Welcome back everyone. Today on the Joseph Carlson
Show. This week we get into the
biggest earnings week of the season.
We've already gone through a number of companies like Google,
Visa, Texas Roadhouse. We had some pretty big ones
reporting earnings last week, but this week is really where we
get into it. Let's go ahead and just take a a
look at the list here. We have it up on the board and
we start off today with McDonald's already reporting
earnings was not good. We're going to go over
McDonald's earnings and look at the problems they're having.
But then Tuesday we get into the upcoming earnings.
We have Sofi, Microsoft, we have Starbucks.
These are all ones that we've been paying attention to.
I didn't circle PayPal, but I'll probably share a few thoughts on
that one as well. Then we have Wingstop.
This has been one of the high flying compounder stocks.
It's gone up like crazy. I'll share a few thoughts on
Wingstop. We have MasterCard, one of my
core holdings. Then we have more big tech on
Wednesday after market close. We're going to hear from Meta
and see how that company's doing on Thursday.
We also have a massive day. In fact, I think Thursday is the
biggest day because we have the duo Amazon and Apple.
These are two of the most well owned stocks by investors.
So many investors own Amazon and ALE for good reason, and we're
going to be looking at what to expect going into those
earnings. And then finally, another stock
that's a bit smaller, but one that I have in My Portfolio.
I've been building a position is Booking Holdings.
That one's also reporting earnings on Thursday.
I'll be sharing some thoughts on that as well.
So looking at the list here, it's going to be a massive week.
We have 10 companies. I'll be going over in this
episode and giving some context and insight into what to expect.
We'll start off with the beginning of the week and work
our way to the end. We'll start off with Monday
morning, which McDonald's already reported earnings.
McDonald's earnings were not good.
And I know that's disappointing to hear if you're a McDonald's
shareholder, but they just weren't good.
That's the truth. They missed on the top and
bottom line and they missed by a meaning full amount.
These weren't just really narrow misses, but that's not the
biggest deal here. I don't think that's the biggest
concern. I'm OK if companies miss as long
as things are still headed in the right direction.
If a company misses their expectations, but they're still
growing and intrinsic value, I think that's fine.
In this case, McDonald's is not really headed in the right
direction. McDonald's same store sales
shrink 1%, so the company literally sold less on a per
store basis than they did last year.
This also missed the growth expectations of .4%.
So expectations were not that high.
The expectations that it was basically flat, but they still
shrink. It's the first time the company
wide same store sales have fallen since the fourth quarter
of 2020. So we're seeing a reversal of
trend. McDonald's went through a time
period of immense pricing power and price hikes.
Everyone's felt it and now customers, as they're finally
pushing back, they're not ordering as much at McDonald's
and you're seeing sales actually shrink year over year. the US
McDonald's same store sales decreased by .7% for the
quarter. A year ago, the chain reported
US same store sales of 10.3%. So we're seeing a huge reversal
here. Consumers have cut back on their
restaurant spending, particularly at fast food
chains. I think that's because fast food
chains are not good value anymore.
They're not good value compared to sit down restaurants.
Compare the price you pay bringing your entire family to
McDonald's to what you pay at Texas Roadhouse.
Texas Roadhouse, you're getting steaks.
They're they're grilled fresh for you right there.
You're getting homemade food, usually with homemade
ingredients, and you're getting service, and the price is
usually around the same as when you go to McDonald's.
It's not that much different. So fast food companies have
really pushed up the pricing too much, and that's why you're
seeing a pushback in McDonald's and you're not seeing it in
restaurants like Texas Roadhouse.
Texas Roadhouse just grew earnings like crazy.
McDonald's is seeing a massive amount of pushback, and I think
it's very clear that the reason there's such a pushback in fast
food in particular is because it's no longer great value.
People feel like they're getting ripped off, and so they're
finally pushing back. Even the CEO of McDonald's on
the earnings call noted that they're seeing weakness all
across their stores. Customers are pushing back,
They're ordering less, they're ordering smaller amounts, and
they're reacting. Now the stock today off of this
bad earnings is up. It's up 3.2%.
That can make you believe that this was good earnings if you're
just looking at the stocks reaction.
But remember that the stock going up after or going down
after earnings is not an indicator of how good the
earnings are. That's something that I always
try to tell people. This does not determine how the
company's doing because in a lot of cases, this just means that
investors were expecting slightly worse and some metric
came in slightly better, and so the algorithms are pushing it
up. This is not a sustainable rise.
