Welcome back everyone today on the Details of Carlson Show.
We've already made it through the majority of earnings season.
We've passed the test. We've seen what's happened to
our portfolios. Most of the big tech companies
have reported earnings, but there's always a few stragglers,
a few companies that wait a week or two after to report their
earnings. They're always late to the
party. In this case, this Wednesday, we
have a number of companies that are quite notable reporting
earnings, one of them being NVIDIA, a three plus trillion
dollar market cap company reporting earnings Wednesday
after market close. Then we have Crowdstrike, the
cybersecurity company trying to recover from one of the biggest
tech outages ever. They're under lawsuit from
companies like Delta Airlines. And then we have Salesforce.
This is one that's in My Portfolio.
Salesforce traded down after their last earnings.
It dipped big time and I thought the earnings were quite good.
So we're going to go into my expectations and my position in
Salesforce. And then moving on to Thursday,
we have two more notable companies reporting earnings,
Lululemon and Ulta. These are two companies that
value investors are buying up. We'll be looking at what to
expect from their earnings. So we'll be going through all
five of these upcoming earnings. I'll be framing it for you,
giving you a picture of what Wall Street is expecting and
what I expect. Now we also have some other news
to get to. I recently tweeted out some news
about Costco and the tweet went ultra viral.
It has 8.2 million views, 20,000 likes, 2200 reposts and 425
comments. The tweet showed the massive
lines to get into a new Costco in Okinawa, Japan, the first one
in the city, and also shows just the massive crowds inside.
They're at Max capacity. Within an hour of opening up,
they had lines of is wrapping around the building.
So we'll be looking at why this tweet went so viral, what people
are saying about it, and what the obsession is with Costco.
So let's go ahead and jump in. We'll start off with this week.
Now when we look at the map with Monday and Tuesday, we don't see
that many interesting earnings reports.
We really get to the interesting companies come Wednesday.
Wednesday after market close, we have the biggest, most
meaningful earnings report of the week.
And maybe you have the entire season, even though it's coming
later, maybe this is the most important earnings report of the
season, which is NVIDIA. The first thing I need to
establish is that NVIDIA is a massive company and a lot of
people don't really have a clue or they can't really
conceptualize how big this company actually is.
So let me give it some context here.
NVIDIA has raised up to a market cap of $3.18 trillion, so it's
well above the $3 trillion market cap territory.
It's gone up 163% year to date, so it's well over doubled in
2024. In fact, it's about doubled in
market cap since February of this year.
So it hasn't taken long for the market cap to completely double.
Now, a lot of people are predicting the NVIDIA will
continue racing up like it has. We look at the charts here and
of course, going back a year, it's up 170%.
Going back five years, it's up thousands of percentages.
So what's one more double? What's another 50 or 60%?
Well, I'll tell you what that would mean.
If NVIDIA were to double again, if the stock price was to race
up another just another 100%, which it's already done this
year really easily, that would make NVIDIA bigger than Google,
Amazon and Meta combined. All three of those companies,
the combined market cap of Google, Meta and Amazon is $5.25
trillion. NVIDIA would be past $6.5
trillion if it doubled again, so simply going up 100% more would
make it bigger than three of the largest companies in the world.
So obviously this company is massive.
It is a juggernaut of a company. But can this growth continue?
Let's take a look. We can better frame this by
looking at how much NVIDIA is supposed to grow this quarter,
according to Wall Street analysts.
Project revenue growth of 28.84 billion according to the
estimates compiled by Visible Alpha, which would be more than
double Nvidia's revenue in the same period a year ago.
So revenues expected to grow over double from one year ago.
And if we look at this on 1/4 over quarter basis, we can take
a look at this in the numbers. So we have the most recent
quarter here. I'll zoom in.
In the past 10 years, the most recent quarter was 26 .04
billion. So you're going to see growth
that looks like that. That's what the next line is
going to look like. That's what the expectations
are. So investors are expecting this
next quarter to be another one of large acceleration, a massive
leap up from year over year, which was right here.
This is about, let's say, $14 billion.
