Welcome back. Everyone today's episode.
We have something, I think a little bit different.
I've received. I think the most criticism as a
YouTuber, by focusing too much, on the story of a company to
Bunch on the narrative, basically the qualitative
aspects of it and not the valuation.
That's the biggest criticism that I've received.
Now. What I want to do in this
episode is talk about valuation. Talk all about valuation for
this entire video. And what I plan on doing is
going over every single company in the story fund, which is this
very much. Beaten up growth portfolio.
And I'm going to go through every single company and give my
personal valuation of it as well as the valuation of analysts and
kind of correlate that and tie that in with your guys's
valuation. Yes, even yours as well.
So we'll look at all of them, kind of together.
What I did was a poll recently on my channel, right?
At a question. I said out of all of these
companies, which one is the most overvalued.
So most of you said Salesforce is the most overvalued company.
My portfolio. Then Adobe.
Apple then Netflix, Microsoft Ali, Baba an Amazon and
literally out of like, 300 people responding.
No one voted for Google or Facebook.
So you guys think that Google and Facebook are not overvalued,
that was not the ones that you picked.
But regardless we'll be talking about all of that.
Will be looking at every single one of these companies and the
valuation of each of them. Now, before we jump into the
valuation of these individual companies.
I want to share some thoughts on valuation in general.
One thing is a misconception that I see shared quite
frequently. This is very common amongst
investors. We See that most any growth
portfolio is probably in the red over the past year.
That's just a case. The market has sold down like
crazy. Most of us are taking losses in
any growth companies, Great companies like Amazon, Google,
Microsoft Netflix, Adobe, you know, all of these are basically
trading down over the past seven months.
And one thing that I see, often said, in cases, like this is
because the company used to trade way up here.
It was at this price. Now, it trades at this price.
It had to be overvalued. At this price because currently,
it's trading down here. That's what people think.
If a company goes down in price. It had to be overvalued at the
price that used to trade at. And likewise.
I see the same thing during a bull market because a company
used to trade down here and now it trades a pair.
It was undervalued down here because if you bought it down
here you would have made money. Well, I don't actually agree
with that reasoning at all. Here is a true story about Peter
Lynch that I think illustrates the problem with this logic in
1972 shares of Taco Bell, we're going through a major
correction, but the legendary investor, Peter Lynch, saw an
opportunity in just a short amount of time.
The stock price had been cut in half from $14 to $7 despite.
No obvious issues with the business Lynch, begin scooping
up shares. So here we have a case of Taco
Bell back in 1972 trading from $14 to seven dollars and that
catches the attention of Peter Lynch.
So he sees a company go down by half.
He starts to load up on Cher's at 7:00.
There's a share. So he's loading up at seven
dollars a share thinking. He's getting this at 50% off but
the correction wasn't over shares kept sinking eventually
hitting. $1 an 85% pull back from the $7 at that level.
The seven dollars were lynched started buying the stock.
So imagine this he sees a stock fall 50%.
He thinks that this is a company that doesn't really have any big
issues. He starts loading up at seven
dollars a share, then it falls an additional 85.
Five percent. Now, in this situation, most
investors would conclude that they have made a grave mistake
that they were wrong in the market has proved them has
proved them wrong, right? Because at the point that they
bought at seven dollars, it's now traded down to $1 down, 85
percent. It would seem kind of crazy to
conclude that you're still right in that purchase and most people
would assume that the stock was overpriced at seven dollars a
share. Because it's now trading at $1,
share, Peter Lynch didn't operate this way.
He said, Rather than chalking it up to a loss, Lynch kept buying
Taco Bell, even at one dollars a share.
You see, Lynch knew the real story.
The company had no debt continue to see strong growth, which
meant the pullback in the Stock's price was a great
opportunity for patient investors.
And as we now know, later Lynch was absolutely right.
Once the dust settled, Taco Bell was acquired by PepsiCo for $42
per share. Making it a five bagger meaning
that he earned five hundred percent has returned.
From his original by in price. Meanwhile, the stock going from
$1 to $42 is a four thousand one hundred percent gain, that's the
stuff of Legends. In fact, Peter Lynch consider
that one of his best investments ever.
See, Peter Lynch, clearly, understood that stock prices.
Do not trade in line with the company's fair value.
They don't just trade right there with the fair value.
All the time investors are incredibly emotional when he
bought Taco Bell at seven dollars per share.
He knew that that was an undervalued price.
Given the company's fundamentals and growth prospects.
Went down to $1, a share that didn't change his opinion.
That was the market being irrational.
He held onto it and eventually he made a lot of money and I
think this story is incredibly applicable right now because
there's many great companies, especially growth companies that
are trading down like crazy and that doesn't always mean that
they were overvalued at your initial purchase price.
I think many of these companies in the market right now that
have been sold off over the past three months, will prove to be
some of the best performing, stocks over the next 10 years.
So that's just something to keep in mind.
Mind on a bigger scale. I actually Drew this out because
I think it's I think it's important.
This is how I view the fair value and the price of a
company. Still have the fair value which
is what the company's actually kind of worth the intrinsic
value of the company, really where it should be trading.
Then you have the price that it's trading at.
The price is trading at is, dictated by all sorts of
different things. Stick dated by emotions by
Russia, by inflation, by guesses of interest rate hikes.
It's lots of logistics with Doing retirement planning and
pulling money out of different funds, all different things
affect the price. The fair value is what the
companies actually worth, based on its future growth prospects.
Now, what I tried to illustrate here, with this very crude
drawing, is that the blue hair, the fair value and the red hair,
the price. They don't really match all that
often. They're not really perfectly in
line. And I think this is really what
it's like. The fair value of the company
does fluctuate up and down. To some degree is a company has
its fundamentals change, but the price is wildly.
Oil for a lot of growth stocks, especially the price moves up to
way. Overvalued territory, then
investors turn bearish. Like they are right now and many
great stocks. Just keep selling down, more and
more and too heavily undervalue territory.
And it's difficult to know. What is the actual value of the
company. But the goal of us as investors
is to wait until companies that are really great companies.
