Well, we have some breaking news Bill Ackman that bought in a
billion dollars worth of Netflix just three months ago, sold
entirely out of the company dumped his entire his entire
position in it. Only three months after buying
it and he did it after a 37 percent loss.
So in this episode, we're going to be going over his letter of
why he explains the reasons that he sold the company.
We're also going to be talking about my holding a Netflix, I
haven't sold yet and I want to share my thoughts on if I'm
going to sell or what my plans are.
Going forward. And then we also have another
subject I want to dive into in this episode, which is Amazon's
upcoming earnings. Next Thursday, Amazon is by far
my biggest position. We have their earnings just one
week away and I have some thoughts on what to expect for
their upcoming earnings. So we have a lot to get into.
Let's go ahead and Jump Right In.
All right, so first of all, let's go ahead and look at the
letter here, der Pershing Square investors.
Today, we sold our investment in Netflix, so they sold the entire
thing, which we purchased earlier this year, the lost on
our investment reduced Pershing Square funds here today Returns
by four percentage points so he had roughly the same position
size. I did.
I lost maybe four and a half percentage points based on just
that one day that 36 down, 36 percent down move.
He says reflecting this loss. As of today's close Pershing
Square funds are down approximately two percent
year-to-date. So people that are are kind of
dunking on Bill Ackman. Like he's a bad investor because
he bought it and then sold it quickly.
Realize that he's down two percent year-to-date.
So take a look at your portfolio, your today.
Day, see how you're doing and see if it's better than 2%.
Anyways, he goes on and says, while we have high regard for
Netflix's management and the remarkable company, they have
built in light of the enormous. Operating leverage inherent in
the company's business model changes.
In the company's future, subscriber growth can have an
outsized impact on our estimate of its intrinsic value in our
original analysis. We viewed this operating
leverage favorably, due to our long-term growth, expectations
for the company yesterday in response to Continue
disappointing customer subscriber growth.
Netflix announced it would modify its subscription-only
model to be more aggressive in going after non-paying customers
and to a corporate advertising an approach the Management's
estimates would take one to two years to implement.
While we believe these business model changes are sensible.
It is extremely difficult to predict their impact.
On the company's long-term subscriber growth future
revenues, operating margins and capital intensity.
Now, he goes on saying his requirements for any Investment.
We require a high degree of predictability in the businesses
in which we invest due to the highly concentrated nature of
our portfolio. While Netflix's business is
fundamentally simple to understand, in light of recent
events, we have lost confidence in our ability to predict the
company's future prospects with a sufficient degree of
certainty. Based on Management's track
record, we would not be surprised to see Netflix
continue to be a highly successful company and an
excellent investment from its current market value.
That said, we believe the dispersion of outcomes has
widened to a sufficiently large extent, that it is challenging
for the company to meet the requirements for a core holding
one of our learnings from the past mistakes is to act
promptly. When we discover new information
about an investment that is inconsistent with our original
thesis, this is why we did. So, here we are in the midst of
an opportunity, Rich environment for Pershing Square due to the
dramatic shifts in the Federal Reserve policy, a highly
inflationary environment, geopolitical uncertainty and The
resulting High degree of scrutiny price volatility, we
therefore expect to find good use for the Netflix proceeds.
So when I read this letter, I think as a fancy way
well-worded, way of Bill Ackman, just saying look this last
earnings report was shocking, we didn't expect it.
This is way different than our normal investment thesis and
we're just taking our losses and move on.
And moving on to something we expect, that's basically what I
see him saying. We just did not expect this
outcomes so I don't blame Bill Ackman for selling.
In fact, I think it fits with his investing framework pretty
well. The question is what do I do in
this situation? I am down twenty thousand eight
hundred dollars in his portfolio and the huge majority of these
losses 16400 is from Netflix alone.
The big majority of my overall losses in this entire portfolios
from one company. So Netflix so far has been a
disastrous investment. It's throw me into the red and
every single time we climb back to the green and I start making
progress actually making gains. Netflix has another quarter
which just knocked me right back into the Ed.
So this has been more than a frustrating investment, it's
been a terrible investment, but I want to go over what I think,
I did wrong and what I plan on doing now.
So let's go ahead and first talk about what I did wrong.
A lot of people go right away to blaming valuation, they say, the
reason that you're in the red on Netflix is because it was
overvalued, it was a valuation problem, you don't run
discounted. Cash flow analysis, right.
A lot of people say that. First of all, that's not true.