Thirteen billion. So they're going from 13 to 28 /
100% revenue growth. And likewise, net income is also
expected to more than double from a year earlier to $14.95
billion. If we look at the net income
chart here, we can see one year ago we go back 1234, that was Q3
of 2023, that was $6.06 billion. So net income is expected to go
from $6 billion four quarters ago to now 15 billion.
One notable thing about this is that the most recent quarter, it
is almost 15 billion as well. So net income is basically
supposed to stay flat quarter over quarter.
It's growing massively year over year, but this is going to be a
flattish quarter over quarter with net income.
Now they also mentioned that it's going to have a sharp
decline in earnings per share expected primarily as a result
for the 10 for one stock split. Really when you're looking at
earnings per share, you should be looking at diluted earnings
per share. If you want to get technical,
that's the only thing you should pay attention to.
You should never look at non diluted earnings per share
because that doesn't account for stock splits.
So in Qualtrim, whenever I'm looking at earnings per share
and the earnings per share chart here, this is the diluted
earnings per share. This will show you the earnings
per share with stock options, with dilution, and with stock
splits accounted for. So this is the best way to look
at it and it's what most people should be looking at.
Now to look at the diluted earnings per share, they have
the estimates here as $0.59. If we go back and look at the
earnings per share chart, the last quarter was $0.60.
So again, they're basically expecting, and this makes sense
because the net income was about flat.
They're expecting the earnings per share to also be about flat
quarter over quarter. So consecutive quarters it's
going to be relatively flat, but year over year it's a massive
gain. If we go back 1234 quarters ago,
it was $0.25. So we're going from $0.25 up to
$0.60. But keep in mind, we're not
growing it quarter over quarter like we have for the last five
quarters. So this is going to be the first
time that the earnings per share for NVIDIA has stayed flat for
two consecutive quarters in at least a year.
So, so far with NVIDIA, we have around a $2 billion growth in
consecutive quarter in revenue and net income and earnings per
share. That's staying relatively flat
on a consecutive quarter basis, but it's still growing massively
year over year. Now the biggest thing that they
point out, the biggest thing they're looking for in growth is
in the data center. And this is something that I've
been saying for a long time, The NVIDIA has a concentration of
revenue and earnings in the data center.
On call trim. We have different charts here.
One of them just shows the total revenue.
It's difficult to differentiate what's going on here.
But we've also added in key performance indicators.
One of them is revenue by segment.
This shows you in a granular basis where the revenues coming
from. If we look at the different
categories here, we can see very clearly that everything is
coming down to the data center. In fact, if we get rid of the
data center, if we check that out, if you take out the data
center, NVIDIA has no growth since Q4 of 2020.
So there's no growth coming from gaming or professional
visualization or automotive. It's all coming from the data
center. If we reverse this and we look
specifically at the data center, only you can see the massive
growth in this. All of it comes down to the data
center, which grew 426% year over year.
So if you're investing in NVIDIA, you're investing in a
data center company. The data center revenue reached
a record high of 22.6 billion dollars in the first quarter of
fiscal 2025, surpassing its previous record set the three
quarters prior. We can see that illustrated
here. This is the $22.56 billion and
it's going up sequentially. Analysts expect revenue for the
data center to be 25.19 billion in the second quarter, which
would be a new all time high. So we are expecting the revenue
for the data center to be 25.19 billion.
To put that in perspective. That is around right here,
another incremental setup, which I think is realistic.
I don't think there's anything outlandish about these
projections here. We're just extrapolating the
same growth we had in recent quarters.
But with NVIDIA, as we've illustrated here, a lot is
riding on the data center. Everything comes down to this
one business line. It is where all the growth and
earnings are coming from for the company.
There was one concerning report that came up recently that
caused the stock to go down a little and that was a reported
delay in their new Blackwell chip.
Any type of delays, of course is going to be something of
concern, but most analyst looked at this and they said it's
really not that big of a deal. Raymond James analyst said that
the impact would be modest and they expect management to
downplay the speculated delays. So there's a bit of set up for
Nvidia's earnings and you get an idea of the expectations this
quarter. Now, if we go back to one major
point here, one that I touched on at the beginning of this, the
sheer size of this company, like I said, NVIDIA is a $3 trillion
market cap company, almost three trillion, 200 billion.
