Look, it's a it's a it's a it's a gut punch and you know running
a company and I've been doing this.
It is a gut punch. What Salesforce is going through
right now is a gut punch. Now, also the fact that
Salesforce is down 47 percent year-to-date, that's a gut punch
but that's not even what Marc benioff the CEO of Salesforce is
even talking about here. He's talking about the fact that
seemingly nobody wants to work with him.
We have sales force. Executives not just employees
but Executives across the board fleeing, the company, an exodus
of Executives. We still have the CEO of the
company, Marc benioff. But even last earnings report,
the last Salesforce earnings report was a disappointment to
investors causing yet another sell off.
So the stock is down, big this year, executives are leaving the
CEO is still currently here and we have to ask the question.
What do we do in this situation? Do we buy more Salesforce?
Do we double down on it? Do we?
Just hold strong and kind of try to wait through this, or do we
sell out and move on to something else.
Something that has a brighter future and less red flags.
That's what I'm going to be diving into, in this episode.
We're going to be looking over Salesforce and trying to dig
down into what's really going on and what I plan on doing with my
holding. So, let's first start off by
jumping into a portfolio update. If your new hair, this is going
to be something a little bit shocking, but I show my
portfolios with complete transparency on a week-by-week
basis. No matter what direction they're
headed. So, even though this one's in
the red, right? Now and this one's performing
poorly. I'm going to continue to show
the progress of it every single week for at least the next
couple of years until at least 2025 and I might show it beyond
that as well. So if you want to follow along
and track this portfolio live with real updates, just
subscribe to the channel and you can follow along for free.
Now, when I look at the performance here, and I look at
the individual Holdings. I notice a common Trend here,
basically, every company in this portfolio, aside from Berkshire,
Hathaway, all of them are out of favor in this market.
Investors don't Anything to do with these type of companies
grow center technology companies, they're not in favor
right now. We have the Federal Reserve just
yesterday going on and on about how they're not done.
That's the message they said we're not done.
We're more hawkish, we have interest rates going up over the
next year. We're going to hold them very
high. We're going to have the most
restrictive monetary environment that we've had in decades.
It's going to be brutal for any company.
Like these ones, that's what drone Palace said and every
single time he holds a meeting these Please go down in value
more, and more. You can look just today one day
after the meeting. And we're down 5% 4.75%, another
five thousand dollars. So these type of meetings with
drone, pal, being incredibly hawkish and talking about how
much he's going to raise interest, rates causes investors
to run out of these companies into the more defensive ones.
That's the environment we're in. Now, I've said this many times I
would not copy this portfolio, I don't recommend copying it.
In fact, I'd recommend not doing so because it's highly volatile.
These companies trade up and down 40, 50 percent in a single
year and it's in an environment right now, we're again, these
type of companies are out of favor, so, don't copy this
portfolio. I'm doing this more of a fun
thing to watch from the sidelines, but I wouldn't jump
in unless you're ready for all the risks.
All the volatility that comes along with this volatility is
one of those things that's much easier said, than done.
It's easier to look into the future and say, yeah, I can
handle volatility. I'm okay with that.
But once you're actually in it like this, it's much more
difficult. To handle, it's much easier said
than done. Now, when I Benchmark this
against the S&P 500, as if I deposited money at the same time
in the same amounts, this is what it looks like.
The S&P 500 is the redline the story fund is the blue line.
So we are underperforming, the S&P 500 by 23% right now, a huge
gap of under performance but we've been tagging along over
the past six months, we're kind of hanging in there and we've
actually closed the Gap a little bit for time period.
We're underperforming by 30%. So I think we're doing.
Okay, we're slowly catching up a little bit but this is still not
good. We're still under performing
right now. Luckily I have a lot of time on
my side. I can let these companies sit
and grow over a very long period of time.
I do not need this money anytime soon.
So that's my overall portfolio. If we want to look specifically
at Salesforce ticker symbol CRM, it's right here, the very bottom
row, I can look at my return so far since I've bought it
throughout the year and not right at the beginning.
Beginning of the year, I'm down 35 percent.
So the stock overall this year is down 47%, but my personal
position and it is down, 35% not optimal.
We're in the red by over two thousand dollars on this
holding. And we currently have a holding
value of thirty eight hundred dollars.
And as I've outlined, we've had a lot going on with this
specific holding the big news item.
The most recent one, is it, a lot of executives are bailing on
Salesforce. They're just leaving the
company. We have right here that
Salesforce just lost another CEO.