I have a Discord where I discuss valuations all the time with
lots of different investors. We go through different
scenarios. Ariel's and discounted cash flow
analysis. And when I put this much money
into any investment, I do a lot of valuation work on it, so this
wasn't a lack of effort and valuation.
And I think that simply saying the company was overvalued when
you were buying it. I think that understates the
real problems here, an important component of valuation is your
expected growth of the company, that is one really important
ingredient or or factor the factor into the valuation.
And in that growth, there's two important components There's how
quickly you think the company will grow and for how long do
you think it will grow those two variables alone?
Determine a huge part of the terminal value or the intrinsic
value of a company. So if you have a company that
you believe will grow at a very brisk pace and you think it will
grow for a very long period of time 10 plus years.
That is a company that you're willing to pay more for the one
that you think is just going to stay flat and not really grow
but it's just going to kind of stay where it is.
That one would deserve a lesser multiple and a lower valuation.
So the growth In the expected, growth of the company is a huge
component of the price that you should be paying for the
company. My assumptions with Netflix is
that right now today it would have over 250 million
subscribers. That was my growth assumption.
They're struggling to get past 220 million, they got 2222 and
they're expecting to shrink. So it's kind of part of my
valuation. The growth assessment is part of
my valuation, but more specifically the big thing that
I got wrong with my analysis on Netflix is the expected.
A growth rate of the company they're running into resistance
with their growth rate far quicker than I expected.
I expected at a minimum that they would be able to get to 350
million subscribers before, seeing a lot of resistance in
their growth. And here we are at 220 million
and they're seeing a lot of resistance.
So again, you can see this was a valuation problem while that's
technically true within the scope of valuation is the growth
assumptions and that's specifically the part that I got
wrong. If Netflix continued to Row,
according to my valuation analysis.
What I thought it would continue to grow at.
Then I'd be still fine paying the price.
I originally paid if they grew to 250 million subscribers and
they're adding more subscribers every single quarter, I don't
think we'd be seeing the massive sell-off set.
We're seeing I think the price I paid for it would have been
completely fine. So of course, we're Netflix has
run into trouble. Is their growth has completely
stopped. Its came to a grinding halt
announced the question of whether or not they can continue
to grow at all. That's the question investors
face. So that requires a pletely
different valuation. And I think the multiple
contraction associated with that, the rewriting of the
company makes sense. I think it's deserved.
I got the analysis wrong. I thought the company would grow
with ease. It's not growing with these.
It's running into a lot of trouble, so it deserves to be
rated at a lower valuation. So the question for me is what
do I do at this point? Do I do it?
Bill Ackman, didn't just dump the holding a move on or do I
hang onto it and by the way, before you leave your comment of
this is why you don't follow Bill Ackman into a holding.
I did not follow Bill Ackman into buying.
Flex. I've held this company long
before he was ever involved in it.
So before you leave that comment, I didn't buy the
company because Bill Ackman bought it.
Now, the question remains, what do I do with my remainder of
Netflix? I currently have eleven thousand
two hundred dollars of value and I haven't sold a single share.
I've not sold out any part of this company.
I've decided that I'm going to hang on to it.
I just want to see a full Year's performance.
And if this is a consistent trend of declining subscribers
for the foreseeable future, or if they can reverse this and
start to gain subscribers towards the end of the year,
which is usually their best months.
Because right now, Netflix has traded down so much, another 36
percent in one day. And then another 3%, that there
is a ton of pessimism built into this stock.
It's been completely re-rated, it's down to a 24 PE ratio so
all the growth investors have dumped out of this stock they've
moved on and now it's being priced with much lower
expectations. The expectations are very low
for Netflix as of right now so I could continue to lose money
with Netflix. They could Continue to
disappoint, even below the current low expectations, but I
think the expectations are very low, I think pessimism is very
high. People are becoming very bearish
on streaming and Netflix in general.
So I think the opportunity for them to actually outperformed,
expectations are high right now than they were a year ago,
certainly much higher. So I'm going to hold onto
Netflix for at least the next quarter, I'm going to be looking
at next quarter and seeing if they guide down again throughout
the rest of the year and how many subscribers they really
lose their Rejecting a loss of 2 million subscribers, and if they
lose more than 2 million, I'm dumping the stock.
So that will be the final straw. I'll sell the company at that
point at a big loss, but I just want to see if they're being
very conservative, if they actually beat the expectations
of the - 2 million subscribers and what they guide for the
remainder of the year, because that's usually a strong quarter
for them. So I think that next quarter
will be very revealing of Netflix and what their future
path is and I just don't feel comfortable dumping out of the
story as of right now. So, that's what I'm choosing to
do. But I understand if people, Hold
it. I understand if people bought in
right now, everyone has different views and expectations
on Netflix. But that's what I'm doing.