McDonald's being flat and shrinking revenues means that
the company's not going to sustainably grow unless they
start growing those metrics. What we can look at here is that
the price of McDonald's stock is down 13% year to date.
So this is a company that's in decline right now.
Same store sales are falling and they're trying to turn things
around. Now, McDonald's CEO does have a
plan to address this, and that's the $5 value menu.
So they're bringing back the really cheap value meals, and a
lot of customers are excited about that.
I think investors are excited about them.
Some of them may believe that it will cause the stock to go up
the rest of this year, but I think that's going to be very
difficult. It's difficult to grow sales
meaningfully with a restaurant chain this big.
When you're offering more value or cutting prices for customers,
that's just really difficult to do.
So right now, I think McDonald's is in a tough spot.
I really do. They can get out of it.
I think that they can grow sales over time over the long term,
But in the short term, I think it's going to be difficult.
And this earnings report was just not good.
Now moving into Tuesday before market open, we have Sofi
reporting earnings. Let's go ahead and take a look
at this company. This has been one that's passed
around online. I see a lot of retail investors
investing in this one. And I think it's a decent
company. If you're looking for a bank
technology company, they're kind of a mixture between the two.
If we look at what Sofi does, they offer a lot of financial
services that they sell to customers and they sell to other
financial institutions. And we have two different things
that I measure here in Qualtrim that are specific KPIs to Sofi.
One of them is the amount of members this institution has.
So we look at the membership chart here, and this is one of
my favorite ones. I do like this chart a lot
because it shows the company's growing very consistently over a
long period of time. We can see the amount of members
they have every single quarter. Going back to 2019, they had
704,000. In 2020, they had around 3.46
million. So you see exponential growth
going on there. And then most recently, as of
Q1, they had 8.13 million members.
So Sofi is growing up. They're gaining millions and
millions of members, which is what they need to do.
So we have immense membership growth there and we have product
growth. This is another unique KPI that
we're tracking on Qualtrim that shows the amount of products
that different customers have. For example, they have the
financial service products and then the lending products.
So we have this bucketed in the two different categories, but
the combined growth is very strong.
Again, we're looking at these growth numbers.
When we look at it, it's 38% year over year.
So we're seeing huge growth in the amount of products that
they're selling to customers. So when we look at this company
right now, the financials in terms of the earnings and free
cash flow, they don't look great.
They're all over the place. It looks a little bit shaky.
The earnings per share are finally in the positive, but not
by much, just by a few pennies. But when we look at the actual
KPIs and what the CEO of the company's tracking, what the
executives are tracking, they're looking at these numbers of
their user growth and their product growth.
They're looking at their membership grow.
And I think that's the primary thing they're focusing on.
I believe over time, Sofi is going to transition from growing
the platform, growing and scaling into profitability.
But Sofi does have some of that already priced in at a $7.83
billion market cap. It's already a pretty big
company. And it's estimated that it's
going to generate at least hundreds of millions of dollars
in free cash flow. So investors have already priced
this thing to where it's generating a lot of cash flow
that it's currently not now. Right now, Sofi's in a position,
but I think it's just too tricky.
It's too tricky to have a real valuation on this company
because I don't think any investor really knows how much
free cash flow they're going to generate over the next three
years. I don't even think the
executives know. It's just too difficult to tell
right now. So they may come up with some
some analysis or some projections and put them on a
spreadsheet, but that doesn't mean much when you really don't
know how much this thing is going to generate.
Now, I don't personally own Sofi stock.
It's not a company that I'm interested in because I usually
don't invest in banks, but if I were invested in Sofi, I would
focus less on the earnings and cash flow today and I would
still remain focused on these KPIs.
So when I'm looking at this company, I'd be seeing if
they're still having steady and strong growth and membership and
in their products with the hope that later on they can monetize
those products to a meaningful amount because they need to be
able to flip that switch in the future.
Now let's go ahead and move on. One of the companies that I
didn't circle because I didn't want to do a full analysis on
it, but I'll just mention a few thoughts on is PayPal.
Paypal's reporting earnings Tuesday before market open, so
tomorrow morning. Now, when I look at PayPal, I've
been saying the same thing about this stock so often that I feel
like I'm just a broken record at this point.
The company isn't really growing free cash flow a meaningful
amount. They've been stuck in the same
kind of funk for the past five years.
And even though they're growing in the amount of transactions
per account that looks good, the company's really not growing
otherwise. For example, if we look at their
total active users, this is another unique KPI to PayPal
that we track in Qualtrim. Look at their total active
accounts. That doesn't really paint the
positive picture for PayPal. It shows that the company is
just not growing. And what is the excuse for
PayPal not growing the amount of active accounts?