So the way that they ran the company is Marc, benioff was the
CEO and then he hired a co co similar to Reed Hastings and Ted
strandos, the co-ceo is something that's uncommon, but
it works in some cases. I don't necessarily love co-ceo
relationships but in some cases, if you have two individuals that
have been basically in the company so long, they're each
taking on about 50% of the work, they're each running half the
company and they're both basically co-ceos.
So you may as well just give them the title.
That's how Reed Hastings intense rounds have been.
So they just made something that was unofficial official.
Well, Marc benioff did the same thing, he was the CEO of the
company and then you made someone else, the co-ceo in the
last two weeks, Salesforce has lost two of its most senior
leaders first. The company announced that
co-ceo Bret Taylor would leave in January.
Then on Monday, the company said, that Stewart Butterfield,
the founder and CEO of slack, which sales force acquired in
2020 for almost 28 billion. Would also leave next month.
So we have the CEO bailing early next year and then we have the
CEO of slack which they purchase leaving early next year as well.
They're both leaving January, they say to be fair.
None of the people leaving said anything negative about CEO Marc
benioff, in fact, Butterfield didn't mention him at all.
That's a little odd in my opinion, you know, and not
saying something - that's good, I guess.
But the fact that he didn't mention him at all, that tells
me in my experience in the workforce.
If someone leaves and are a high-ranking position and they
leave a very public high-profile position and they don't even
mention the team that they worked with.
They don't say anything at all. That strikes, me is.
If you have nothing nice to say, don't say anything at all.
If you had anything positive to say about Marc, benioff, he
would have said it so that shows me that they had some
disagreements. They didn't like how he was
running the company. Maybe there is problems with the
acquisition that frequently happens but regardless I think
it's good. He didn't say anything - but I
think that Is probably some bad blood there.
He did mention Taylor only to say that the timing was purely
coincidental. This is another thing.
Both of these executives are leaving Salesforce at the exact
same time, and then they're saying, you know what, this
wasn't like some planned thing. It was just coincidental which a
lot of people have outlined as something positive.
Hey they're just leaving coincidentally, that's not so
bad. Again, in my opinion I read this
is almost worse. The fact that you have multiple
different Executives bailing on the The same company at the same
time without coordinating at all.
That shows that something might be going on.
And that's a big red flag. They say it is however, an
interesting coincidence. Considering Taylor's largely
considered responsible for shepherding, salesforce's
acquisition of slack in the first place.
So yeah, we have a lot of speculation here.
So to me this first news item that we have multiple
high-ranking Executives leaving at the same time.
I think it's a red flag. I have no other way to really
describe it than that. It is not a good sign.
Anytime you want to company and there's employees internally
bailing on the company and higher up positions, leaving the
company left and right, that's a red flag.
That means that they have an inside view of something going
on. And they're saying, I don't want
part in this, I'd rather just go and find my way somewhere else.
Even though I'm getting a paycheck here, I want out.
That is not a good sign for the company.
So whether this has a long-term negative effect on the stock, I
can't say, I don't know, but I think this is clearly a red flag
in something to pay attention to was Salesforce.
Now, the next part is Salesforce is what the actual operating
results of the company are doing, how is the company doing
operationally with their profitability and with their
progress and growth. Now, the first thing that I want
to go into, is the obvious elephant in the room here, which
is the stocks performance this year, which has been is just
awful, it's down, 47 percent year-to-date.
So this company has been a poor investment for the past year,
but I like to start off with the stock performance before even
going into the operating performance because a stock
performance sets the tone How people view.
The company sentiment is driven by stock price.
If Salesforce is up 50% this year and it had the same
operating performance people, just view it more positively,
they'd look at it and they'd say this companies probably doing
something, right, right? Sentiment is dictated by the
stocks performance. So this sets the tone Salesforce
is down big and so now people are highly critical of the
company, but I also want to put this in context.
Let's just do some quick comparables here.
Here we have crowds Strike another Cloud company.
This is one that's in cybersecurity.
It has very strong fundamentals, high-revenue, net retention
rates and things like that. It's down 41 percent.
This year, we have Amazon the Juggernaut Cloud hosting online
retail, you know, the third party services.
This is one of the most powerful companies in the world down 48
percent. We have atlassian, this company
again has grown rapidly this year.
The profitability metrics are moving in the right direction
down. Fifty-eight percent this year,
Netflix is down, 51 percent, Tesla's down 60%, then we even
have the software Tech sector ETF.
And this is down 34 percent, year-to-date the entire software
Industries down 34 percent, we have the cloud industry, wisdom
trees, cloud computing ETF is down 49 percent.