And if the stock goes up another double.
It's bigger than Meta, Amazon and Google combined.
If we look at NVIDIA in isolation and we look at the
amount of cash flow the company's actually generating,
we can view this on a trailing basis.
NVIDIA does generate a lot of free cash flow.
On a trailing 12 month basis, it is generated $39.33 billion.
So we're basically at the $40 billion mark.
Now if instead we look at this on a quarterly basis and we look
at the most recent quarter, which was 15 billion and we do
15 * 4, we of course get 60. So we can say that the run rate
of cash flow right now is $60 billion.
That's assuming that NVIDIA makes $60 billion this year and
they continue doing so in the future and hopefully for their
shareholders that that amount of free cash flow continues to go
up. If we compare that to other
companies we have here, Google, we can take a look at that.
We can see that Google made $60 billion in free cash flow.
So Google's making the same amount as NVIDIA.
Even if you use Nvidia's run rate and you use Google's
trailing numbers, that means that we're using past numbers
for Google, we're using future numbers for NVIDIA.
Even if we do that, they're generating the same amount of
free cash flow. But Google is a full trillion
dollars cheaper than NVIDIA. Amazon, which is $1.3 trillion
cheaper than NVIDIA. Amazon generated $48 billion in
free cash flow over the trailing 12 months.
That's $8 billion more than NVIDIA.
And Amazon again is $1.3 trillion cheaper than NVIDIA.
Then we look at Meta. Met is a company that has a
relatively high free cash flow yield.
We look at the trailing 12 months and it's $50 billion.
So Met is generating around the same amount of free cash flow as
NVIDIA today, while the market cap is currently less than half
the size of Nvidia's. So it's not a question of
whether or not Nvidia's price for growth.
It is priced for massive growth in its free cash flow today.
It's priced that it will continue to earn at least $15
billion in free cash flow per quarter.
And then it also assumes that this company will be able to
sustain those levels of free cash flow for years and years in
the future. They can't just earn it in one
year to justify the current market cap.
You need to have a reasonable expectation it can do this for
years and years in the future. So the question that investors
need to ask is whether or not NVIDIA can grow its baseline of
free cash flow today, sustain it for year on end, and continue to
grow incrementally in the future.
So when I try to balance out all of these questions, I don't have
confidence in Nvidia's ability to do that over the next 10
years. I think it's it's going to be
very challenging. When I look at different
companies like NVIDIA and stack it up against different software
companies. I think software companies are a
bit more predictable and the same people that will tell you
that NVIDIA is going to do this in the future.
It's a very predictable company with a wide Moat.
Most of them did not predict Nvidia's growth over the past
five years. Most of them did not invest in
NVIDIA before this parabolic growth.
In fact, I don't know many investors that were invested in
the company at this time period. Most of them joined along after
the parabolic spike in growth, and now they're predicting that
this parabolic spike will continue in the future.
For me, that's a very difficult judgement to make.
NVIDIA lacks the predictability that I look for in a stock.
At least in my case, I wasn't able to predict the huge influx
in demand before it happened, and I don't believe I'll be able
to predict any glut in demand before it happens.
There's a few things we can look for to try to determine demand
for Nvidia's chips. One of them is commentary by
their biggest customers. Their biggest customers are big
tech companies, specifically the hyperscalers.
NVIDIA makes most of the money from data center, and the
companies that invest the most in data center are their biggest
customers, Sundar Pichai being one of them, Sundar in the most
recent earnings report said. I think one of the ways to think
about it is when we go through a curve like this, the risk of
under investing is dramatically greater than the risk of over
investing for us here, even in scenarios where it turns out
that we over invested. So Sundar is saying that the
risk of us under investing in cloud and AI is bigger than the
risk of over investing. So we're going to make sure we
over invest. That's good for NVIDIA today
because Sundar Pichai is spending a lot of money, but it
doesn't necessarily mean it will be good in the future.
What happens if Google and Sundar Pichai realizes with the
data that they've been over investing?
What happens when they cut down their orders from NVIDIA?
That could impact the stock to some degree.
