Welcome back, everyone. Today on the Joseph Carlson
Show, it's time we talk about dividends and how I grew this
portfolio into a monster dividend portfolio.
We'll be going over how much money this $750,000 portfolio
earns in dividends every single year, how many dividends it will
earn specifically in 2024, how many dividends it's earned all
time. And we'll be looking at each
holding in My Portfolio, laying out which ones are the biggest
dividend payers, which ones have the highest and lowest dividend
yield, which of these companies are growing their dividend the
fastest and what yield on cost is and which companies have the
highest yield on cost. Every company in this portfolio
pays a dividend. And as these companies generate
continual cash flow, their dividends grow.
So we'll be looking at this overall and getting an idea of
how to grow a dividend portfolio.
Now, of course, we have some other news to get to as well in
this episode. Adobe's getting hit today.
It's down nearly 9% after their Q3 earnings.
They beat on their earnings per share estimates and their
revenues. So the past quarter looked good,
but the problem is they gave week forecast Adobe's supposed
to be growing in part because of AI tools.
They're developing all of these signature creative software AI
tools, but apparently that isn't enough to help the stock grow
faster than expected. This brings us back to the
question of whether or not Adobe's being helped by AI or
hurt by AI. We have news that Uber and Waymo
are once again teaming up and offering driverless ride sharing
trips in Austin and Atlanta. Why is a company as big as
Google that owns Google Maps, it's as big as Waymo teaming up
with Uber? We've also heard the news
recently that MasterCard is doing an acquisition and they're
buying a company that's a cyber security company for a $2.65
billion price tag. We'll be looking into the
details of this deal and also going over what this means for
MasterCard and Visa. So we have a lot to get to in
this episode. If you like this type of
content, just make sure you're subscribed to the channel and
like the video. Both of those things are
completely free. Now.
Let's go ahead and jump into the portfolio here.
This portfolio, the passive income portfolio, is a a normal
equity portfolio. I don't use any leverage, I
don't use any margin. This is all money that I have
contributed or earned in dividends.
The total value is $752,000. The total gains is $261,000.
So we've passed the point of a quarter $1,000,000 primarily
through gains, which is just incredible.
Looking back six years, this seems like it would be
impossible to do. But through a history of steady
contributions, continually adding money, dollar cost
averaging, buying every dip I could and getting continual
dividend payouts that are quickly reinvested back into new
opportunities and having capital appreciation, this portfolio has
grown and grown and grown. This portfolio's origins are a
dividend growth portfolio. That's where things started off.
In fact, if we go back to my oldest videos, the very first
ones that I made, they're still live on this channel.
The very first one, episode 1, was an introduction to My
Portfolio. The current value at the time
was $25,000. I give an update on my
companies, explaining why I thought Apple and Microsoft,
Home Depot and Costco were good investments.
Five years ago I had a video called Building a Winning
Dividend Portfolio. It went over the core aspects of
dividend growth portfolios. The premise of it was to invest
in quality companies that could grow their dividend overtime.
I think the content was OK for the time, but this was five
years ago. A lot has happened over half a
decade. I've learned a lot of lessons.
I've been through a lot of market volatility.
I've seen a lot of investors do a lot of different things.
And with investing, like any discipline, if you actively work
on it, study it, increase your vocabulary, read about it, learn
from other great investors, you get better at it.
Over the past five years, I think each consecutive year I've
grown as an investor, I've learned some things and I think
most of my audience has as well. I've gotten better at doing a
lot of analysis on companies, understanding the true
fundamentals, understanding long term durable moats from weak
moats, understanding which businesses are likely to
increase in value more than others.
I've also gotten a lot better at identifying quality dividend
companies from ones that are dividend traps or value traps.
The accumulation of time and experience and knowledge over
making hundreds of videos on investing, learning from
community members, studying great investors has an
accumulative effect of improving your investing philosophy
overall. And recently I've put all of
what I've learned is the best investing lessons into a simple
investment philosophy presentation.
This is only 8 pages long and I think it goes over the most core
basic lessons of how to create a very high quality portfolio.