Have they maxed out the amount of adults that can use payment
networks? They haven't.
There's companies that have many, many more people on them
than PayPal. PayPal only has 429 million.
That's a lot, but that's not nearly the their total
addressable market. So PayPal has maxed out their
total users. They haven't grown it since
2021. So there's no growth in active
accounts. They're only growing the amount
of transactions per account, so that's good I guess they're
growing in the amount of transactions, but what I see
here is a company struggling to meaningfully grow and I see a
lot of investors buying in it because of the perpetually low
valuation. It trades at a 5.5 free cash
flow yield. It trades at a 12.6 PE ratio in
my opinion. And again, I, I hope I'm wrong
on this. I hope that I'm wrong.
I hope PayPal does incredible and the stock goes up.
I really hope that. But to me, the stock feels a
little bit like a value trap. And it's felt that way for a
while. I said for over a year now that
Paypal's a company I would avoid.
And it's just trading around the same territory, down 22% over
the past year because it feels like a value trap, because I
don't see the core metrics rising a meaningful amount.
This company to me is an avoid. I look at companies just as a
reminder. This is an investment
philosophy. It's 8 pages long.
This is where I outlined everything that I look for and
you can download this completely free.
But as part of the site, go over the intrinsic value of a company
and what are the main drivers of intrinsic value?
The main thing that causes a company to increase its
intrinsic value is organic revenue growth, free cash flow
per share growth and the predictability or the Moat
improving. Simply put, if those three
things happen, the stock is going to go up, the intrinsic
value will increase. And so when companies aren't
doing these things, when they're not growing their revenue
organically without acquisition, when they're not growing their
free cash flow per share and they're not improving their Moat
or predictability, they're not going to grow their intrinsic
value. So Paypal's one of these
companies that I think investors are expecting a turn around
play. Turn around plays can work, but
I think they're really risky and they're difficult.
The risk is that you put a lot of capital in them and you're
stuck in a value trap for year after year after year until you
finally sell at around the same price that you bought in.
And that is a big opportunity cost where your money could be
used at far more predictable companies that are growing
routinely in intrinsic value. Now Next up, we have Tuesday
after market close the biggest big tech company reporting
earnings which is Microsoft. Microsoft is what I have
described routinely as the poster child for the perfect
fundamentals in My Portfolio. I have the main one here called
the passive income portfolio. This one's done really well over
time and one of the companies that's really helped in this
performance is over weighting Microsoft.
I've added more Microsoft than the S&P 500 holds, more
Microsoft than even the QQQ holds.
I made it a huge position in My Portfolio and I added a lot to
the company when it traded around 2:20.
That's when I was pounding the table saying that Big Tech was
cheap and Microsoft was a company that was highly
predictable, that was selling for cheap.
Now, if we look at this position here, this is a company that I
like so much. I own it in two places.
So I have a $70,000 position here with $26,000 in gains.
But then I also own Microsoft in my other portfolio, the Story
Fund. If we switch over to that one,
we have the Story Fund here and we have Microsoft right there,
another $21,000 total position with 8600 in gains.
That's been about a double in the stock in the Story Fund
because again, I primarily bought into this one at 2:20.
And Microsoft, again, in my opinion, is near perfect in
terms of its fundamentals. The company has subscription
revenue for around 80% of its revenue.
It's reoccurring revenue that's highly predictable.
Microsoft has three primary segments, productivity and
business processes. This is like the thing that all
the Fortune 500 companies have where they're using all their
productivity software like Excel, you know, different
document software. They're using all of that.
And that's a staple for every business.
Basically, every business has to use that.
Then you have the intelligent cloud, another huge portion of
the company that's growing quickly.
Then you have personal computing.
Personal computing is the least meaningful portion of this
company. If we look at business processes
and productivity and intelligent cloud, these are the big
portions. The intelligent cloud includes
Azure, so you have this company that has bundling subscriptions.
Everybody's using their business.
They can constantly acquire or copy any company that offers a
new product, and because they already have the relationship
with so many Fortune 500 companies, they're already
embedded in the system. You have other segments of the
business like Azure as well, growing like crazy.
A lot of people believe now that Azure will eventually catch up
and surpass AWS. I think that's going to be
difficult, but if there's one company that can surpass AWS,
it's Microsoft. So they have highly diverse
revenue across various products and it's also highly diverse
across customer base and geography.