The only thing that Andy Jassi from Amazon said regarding
NVIDIA, or at least it was a reference to NVIDIA, was we are
investing a lot across the board in AI and we'll keep doing so as
we like what we're seeing and what we see ahead of us.
That's very vague, but overall very positive for NVIDIA.
He's saying that we're going to continue investing heavily in
AI. Amy Hood from Microsoft said
that they are capacity constrained in AI, that they
need greater and greater investment.
So all three of these companies, at least for this next quarter,
are going to be spending big on AI, which a good portion of that
spend is going to be for NVIDIA. As a result, even though
Nvidia's market cap and price, I believe is getting a little
inflated, I still think this next quarter is going to be
good. I think they'll continue to grow
on pace. I don't think there's going to
be any major red flags because what we see right now is all
three of their biggest customers willing to continue to spend
money. When that will change, I don't
know, but so far it looks good. Now Next up, we have Crowdstrike
reporting at the same time. Obviously the earnings report of
Crowdstrike is going to be overshadowed by Nvidia's, but
it's still a really important earnings report, especially
because Crowdstrike recently just went through a huge ordeal.
They released an update which was a simple content update.
It's supposed to be a low risk update and it had a major fatal
error on every Microsoft device that was updated.
It bricked the computers, causing hundreds of 1,000,000,
if not billions of damages to different companies.
One of them, Delta Airlines, is suing Microsoft and Crowdstrike
for the update, so they have some ongoing litigation.
They've had a little bit of tit for tat battle between the two
companies where their lawyers are shooting off different
things. It's a a bit of a mess.
It's caused them to change their website, their marking material,
the way that they approach business to business sales.
It's also caused them to change the way that they do updates.
They now test them among smaller groups of customers before
releasing them to everyone. So Crowd Strike has learned a
lot over the past three months. They're in a bit of a recovery
mode. They're trying to move on from
this, move on from the litigation, depressed forward
into the future. Now, I think Crowd Strike is a
really good company. This is one that I've actually
owned in the past for a short time.
I'm really interested in the stock.
I think it's a really good recurring revenue company.
So if we look at the revenues here, you see that the total
revenues climb quarter over quarter, quarter over quarter.
It's climbing fast. We break this down by segment.
It illustrates how much of it is non subscription.
This is the professional service or non subscription portion of
revenue. And then you have the
subscription portion. The subscription portion is a
huge majority and it grows steadily every single quarter
because they're making more, more money per their
subscribers. Now I expect this to continue
and I actually think that crowd strike is set up well to recover
from this incident. Before the incident, the stock
traded up to $380.00 per share. So it was flying high.
It was the Sky's the limits. Everybody was very bullish on
the company. Of course, this put a huge
damper in. It traded down to 217.
Now the stock is already up to 260 and I think within the next
three months, I would not be surprised to see crowd strike
trading above $300.00 per share. And there's a couple reasons
why. One of them is the ongoing
growth in their revenue and earnings per share.
This quarter they're expected to reveal an earnings per share of
$0.98. That indicates a growth of 32%.
The revenues also expected to be $958 million, which is a 31%
increase. Even though this company faced a
blunder, I think the combination of organic growth, earnings
growth and the free cash flow of the company, which is increasing
every single quarter is going to push the stock higher.
If we look at the free cash flow per share, it continues to grow.
It is true that they have some stock based comp, but they're
pulling away from the stock based comp over the past 3/4.
As a company differentiates rates, the amount of stock based
comp against the free cash flow, the free cash flow margins get
higher and higher. I'm going to wait around with
crowd strike because it's still at a high valuation, but if we
get a really good dip in the stock, if it sells off after the
quarter, it is going to be one I'm looking at.
Now moving on, of course we have sales force.
This is one that's reporting earnings Wednesday after market
close and it's also one of my larger positions in My
Portfolio. In fact, sales force is a new
position to the passive income portfolio and right now it's the
only one that's in the red. That's right.
Every other position's in the green.
Most of them buy a a very decent margin.
We even just had booking holdings move into the green.
So this one's looking good. And then we have Salesforce, the
one company that I missed time to buy.