In many ways, my investing philosophy has changed from
looking strictly at dividend growth companies to looking at
compounding machines. Compounding machines is a more
nuanced, holistic term of looking at a company.
It doesn't just focus on the dividend payout, it focuses on
the core fundamental components of a company that allows for a
company to pay a growing dividend.
But the interesting thing is, in most cases, compounding machines
are dividend growth companies. In most cases, compounding
machines make for the best dividend companies.
So this isn't a change of strategy shifting away from
dividends to a different type of company.
This has been a shift of strategy of better identifying
the best type of dividend growth companies.
As it stands right now, every single company in the passive
income portfolio pays a dividend.
And that's typically the case with compounding machines
because in most cases, when you find companies that are
monopolies, they have ample pricing power and operating
leverage and organic revenue growth and are capital
efficient. These are the type of companies
that can afford to pay a dividend, and they're also the
type of companies that can grow a dividend overtime.
So every single company in this portfolio is paying a dividend
and growing it overtime. Even though there's always a lot
of talk about buybacks and companies buying back their own
shares, even though that's a great aspect of a company, we
shouldn't leave out the compounding impact of a stable
and growing dividend that's continually reinvested back into
a portfolio. Now we can better understand the
role that a dividend plays in compounding a portfolio by
looking at a breakdown of the returns.
For example, in My Portfolio right now, we have $261,000 in
all time gains. Now the gains do not include
contributions. So none of this money in the
green is because I put money in the portfolio.
Gains only come from two things, capital appreciation or
dividends. That's it.
So the all time gain is another way of saying the capital
appreciation plus the dividends. Now it's true that you have to
buy stocks to have something to appreciate, but this is from the
appreciation or the dividends. For example, if I was to
hypothetically deposit $1,000,000 into My Portfolio
today, if I somehow had that money and I threw it into My
Portfolio, the all time gains would stay the exact same.
It wouldn't move a penny. The only way that this number
goes up or down if there's capital appreciation or if they
pay me a dividend. We can better understand this
performance here. If we look at a breakdown of my
portfolio's performance as of right now, it has a 158% money
weighted return. That's based off the inflows and
outflows of capital, meaning that since the beginning that is
my rate of return of this portfolio.
We look at the market gain. The market gain is another word
for capital appreciation. This is where the majority of
gains come from. Right now the capital
appreciation is $229,000. So that is the lion's share of
the gains in this portfolio, but we can't count the effect that
dividends have the entire time this is happening.
Dividends are being paid out every single month.
And so far a total of $32,300 in dividends have been earned and
paid by this portfolio. This is Money that's reinvested
back into the portfolio. So part of the net cash flow
here includes the dividend payments.
The dividends continually being reinvested back into the
portfolio buys more shares, which also helps increase the
market gains. So this is what I first do.
I buy companies. Those companies pay me
dividends. Those dividends are reinvested
back into the portfolio. Those reinvested dividends earn
me more capital appreciation. And over and over again, this
cycle grows. Now in my brokerage M1, they
tell me how many dividends I'm earning every single month, my
projected earnings, and what I've earned historically.
We can take a look at the dividend income overtime.
For the full year of 2024, I'm going to earn $8718 in
dividends. So if you think that dividends
are just a small part of the portfolio, that's true.
But 8700 dollars is not a meaningless amount of money.
That is a significant amount of capital.
And keep in mind, it's not like I get one payout at the end of
the year. This is Money that's paid out on
average $700.00 per month. That money gets reinvested back
into the portfolio and have bigger and bigger dividend
payments in the future. Now, if we look at this on a
month by month breakdown, we can see better what's really
contributing to this massive dividend payout.
A lot of it comes from January. So January is the best month of
dividends by about double for My Portfolio.
Why is January so big? Why do I earn over $2000 in
January? Well, there's one company in
particular that has a relatively large payout in January.
That company is Costco. As you can see in the breakdown
there, we have three major companies that pay dividends in
January, Costco, VICI, and Intuit.
Intuit's the smallest, making up an $84 dividend.
Then you have VICI paying a staggering $755.