So, of course, it's disappointing to see Salesforce
down 47% this year, but I like to put it in context with the
entire Cloud industry to show that.
It's not much of an outlier. It's not like the cloud
Industries up, twenty percent this year and Salesforce is
down. 50% that would be more troubling but the relative
performance of Salesforce to all of its peers to the entire
industry the entire Tech cloud computing industry.
It's basically in line maybe slightly worse slightly better.
It's basically in line with the rest of the industry and like I
said on the onset, like I said with my portfolio update, these
type of companies are out of favor with Pastors, if you're
investing in tech companies, cloud computing companies,
you're going to have a rough time until j-pal cools off a
bit. That's just a story.
That's the macroeconomics. I think that's something you
have to keep in mind. Now let's go ahead and look at
some of the real measurements here.
Last quarter, they reported growth of 14 percent
year-over-year. I still see that as strong
growth in this environment. I think that's very strong
growth. And again, this is a major focus
of Marc benioff. If we look at his tweets, this
is his pinned, tweet the thing. He wants you to see out of all
the things he tweets, salesforce's Revenue growth year
after year, after year. He has twenty six point five
billion dollars in revenue and 2022, and then Thirty 1 billion
dollars in guidance for next year.
So again, top line revenue growth is obviously the big
Focus for Marc benioff and I think you actually focuses on
this metric a little too much because although this is good
for bragging rights, you can pin this on your Twitter, you can
brag about it on CNBC how you're bigger than all these Other
cloud computing, companies viewers of the gels of Carlson
show. No, well by now that revenue
does not pay. You dividends Revenue, doesn't
give you BuyBacks Revenue, doesn't pay the shareholders and
revenue doesn't give you free cash flow.
Profitability gives you all of those things margins.
With the revenue is what gives you those things?
And I think that should be a primary focus for Salesforce.
Let's go ahead and look at a couple other metrics here, we
have the ibadah, generally speaking going up over time, but
not nearly as smooth as the revenue.
We have the free cash flow hair. It shows a strong trend of going
up over time, in fact, the free cash flow looks fantastic.
Just amazing. Look at this free cash flow
Co-op year after year, it's absolutely incredible.
It reminds me of companies like Nike and Estee Lauder, the best
of breed companies in the market.
But then we do something here, we toggle over the stock based
compensation and it makes the picture.
Look a little less glamorous, a little less good.
In fact, the amount of free cash flow that Salesforce earns is
basically chopped in half by the amount of dilution that they do.
And this is one of the points that I think investors are the
most troubled with this stock. We can see this most clearly if
we switch over to annual hair, we have the free cash flow in
Orange. We have the stock based
compensation and purple and notice how the free cash flow is
basically chopped in half year over year by the amount of
stock-based compensation. So we could cut all these
numbers in half and say and 2018 since its 2.2 billion dollars in
free cash flow. We chop that in half because the
stock based compensation and we have one point 1 billion dollars
left. Dover after dilution 2019, we
have one point for in 2020. We have 1.8 in 2021, we have two
and then a 2022. We have two point five so far.
So even if you did net out, the stock based compensation, this
company looks pretty strong. Another metric we can look at is
the free cash flow per share. This is where we take the amount
of free cash flow, the company generates and then we divide
that number by the shares outstanding.
So if they are diluting the shareholder, that's factored
into this. Calculation and we can see that
they're growing, the free cash flow per share over the past 10
years by 21.7%. Kegger, that's a very fast
growth rate of the free cash flow per share.
So again, this looks terrible because half the money is eaten
up by stock-based compensation. That's a big negative for the
investor, but even when you factor that in their still
growing, the free cash flow above that at a very attractive
rate. Now if we move on from the cash
flows and we look at the actual balance sheet of this company.
What we have here is a chart that That shows the cash the
debt in the capital leases, the debt is long-term debt in the
capital. Leases are basically like rental
agreements but they, they organize them in a different way
where they call them Capital leases because they might have
some ownership rights so we can simply filter and look at the
cash for. It's the long-term debt.
They currently have eleven point nine billion dollars in cash,
and then eight point eight five billion dollars in long-term
debt. And the long-term debt is
steadily going down quarter after quarter, then we have the
capital leases here, if you Actor in the capital leases it's
barely above the amount of cash they have, but I don't consider
this problematic. This company does have a very
strong balance sheet that needs to be said about Salesforce.
They're in a very good situation, they're going to have
no problems with the liquidity crunch.
Now, finally, the last thing in this one is a killer for
Salesforce, is the shares outstanding over time.
We've seen these charts before investors hate this and I think,
for good reason, when we see a long history of the amount of
shares outstanding, Going up, that means that your ownership
in the company is being diluted over time.