I bought it before an earnings report.
Salesforce dropped around 10 to 15% after the most recent
quarter's report. So investors did not like last
quarter's report. They sold out of the stock and
I've been in the red ever since. Now I have a total position size
of $58,000 and it's only down 2500.
So we're getting closer and closer to the green and I
believe eventually this one will work its way into the green
either this upcoming quarter or the next.
And in fact, I don't believe that Salesforce deserved to sell
off last quarter like it did. I don't believe the stock
deserved to be down. And I based that off of a few
different reasons. One of them is that Salesforce
had a very strong quarter. They did everything that they
told investors they are going to do.
They said that they are going to grow organic revenue without any
big acquisitions. That's exactly what they did.
They grew their revenue by 11 percent on a trailing 12 month
basis. Even quarter over quarter grew
11%. That is nice.
Organic revenue growth through more products and more
customers, customers and higher prices.
Then we look at the different segments of business.
Every segment of Salesforce is growing.
So across the board we have strength in every important
segment. Now, most importantly, the
biggest thing that confuses me about Salesforce is stock
currently. Is the fact that the free cash
flow is growing exponentially parabolically.
You can see the free cash flow line here.
On a trailing 12 month basis, last quarter was a record high
eleven, $33 billion in the past 12 months.
So we have massive free cash flow growth.
Salesforce has struggled with stock based comp diluting away
some of the free cash flow. But when we look at this, the
stock based comp is even going down.
You can see here, if we zoom in, we can see this more clearly.
The stock based comp has been going down consistently since Q1
of 2023. So the margins between the free
cash flow they're generating and the dilution they're doing
through stock based comp is getting wider and wider and
wider. If we look at this on a free
cash flow per share chart, you can see the exponential growth.
It increased by 62% year over year.
These are very strong numbers. These aren't the numbers of a
struggling or weak company, and typically companies like this
dominant software companies with fast growing free cash flow
margins are priced really high. But in the case of Salesforce,
the valuation is not demanding. In fact, I think the company is
currently undervalued. It trades at a modest 26 Ford PE
ratio, so it's not really a high PE ratio.
The free cash flow yield is 4.4%.
Even when we take out stock based comp, it only goes down to
3.3%. That's a high free cash flow
yield for company in this position.
Now if we look at some of the analysts commentary on this
stock, Deutsche Bank's Brad Zelnick says that Salesforce's
Q2 operating margins could move the stock as well as its Q3
outlook for a key financial metric.
The current remaining performance obligations, CRPO
bookings are an aggregate of deferred revenue and a backlog.
Now that number, he's referring to, the obligations we have
measured right here in Qualtrim. This is the obligations of
different companies to use Salesforce contracts they've
agreed to. And you can see the growth of
this is around 15%. So if we have another good
performance obligation number showing more and more people
committing, that can move the stock higher because this is a
form of deferred revenue. At Oppenheimer, analyst Brad
Schwartz said in a report that positively the stock trades at a
deep discount multiple versus its pairs, which infers that
investors expectations are low heading into the Q2 print and
that the business is heading towards better seasonality in
the second-half of fiscal 2025 for sales for stock right now,
expectations are low. Investors aren't enthused about
the company. They don't look at it as an AI
play, but I look at it as a free cash flow play.
I think that ultimately, given enough time, the free cash flow
per share growth of the company will eventually push up the
stock price. And I think right now, the fair
value of the company's around 300.
Now this earnings report, I can't say what direction it will
trade right after earnings. Maybe it will have another
disappointing earnings report. Maybe Mark Benioff will say
something silly on the earnings call.
I don't know. But given enough time, usually
the fundamentals override fleeting narratives.
And for me, Salesforce is a free cash flow per share play.
Now moving down the week, we get to Thursday and we have
Lululemon reporting after market close.
An interesting article that I read about Lululemon is the fact
that consumer preferences and especially TikTok preferences
change all the time. There once was a time where
everyone valued name brands. You wanted to have the logo, you
wanted to have the name brand. But now we have a report from
the Wall Street Journal saying that the TikTok crowd, the young
people on TikTok, they're OK with dupes.
They don't care if you have knockoffs.