VICI is a real estate company. The majority of returns from
real estate typically comes from dividends, or in the case if you
own the real estate, directly from the rent and then you have
Costco. Costco paid A1 $1296 dividend in
January. Does Costco really pay that big
of a dividend? Or do I own so much Costco that
it should be paying me $1000 per quarter?
My Costco position is only $80,000.
Now that's a big position and the majority of that is from
games. It's $44,000 in the green.
But an $80,000 position is not enough to earn $1000 per
quarter. If we use Qualtrum to look at
the dividend history of Costco, we can see this illustrated.
The dividend is this, this one right here, a $15 per share
dividend that was paid out in Q1 of 2024.
Notice how it's much larger than any other dividend before or
after it? That is because this is a
special dividend. This one right here is a special
dividend. This one back in 2020 is a
special dividend, and this one and this one and this one.
These abnormally large dividends are when Costco management says,
hey, shareholders, we have way too much cash.
We can't distribute it through our normal dividends every
quarter. We're stockpiling this cash and
we think that you should have it.
So we're just going to throw this money out to you, the
shareholder, to give you an idea of how much a $15 dividend per
share is. That is the equivalent of Costco
paying out a full year of earnings of the company, a full
calendar year, earnings they paid out in a single dividend.
So this was a massive dividend they're paying.
I can tell whenever Costco is going to do this because you can
see that the cash balance rises way above their levels of debt.
We had it right there. Their cash was $17 billion.
Their debt was 5 billion. They had way too much money.
So what did they do? They gave some of it back and
that's why their cash went down from 17 billion to 10 billion.
Then what happens after that? Costco earns too much money.
It goes from 10 billion to 11 next quarter.
It's going to go up more and more and more, and eventually
they're going to have excess cash and they'll pay a special
dividend again. So $1300.00 of this year's
earnings is because of the special dividend.
Now, we're probably not going to have a special dividend every
single year, but I think on average we'll have them around
every three years based on the rate that Costco's growing and
the amount of excess cash they generate.
If we move on to February, we had an ETF called S Gov pay a
dividend. That's when I still owned a
little bit of cash. We have MasterCard and Costco
paying their normal dividend. So Costco got done paying their
special dividend, then they paid their normal dividend.
We move on to March. In March, I earned $688 in
dividends. Texas Roadhouse paid 265.
S&P Global paid 175. Microsoft paid 122.
Texas Roadhouse has turned out to be a great dividend payer
company. If we glance at their dividend
growth history over time, they are growing their dividend far
faster than the market average. Last quarter they only grew it
by 11%, which is still really fast.
But for the past five years, they've averaged growth of 15%.
That's really quick growth from a restaurant company.
Like I said, if you buy a compounding machine, a company
that can grow its free cash flow at a high rate, they can afford
to grow their dividend at a high rate.
So the best dividend growth companies are free cash flow
growth companies. The best free cash flow growth
companies are compounding machines.
Moving on to April, we have another dividend payment from
VICI, one from Union Pacific. This is a company that I've
since sold. And then we have Intuit, which
is an $84 dividend payment. Intuit does not pay a lot in
dividends right now. They're mostly doing buybacks.
May we have MasterCard, Costco again and Apple.
In June we have Texas Roadhouse again, S&P Global and Microsoft.
And then we start to see a little bit of cycling care where
the same companies are paying out their quarterly dividends.
The new one in July is Salesforce.
That's a new holding to the portfolio.
They're also a dividend payer. And then we have the projected
dividends in September, all beginning of $122.
One from Microsoft, S&P Global will be 188, Texas Roadhouse
will be 265. The ones that are projected
throughout the rest of the year are $700 in October, 263 dollars
in November and in December it will be 773.
And again, whenever these companies pay dividends, that
money immediately ends up in my cash balance.
Right now I have $800 in cash. 100% of that money is from
dividends. I'll look over the dip Finder
and see which companies are doing well and doing poorly in
My Portfolio in terms of their performance.
When I look right now, I see that the companies that have the
most momentum, the ones that are rocketing to the moon, are
Costco, Moody's, S&P Global, Apple, and VICI.
