye and and as we turn we
get onto a great bike path. It looks like it's going to be a
beautiful dry. This isn't something that's
going to be available in all of Google Maps, it's limited to 15
cities by the end of this year. So the seems like something very
specific to highly concentrated dense areas where there's a huge
population. You're probably not going to be
able to do this across the country.
Now the next big thing that Sundar goes over is in Google
photos. And I must say, when I was
watching this part of the presentation, I was thinking
about Adobe. I was thinking about Photoshop
and photo manipulation, a lot of what a dhobi cells is tools to
manipulate photos in different ways.
And it seems like Google's cutting into adobe's moat a
little bit here with their updates to Google photo.
In fact, it seems like they might be cutting into their most
significantly, but let me know if you agree.
We introduced it at I/O in 2015, it was one of her first AI,
native products, breakthroughs. And machine learning, made it
possible to search your photos. Things like people sunsets or
waterfalls. Of course, we want you to do
more than just search for those. We also want to help you make
them better. This is a really cool feature.
If you have a big Library photos, you can type in dog and
will find all your pictures with you and your dog or you can type
in the name of someone. You can type in different
objects like this and it sorts the photos by whatever you're
searching. I never thought this feature cut
into Adobe smote but the next part, I believe does, of course,
we want you to do more than just search photos.
We also want to help you make them better.
You can do much more with a new experience called Magic editor.
Let's have a look. Say, you're on a hike and you
stopped to take a photo in front of a waterfall.
You wish you are taking you back off for the photo.
So let's go ahead and remove that back strap.
The photo feels a bit dark so you can improve the lighting.
And maybe you want to even get rid of some clouds to make it
feel as sunny as you remember it.
Now, if you notice from this photo to the previous one, a lot
of the clouds just simply disappeared.
Here's what it looked like before.
Here's what it looks like. Now looks like a sunnier day.
I do have some qualms about this.
Is anything going to be real after.
This feature is launched, we're going to alter the weather.
Now, you're not even remember truly what the weather was like.
When you're on vacation, I realize that photos are already
so edited that you can't really trust them at all, but this is
taking it to a whole new level and these alterations continue
on looking even closer. You wish you had post.
So it looks like you're really catching the water in your hand,
no problem. You can adjust that.
I'm going to be, I'll say a couple years from now that I
grew up in a time where photos were real, where you took the
photo, it didn't look that good but that's what it was.
That was the reality of the situation.
What we're headed into now as a world where you can't really
trust what you see that pattern, you always want your kid at the
center of it all, and it looks like the balloons got cut off in
this one so you can go ahead and reposition the birthday boy
magic editor. Automatically recreates parts of
the bench and balloons that were not captured in the original
shot as a Finishing Touch. You can punch up the sky, it
changes the lighting in the rest of the photo, so they edit
Fields consistent, it's truly magical.
Now, of course, this doesn't replace everything that adobe
has built, but these type of photo manipulation features have
to concern them a little bit. A lot of what people use
Photoshop is simply making photos look better, and it looks
like Google's recreating a lot of those same tools and
including them in their vast bundle.
Now, I'm not going to go over every feature that they
announced are, they did things like coding, how would I use
Python to generate the scholars mate, move in chess?
And as you can imagine Bard can now code and it can do it
really. Well, you can type in different
prompts or different code questions and it will print out
the proper response. They've integrated bar to be
able to have search results. Now linked to the web something
that it couldn't previously do barred.
Can now answer by showing you results integrated with Google
Maps Bar, Even in a crates with Excel, you can put things in
tabular format. One of the most significant
Integrations of this is AI into Google search.
This is the primary profit driver for Google.
So they have to get this, right? They give an example.
Search here, a good bike for Five Mile, commute with hills in
the a I paused snapshot. You'll see important
considerations like motor and battery for taking on those
Hills and suspension for a comfortable ride.
You'll notice how now Google search.
Lays out more information. There's less Direct links.
And there's more accompanying text to, give you information
about your search, they're using more AI to integrate into the
search results themselves. And then throughout the rest of
this presentation, they talk about Ai and cloud and Android
and all the other applications of it.
They're integrating like Microsoft AI into every aspect
of their business. Now overall investors were
pleased with this presentation and I think it's deserved.
I've believed for a long period of time.
The Google has been undervalued the companies up, 30 percent
year-to-date, so it's had a really good run.
And then even over the past month, it's up another 8% with
this presentation. It jumped eight percent in a
matter of days but we can't just look at previous recent
performance. When I look at the valuation of
Google, it's trading at a PE ratio of 17.8 that seems like a
very low P/E ratio for such a high quality company.
The free cash flow yield not counting stock-based, Compass
4.13 percent with stock-based complex closer to 3.5, which I
still believe is a healthy PE for this company.
So overall, I still think that Google has room to run, I would
not be surprised to see this company trading at $130
relatively soon that would put the company at around a 20 PE
ratio and a little bit lower than a four percent free cash
flow yield. Both of them would seem
completely reasonable. So in my opinion I still think
that Google's undervalued. I think it's too good for where
its trading and I think it still has more room to run.