So you own less and less of the company as their printing out
and giving away more shares to employees over and over again
they're diluting your stake and giving that Equity to employees
and that's how they run the business.
And a lot of times companies do this because it looks better on
paper to pay employees through Equity than it does through
cash. So they have incentives to do
this. And Salesforce has been a highly
diluted company over the past two decades.
So this aspect of The dilute of nature of it is one part of it
that I think it's been a big downside for a long period of
time. And this brings me to my next
point about Salesforce, something that I don't like
about this company is I think it's very difficult to do real
analysis on. I think a lot of the numbers and
a lot of the things they say you have to do a lot of detective
work to decipher them. Let me give you one example.
Here I'll bring up the latest earnings report from Salesforce
is just the most recent quarter a couple weeks ago.
We have November 30th. 20 right or 2022.
Sorry, we look at this and we have all the numbers here, they
do the highlights. They try to brag about what the
company is doing. We have the revenue growing 14%
19% in constant currency. I think that's fine.
Top line revenue, growth is great.
Again, that's the big Focus for Marc benioff, but it's when you
get into the profitability metrics where I have issue with
how they relay what they're doing.
Let's go ahead and look at one example, we have right here,
they say they return. One point seven billion dollars
to shareholders in the third quarter in the form of share
repurchases, that is share BuyBacks so they said that
they're returning one point seven billion dollars back to
the shareholder that's money. Going to you they pointed out
there. Claire's day returned, 1.7
billion to shareholders in the form of share repurchases.
Now we should know what share repurchases are.
I'm going to have a full video on this in the future but a
share repurchase is called a share buyback.
It's when they buy back shares outstanding During which is the
opposite of dilution. So the thing that investors have
been complaining about the shares outstanding going up,
Sherry purchasing is doing the opposite and we should see this
number come down. But the interesting thing is
look at last quarter's numbers, we ended the quarter with 997
million shares outstanding, the quarter before.
We had a 997 million shares outstanding.
So the share count is the exact same.
The exact same quarter over quarter.
Belgium is correct here. My website is showing these
numbers correctly. The share count didn't go down
at all. So they spent one point seven
billion dollars on BuyBacks saying that they return that to
the shareholder. When in reality, they don't
return anything to the shareholder.
The share count didn't go down at all.
All they did was offset the amount of dilution that they're
already doing. So, this is such a tricky way.
I absolutely hate that companies.
Do this. I think it's incredibly
misleading. I think it.
Honestly, in my opinion, I think this type of thing should be a
Illegal to say, I think a gaap accounting should update their
rules and come out and be much more clearer with the effect.
This is having to shareholders because basically, what
Salesforce is doing here is saying that we're diluting you
to pay for our employees, but then we're buying back the
dilution and off setting it to 0.
And what they're saying is we're returning that money back to the
shareholder, in my opinion, that's not accurate.
That's like me saying. I'm going to take a dollar from
you and then I'm going to give it back to you.
And then at the end of this, I'm going to say I just gave you a
dollar. Well, that's Really the case I
took one and then I gave it back.
We're basically netting out zero in this case we're literally
netting out. 0 investors did not gain any equity in the company
at all, share counts the exact same and this is the true tell
of if you're gaining Equity. We own common shares
outstanding, if you're gaining equity in the company, the
common shares outstanding will come down.
So again, when I look at these reports and I see them claiming
right at the headline there, that they're returning one point
seven billion dollars to shareholders in the form of
BuyBacks. And really, all they're doing is
offsetting the Current dilution, I just think that's so
misleading. I think that Gap accounting will
eventually be updated, and they won't be able to make these
claims anymore. In the meantime, we have to do a
little bit of detective work to figure out what's really going
on with our companies. So I use different ways of
looking at it than just just the headline sentences here.
So, so far, the bad news that we have about Salesforce is one.
We have Executives leaving the company to, we have the fact
that even when they do BuyBacks, we're not seeing a reduction in
shares outstanding. So we have some problems there
with them, actually returning. Capital back to the shareholder.
And I want to highlight what I consider to be the third, big
problem for this company and that is Tech employee layoffs.
We see in this chart and I'll zoom in for you so you can see
it as well. Let's take a look here.
I'll see if we can zoom in more. This is the amount of tech
employees. Let Go by different companies
every single month. So we can see all the different
companies stacked on top of each other.
And then the total amount of employees in November, we had
60,000 layoffs announced by all these different companies He's
in December so far. It's 13,000, but you're seeing
this progress over time. If we go back to January of this
year it was 600. There's like no layoffs.