Get into this undervalue territory and buy them while
other people are pessimistic and hold on to them be able to hold
on to him, even if Trade down into further and further
undervalued territory. So this may not be the way that
you look at valuation. But this is the way that I look
at it. Now having said that, let's go
ahead and talk about my individual Holdings, and we'll
look at a couple different things with these valuations,
will start off with the top holding care, which is Amazon.
Amazon is a company that when I do valuation on it, I'm always
looking at the terminal value of the company and terminal risks
to the company. What is terminal value mean?
It means the value of the entire lifetime of the company, not
just the next year, right? Not how many e profits going to
produce next year but the profits will produce over the
next 30 years. That's the terminal value, the
present value of all future, cash flows from the company.
So what I'm attracted to with Amazon, the reason why I've
bought so much of this company, is it really so much of a
concern about the present value that will talk about but it's a
concern about the industries of Amazon's in it's in a couple
huge industries that I think will continue to be huge
Industries and bigger Industries for the long-term future online
retail. I think Amazon is dominant and
will continue to separate from other competitors like Shopify
and it's in AWS the online it Cloud hosting.
They have the leadership position.
They have incredible lock in. They have a high rate of growth
and the competitors that are competing against them will take
some market share, but I think the industry overall will
continue to grow at double-digit rates for a very long period of
time. So those two industries of
online retail and AWS Cloud, hosting are the things that are
attracted me to Amazon to begin with.
Now, if we go into the valuation, there's a couple
things I want to look at first. We'll just take a glance at what
you guys thought were the most overvalued companies out of my
entire portfolio. Only two votes were for Amazon.
So, some of you might think it's overvalued, but you don't think
it's the most overvalued company in my portfolio.
Now, let's go ahead and look at the analyst first.
This is something that will look at for every holding.
This is Morningstar. Their analysis firm.
They do analysis on all of big Tech.
For Amazon right now. They have it as a five-star by
which means that the company in their rating system is as good
of a bias. You can get.
It's the biggest by rating, they put the Fair Value Estimate at
3850. So they think that this company
is heavily undervalued and they give it a moat rating of wide.
So they also think the company has a wide moat.
Now, I can also look at Schwab's reading on this.
They also have Equity analysis on these companies and they give
it a market perform, which is basically a hold.
So they I don't consider a strong by a strong cell.
They just think that it's a hold right.
Now. The last one that we can look at
is cfra. This is another analysis firm
and they consider Amazon, a four-star rating, which is a by,
but not a strong by now that we've looked at your votes on
Amazon. We've looked at the analysts
ratings on Amazon. Let's go ahead and look at my
valuation on the company. This is going to be using
qualtrics insights, which I get a lot of questions about this.
This entire website, with all these graphs here, in this
information is available as part of the patreon.
There's no bait and switch. It's not Anything extra is just
part of the membership. So if you want to try this out,
you can join the patreon. There's a free trial in the link
in the description below. Now, let's go ahead and look at
Amazon's valuation here. Companies came down from three
thousand dollars per share to 2000 trades at 2100 right now.
And a lot of the things people look at when valuing any
company, but I think it's fine is a forward P/E ratio.
Based on this Amazon is expensive, you're valuing the
company on the narrow term price to earnings ratio.
Amazon is a company. That's very expensive.
Pensive. So I don't blame you, if that's
the way that you're looking at it, but there's other ways to
value a company. When you look at the Evita
ibadah, the Enterprise Value to ebit of the company, that is
another proxy for the earnings of the company.
And if you look at it this way, which I think most analysts do,
Amazon is much more in line with the rest of big Tech.
It trades that an Enterprise Value to ibadah of 18.9.
So it's right there in line with Microsoft, Apple, Google and
Facebook, right? Little bit more expensive than
some little bit cheaper than others on an Evita.
That basis, I think the Amazons undervalued we can also look at
the free cash flow of the company.
This is the most controversial part of this company.
If you look at the free cash flow over time, I know that
Amazon has the ability to generate growing free cash
flows. I know that they're capable of
doing that because you've seen them prove that to investors
back. In 2015.
They had seven billion, then nine billion, then back down to
six billion, then they hiked it up a lot in 2018.
They had 17 billion. This was pre covid-19.
You know, big boost for Amazon, 2019 pre covid, 22 billion
dollars in free, cash flow then in 2020.
They update the 26 billion dollars.
So Amazon has the ability to grow their free cash flow.
I think at a very steady rate and the company's grown its
Revenue dramatically since 2019. It's added 200 billion dollars
in Revenue so they can grow free cash flow.
They have AWS growing like crazy.
They have their revenue on their retail growing like crazy and
the free cash flow just goes off a cliff.
Right here in 2021. It goes down to 14 billion
dollars in the - the reason. Why is because Amazon is doing
aggressive reinvestments. They're throwing all of their
cash flows into capex. Meaning, they're buying so many
warehouses hiring. So many workers, buying all the
tools and equipment and they're just not making any free cash
flow right now. Now as a long-term investor, I
can't just look at one year, just their capex in one year and
base my investment thesis off of that.
I'm looking at the long-term time Horizon of the company, and
I think that If the company chooses to based on my analysis,
I think the company could generate 30 to 40 billion
dollars in free cash flow next year.
That's I think a conservative estimate that is incremental
free cash flow growth since 2020 as the company's expanded
rapidly. So, based off those estimates
Amazon. Right now with this one point
zero, nine trillion dollar price tag.
It's trading around 25 to 30 times.
Next year's free cash flow. And to me, that seems cheap for
Amazon. It's more expensive than other
companies. That's more expensive than
Google, or You know, other companies in the market that you
can buy but not many companies in the market are growing their
e. But I like this, there's just
not many doing this. There's not many companies in
the market growing their revenues like this.
There's really not many companies.
Pulling in half a trillion dollars in Revenue.
Growing their ibadah at incredible speeds and trading at
25 to 30 times free cash flow. So overall, I don't have a
specific dollar number of what Amazon is worth.