This group of companies are just doing fantastic.
They're the ones that are carrying My Portfolio right now.
Moody's is crushing the market. S&P Global's having a great
year, and of course, Costco is up 40% year to date, not
counting their massive dividends.
So these companies are doing so well that I typically look at
them and I think, you know what? I'm just going to hold my share
in these and focus on reinvesting my dividends and
ones that haven't rocketed up quite as much.
When I look at the other end of things, the only company that's
not doing well right now is Salesforce.
This one is having a bad year. The company has yet to gain any
market momentum. I do analysis on the company and
from the fundamentals, everything looks really good.
So this is a company that I look at as a potential buy.
And of course, if we look at my trade history in 2024, one of
the companies that I've been buying the most with every
dividend payment and with new contributions is Salesforce.
I'm buying into this company because it's not doing well
right now. It is a great company
fundamentally that the stock price isn't following, but
Salesforce of course is not the only example.
The point is the dividends don't need to be reinvested right back
into the company that paid them, and in many cases, the company
that just paid a dividend is not the best one to reinvest the
money back into. For example, again, one of the
biggest dividend payers this year has been Costco.
But Costco's trading at an all time high multiple.
Costco's very expensive looking at its historical multiples.
So out of the companies that I have to pick from, even though
Costco's paying a lot in dividends, it's not the one that
I'm reinvesting the dividends back into.
I'm buying companies that have less positive sentiment, like
Salesforce and Booking. To better understand a dividend,
it's important to know where the dividend comes from.
What affords a company's ability to pay for a dividend?
That is called free cash flow. Free cash is the amount of money
that's leftover after a company pays for all its operational
expenses and capital expenditures.
When you you factor in operational expenses like paying
employees, paying for logistics, paying for all those random
expenses a company has. And then you also factor in
paying for capital expenditures, buying warehouses, paying for
office space, paying for vehicles to ship things back and
forth. It's the money left on the table
after all those cash flows are accounted for.
That is your free cash flow. We're running MasterCard and
after we pay for basically everything to run this company,
we have $11 billion leftover. We're very profitable company.
We have a lot of free cash flow leftover.
Well, what can we do with that money?
Companies do one of two things with their leftover free cash
flow. One of the things they do, and
they do it frequently, is they buy their own stock.
Buying their own stock reduces the amount of shares over time,
increasing investors equity. As the share count goes down,
your value in the company increases.
So buybacks are one of the things they do with their extra
cash. But then some companies are so
profitable that they also dish out money through dividends, and
this is where the dividend payouts come from, the free cash
flow. Now, knowing that, we can look
at the companies in My Portfolio and see what they've paid out in
dividends over the past 12 months.
The top one is VICI. And that makes sense because
again, this company is required to pay out the majority of its
profits and dividends. So far, in the past 12 months,
VICI has paid me $2742 in dividends.
Vici's not a flashy holding. This company doesn't do anything
too spectacular. They just own a lot of iconic
real estate and they collect rent checks.
It only takes a handful of employees to run this company.
They buy real estate, they collect checks, and then they
look for other investment opportunities.
So the gains from this company aren't astronomical, but they
were never supposed to be. This company was never going to
be a growth monster company. It was going to be one that paid
a steady rate of return with continual dividends and
continual reinvested dividends. So far I've gained around
$12,000 from this holding. The dividend yield is 5.15%
today. The yield on cost or what I got
and my yield based on the price I paid for it is 5.86%.
So it's very close to the current dividend yield.
Meaning that I got this company on a discount, but not an
amazing discount. The average price paid was
$29.52. So the majority of my return
over owning this company has been from dividends.
Now if we move on to Costco, this is actually my second
biggest dividend paying company over the past 12 months, and
that is of course because of their massive special dividend.
I've earned $1673 from Costco in dividends in the past year.
My yield on cost is 1%. So based on the price that I got
Costco, I paid half as much for the dividends that I'm getting.
As if you're going to buy it today.
My average price paid for Costco is $431.00 and that's for a
company that's currently trading above $900.