I'm going to be holding onto Netflix for one more quarter and
seeing how this shakes out for the rest of the are now.
Moving on, I want to talk about Amazon.
This is by far. My biggest holding, I have 41.8%
of my portfolio into Amazon. I feel very confident in this
holding. It has a couple things that I
think Netflix lacked as an investment primarily it has a
margin of safety. I think that AWS as a business
acts as this enormous margin of safety.
Safety to put it in perspective, there's companies like a
Netflix, Disney there is Warner media.
There's all these streaming companies like Starz and
Showtime and, you know, all these different ones competing
to be the best streaming service, but no matter which one
wins. It doesn't matter, Amazon wins.
They're hosting the data for every single streaming service
virtually, all of them, except for apples right there.
Hosting the data for every single streaming service.
So, the kind of like this real estate landlord of the streaming
services. They win, no matter who becomes
a Taurus, whether it's Netflix, or or Disney, both of them, use
AWS. So I look at Amazon as an
inevitable winner. It's a platform that has a
growth path that I think is very unlikely to be disrupted.
And I think that that brings in a much larger margin of safety
than the smaller bets of companies, like Adobe or
Salesforce. I think the Amazon is a much
safer bet. Now, having said that, let's go
ahead and look at some of the valuation of Amazon and their
fundamentals. Like I said, the earnings are
right around the corner there. Next Is day for Amazon and
that's very important for my portfolio because I have over 40
percent of my portfolio in this one company, I can recover from
a loss in Netflix, I can recover from a loss in Ali Baba, but I
cannot recover from a loss. In Amazon, this company doesn't
perform well over the next four years.
Then I'm not gonna be able to outperform the S&P 500.
So having said that, let's go ahead and jump right into this.
The market cap is one point five seven trillion dollars.
So one and a half trillion dollar market cap, a lot of
people The Ford PE of the company and based Amazon's
valuation off of that. I think that's an incorrect way
of looking at it because Amazon, they do things with their
earnings that I don't think are fully reflective of their
profitability. For example, we can look at the
annual free cash flow here, notice how it goes up into the
double digit billions for 2018, 2019 2020, it's grown
consecutively every single year and then Amazon has - free cash
flow 15 billion in 2020. One.
Now did Amazon struggle in 2021? Did the company was it?
Like Netflix where they're just losing customers know.
This company is on fire, they're growing like crazy.
The reason that they have negative fifteen billion dollars
of free cash flow in 2021 is because they did massive capex
investments in their retail business.
They hired hundreds of thousands of new employees.
They open up hundreds of warehouses, they bought planes,
they bought shipping trucks, they bought Vans, they did
massive Investments, that they expect to get a return on in the
future. Now, having said, Of that.
Let's go ahead and jump into the sum of the parts valuation.
This is where you break out the different aspects of Amazon and
give each of them, their own unique valuation based on future
assumptions. And I think that this is pretty
accurate, conservative assumptions.
So, we have the first thing that we can look at which is one
party first-party Revenue. This is the stuff that Amazon
sells themself on their website, not 3rd party seller.
So when Amazon sells their own items on their websites in many
cases, it's stuff that other people don't want to sell Amazon
doesn't really want to compete with all their Cellars, they'd
rather fill in the gaps and make the shopping experience more
complete. They want you to have a wide
selection of stuff. So they look for the stuff that
doesn't have great margins and that's what they try to sell.
So their first party revenues is a lot like Walmart.
It's just not high margin. It's very low, marginal revenue
and because of that, we're going to only give this a 1 times
price to sales. So just a one price to sales,
this part of the company will be valued at one year's worth of
Tails, they're expected to do in 2023 three hundred and thirty
six billion dollars. In first party sales.
It's a lot of sales, but this is Amazon, we're talking about.
And if we give that a 1x on the price to sales, that's three
hundred thirty, six billion dollars market cap.
So, right there, we have three hundred billion dollars in
market cap for Amazon. Now, the third party sales which
is hundreds of thousands of small businesses selling on
Amazon's Marketplace. This has a much higher margin
because Amazon basically just fulfills the product and they
don't count the entire thing as Revenue.
They only count the part. That they make money on their
fees as a revenue of the sales. So this is understating how much
they actually sell in third party sales.