Now, moving on from Google, we have to talk about Disney here
for a minute. This company is going through a
very rough. Patch.
Investors are concerned about it.
I know a lot of People are invested in this company because
it's such a huge consumer facing company.
It really seems almost impossible for such a massive
successful company to be a poor investment.
Let's go ahead and take a look at what happened here in the
last quarter. Disney streaming losses improve
even as subscriber numbers decline investors like to focus
on subscriber numbers, even when they should be focusing on the
losses. So financially the streaming
losses have been better year over year which is an
improvement. But the big problem here is that
At Disney dropped a lot of subscribers outside of the US.
And in the u.s. we have the data right here, Wall Street
expected, Disney plus subscriptions to grow less than
one percent, during the quarter and reach 163 million, 170,000
users. However, the service saw a 2%
decline in membership following to 150 7.8 million.
Now, here's the caveat with that.
And this is important context. The huge majority of those
losses came with Disney plus India, which is Disney, plus is
hot star service the India. Fibers are worth far far less
than us subscribers. So, while us subscribers are
paying somewhere around seven or eight dollars per month, the
India subscribers were only paying a dollar or less and the
profit margins were terrible. So they lost a lot of
subscribers that were far less valuable to the company.
But even so they also lost 600,000 subscribers in the US
and Canada. And those are valuable
subscribers. So, no matter which way you
slice it, in terms of total subscriber gain and loss, this
wasn't good lose. A lot of low value subscribers
isn't the worst thing in the world but they also lost
valuable subscribers in the u.s. now.
It wasn't all bad news. Disney posted a loss of 659
million versus a loss of 841 million a year before.
So their losses are going down, which means is headed in the
right direction and revenue. Overall, for their
subscribership Rose, 12% 25.5, 1 billion, meaning that even
though they're losing and volume, they're increasing in
prices, so this isn't all bad, but it's also not optimal the
best. Of companies other ones that
grow in both volume and in price, they can grow both ways,
Disney grew and price but they didn't grow in volume.
Now, I want to dive in further to this quarter and go over the
report but I also want to go over.
Why I sold out of Disney. I sold Disney.
You can see right here with this cell order at around 110 dollars
per share. So just above 110 around
February, 9th of this year. So, this is the area that I sold
Disney. It was actually the high of the
year so far. And there was a specific reason
that I chose I chose that date. This was a bounce and a rebound.
After the activist investor Nelson Peltz came into the stock
and bumped up the stock price. Temporarily, I thought that
there is a chance that this wouldn't last long and I'd been
looking for an exit to this company for some time.
So, I took advantage of Nelson. Peltz entering the stock, a
quick bounce in it to exit my position.
Now, Disney has since fallen down a little bit further, been
a very rough past five years for this company, over the past five
years, in total, it's down 10.8% and Stock prices down now where
it was during the covid lows. So Disneys at a price of ninety,
one dollars per share. Again, is this a phenomenal
company? A high-quality compounder on
sale, or is it a company that struggling the deserves to be
trading at this price? The first thing I want to do is
do an overview of how I see Disney's business right now and
the predicament that they're in. We have a pie chart here that I
put together a crudely drawn pie chart, but I think it
illustrates the point quite well.
Right here, we have the parks, the parks is a Huge part of
Disney and overall, the parks are, what's really holding this
operation together. When I look at Disney as a
business, the parks operation generate, a ton of the operating
income, a ton of the prophets, and they're also incredibly
resilient and reliable. This is the cash printer of
Disney. They have the parks people.
Love them. They're always packed, and
they're always generating profits.
There's an issue with parks and the issue is is that they can
grow. A price, but they have a very
difficult time. Growing through volume Parks
aren't like digital software where you can sell to more and
more people. So, growing through volume is
very difficult. When you have a park in
California or Florida, you have that one park and then it can
only hold a certain amount of people.
So the only way the parks business can grow is through
price increases. So even though the parks are a
great business, it's limited in its growth potential because
they only have pricing power and Disney has heavily leveraged
their pricing. In power in their Parks.
I would say that they've almost exhausted it if they continue to
raise prices at the rate that they have, they will offend
their core customers. People will stop visiting the
parks because they are getting very expensive, almost
everything that Disney can monetize in the Parks has been
monetized. So when I look at the parks,
even though they're a great money generator, in terms of
growth, I don't see a lot, I don't see a lot of growth in
terms of pricing power, or in terms of volume.
To create more parks and more experiences takes billions of
dollars and years of development, and to raise prices
further than now. I think it's very difficult,
especially if the economy is slowing down.
So I don't see a lot of growth in Parks.
I see as mostly a good but stagnant business.
The next largest segment we have is linear television.
This makes up roughly a third of Disney's overall revenue and
this part of the business is also a wonderful business in
terms of its economics. It has high Ian's.
The problem with the linear business is, it's in secular
decline every single month, they lose hundreds of thousands.
If not millions of subscribers to cable TV, they're highly
profitable. Linear TV.
Business is currently in Decline, then we have Disney's
new growth Avenue which is streaming.
We have all of their various services like Hulu and Disney
plus and Disney hot star. We have the ESPN app.
So we have all the streaming services, this makes up over 20%
and this aspect of their business is growing.