Between the dividends paid and the low cost basis for this
company, this has been one amazing investment.
If we look at Texas Roadhouse, this is the third largest
dividend payer in My Portfolio. I have earned 1011 dollars in
the past year from this company and they keep raising their
dividend paying more every single year.
Also, like Costco, I haven't sold any shares in this company
so it just keeps stacking up and accumulating gains.
The current dividend yield is 1.5% which I think is a bit low
for this company. Right now.
My yield on cost is 2.8%, so I got a much better deal when I
was buying this company and that's because of course, my
average share price paid is $86 for Texas Roadhouse.
Today, Texas Roadhouse trades for 164.
So this is one of the opportunities that I went for.
I was pounding the table saying that I think this company's a
great investment. I made multiple videos on it and
it's turned out to be a spectacular one.
Between the doubling and capital appreciation, the 2.8% dividend
yield on cost, this has been one of my better investments.
The 4th largest dividend payer in My Portfolio is S&P Global.
This one's paid. $718 over the past year.
Now the current yield is only .7%.
My yield on cost is a bit higher because this stock has gone up.
My average cost on this one is 366.
Today a share will cost you $520.00.
So I feel like I got a good deal on this one.
The interesting thing about S&P Global is this is one of the
most through and through compounding machines.
It means every characteristic. It's a super high quality
company that's incredibly efficient, but it also happens
to be a dividend growth machine. The company has paid a growing
dividend since 1985. You have 3040 plus years of the
company paying growing dividends.
That's incredible. So again, in many cases, the
best dividend payers are free cash flow growth machines.
The best free cash flow growth machines are compounding
machines. Microsoft of course shows up on
the list as #5 this company has been one with me for a long
period of time. I've had it since day one of My
Portfolio. In the past, trailing 12 months,
it's paid me 590, $8 in dividends.
The current yield is .71. My yield on cost is 1.11.
My average share price for Microsoft in this portfolio is
271. So I bought this company, I
believe at the right times. I had videos going out when
Microsoft and all of big tech were trading down to
unreasonably low territory around 2:20 and 2:50.
I bought a lot of shares of the company during that time period
and even added to it a little bit more later.
Currently Microsoft trades is at 429, so owning it at 270 I think
is a good deal. I'm going to hold my shares
here, but I think Microsoft shares today are a little steep.
And number six, we have MasterCard.
This one's paying me $444.00 in dividends the past 12 months.
That's .54% dividend yield. My yield on cost is slightly
higher. My average share price for
MasterCard is 384. Currently it trades at 496.
You'll see the common theme here where I try to buy high quality
companies, but I try to do it at times where there's opportunity.
Earlier in the year and even in 2023, there were so many
opportunities to pick up these companies at cheaper prices.
Right now, those opportunities are few and far between.
They're much more difficult to find.
So I'm looking elsewhere than companies like Microsoft,
Costco, and MasterCard. These ones were good a couple
years ago and I believe there holds today, but I think there's
better places to put money right now.
And #7 we have into it now. It's paid me $329 in dividends
into. It's just it's not a big
dividend payer right now and the current yield is only .64%.
My yield on cost is quite a bit higher at .9% and I own the
company at an average cost basis of $463 today, a share of Intuit
will cost you a sizable amount, 656 dollars.
The company is moving fast. They have massive dominant
platforms and they are severely underrated, especially by retail
investors. We have applet #8, so we're
getting down to the lower dividend payers here.
This one has only paid me $233 this year.
The dividend yield is a meager .45%, which is just so small.
My yield on cost, meaning the dividend yield I'm getting with
the shares that I purchased is over double that at 1.12%.
My average cost basis on Apple is $89.00.
Apple today trades at 223 dollars.
I consider my history with Apple and the calls I've made on this
channel with videos over and over again on this stock as one
of the best calls I've made. Owning Apple has been a
significant contributor to this portfolio.
In fact, when we look at the holding now, I have around
$32,000 in gains from Apple and the current position size is
$33,000. The 33 $3000 I have invested in
Apple is almost entirely gains. I still like Apple as an
investment. I think it's a dominant company.