And in my opinion, I don't think that's the way to look at
valuation. I've never once heard Warren
Buffett or Charlie. Munger, say apple is worth
exactly. This dollar amount or Coca-Cola
is worth exactly this dollar amount.
What they do is they look at ranges.
There's a ranger Amazon becomes kind of overvalued, and then it
becomes very overvalued. There's a range where it's
mostly fair value. And then there's a range where
it's undervalued and a range where it's grossly undervalued.
So based on my estimation of the company, my valuation.
I think that fair value right now is somewhere in the range of
3402. Dollars per share.
I think that's fairly valued based on the mode of the
company, the growth prospects the industries, that it competes
in the ibadah, growth of the company and the free cash flow
opportunity. I think that's a fair value.
I think that if the company got up into the range of forty eight
hundred dollars a share, that would probably be up into the
overvalued range right now and I'd be looking at taking some
gains at that point and I think the at a range of 2,000 dollars
per share. I think that the company is
undervalued. Now, there's no guarantees with
this and just as a disclaimer. This isn't a buyer sell
recommendation. I'm just showing you my thoughts
and what I'm doing with my portfolio, I'm not telling any
of you what to do with yours. Now, the next company on the
list, the next biggest holding in my portfolio is Google and I
switched over to the Holdings page here.
So you can see the real return with Amazon.
I'm down 30% right now and with Google, I'm down 11% over.
Also, even Google has sold off over the past couple of months.
And it's a great company. Largely considered to be
undervalued. By most of you.
In fact, in the vote of what's the most overvalued company,
literally. Nobody voted for Google.
None of you. Thought it was the most
overvalued company in my portfolio and across the web
right now. Most people agree, that Google's
undervalued. It's basically a consensus right
now. Now, let's go ahead and see if
the analyst agree. Morningstar has Google at a
four-star by. So they actually believe that
Google is not as good or not as undervalued as Amazon.
They think the Amazons a more undervalued company.
Now, they give Google a Fair Value Estimate of 3600 dollars
and an economic moat that's wide.
So why don't company undervalued right now?
Things are looking good. According to Morningstar Schwab
Equity analysis, right now, gives us a strong outperform,
the consider a by, and then we have the cfra giving Google a
four-star by. So all the analysis agree that
Google is undervalued currently. So if you looked at the analyst
opinions, all of them across the board agree that Google is
undervalued, and I think that most people online do, let's go
ahead and take a deeper. Look at this, with quatrain
sites. The first thing is that Google
has a nineteen point two. And forward P/E ratio, so this
big of a company growing, this fast has a 19-4 PE but keep in
mind, Ford Pease are based on analyst estimates.
There are just estimates that it's not set in stone and they
can be revised downwards. If a lot of companies, pull
their funding, they pull their marketing budget because they
think we're going into a recession or if we do enter into
a recession. I think that Google will get
hit. The company will have lower
earnings than its. It's analysts forecast right
now, so that It is something to keep in mind.
Google will get more expensive. If we enter into a recession
with lots of companies pull their ad budget.
But right now, it still looks very cheap.
When you look at the growth rate of the company.
It's just absurd. The company's growth is
incredible. In fact, it was unnatural growth
from 2020 to 2021, the free cash flow.
Growth of the company is absurd in 2021.
Google earned sixty seven billion dollars in free cash
flow. So that's not hypothetical.
That is how much they earned based on the free cash flow.
Well, it's trading at a 22 free cash flow multiple.
So the company is trading above some other companies but it's
still relatively cheap for a company like Google and the
Enterprise Value to e but have Google is even better.
It's at a 13. So the Enterprise Value to
ibadah was brought down a lot as Google, grew their ibadah again,
unnaturally from 2020 to 2021, going from 61 billion dollars in
ibadah to 103 billion dollars in ibadah.
That is just incredible. So when I look at all of these
metrics and I try to form a fair value of Sumption on it.
I think the fair value of Google is around 2,800 dollars per
share. That's where I'd be looking at
it as mostly Fair valued. I think at 3,000 or thirty five
hundred dollars a share the company's overvalued and I'd be
looking at taking gains and I know that this is different than
what most people believe, right. Now.
A lot of people believe that Google is the most undervalued
company in the market and the most obvious by.
But when I compare Google to other companies, I just think
that the terminal value risk. The long-term risk to the
company are greater than other. He's one of them is advertising.
Advertising is a great business during good times.
But when we enter into a big recession, if we eventually do,
I think that Google's ibadah their earnings and profitability
will be hit quite a bit. It's not as resilient as
something like Microsoft. Another thing that I think is a
risk for Google is the same risk for Facebook.
You saw what Apple did to Facebook by doing privacy
changes. Now, just entertain me here for
a minute. Just imagine this hypothetical.
Let's say that in a couple years.
I will no longer wants to do the agreement with Google where
Google pays Apple 12 plus billion dollars to be the
default search engine to be the default homepage on Safari
browser, when billions of people by their phones, they open it
up. They have the Safari app and
they see Google as the default search engine.
Google is paying for that, right?
If they had an incredible moat and they, they just had no
competition. Why would Google pay Apple?
12, plus billion dollars to be defaulted.
Clearly. They think it's worth that much.
Money now, imagine for a minute, if Apple decided they no longer
wanted to do that and then stead they defaulted their own browser
apples search. Right?
I searched they could call it Spotlight, right?
They could do whatever they want and it could have a huge privacy
emphasis, just like what they did with Facebook.
This poses. I think a very great risk to
Google's business. It's something that I just
factored in in the back of my mind.
Apple could essentially do that sometime in the future and who
knows what would happen? Would people just revert right
back to Google search. Does it have that big of a
switching cost in a moat? Or would people kind of start to
use the Apple search. So overall, I do like the
business of Google and I think it's clearly undervalued based
off its near-term future earnings, but there's some long
tail risks with this company that do concern me.
Now. My third biggest holding is
Microsoft. I currently have around 10
thousand dollars of value. And this holding is down, four
point five percent. So it's down just a hair,
Microsoft is one that about seven of you in this poll, so
not the most but some of I thought it was the most
overvalued company in my portfolio and the comments on
this one. We're basically that Microsoft
trades at a high P/E ratio. And the growth isn't too fast.