If you look at the total revenue of third-party sales, it would
be multiples bigger than this, but since Amazon only counts,
their fees as Revenue, its 159 billion dollars.
And because this has three times a margin of first party sales,
we're going to give it a three times price to sales.
That brings a valuation to four hundred and seventy seven
billion dollars in the market cap.
Now, moving on, we have the retail subscription Revenue,
this is very high. Marginal revenue and it's very
consistent sticky Revenue. Amazon has one of the lowest
churn rates in the industry right there with Costco and
because this is high-margin revenue, we give a higher
valuation of four times price to sales.
Which again, I think is pretty reasonable.
Now, they're expected to have fifty two billion dollars of
subscription Revenue in 2023. Which means that this aspect of
the business would be worth two hundred eight billion dollars
based on these assumptions. That's what it's worth.
Now, moving on we have the AWS portion of Amazon AWS is by far
the most important most profitable biggest growth, path,
least, disruptive. All biggest Mount part of
Amazon. It is the key part of this
business and I think that in 5 to 10 years that will become
increasingly clear that when you're investing in Amazon,
you're investing in this Powerhouse of a business called
AWS with their little side thing that they do in retail and their
Logistics business and their subscriptions.
Those are all little site things around the Central Business,
which is AWS. And I think that this business
in and of itself, This is on par with the likes of Microsoft so I
hold AWS an incredibly high regard and I think that this
will continue to be a big profit Center for Amazon now AWS right
now, does 70 billion dollars in Revenue.
That's their run rate and their expected in 2023 to do 111
billion, which I think is a very conservative assumption based on
their growth rate, the multiple that we're giving it is a
conservative pain price to sales a 10 price to sales is a lower
multiple than Microsoft which currently has an 11 or 12.
And Microsoft is growing around half the speed of AWS.
So, this is a very conservative multiple for this company.
There's arguments out there that you could give awsa 15 or 20
price to sales, but we're being conservative, giving it a 10
price to sales. That puts the Enterprise value
of just AWS at one trillion. 100 billion dollars 1.15.
So, just this portion of Amazon in and of itself, I think is
worth over a trillion dollars. I think it's worth the Amazon.
And if you value any of the other business above 400 billion
dollars, which I think is extremely silly.
It's conservative. Obviously, it's worth more than
that. I think the Amazon right now is
heavily undervalued we can continue on with this, we have
the other revenues advertising, advertising is a bigger business
for Amazon than it is for YouTube.
YouTube makes less money and advertising than Amazon does.
In fact, Amazon's advertising business on their website.
Amazon.com is not only Bigger than YouTube but it's actually
growing at a quicker Pace, they're making more money at a
quicker Pace than youtube.com. We have expectations in 2023
that the advertising portion of Amazon will have fifty nine
billion dollars in Revenue. In this is an extremely high
margin business. This is one of the most high
margin parts of Amazon. If we attach a five price to
sales on that, which I think is conservative that is a 299
billion dollar market cap. So when we break down all the
parts of Amazon and give them all different conservative
valuations the company should be worth two.
Point four trillion in 2023, which currently is a 44% upside
that would mean the price Target as of right now, pre-split would
be 4850. So, the reason that I have
Amazon is such a big conviction, such a big bet in my portfolio.
The reason that I have 42% of my portfolio allocated to it is not
because I like the logo or I like the website or you know
Jeff Bezos isn't my hero. That's not the reason that I'm
buying this stock. The reason that I'm buying it is
because of the valuation. I think this.
Company is heavily undervalued based on a breakdown of the
parts of the company and their future growth expectations.
I think that investors are heavily under estimating Amazon.
So with Amazon, I not only have very high expectations, but I
also feel like I have a decent margin of safety.
I don't think I'm going to lose any type of money on Amazon.
Like I have with Netflix, I think that it has a much better
margin of safety. And one last thing that I'll
mention on Amazon, this company is constantly still innovating.
They're still creating new stuff all the time, Amazon unveils by
with Expanding Prime, shopping benefits, Beyond amazon.com.
So now third party websites can have a by with prime button
where you pay with Prime and all the Fulfillment and all the
customer service, even though you're on a third party website
is still fulfilled through Amazon.
Justice news alone, took Shopify down 9% today.
The fact that Amazon is now going outside of the bounds of
amazon.com. Now, you're going to be able to
order from Amazon and their fulfillment as a service Beyond
just amazon.com. I'm very bullish on this
company. I look forward to the earnings
crossing my fingers that it goes well, but we'll see.