It's a juggernaut and very difficult for other companies to
compete against. But I do see the growth path is
more difficult. Looking for the next 5 years.
They need to grow through software and increasing prices
and continually innovating, which is going to be a challenge
for the company. The valuation is much higher now
than it was five years ago, and it seems like it's just a bit
more limited in its growth than other opportunities.
So while Apple still is a great company, I've reduced my
position because I don't think it's quite as good of an
investment as it was five years ago.
We look at some other smaller positions in the portfolio.
Canadian Pacific. Kansas City Southern is one of
the companies I've invested in in the past year, and this one
has been a bit of a snooze fest. It's paid me $200 in dividends.
That's a .63% dividend yield. My yield on cost is slightly
higher as the stock price has gone up.
My average on the company is $77.
The share price today is $86, so it's gone up a little bit.
We're in the green by a couple, $1000.
But there's nothing to write home about here.
This one has not been that exciting of a holding.
I think the Canadian Pacific is still a great company.
It's growing. It's free cash flow quickly.
They're going to be growing their earnings quickly.
They have very low downside in terms of disruption or intrinsic
value, terminal risk. I believe I have the ability to
make better gains and identifying high quality tech
companies in #10 we have Moody's.
This is one of my favorite companies.
Moody is one of these companies where it's really boring at
first glance. Your eyes will just glaze over
when you're reading their investor relations.
It's very mundane, very stodgy looking of a company.
But the more you research this company, the more you do
analysis on it, the more you like it.
This is one of the ones that I guarantee the more time you
spend reading about it, the more you'll like it.
If we look at the dividend payment over the past year, it's
only $197.00. That's a .71% dividend yield.
My yield on cost is slightly higher at .87%.
The average price I've paid for it is 389.
Right now it's trading at 479. Even though Moody's doesn't have
the highest yield, this company represents one of the best
dividend growth companies over the past 30 years.
Then at the very bottom here, we have two of the newest
additions. Now these companies are #11 and
12, simply because they're newer additions and they haven't had a
full year to even pay dividends. For example, Salesforce has only
paid me one dividend. The yield on it is .63% and my
yield on cost is .58%, meaning that I'm in the red on this
company. My cost basis is 277 right now.
You can pick up Salesforce for 2:56.
I currently have a $56,000 position and I'm in the red by
4500 dollars. Obviously it's a bummer to be in
the red in any position, but the truth is when you just buy into
a company brand new, like I've done with Salesforce this year,
it's very difficult to control which way the stock will trade
within a single year. Peter Lynch says his best stocks
really happened three to five years after buying them.
So Salesforce being a brand new position, it's much more
difficult to get it right, right away.
I'm going to give this one more time.
And I think with their continual buybacks, with their margin
increases, with their steady organic revenue growth, I see
this one working its way above $300.00 per share in the future,
and that will put me well into the green.
The last one we have Booking, which is my newest addition to
the portfolio and it's paid exactly $0.00 in dividends and
that is simply because I haven't owned it long enough for it to
even pay a first dividend. But this company is a dividend
payer. In fact, they have a decent
yield for this good of a company, a .9% dividend yield.
My yield on cost is .95%. So I'm in the green by a bit on
this one. My average cost basis is $3688
Right now it trades at $3925.00. So looking over every company on
this list, the important thing is to not focus on the starting
dividend yield and which one has the biggest dividend starting
off. The important thing is to focus
on companies that have great balance sheets that have the
ability to grow free cash flow over time, which will eventually
support a growing dividend. This is the reason that My
Portfolio has growing amounts of dividend income every single
year. It's also the reason that I
avoid tragic scenarios where companies struggle, cut their
dividend by 50% or 70% or completely eliminate it.
So far in My Portfolio, no company company has cut their
dividend, they've only grown them.
The dividends that I'm continually paid and I reinvest
back into the best opportunities at the time has acted as a
significant catalyst to the growth of this portfolio.