So you think it's the most overvalued?
Now, let's go ahead and take a look at the analyst here.
Morningstar has Microsoft as a four-star by the fair value
estimate of 352, and a wide economic mode.
So I agree with everything basically here.
I think that Morningstar has this one, right Schwab also has
this one as a strongly outperformed, their strongest by
rating and cfra. A also has Microsoft as a
five-star by so across the board.
The analysts think that Microsoft is undervalued.
Now, let's go ahead and take a look at the fundamentals here.
Microsoft trades at a 23 forward, P/E ratio.
So that's where most people think that it's overvalued
because right now, any company above a 20 PE ratio is being
looked at with very skeptical eyes, right?
People are looking at these higher PE companies and seeing
if they really deserve it, Microsoft is one that I think
really deserves it. This company deserves.
Trading at a 25 plus forward P/E ratio if we look at the other
valuation metrics, Microsoft trades at a 10 price to sales.
I think that's reasonable. That's where it often trades
right there in that same range on an EV to ibadah at trades,
that an eighteen point seven. So, right there, with Amazon,
now, the thing that I really like about Microsoft is, I think
this company has an incredible mode.
I think that unlike Google or unlike Facebook.
If we go into a battery session, it will hurt, Microsoft's
earnings to some extent. But I have to believe that all
of its corporate business, licenses all the office tools,
all the things that they sell cloud computing.
I think that that will hold up a bit better than the advertising
business. So, I think that Microsoft is
less susceptible to the impact of a recession, then companies
like Google or Facebook. That's why I think it deserves a
higher PE ratio. Now, on a free cash flow basis,
Microsoft generates consistent and Incredibly fast growing free
cash flow. It has incredibly high gross
margins. So as this company grows, its
Her mental Revenue, it keeps a lot of that as free cash flow.
And right now it's trading on a price to free cash flow of
around 33. So 56 billion dollars of free
cash flow last year, this continues to grow on Pace.
You can see the trend over time. They're always posting positive
free cash flow. They have.
I think an unassailable moat. I don't think they're ever going
to get disrupted and I think 33 price to free cash flow is
reasonable for a company like this.
I think a PE ratio of 24 is undervalued side.
Look at Microsoft and I think the fair value of this company
is right there with Morning Star.
I think it's 350 right now, at 260.
I think that the company is just undervalued and the arguments
that Microsoft should trade back into a teens PE ratio, right?
17 or 18. I just think are incorrect.
This company deserves a large premium over other companies
because of the consistency of their cash flow that consistency
of their growth. And I think they're incredible
mode. When we look at the shares
outstanding, you can see that they just continually do these
share BuyBacks. And I think that there Do that
right now. So Microsoft is actually a
company that right. Now.
I think is set up very good for the next three years.
I can see it continually growing and being impacted in a
recession to a lesser extent than most companies.
So if Microsoft trades up to the 350 range, that 360s, I'll be
looking at taking gains at that point.
But right now, it's not even close to that.
And I think in this market with the hatred towards any tech
company, I don't think I'm going to get there.
Anytime soon. Next, we have Netflix.
This is the fourth largest holding and boy, is this one, a
tough one. It's a Tough one to look at.
I am down seventeen thousand six hundred dollars on Netflix.
That is. 64% some down over half my initial capital in this
company. This one is not a company like
Taco Bell, right? This wasn't Peter Lynch buying
Taco Bell and the company fell down half in price because of no
fundamental reason. Netflix fell down half and price
or 64 percent in price because of fundamental related reasons.
The growth Outlook has deteriorated for the company.
Their total addressable Market seems to be much.
Smaller than investors were anticipating and the competition
seems to be having a greater impact.
So I don't think that Netflix sold off for no reason.
I think the company deserved a trade down, but the question I
have to ask myself now is with it at its current price.
Is it still overvalued or undervalued?
And that's what we're going to look at.
Now, in terms of the poles. You can see Netflix right here,
eight of you thought that this is the most overvalued company
in my portfolio. When I read your reasoning, many
of you said, Netflix, just has to Take the bowl and difficult
of a path, which I think is a fair argument.
You're basically saying you can't predict the future.
The company might not, you know, have any free cash on the
future. It might get to disrupted.
So it's to overvalue too risky. And that's a take that I
understand. Now, let's go ahead and look at
the animals here. Morningstar has Netflix.
Now, as a four-star by, and I have to give credit where credit
is due. Morningstar was spot-on with
their assessment on Netflix. They've held that this company
has been overvalued all the way since 2017, this Orange.
Hair is overvalued. So they firmly said, this
company has been overvalued for a very long time, year after
year, after year. And after this massive Plunge in
stock price. Finally, for the first time in
like ten years. They're saying, now, the stock
is undervalued, right? The price has changed
dramatically for Netflix and now they're actually saying that
it's a four-star by. They have the Fair Value
Estimate as to 80 Schwab has a rating of hold on.
Netflix. It's a market perform and cfra
has a three star rating. On Netflix, which again, is just
like a hold. Now.
Let's go ahead and take a look at Netflix and my personal
valuation on the company. When I look in terms of
valuation on Netflix. The first thing that I'm looking
at is the PE ratio of the company, it used to trade at
that growth premium. The growth premium was a
40-plus. So, while Netflix had a bright
future, it didn't seem to have such a small total addressable
market and before it had a huge indication is that competition
and internet-connected devices was a big problem for it.
It traded at that growth, premium valuation of Got 40 to
60 for PE. Now.
Look at it, the premiums gone. It's trading at a 17.
This is cheaper than basically, all of big Tech right there with
Facebook. It trades at the same PE ratio
as many restaurants and slow growing companies.
So Netflix, no longer is being priced by investors as a premium
company. It's traded down to a very
moderate slow growing company that has lots of risks.
So that's the first thing that I would point out the Enterprise
Value to ibadah is for .7, And now I know that Netflix has some
different accounting with their amortization.