And on top of that, the revenue is also very high margin and
they maintain those margins. If we look at the margins of
Microsoft, their gross margins are always going to be around
70%. I can look at it.
I don't even need to look at the most recent quarters.
I just know it's going to be right along the 70% gross margin
line. Microsoft themselves put a huge
focus on this gross margin. They do not want to go below
70%. So at this upcoming quarter, I
expect gross margins to be above 70%.
We also have operating margins that are very high.
They're growing over time, now 45% profit margins that are 36%.
So across the board, they're able to maintain these margins
because competitors do not have the scale or means to compete
with them. There are some risks to
Microsoft, but I think they're fewer than other companies.
I think the Moat is incredibly deep and wide for this company.
They also generate meaningful free cash flow every quarter.
I think they're going to generate around 60 to $70
billion per year very reliably. Now, this isn't as much as
Apple, but Microsoft is considered more predictable than
Apple. So even though they generate a
bit less free cash flow, they generate it on a more
predictable basis with subscription revenue and they're
not having to come out with new iPhones every single year.
Their free cash flow per share has grown around 13% for the
past five years. It took a little dip last year
as their free cash flow went down, but that's one temporary
bump. We've seen that before.
I expect the free cash flow per share this year to be above
where it was 2022. The company qualitatively is
incredible. Again, I can't say enough about
Microsoft. This stock is the perfect stock
or near perfect in terms of the fundamentals.
The problem with the company right now is if you're buying
it, you're not buying it on a discount.
You're buying it around what I consider to be it's fair
intrinsic value. The company trades at a 34 Ford
PE ratio. It's not really cheap.
That's an expensive company. The free cash flow yield, if you
buy $100 worth of Microsoft you get back $2.23 in free cash flow
every year, where if you buy $100.00 of a bond you can get
back 5.5%. So Microsoft is over double the
price of AUS Treasury, meaning they'd have to double their free
cash flow per share to be at the same free cash flow of AUS
Treasury. So you can see the problem here.
Relatively speaking, Microsoft is not at a discount.
And going into this earnings, I think that's going to be the
biggest challenge. I think they'll beat on their
earnings per share and their revenue.
I think the cloud will come in very strong, very strong growth
with a cloud. I think overall it will be a
very solid earnings report. My prediction is even with that,
the stock will be mostly flat or slightly down.
That's how I think this one's going to play out.
Now keep in mind, even though Microsoft is priced at a high PE
ratio and a low free cash flow yield, it's relatively expensive
right now and I'm not seeing super high upside in this
upcoming quarter. I still think it's a great hold
and it's a company that I'm not selling.
I'm not going to be buying more right now, but I'm certainly not
selling my position because again, if we look at the drivers
of intrinsic value, as the company grows its organic
revenue, free cash flow per share and predictability, the
stock will continue to move up over time.
It'll have some ebbs and flows in some cases in a three month
period, it will go up a lot. In some cases, it will stay flat
for a while. But holding on to it typically
is better than trying to time those ebbs and flows.
So with Microsoft, even though I'm not expecting massive upside
this quarter, I'm still holding with my full position with
around $80,000 of value in this company.
Now Next up, reporting earnings after market close on Tuesday,
we have Starbucks. This is a highly anticipated
earnings report because if I'll remind you, Starbucks last
quarter was terrible. It was one of the worst quarters
I've ever seen. Basically every single metric
was in the red. Everything was going down.
They're active members. The, you know, the amount of
sales per location was down, their geographic mix,
everything, their pricing power was down, their earnings went
down. The revenue, all of it was
headed in the wrong direction. And then the CEO, Starbucks went
on to CNBC to give an interview. And Jim Cramer, of all people,
just crushed him in the interview.
He asked difficult questions. The CEO of Starbucks could not
hold up to it. He couldn't answer the questions
confidently. It didn't instill a lot of
confidence in the investor. It was a terrible interview.
I did a whole video on it, so you can watch the interview if
you want to be reminded of it, but it wasn't good.
Now, what happens like this in cases where a company fumbles
big time, where the CEO really loses track of things and it
looks like the company's not being LED well?
Well, it's like having blood in the water.
It attracts sharks. There's people that pay
attention to this. They see the situation that
Starbucks is in and of course they want to profit from it.
So you have activist investors attracted to struggling
companies like this, especially if the company has a history of
being high quality, which Starbucks does.
And that's the case here. We have activist investor
Elliot, which is a firm that is owned by Paul Singer.