They don't care if you're being cheap.
Less expensive versions of premium products have become an
acceptable alternative, particularly for the younger
shoppers. In some cases, dupes, short for
duplicates, are considered cooler than the real thing.
This is becoming a problem for the company that pioneered high
end athleisure and made $100 leggings the norm.
This is a change from history. We used to signal things of how
good we were in our status by the clothes that we wore.
The more expensive the better. This is why high fashion brands
exist. Look, I can buy something that
you can't. That makes me a cooler, better
person. That's how we used to signal
things to other people, and specifically with clothing and
with cars we drive. But now it seems like more and
more people are rejecting that type of signaling.
They're going more Dave Ramsey. People are in fact signaling the
exact opposite, that you're cool if you can find the deal, if you
can get something for cheaper that makes your status go up.
And this is a notable challenge for companies that rely on
status symbols, that rely on being the name brand, the
expensive original brand. On top of these differences in
consumer preferences and the willingness to go into dupes, we
also have the challenge of competition.
The heightened competition comes as Lululemon has made a series
of missteps that have turned off even some of its most devoted
fans. One of the big things they
outline here is the color palette, and this shows how
difficult clothing brands are. Clothing brands are so
difficult. You have to have the size that
fits everyone. Is it wide enough?
Is it thin enough? Is it tall enough?
Is it short enough? Does it does it have the
waistline that you want, the leg width?
It has to fit everyone to all these different body shapes.
And then you also have to have the different color preferences
O in a clothing brand, you have to keep so much stock of
different sizes, different color ways of the same type of
clothing. And if you don't sell enough of
one different size of one different color, you eat the
manufacturing cost of that. That's why these companies are
very difficult. Nike is an outlier of getting
this right for a long period of time.
They say that the color palette with Lululemon was too limited
and not having enough of some products such as smaller size
leggings. The misfires have pushed people
such as Natalie to seek out different brands.
The 20 year old college student said that she switched from
Lululemon to Gym Shark and AYBL not just because their leggings
cost less, but because they have more color varieties.
It's not just the lower priced dupes that are eating away at
Lululemon's dominance. The brand is also facing more
competition from new premium labels such as Aloe Yoga and
Viori, whose prices are similar to Lululemon's.
So they're getting flanked from all sides.
You have duplicates that are much cheaper, ones that are
knockoffs of these companies at places like Costco or online at
Amazon. There's 1000 Chinese retailers
making knockoffs of Lululemon. But then you also have premium
brands very similar in quality to Lululemon, like Viori, that
are also taking market share, the combination of which is very
difficult for even a strong company to deal with.
Lululemon is a fantastic brand and a fantastic company, but
this is challenging for this company to deal with.
Lululemon still remains the favorite brand for people making
over 100,000, but Aloe and Viori are gaining ground.
So Lululemon right now is currently losing market share to
their two premium competitors. So we have a difficult setup for
this company and for Lululemon. The earnings call is going to be
just as important as the earnings report because we have
the company going to explain how it's going to face all of these
challenges. The stock is down big time.
It's down 45% year to date, and it seems like it's set up for a
rebound. So we have many value investors,
different people jumping in here, buying this company at
different points in time, hoping for recovery.
That recovery may come. But I think this is again, a
difficult situation. When I'm looking at companies
like Lululemon, I'm always looking at predictability first.
And with any apparel brand, as good as it is, when it faces
this much increased competition, duplicates and challenges with
consumers wanting to pull back on high-priced goods, I think
it's a difficult setup for this company.
So I'm not bearish on this quarter for Lululemon, but given
the pressures this company faces, it's not one that I'm
interested in. Now finally, we get to Ulta
Beauty reporting at the same time after market close on
Thursday. This is a company that I've been
following for some time. I've covered it as a stock
that's a retailer and one of the better retailers.
This has historically been a massive compound machine for a
long period of time. It recently sold off early this
year as the company faced challenge and gave lower
guidance and the stock continued to go down.
It went down and down and down until Warren Buffett finally
bought the stock. Berkshire entered into a
position with their last 13 F and immediately after it became
known the stock was up 10%. So this bounce from the dip
right there is because of Warren Buffett's buy.