So that eBay doesn't perfectly reflect the profitability and
free cash flow. I'm aware of that but that's
still a pretty incredible even at ibadah.
Even when you discount the amortization, which most
expenses for Netflix, about 80% of them are amortized in the
first two years. So on a rolling basis, this is
still a lot of ibadah for a very cheap price.
We look at the price to sales of Netflix.
We just saw that Microsoft trades at a 10 Used to sales,
Netflix is creating out of 2.7. So 2.7 times its Revenue.
That's the price of the market cap.
Overall, the picture and painting here is that Netflix is
not priced for greatness. It's not price to be this
all-encompassing biggest streaming service super
profitable. Now, it's just being priced as a
very moderate kind of slow growing company and I still
believe that Netflix does have a lot of potential aside from what
the widespread - press has led everyone to believe they for I
casted Mega subscriber gains, right?
They're going to lose two million next quarter.
That's what they're forecasting. But based off their last
forecast. It could be plus 1 million or -
5 million, right? It's a little bit unpredictable.
But overall, they forecasted that they're having a churn and
subscribers because they're at this massive size and many
people in 2022. Are like finally, I can go out
and go on vacations. Finally.
The covid restrictions are gone. So this hasn't been a good year
for Netflix, and I think that the rest of this year, will be
really tough, but I'm still looking.
The terminal value of this company.
The long-term Prospect right? Netflix still is the biggest
streaming service. The free cash flow has widely
been for the past 10 years - just money burning all around
every quarter, burned more and more money.
But now look, they're having more and more positive quarters.
And these are meaningful quarters.
Last quarter. They beat their free cash flow
estimate by 100 million. So they were expecting to have
somewhere a little bit over 700 million.
They came in with 800 million free cash flow that quarter and
they're projecting their forecasting to be free, cash
flow positive from here on out. So looking at the current
valuation and the situation Netflix is in, I still think
there is a network effect to this company.
Meaning right now. They're shedding some
subscribers because of I think temporary issues over the full
year term in 2022. I think that Netflix will come
out with a net subscriber gain going forward.
If they're continuing to do that.
They will have earnings growth. I estimate that their earnings.
Will be 20 to 30 percent over the next five years.
And I think that in 2025 Netflix could have free cash flows of
around 8 to 10 billion dollars. That's the case, the company I
think will be valued above 550. So even right now, is
discouraging, as this company has been to hold.
I think I can make a profit on this over the next five years.
The downside of this company is if they just cannot regain
growth, if the company's just fizzling out, they have no
bigger total addressable Market. They can't figure out the India
market, the Asia Market, they Can't continue to grow in South
America. If that's the case, then the
share price will either stagnate or just Trail off.
So that's the upside and downside right now.
For me. Netflix is a whole.
Now after Netflix. We have my next largest holding,
which is a Dobby. I'm down 8% on this.
Holding. So out of five thousand, three
hundred dollars invested. I'm down.
Roughly four hundred and sixty. Now adobe's one of the companies
that you voted as one of the most overvalued in my portfolio.
So right there behind Salesforce, we have 20 votes
that Dobby is the most overvalued.
Let's go ahead and take a look at what the analysts.
Think, morning start believes that adobe's.
Actually, a by the consider, a five-star by.
So a better buy than Google. I think that that's probably
shocking to a lot of people. They have the Fair Value
Estimate at 6:15. They have the economic moat of
the company rating as wide. And I agree with the moat
rating, but we'll talk about the valuation in a minute.
We have Schwab giving Adobe a hold.
So they don't consider a strong by.
They're just saying, hold on to it.
And we have the cfra giving this one a four.
Star by. So let's go ahead and look at
adobe's valuation. This company has come down like
crazy and price. We can see from the beginning of
this year. Year-to-date adobe's down $165
and over the past year. You can see the huge spike in
price is up to nearly $700 per share.
Now. It's down to four hundred
dollars per share. But again because a company came
down in price doesn't mean that it's now undervalued necessarily
because a company moved up in price doesn't mean that it was
undervalued previously, fair value.
Estimates can vary widely from Actual price.
If we look at Adobe, we have a company that trades at a
premium. The premium is 29 forward P/E.
That's what most of you are saying.
Means this company is overvalued it, trades at a premium
valuation, in terms of forward, P/E ratio and the Enterprise
Value to ibadah. Even on a price to sales basis,
Adobe seems expensive. It trades at a 12 price to sales
where Microsoft trades at a 10. Right?
Those are both software companies.
Microsoft has incredible gross margins, but Adobe Demands, even
a higher price to sales than Microsoft.
So so far at a quick glance at these valuation metrics overall.
I'm starting to agree with you. That adobe might be the most
overvalued company in my portfolio.
Let's go ahead and take a look at why investors might be
valuing this company, to this extent.
First of all, let's look at the annual free cash, flow growth
because I think this will be revealing, this company is
growing, its free cash flow to an insane amount.
Let's go ahead and blow this up because I want to look at the
free cash flow of this company. Over time.
This is what I Investors are really looking at and really
paying for with this company. Try to find another company,
with this explosive level of consistent, growing free, cash
flow. See if you can find another
software company that has it to this extent.
We have a company that for 2002 to 2014.
It did grow its free cash flow substantially, you know, but
then in 2013, it was like a switch flipped, right?
Something happened. What happened was they switch to
SAS? They switch to the cloud model
no longer. Could you go on and just pirate
the whole Adobe suite? They switch to that nice Cloud
Model that stopped all the piracy.
They have incremental updates. They build people monthly lots
of professionals, use it for photography, for video editing,
for all different applications. They have very tough switching
costs. So if you learn everything on an
adobe piece of software, you don't really want to switch over
to something else. Even if it's cheaper.
You just have so much energy. Tie it into Adobe.
So since 2013, they started to see this explosive growth in
there. Out Create a seat subscriptions
and their free cash flow and you saw it go from.
Let's see, less than 1 billion dollars in free cash flow per
year to 6.8 billion. So they 6 x 7 x their free cash
flow from 2013 to 2020 one. That is dramatic and simply put
not many companies are doing this.