Who Paul Singer. I, I won't go over his whole
background, but he's just a scary guy in the hedge fund
world. He's one of the like big bosses.
He's one of the scarier ones to have invested in your company.
Now he has taken a softer approach with some companies,
but others he he's a bully. He'll come in and he'll really
throw his weight around. He'll throw the ownership.
He has to pressure companies in the directions they don't want
to go. So he does cause a lot of
contention, a lot of adversarial relationships with companies.
The Wall Street Journal reports that Elliott has been engaging
with the company behind the scenes in recent weeks.
The situation is fluid, and it is possible that they'll reach
an agreement privately soon. So we don't know how this is
going to conclude. But right now, Starbucks is
under pressure. That's how I describe the stock.
A lot is on the line for this earnings report.
If we look at what's going on, their total stores are opening
at a slower cadence than they expect, especially in China.
So they need to speed up this total store opening.
Another thing that was really disappointing on their most
recent earnings call was this other unique KPI, which is their
90 day active reward members. These are people that have
logged in and used the Starbucks app in the past three months.
It went down quarter over quarter.
Now, year over year, it's still up 6.49%.
That's what the CEO said. He said, hey look, year over
year it's still up and having a 1/4 consecutive loss there is
not a great thing. I think it will be very
disappointing to Starbucks investors if this goes down for
another consecutive quarter. I think that'll cause a lot of
panic for Starbucks investors. One of the big investment
thesises is using the Starbucks app to gain new membership, to
gain more people that are constant customers of the
company. And seeing that headed in the
wrong direction is just a really bad thing to see.
So this quarter we need to see this number be above 32.8
million. If it's below 32.8 million, I
think that's going to be really bad for the stock.
Right now, the one positive about Starbucks is it's at a
very low valuation. It's at a 24 PE ratio and a four
point 2% free cash flow yield. So the company is relatively
cheap and it has a lot of upside.
If they can get the KPIs, the metrics back on track, this
company will have a 2030% bump. So overall, going into this
earnings, I actually feel pretty good about Starbucks.
I think that the report's going to be much better than last
quarter. I think there's really only
upside from that report. And I think if they can get
those active members to grow again, investors will be re
enthused and I could see a little bit of a RE rating for
the stock. Now moving on from Tuesday, we
get into Wednesday before market open.
We have a Wingstop reporting earnings.
This is one that I haven't talked about that much, but I do
cover food companies and Wingstop has been one that's a
franchise business model rapidly growing.
It's a fast growing company and it's also insanely expensive.
I don't have much to say about this company other than the
price of it. It's just such an incredibly
expensive stock when you look at any of the basic metrics.
For example, if we look at the PE ratio of the company right
now, it trades at 120 times the next 12 months expected
earnings. So 120 times expected earnings
is quite expensive. The free cash flow yield is half
a percent. I like Wingstop as a concept,
but I don't own it. The valuation's just too crazy.
Going into a company with that low of a free cash flow yield,
that high of APE ratio, no matter what type of discount of
cash flow I give it, it just seems incredibly risky.
If there's any downside or weakness in the report, this is
a stock that that could drop twenty, 3040% because it's not
being supported by cash flows. So I think Wingstop will
continue to execute well, but the risk of substantial
unsupported downside, I think it's too great.
Now Next up, we have MasterCard also reporting earnings
Wednesday before market open. This is a large position in My
Portfolio. I've gone over the stock many
times. So if you want to see content on
MasterCard, I have many videos going over this one, so I'm not
going to repeat too much about it.
Most of you know the thesis about MasterCard.
It's a huge network company. It's monopolistic.
It shares a duopoly with Visa. And what I'll say about the
earnings is that MasterCard is just not a company I concern
myself with. I review the earnings every
single quarter, but it's one of these companies that really it's
not one that trades too much off of earnings.
It it really doesn't. It might go up a couple percent
or down, but this is not a nail biter.
This is a company that is a predictable compounding machine,
a company that will grow its free cash flow per share year
over year over year. They do that by growing the
payment network, which will which will organically grow over
a long period of time and their value add services.
This is the data and subscription services and
security services and know your customer that they sell to
different companies. So they have these two different
forms of revenue and they grow these year after year after
year, and they do so very efficiently.
MasterCard is also growing the total Mastercards around the
world routinely. We can see that over the past
year they've grown this by 8.56%.
So that's 3.01 billion Mastercards outstanding.
That's how many total cards there are outstanding.
And you can see that the total cards continue to go up.
I look at this the same way I do Costco cards or Costco
membership, right? As these metrics, let's grow the
company inevitably will make more money.