He gave the stamp of approval to value investors that it's time
to jump in and Ulta Beauty since then has become one of the most
talked about investments by value investors and dip buyers.
O the question is whether or not it's now finally a decent time
to buy into this company, whether the trend will continue
to reverse and we'll see some upside in this stock.
The first thing we can look at is the past 10 years of this
company. In the past decade, it's up
282%, which is really good. But you'll also notice if you
look at the chart here, this company is routinely going
through large dips. It's gone through a dip in 2017,
multiple dips in 2018, multiple dips in 2019, and then 2020 is
when it really took off. It got a little ahead of itself
in 2022, like a lot of other companies, it's sold back down.
It got ahead of itself again, and since then it's traded back
down. This is a volatile stock full of
ebbs and flows and I would not be surprised if we see another
surge upwards in the price. The revenue growth has been
relatively consistent for a long period of time.
If we factor out the Covic period, we can see that revenue
really is on track with this long term historical norm
growing around 11% overall. So we have a strong top line
growth and this growth is mostly organic.
It's not from large acquisitions or doing anything tricky.
They are growing up by opening up new locations, growing their
location sales and growing their online sales.
Then of course, we get into my favorite metric for these
companies, which is the free cash flow.
On a trailing basis, we can see that the most recent quarter
they generated $900 million in free cash flow, which looks
really good. It's at a high free cash flow
yield. So the stock is cheap right now
based on its current free cash flow, but I also take a look at
this and see that it hasn't grown that much since 2020.
It has a shrink, but the free cash flow hasn't been growing.
It's been a steady producer of around the same amount of free
cash flow per year. When we look at the free cash
flow per share, it's going up slightly because they're buying
back some shares. But again, it still looks
relatively the same for the past couple of years.
I like to buy companies where I see more explosive free cash
flow upside. So a lot of companies that I'm
buying I consider to be strong free cash flow growth companies.
With Ulta, I think this is more of a current valuation play.
I think investors are buying this company hoping that the
outlook will improve and the multiple will rise.
My biggest concern for Ulta Beauty is similar to other
companies, which of course is competition.
They noted in their most recent call that competition is
impacting the company. The retailer said in late May
that they lost market share in the prestige brands, noting that
quote, more than 1000 new points of distribution have been opened
in the past two years. Much of this is probably
referring to Sephora, which is opened up inside more than 900
Kohl's. So over the past couple of
years, there's other companies that are very similar to Ulta
Beauty Sephora that have opened up 1000 new locations.
That's a development I don't like to see.
When your company has another competitor that's expanding very
rapid and there's not much difference between the products
you sell. You can get the same thing at
Sephora that you can get at Ulta for the most part.
Another emerging threat is Amazon, where luxury cosmetic
brands have been broadening distribution.
Every single year, more and more people get used to purchasing
things online, even things that they weren't used to purchasing
recently, like healthcare items, prescriptions.
And now you're going to see more and more beauty items purchased
on Amazon. If people find out a product
that they like from Ulta Beauty and they already have tried the
product, they know what they like and then they find it
cheaper on Amazon.com, they might go to Amazon to purchase
it in the future. So this creates another issue
for Ulta Beauty. So overall, my biggest concern
with Ulta Beauty is once again, competition.
Now having said that, they do have a very reliable free cash
flow over the past three years. And I think that's likely to
continue, which I think puts a bit of a floor on the valuation
of this company. I can't imagine it getting much
lower than it is today, so I think investors buying in today
are likely to have the stock trade around where it is or
maybe somewhat higher. I don't expect any massive
returns with the company, at least I don't see that in the
numbers. But right now I do see it as a
good value play with minimal downside.
If I was to pick between Lululemon and Ulta Beauty, I
would pick Ulta Beauty because right now I think there's less
downside in the stock. Now that wraps up this week's of
earnings. It'll be interesting to see how
this all plays out. If you want to see follow up
videos on these earnings, what I thought about Nvidia's earnings
or crowd strikes or Salesforce, just make sure you subscribe to
the channel and my other YouTube channel.