So, I think, the biggest reason that investors are paying a
premium for Adobe, is this consistent growth of free cash
flow consistent growth of ibadah, explosive growth of
Revenue. New, the company has every
metric moving in the right direction.
It has high gross margins. It's highly profitable.
The net income looks fantastic. The earnings per share.
Growth is very consistent, and growing.
And unlike a lot of software companies.
They're not diluting you. In fact, they're doing the
opposite, you can see the shares outstanding going down over
time. So adobe's now in the situation
where they generate so much free cash flow.
They can use that to buy back their shares of manufacture
their earnings. So when I look at all these
metrics of adobe, I'm looking at a company that I consider to
have a pretty. I'd mode there is competition.
There are people moving away to other products.
But Adobe still has a pretty big Moe and it has lots of markets.
It can actually grow into lots of international markets.
Now, having said that, we have a company that trades at a price
to free cash flow of around 30 based on last year's earnings
2021. I think that the free cash flow
will continue to grow, you know, the pasted.
It has been ten to twenty percent per year and based on
that. I don't think it's too
expensive. I think that adobe's right there
around fair value. So, this is actually a company
that II do think is sitting around fair value.
My estimates are around 450 for it right now.
So if Adobe does trade up to like, 600 dollars a share, 650,
I'll be taking gains if it trades down to 32, 250.
I'll be buying more of the company because I look at this
one is almost a certainty. It's a bond like company that it
will generate free cash flows. That's for certain the amount.
That's a variable is how fast those free cash flows will grow.
So this company I think is a safer bet.
It's more of a bond like company.
You have to pay up for the premium of adobe.
But right now I think it's just under Fair Value.
Now, next up after Adobe. We have Ali Baba.
The Chinese e-commerce giant. This company has been one of my
biggest losses in the portfolio. Overall retail in general has
just been hit any company connected with retail and
especially online. Retail has been hit hard over
the past couple of months, but Ali Baba has its own specific
unique concerns. I have five thousand one hundred
dollars worth of value in this company, and I'm down currently
5700. So 53% I bought this one
thinking, it was a value play, the numbers look good on.
It looked like a fast growing company and people were fearful
of China, but not to the extent that they are currently right.
Now. People are very skeptical of the
Chinese government, and most investors, want nothing to do
with it. So when we look at your guy's
opinion on the most overvalue companies, two of you voted for
Ali, Baba, and your comments were that Ali.
Baba basically can't be valid because it presents too many
risks, right? The Chinese.
Is the biggest one. Now, we look at this and we look
at the analysis here. Morningstar has a five star by.
They have the Fair Value Estimate at 179 and they have it
as an economic wide mode. And while Morningstar is correct
on many of these companies. They've been very incorrect on
Ali. Baba.
They had this company at a fair value of 300.
Now they have the fair value at 180.
So they keep adjusting down the fair value.
Cfra has this one as a cell as well.
So they have it as a 2 Star which is a cell they say that
they're Risks of assessment, reflects, our view of
considerable oversight and interference by the Chinese
Communist Party notable competitors.
And dynamic market for e-commerce and other digital
offerings. We also have some concerns
related to corporate governance. So that's their thoughts on it.
They think that this one is a cell.
There's this too many extrinsic risks to the company.
Now, with every company that I look at, I'm always trying to
separate the company, the fundamentals and the fair value
of the company from the stock price.
The stock price can trade, very volatile can go any direction.
In. But we want to look at the
actual company in the fundamental and future outlook.
Right now. The valuation of Ali Baba is
it's creating out of ten price to earnings.
So it's cheaper than any other big Tech in the u.s.
It's cheaper than Facebook cheaper than Amazon cheaper than
basically everything cheaper than Netflix, you know cheaper
than a lot of restaurants here on paper Ali.
Baba's like the cheapest company if it was a US based company,
but looking at the actual fundamentals of the company, we
have growth actually to celebrating Revenue.
Growth is decelerating a lot and it's kind of unknown.
If it's going to re-accelerate. We have all the margins, gross
margins profit, margins operating margins decelerate, in
a moving down over time as well. We have a company that is facing
increasing competition and it has a lot of factors at play
that I don't think are directly fundamentally related, but I
think they're close enough. The Chinese government can
affect the profitability of the company and their interference
over the past year has been pretty aggressive way more than
I actually anticipated. So I'm looking at this company
looking at the concerns going forward and I'm going to be
tracking this company over the next two quarters.
Because as of right now, Ali Baba.
And my opinion is a hold on paper.
It's undervalued. It should be trading at 150 $200
a share right now. But if the fundamentals, if the
actual growth rate margins competition, continue to
actually deteriorate over time, I'm going to be moving out of
this company. Now after Ali Baba, we have
Salesforce. This company is enterprise
software. It's grown massively.
Over the past decade and I have currently 47 hundred dollars of
value in it. I'm down 21% and that's twelve
hundred dollars. So first of all, just take a
look at the graph here. Salesforce is very volatile, it
traded up like crazy and 2020. Then in November with the rest
of all the other Cloud companies it traded on a lot.
It's down 48 percent from its recent all-time highs.
Now, out of all the companies that you voted on, as the most
overvalued, the majority of you picked Salesforce right here.
28. People said that this is the
most overvalued, so at one by an overwhelming extent.
Now, funny enough. Most of you think that
Salesforce is overvalued, when we look at the analyst hair,
they disagree. They think that this company is
actually like a still right now. It's a really strong by
Salesforce by morningstar's estimate is worth three hundred
and twenty dollars. That's their Fair Value Estimate
Schwab doesn't like it quite as much.
They consider it a hold and the cfra analysts agree with
Morningstar. They consider this one a strong
by so we have the Audience. Here.
Most of you think that this company is overvalued and a lot
of analysts think that the company's undervalued.
So having said that, here's how I look at the valuation.
We have sales force at a 34 Ford PE ratio, 34 Ford PE is
expensive. If you're just looking at that
in today's market, it probably looks over valued, even looking
at the Enterprise Value to ibadah that looks even worse.