So I'm going to continue to observe my companies, do
analysis on different holdings and try to identify the best
opportunities in the given scenarios that were given in
this crazy market. Now moving on, we get to an
earnings report from Adobe and this is more of a story than an
actual earnings report. It's not just the numbers being
reported here, but this sparks a new debate in the continual
question of what type of returns, actual returns are we
getting from AI. So far, we've had significant
and I mean incredible investments into AI.
The amount of CapEx spending of both large and small companies,
every company in between throwing money into CapEx and
employees and talent for artificial intelligence is at
extremely high levels right now. And now investors are asking the
question, where are the returns? What returns are we getting and
where are they coming from? I've discussed this topic of the
enormous amount of money being spent on AI in the most recent
episode in the After Hours channel.
You can check out that entire discussion, but this is more of
a continuation of it. We have the example of Adobe
here, which is currently down 9% after their earnings.
Now they beat on their earnings per share and their revenue
forecast for the previous quarter.
But obviously investors are looking to the future,
especially with growth companies like Adobe.
The problem that they have is that their forecast for the
future was way below analyst expectations.
Adobe shares dropped after the company delivered an outlook
that failed to quell investors and patience for new artificial
intelligence tools to start generating cash again.
That's the big question investors are asking.
When is this stuff actually going to make real money?
Known for its software for creative professionals, Adobe
has been adding AI features to its applications, such as
embedding its proprietary technology Firefly into products
like Photoshop and Illustrator. But investors are keen to see
the evidence that Adobe can actually make money from these
tools, especially as anxiety rises that small startup rivals
will take a business from traditional software companies
like Adobe Salesforce and Work Day.
These basket of companies, Adobe Salesforce and Work Day, are not
only struggling right now in their stock price, most of them
are trading down again. Salesforce is one that I do own
and that's my worst performing holding so far this year.
Investors are not only concerned about whether or not these
companies can make money from their investments in AI, but
they also have been outlined as the victims of AI.
Salesforce and work there are going to have all their
applications replaced by AI, and Adobe could face similar
pressures. Those concerns seem to be
reaffirmed by the fiscal fourth quarter sales guidance that fell
short of Wall Street's estimates.
Adobe has, of course, a lot of different things they do, but
the most important one is the Adobe Creative Cloud.
The Adobe Creative Cloud is a thing that people sign up for at
companies so that they can have access to Adobe Premiere and
Firefly and Photoshop. Creative professionals rely on
these tools. They've built their entire
business using them. They have huge network effects
in their knowledge base, the amount of people using them.
But it is it is true that there's a lot of competition
rising for Adobe. So as investors are trying to
break this down, what are competitive to Adobe?
Why isn't the sales forecast rising with all their
investments in AI? Adobe has a different approach
on this, a different answer. They said on their sales call
that they're still focused on making sure customers use it's
AI innovations rather than seeking to directly make money
from the tools. So Adobe's taking the approach
of implementing AI features and innovations into their already
existing tools as part of the overall bundle.
They're not breaking them out and charging separately like,
hey, here's the Adobe Creative Cloud and here's this separate
AI tool that you can pay extra for.
So investors aren't able to see the actual impacts.
We're not able to drill down and see how AI is actually
benefiting Adobe, but Adobe could argue that, look, the
reason that our company's still growing and we're maintaining
the market share we have is because of our investments in
AI. That makes AIA necessity rather
than a new feature to sell. The company's also working on
developing similar technology for its 3D and video editing
software. So they're going to be layering
upon AI into all the tools that they have.
And of course they need to do this to keep an edge over
rivals. Adobe has an argument of their
own. They're saying that users are
using these AI tools more and more.
Adobe users have used Firefly, this AI tool 12 billion times.
When we look at the graph, it's pretty convincing.
It's just going up and up. So more and more people are
actually using their AI tools. We're just not seeing a big bump
in the actual metrics or the revenue from this AI tool.
When we look at this most recent quarter and what really
performed well, the document processing software outperformed
expectations by more than the products for editing photos and
videos where Adobe has created proprietary AI models.