I'll be doing updates there Now let's go to move on to this
viral post about Costco. Now to preface this, I post
somewhat frequently on X or Twitter.
If you want to follow me it's at Joe Carlson show.
Now in most cases, my post get a couple 100 likes, maybe a few
dozen comments and if you reach tweets, the account that I have
is somewhat large. It's 4500 followers.
So it's not a small account, especially in terms of financial
accounts, but it's also not massive.
I don't have millions of followers on Twitter so most of
the posts get around that same amount, but this one from Costco
got into an entirely different stratosphere.
This is by far the most engaged, the most viewed, the most
everything post I've ever made. It currently has 21,000 likes,
2300 retweets with so many people quote tweeting it,
talking about it, and 429 comments.
Now if we look at the actual post here, I say that this is
the first Costco in Okinawa that opened today.
They opened 3.5 hours before the normal hours.
The building quickly reached Max capacity.
Cars wrapped around the parking lot.
They could only let in people as others left.
There was a 5 hour wait to get in.
So this is the new Costco opening in Okinawa and you can
see the massive demand they have here.
How excited people are to get into this Costco.
Look at the lines you have an entire wall of Costco, which is
just massive with thousands of people waiting outside.
And my first thought when looking at this, which I found
these these pictures on a small Instagram of a a news account in
Japan. I saw this picture and I
thought, why is it dark out? What are what are people doing
lining up at Costco with it dark out?
Costco normally opens late in the morning.
So it's normally pretty bright outside when you go to Costco
and that's why I dug a little deeper into the news article and
they opened it up 3 1/2 hours ahead of time.
So it's literally dark out. People travelled almost in the
middle of the night to get to Costco on opening day.
They waited in line until they could get in.
It reached Max capacity. You can see every single teller
is open here. Everyone's in the the food
court. There's other people that have
done enhanced pictures of this. They've shown that the price of
the hot dog combo is around buck $40.50 in USD.
So no matter where you go, whether it's in the US or Japan,
they're staying true to their dollar fifty combo.
Now, Costco's normally busy most days, especially on weekends.
It's busy. It's tough to move around, but
it's not quite this busy. It's just incredible seeing
these people stuffed in the Costco, excited about this
opening of a warehouse outside of the location.
The entire parking lot's filled. Cars are being funneled around
the building because there's not enough parking spaces.
And again, this is almost in the middle of the night, very early
morning with the dark outside. This led to a lot of commenters
speculating of why Costco does so well in other countries.
Why are the Japanese so obsessed with Costco?
They love it. And before Costco moved to
Japan, there was speculation that Costco wouldn't do well
there. In fact, Costco would do poorly
because they sell big bulk items and Japanese people are pretty
reserved. They live in smaller places.
Maybe they don't have storage room for all the goods they're
getting at Costco. That whole thesis was proven
incredibly wrong when Costco had their first opening in Japan.
But we see continued demand in Japan.
Some people have said that it's simple product market fit, that
Japan doesn't have anything like Costco, which I think is true.
There's others saying that it's just another telling, another
win of American consumerism. But I think it's even more than
that. It's not just American
consumerism, it's the best of America.
Costco represents the best consumerism of America.
Costco represents the best value for customers, the lowest
prices, the best facility. It's kept up really nice every
time you go in it. The happiest employees that are
well paid, they're well taken care of, friendly staff.
The best return policy and investors that make a fortune
because of how efficiently the companies ran.
Overall, Costco continues to prove that it is the best
company in the world. I've said that repeatedly over
the past five years. I've said it not Ironically,
Costco's a company where the business model is predictable,
replicable, repeatable, and improveable over time.
The company has continued to do the exact same playbook with
slight moderations over decades of time, and the rewards have
been significant in My Portfolio.
I still hold the shares of Costco that I purchased.
I now have gains of $42,000 in the company and I continue to
hold. So even though I agree that the
valuation looks more challenging in the short term, I believe
given the fullness of time, in the long term, the next 20 or 30
years, Costco will continue to prove itself as one of the
biggest winners ever. So I'm keeping it in My
Portfolio, every single share. That's all for this episode.
Hope you enjoyed. See you in the next one.