It's out of 41. So both of those metrics don't
paint a good picture, you look at it on a price to sales
because it's a software company. It has high gross margins.
That's at a six. So that's very reasonable.
I think that's actually kind of historically cheap for a company
like Salesforce. So we have some different
metrics are on a price to earnings on an Enterprise Value
to ibadah Salesforce looks expensive on a price to sales.
It doesn't look that expensive. Now the big thing that I've been
focusing on and I've been stressing over the past three or
four months is the free cash flow of the company and this is
the big thing that Salesforce has going for it.
I think this is like Adobe and The investors are paying for
this rapid increase in the free cash flow per share.
We look at this company. Here's the free cash flow growth
over the past while since 2004, right?
It had essentially, no free cash flow.
Then you see since 2015, the rapid increase in free cash flow
every single quarter and every single year if we flip this over
to annually, this is what it looks like.
See these type of charts when you see a company that's able to
leverage its scale and grow its free cash flow at these rates.
This is what investors are paying.
For now, the 2022 hair. This is based off of an estimate
of the most recent quarter, plus the past three quarters beyond
that. So this isn't exactly like
perfect. This is the trailing 12 months
of free cash flow. Either way.
You see the rapid increase in this is what you're paying for
with Salesforce. Remember, when you're buying a
company, you're not buying the future earnings, you're not
buying the future ibadah. You're buying the future, cash
flows of the company. A company is worth the present
value of all of its future cash flows.
Those. So this is really what you're
buying and this is really what they can return to investors.
Now, Salesforce is still in growth mode.
So, if we look at the shares outstanding, you can see this
trend of them, issuing more and more shares.
And this is something that I hate to see with any company
that I own in both of my portfolios, the passive income
account in the story. Fun.
I have exactly two companies that do dilution just to
Salesforce didn't Amazon. Those are the only two
exceptions I've made because I hate to see dilution Salesforce
did some dilution right here when they bought slack.
And then they To do it for stock-based compensation.
Now, the big takeaway here though, is that the free cash
flow growth is heavily outpacing, the share, dilution,
meaning, over the past couple of years.
They've grown, their, their share count by about 40% and
they grown their free cash flow by a hundred and sixty percent.
So, as an investor, even though they're deluding me, they're
growing the free cash flow at a much quicker pace.
And I think that this company has huge Network effects.
I think that it has a huge lead in its industry.
I think it does have a wide amount.
And you can see this Illustrated in the growth of the company.
You don't see many Revenue growth charts like this, with
this type of consistency. This type of speed with these
type of margins. So other companies like twilio
can grow their revenue at PACE but they don't have the margins
of Salesforce. They don't produce a consistent
growing free cash flow per share like Salesforce.
So when I look at Salesforce on a price to free cash flow basis,
it's trading at a 30 right now and that is only expensive if
you think that this free cash flow, growth is going to come to
a complete stop. If you don't think it's going to
grow its free cash flow, all any more that 30 price to free cash,
flow is kind of expensive but I don't think that's going to
happen. I think they're going to
continue to grow their free cash flow 1020 percent per year.
So right now I do think that Salesforce is undervalued on a
price do free cash flow basis based on the assumptions I have
for this company because I consider to be a very wide mode
and I think it will have considerable growth in the
future. I think that the fair value is
around $200 right now, I'd be looking at selling this company,
if it trades back up to 250 to 270.
That's where I think it enters overvalued range and I think it
will eventually get there. We'll see how long it takes.
But that's what I'd be looking to sell now.
Next up. We have apple.
This is a company that I own in both portfolios.
I'm incredibly bullish on it, but it's a smaller holding in
this portfolio. So we have apple has a four
thousand dollar position right now.
And I'm in the green. This is one of the rare ones
are. I'm actually in the green with
my current Holdings. I mean, the green by 8.3%, $300.
So this is actually one of the ones that many of you voted as
overvalued. It was Behind Adobe with 15
votes. A lot of people are convinced at
Apple's. Overvalued you all disagree with
the Warren Buffett. He's been recently buying this
company. Now, let's go ahead and take a
look at the analyst here. This is one where the analyst
actually kind of agree with you. All they have apple as a
three-star, which is just kind of a hold.
They actually think that it's overvalued to some extent.
They think the fair value is 130 and it currently trades at 142.
We also have Schwab's saying the opposite.
They say that this one is a strong buy-in.
We have cfra saying that this one is a buy with a four star
rating. So we have some disagreement
amongst the analyst, two of them saying it's a by one of them
saying it's overvalued. So when I look at this company,
I look at the valuation of it and I try to buy it on a good
deal. But I consider Apple to have a
very high terminal value very unlikely to be disrupted and to
have an incredibly wide mode. And I think there's lots of
opportunities that are just long shot beds like the augmented
reality or virtual reality headset.
So having said that That's the frame that I look at this
company from a qualitative standpoint.
Then I look at the PE ratio of it.
It trades at a 22 forward P/E. So it's slightly more expensive
than the S&P 500. So what I'm looking at from my
perspective is a company that's substantially better than the
average company in the S&P 500. But it trades at a slight
premium, a 22 compared to an 18. So you're paying a little bit
more to have apple over the other companies in the S&P 500,
the Enterprise Value to ibadah is a 17.
So we look at just the The basic valuation metrics.
I think that Apple's pretty cheap, just by its PE ratio, and
it's Enterprise Value to ibadah. And I see no reason that Apple
should trade down back to the 14 or 15 forward.
P/E ratio that it was creating it when it didn't have nearly
the moat that it now has, Apple has changed over the past five
years. They have Apple TV.
Plus they have apple music. They have way more devices that
entangle you in their ecosystem. Like the watch, like the are
pods, right? All these different devices
people use I think the company has a bigger moat.
It has more Network effect. It has higher switching costs
and I think it should trade at a bigger premium.
When I look at the Enterprise Value to ibadah.
I see that the Ebola is growing steadily over time.