Everybody was hiring but now the layoffs are starting to mount
their starting to get higher. And then the number of
companies, this is another troubling thing.
We have here, a chart that shows the number of companies that
have actually announced layoffs every single month and you can
see since May it basically exploded and it's getting more
populated over time so we see more employees being laid off.
More companies deciding to lay off employees.
Now, the concern here really isn't that there's going to be a
recession per se, but it's a fact that Salesforce is a
business to business company and they sell licenses, they sell
seats. So if I have a company that
employs, 50 people and eye contact sales force to say, I
need, I need to get set up. I need your software.
They will charge me based on the amount of seats.
I have the amount of licenses if my company grows rapidly to 100
people. Then I have to pay sales, force
more, maybe $20. As per month, per new employee,
right? That adds more Revenue to
Salesforce. Well, if I start firing
employees, I have less of them to pay for.
I tell Salesforce, I only have 30 employees.
I no longer have 50. So, the amount of Revenue, I'm
giving Salesforce goes down because I have less seats to
fill. This is a concern.
If the economy contracts, even though sales force doesn't do
business with the end user, they do do business with other
businesses and if those businesses are, firing off Tech
developers and Tech workers. And Summer support agents,
they're going to need less licenses and I could see that
have a short-term impact on sales force for the next year,
especially if the economy contracts.
So, I do think it's somewhat susceptible to the economy,
especially the tech economy. If we keep seeing these trends
of growing Tech layoffs. So, overall to put this in
context, we have three different areas that I'm concerned about
Salesforce. The first is Executives, leaving
the company. I think that's a red flag.
The second is a fact that they do things that just bug me like
they say the returning 1.7 billion back to shareholders
when in reality the share count hasn't gone down at all.
That's something that I just don't like to see a company do.
And then, the third one is, there's lots of tech companies
that are tightening their budget.
And part of that is reducing amount of spend, on companies
like Salesforce. So, we have some things that I'm
concerned about some red flags but then there's also parts of
Salesforce that I really like I like the fact that the revenue
is growing. I think that's a good thing,
especially in an economy like this.
I like the fact that the company is growing Free cash flow per
share at a steady clip. This factor is in dilution and
Salesforce is still growing their free cash flow, even with
dilution factored in, and I like the fact that the company's
unlevered, they have no debt. So they're in a very good
situation to be able to weather any storm in the future.
And I also like the fact that right now Salesforce is trading
at a much more. Conservative valuation trading
at a 2340 PE. That's not bad for a company.
Like Salesforce, a low 20s. Multiple.
The free cash flow yield is 4.3%.
Percent if we factor in dilution, that's maybe 2.2%, so
even the free cash flow yield right now, is not that bad,
especially for a company that continues to grow their free
cash flow per share. So to put this in context
there's some good and there's some bad with a company.
When I try to look at this overall, I'm focusing on three
main points. I'm focusing on buying companies
that have very good economics companies like Salesforce that
have reoccurring Revenue, they have powerful Market positions,
they have wide modes overall, it's just an economically.
Good company. The second thing I'm looking for
is companies that have a long runways of growth, they'll be
able to Simply grow for a long period of time with minimal
Interruption the growth gets slowed down a year hair year.
There that doesn't matter. But I want the company to be
around for another 20 or 30 years.
Companies, like Salesforce, these companies that operate in
cloud computing are incredibly sticky.
Look at Oracle for example, look at IBM, it's difficult to
destroy these companies. They've been around forever and
they're probably going to be around for the next 30 Years.
And Salesforce is one of these cloud computing companies that's
heavily ingrained in society and in our corporate world.
So it has a long continuous runway for growth, I think with
minimal disruption. And then the third thing I look
for is buying these type of companies at a reasonable
valuation and again at a 23, Ford PE at a 2.2 free cash flow
yield. I think the companies at a
reasonable valuation. So even with all the red flags,
even with all the things that I don't like there's enough stuff
that I continue to like with this stock that I'm Continue to
hold it and I know that over the next year it's probably not
going to perform well there's so much bad news for tech companies
drone pal, still talking about hiking up, interest rates
another full percentage points and we're going into a potential
recession. So I don't expect.
It will have good returns over the next year.
But again, I'm holding these for the next five to ten years.
I'm looking at this at a very long-term perspective.
So, in my opinion, as far as I'm concerned, I'm still planning on
holding Salesforce. I have no intention of selling
it. We'll see what happens over the
next three to five years, I'll show you the outcome.
Either way, but that's my take on the latest sales, force,
trauma and the operating results of the company.
See you in the next.