So the part of this company in the most recent report that did
really well was the part that has nothing to do with AI and
that's concerning to investors. They say that that's causing
anxiety for investors. Why is the document processing
software where they're really not doing any AI advancements in
doing so well and the creative proprietary stuff with AI that
they're spending a bunch of money on not doing quite as
well. And this comes back to that
debate of how AI is going to help these companies.
In the case of Adobe, I do think they're going to layer upon AI
into all their creative tools. And I still think there's a huge
need for professional tools. But with Adobe, there is
increasing amounts of competent competition.
So Adobe's face a future that requires significant investments
in AI to stay current with their software and competitive during
a time where they're also facing more competitive threats that
are highly competent. When I look at the situation
with Adobe, as much as I like the company and I certainly
don't think it's the worst investment in the world, I think
there's much worse companies you can invest in than Adobe.
But right now, I don't believe this company is as attractive as
an investment as many investors believe, and that's because I
continue to be concerned about the competitive threats.
Now we also have news that Uber and Waymo are expanding their
partnership and now offering driverless ride sharing trips in
Austin and Atlanta. Uber's riders in those cities
can be matched with driverless Waymo cars for some trips.
According to the companies, the rides will only be available
through Uber's app, unlike in San Francisco and Los Angeles
where riders book through the Waymo app.
So Uber negotiated quite a deal here.
They said, look, we'll offer Waymo rides, but only if they
come through the Uber app. Now that makes sense why Uber is
up 5% today. This is a great deal for Uber.
The expansion comes as Uber faces investor pressure to step
up its autonomous vehicle strategy, especially ahead of
Tesla's planned robotaxi event slated for October 10.
Waymo's still small in this business.
As of their weekly recap, they did 50,000 rides, which makes up
for approximately 2% of ride sharing usage in San Francisco.
Ultimately, we'll see what happens, but this is undoubtedly
a good move by Uber. It makes their network effects
stronger. It makes so that the logistics
they've already created have more value.
And even if Tesla comes in and gives a great presentation, I
think Uber will be able to make a lot of money with their
massive network effects and partnerships over the next
decade. But this is a new industry, and
it's exciting to see what's happening now.
Finally, this is some interesting news that we saw
over the past couple of days. We have the company Visa
MasterCard, which I still think that a lot of investors that
haven't looked into these companies view incorrectly.
They view them only as credit card companies.
In reality, MasterCard and Visa are not credit card companies.
They're digital payment networks.
They don't lend money like a bank.
They are technology companies that are incredibly scaled and
globally dominant. They only play a small portion
of total online digital payments, but they play a
critical role and they have decent market share of the role
they play. They're also service businesses
that offer a variety of incredibly important technology
services, one of them being cybersecurity.
The financial services giant said it would incorporate
recorded futures technology, including artificial
intelligence, into its fraud prevention identity and
cybersecurity services. It's expected to close the
acquisition by the first quarter of 2025.
Now, I think that this deal is going to go through simply
because regulators don't want these companies become too big
and dominant. But MasterCard is not a monopoly
of cybersecurity, so there's no argument that they are cornering
the cybersecurity market. Another thing that they could
argue to regulators if they try to give them a tough time is
that by preventing MasterCard from buying a cybersecurity
firm, they're literally making cybersecurity weaker for all of
their customers. So I think this is 1 acquisition
that's likely to go through for MasterCard.
I don't know how the regulators would feel good about blocking
an acquisition of blocking a massive company with a huge
network from buying a cybersecurity firm.
MasterCard said that threat Intel, which is exactly what
this firm does, is critically important to understand what the
threats are, how we prioritize them, and how we can be
proactive. This type of acquisition proves
a few things. One is that MasterCard is a tech
company, it's not a credit card company.
And two, that MasterCard is still focused on growing their
value added services. We know that Visa is doing this
as well at a very brisk pace. When we look at the revenue by
segment, it is true that majority of revenue comes from
the payment network, but there is an increasing amount coming
from these value added services. These are cybersecurity, know
your customer identity, all different services they sell to
their customer. I'm happy about this acquisition
and I think it's going to go through.
That's all for this episode. See you in the next one.