I see that the free cash flow is absolutely incredible growing
steadily over time. Look at this over the past
couple of years. We don't see any other company
in the world. Posting, these type of free cash
flow numbers in 1/4. Forty four point, six billion
dollars of free cash flow in a single quarter.
Now after looking at the free cash flow, I think another
thing. Attention should be drawn to is
the shares outstanding because you want to adjust the free cash
flow growth of the company on a per share basis.
And I'm going to be adding that specific graph into qualtrics in
the next week. So we'll have a free cash flow
per share graph here. But right now, the best we can
do is compare the free cash flow against the shares outstanding.
This is what the shares outstanding of apple look.
Since the beginning of the company, isn't this incredible?
There's not many companies like this.
That have devoured this much. Shares outstanding since 2013,
they've just continue to do share BuyBacks with their
massive growing pile of cash, every single quarter, and they
buy back more and more of the stock as an equity owner and
apple, you own a greater and greater portion of this company,
every single quarter. And with the stock price falling
right now into the 140s. You better believe that Apple's
doing share BuyBacks the allocated ninety billion dollars
for share BuyBacks. So, you know, that this company
is going to manufacture their earnings by Buying back their
shares making that PE ratio go down.
So on a price to free cash flow basis, you're paying around a 34
Apple based off their 20 21 years.
So in the future, it's probably a bit cheaper.
But as of last year, you're paying a 30 multiple on that
overall. I look at the metrics of Apple,
the 22 for PE ratio. I think is undervalued.
I think this company should be trading at a 26 plus.
So right now I do think the Apple slightly undervalued.
I think that fair value is around 150 for it at 120.
I think the company's undervalued all be, buying more
of it at that point. As I don't think, I really don't
think the Apple should be trading in line with the rest of
the market. Just doesn't make sense.
This is a dramatically better company bigger.
Moat generates more free cash, flow can engineer its earnings.
It has I think the least at least low risk of Regulation
compared to other big tech companies because they're so
privacy focused. And I don't think it has as much
terminal value risk to its long-term story than other
companies. So right now, I do think the
apples undervalued, but not to a huge extent, if it gets to 120.
I'll be looking. At scooping up more shares.
Now. The last holding in my portfolio
is Facebook. This is one that I bought back
into, I used to hold it and I sold it at 350 per share.
So that was very fortunate timing.
Then it fell like 40 to 50 percent and it got to a
valuation. I just thought was to oversold.
So I bought back into the company.
I currently have 2400 dollars into it and I'm down 10.6% now,
out of the companies that we voted on as the most overvalued
Google and Facebook were the only two that Nobody voted for
so. None of you think that this is
the most overvalued company in my portfolio and the analysts
here. Mostly agree with you meta has a
five star rating by Morningstar analysis.
They think the fair value is 384 and it trades at 193.
I think that it has a wide moat that looks good.
We have Facebook from Schwab and they give a by reading so that's
good news from that. And then we have the cfra here,
giving it a hold writing. So they're a little bit more
cautious with Facebook. Now, in terms of my thoughts in
the valuation. I I really didn't think too hard
about Facebook. This was a pretty simple
decision. The company sold down to the
point where it was a 17 PE ratio right now.
It trades at a 16. So it's treating their right at
a 16 forward, P/E ratio, which is heavily discounted that's
cheaper than the rest of the market.
So investors are discounting Facebook more than the average
of the S&P 500. The price to sales is 4.4.
The Enterprise Value to ibadah is below 10.
Those all look really cheap. The free cash flow looks
incredible. Growing free cash flow like
crazy. It has 40 billion dollars of
free cash flow in 2021 and that makes the free cash flow
multiple of 13. So this company is creating at a
very low multiple in every way that you slice and dice it a low
price to sales, a low P/E ratio, a low price to free cash flow, a
low ev2. Ibadah.
Everything looks cheap just all around the board, Facebook looks
cheap. So the only bearish take that
you could have on Facebook is if you think the company is just
going to have fundamental. Duration, like the fundamentals
are going to fall out underneath.
It Tik. Toks going to run away with
everything, right? Everything will go wrong for the
company. If you don't have that type of
thesis on paper. And every way that you look at
this company, my opinion, it looks cheap.
So I bought back into the company.
I think it's well, below its fair value and my opinion, it
should be trading at a low 20s multiple.
So, Facebook gets up to a 22-4 PE ratio.
I'll look at taking gains. But as of right now, anytime
below that, I'm going to continue to hold it.
So there you have it. There's a look at every holding.
A portfolio, the valuation of it.
How I view the valuation. Right now.
I think every company in my portfolio.
And this is the reason that I hold them.
If I thought that they were overvalued, I would no longer
hold the companies, and I've sold out of ones that I think
are overvalued. So, the more speculative ones
ones that I think traded up to Big multiples, like, atlassian
or crowdstrike. I sold out of those companies.
I think that they were probably in the overvalued range, the
ones that I currently hold. I think, are at a minimum close
to fair value or undervalued. And in most cases, I think that
many of Mr. Heavily undervalued, they start trading up into that
overvalue territory that I outlined.
I'll be looking at taking gains more aggressively.
So if Apple goes up to 200 dollars a share I'll be looking
at taking gains. If Microsoft goes up to 350.
I'll be looking at taking gains and so on and so forth.
I don't predict. I don't expect that in this
market, that wants nothing to do with these companies that
they're going to race up the high valuations.
And in the meantime, I just have to be patient.
I realized this could take a very long time, until these
companies move back. In the favor by investors.
Because right now, everybody wants to Consumer Staples.
They want nothing to do with Cloud.
Nothing to do with online retail.
Nothing to do with tech in general.
So I'm going to be patient, keep dollar cost averaging in look at
the valuations of all these companies, but overall.
I hope this gave a little bit more insight into how I look at
these companies. So that's all for this episode.
I hope you enjoyed. If you want to have more content
and exclusive content. I have amas and lots of
different videos on the patreon. So if you join that, you get
access to a Discord community You get access to the qual, trim
Insight software suite, and a bunch of other fun stuff.
So, other than that, I'll see you in the next one.