Both through price increases and hopefully in the future in
volume last quarter, it didn't grow in volume.
So we have a situation here where even their good business,
which is supposed to be the growth driver of Disney is not
growing in volume. It grew in price, they raised a
Disney plus prices, a lot, so the overall Revenue went up, but
in terms of volume, the amount of subscribers went down.
So even the story of Disney's growth driver which is their
streaming is running into a kink.
It's turning out to be a A very difficult business.
So what we're working here with Disney, summarized is an
excellent but stagnant Parks business, a linear TV business
with excellent economics. That's in secular decline losing
subscribers every single month and then a streaming business
which is growing through price but also losing subscribers.
And this is what creates the overall story for Disney that is
met. It's just not the best story.
What investors want are very clean stories where they have a
very clear path to growing It's growing intrinsic value through
Revenue, earnings per share and free cash flow per share in this
makeup of a company. Doesn't provide investors with
that clear path. In fact, looking at Disney's
financials, we can take a simple glance at the cash flows.
See, the explosion through 2012 up to 2019 and we look at it.
Now back in 2022, the free cash flows were incredibly low.
A billion dollars compared to almost 10 billion in 2018 and
investors are left with that big question.
Mark is Disney ever going to be able to get their free cash?
Close back up to 2018 levels, is that even possible?
Now I'm not trying to bash Disney.
I think it's a great company, but another thing I'll mention
is almost every aspect of Disney's business has become
more competitive over the years, every single part of it has more
competition than they used to. Even as good as their park
segment is, there's other competitors like Universal and
Nintendo building. Super Nintendo World.
It may not be as good as Disney World, but this is competition.
This is Outdoor Experience. Around families.
If we take the box office and streaming segment, they're
facing significant competition here.
Disney used to be the absolute boss of the box office,
especially an animated family films.
They couldn't be beaten, but then Super Mario Bros, movie
comes around and it's a universal smash success having
over 1.1 billion dollars in Revenue.
Even Bob, Iger praised the Rival, on this huge achievement.
This is Disney getting surpassed by another competitor in their
On game, which is family animated media, even with the
sports segment of ESPN, they have another huge set of
competitors with big Tech, Amazon and apple bidding for
sports rights. So they're going up against them
as well, no matter how you break it down, every part of the
companies, facing more competition now than it has over
its lifetime. Now, to get a second opinion on
this, we also have Tom Rogers who phoned in to CNBC to explain
what he still believes is the biggest Unknown about Disney and
these other Legacy Media companies and no, Needed a
traditional Media Company can tell you whether or not the
decline, they are going to suffer in terms of revenues from
their cable channels is ever going to be made up by the
growth and contribution of their streaming businesses.
They hope so they're cutting. Costs on the streaming side, as
dids, the indicated taking a writedown on programming costs
because they're going to reduce the amount of programming on
their programming cost on this. They're streaming services but
that's a big unknown. What we what we've seen is a
focus away from just the number of Subs to everybody.
Now talking about the profitability of streaming
services. Well, we haven't seen anybody
stand up and yet say, and this is where the focus needs to go
is how bad is the decline going to be when it comes to the
traditional cable channels relative to the growth and
contribution? That we see the streaming side
able to make do those lines ever cross or are we in a situation
where media companies will never recover to where they were based
on what you said the best media model known to man was cable?
I think Tom Rogers Nails. The biggest question here, all
of these Legacy Media companies are left with the same problem
of having that Decline and such a historically, good business.
Part of the reason that I sold out of Disney but I still remain
invested in Netflix in my growth portfolio.
Leo is because Netflix does not have to worry about this
historical cable TV business. That's in Decline.
All they have ahead of them is potential growth.
There's no part of Netflix's Core Business that's in Decline.
So in terms of Disney's future and the stock price.
Right now, it's tough, It's a complex story.
And that's the reason that I'm not invested in the company.
The true answer is if I'm being honest is, I don't know how this
turns out. I don't know if Disney will ever
get back to $200 per share or how Long that will take.
So right now for me, Disney's in this complex basket, it's a
little too hard for me to figure out and above all.
What I've been looking for. In my company's, what I've been
prioritizing is predictability predictability in the company
stories, cash flows revenues earnings per share.
I'm looking for companies that are highly predictable on a
going-forward basis. The reason that I've invested so
much into SP Global and MasterCard is I think their
stories are highly predictable, both in pricing power Revenue.
New growth and consistency of earnings.
It's the same reason I've made investments into companies like
Vici companies like Texas Roadhouse and even the
railroads, all of these companies will have some
fluctuations and variation and cyclic ality and their earnings.
But I think in terms of overall their businesses, they're far
more predictable on a going-forward basis than Disney
right now. Disney's in this flux where it's
very difficult to model out the future.
So Disney could currently be in a big dip and maybe outperform a
largely in the future or the company could stagger.
Long got around the same price point of $100 per share for the
next three or four years now, that's going to be it for this
episode. I hope you enjoyed and if you
haven't already check out the patreon, it gives you access to
Quality, German sites, we've made significant upgrades to it.
I'm excited for you to try it out, and you'll also gain access
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Carl. Austin.