So with Mastercard's earnings, it's one that I'll look at.
But again, it's not a nail biter, not one that I'm
concerned about. I put this one in the back
burner. I invest in it and I hold it
long term. And so far it's been a market
beating position. Now as we get further into the
week, we get back into the big tech companies, starting off
with Meta reporting their earnings after market close on
Wednesday. This is going to be a big one, a
highly anticipated earnings report.
Lots of investors in Meta and for good reason.
The stock has been an incredibly well ran stock by Mark
Zuckerberg. For a time, the company was
headed downhill. As he was going off this path of
the metaverse, he kept talking about that we had CapEx going
up, we had a lot of investment in the metaverse and people
didn't really understand it. And then Mark pivoted right
around here. He started a pivot.
He went from talking about the metaverse to instead talking
about being efficient. The year of efficiency.
They laid off a bunch of employees, they gave them great
severance packages. So the the previous employees
were happy with what they got. But we also had the stock grow
tremendously as the free cash flow continued to grow and the
free cash flow surpassed where it was in 2021.
So we have the year of efficiency.
We have a pivot from the metaverse into instead LLMS and
AI. And that was something that
investors really wanted to hear because they could see all the
profits from NVIDIA. So we had a lot of good
pivoting, a lot of good strategic movement from Mark
Zuckerberg running the company. And that's because he is the de
facto owner of Meta. He can change the company on a
whim. He's not really beholden to
anyone else. He has complete control over it.
Even the board can't do anything about Mark Zuckerberg.
So the fact is that he has an immense influence in controlling
what direction the company's going.
And over this past year and a half, two years, it's really
just been a rocket. They've gone back to all time
highs. When we look at the company
right now, we can first look at the free cash flow.
You can see the resurgence of free cash flow.
We had the dip where they're doing explosive CapEx growth and
talking about the metaverse. That's what causes stock to go
down and the resurgence of free cash flow as they slow down on
that and had the year of efficiency.
Now the free cash flow is back up to around 13 billion per
quarter. They do have some issues with
stock based comp, but this has really been a manageable issue
as they've kept it flat for the past two years.
So overall great growth in their free cash flow.
When we look at some of the key metrics here, we have the
revenue by segment and all this really shows is that this is an
advertising company. They have some other things like
Reality Labs and other, but it's just not meaningful.
This is an advertising company and that's a good thing because
advertising is a good space to be in.
What really surprises me about Meta, and this is where I've
gotten this company wrong, I just don't see it growing in the
future with more and more families using it.
And I'm always surprised to see that there's more families out
there, more daily active users using Meta.
It's really, it's outstanding to see.
The company has grown to have 3.24 billion family daily active
people. These are people using it every
single day, 3.2 billion. I think it's got to end at some
place. We got to Max out the amount of
humans out there, but apparently there's just more and more.
The world's growing and Meta grows with it.
So we're seeing substantial growth even with Facebook, even
with their already mature platforms in usership now.
Meta's also competing in the LLM game, the AI game.
They're making a lot of different models and they have
some of them that are open source.
So Mark Zuckerberg is actually being more open source with the
the AI space than open AI, which is kind of ironic.
But he's going down that route of open sourcing different
technologies with AI, making it more publicly available, making
it so more people can build upon it.
And they have their own, which is Meta AI.
So they also have that gross story with AI and it enabling
their platform use. Overall, right now looking at
the valuation of Meta going into this earnings and looking at the
advertising market with Google, I don't see much of a reason to
be bearish on this quarter. In fact, I think that MET is
going to do just fine. The one thing that I could see
kind of hurting the stock this quarter maybe a little bit is
talks about increased CapEx. I think that they might throw in
that they're going to increase the CapEx.
If we look at that hair investors really don't like
hearing that you're going to spend far more money in building
out servers and that type of thing.
They want to hear that free cash flow is going to grow.
But I could see that hitting the stock this quarter.
If Mark Zuckerberg gets on and says we're not in efficiency
mode, we're an expansion in CapEx mode, that might be a
little bit of a bummer on the stock, but that's the only thing
that I could see out of all of their fundamentals.
And in terms of the value, I don't think there's much reason
to be concerned about Meta right now.
Now going into the rest of this week, we get into companies that
I'm very excited to hear from, specifically Amazon.
This is a massive holding in my story fund portfolio and makes
up 34% of this portfolio. So I have a huge bet on Amazon.
It's a company that I'm super bullish on.
The position size is now 77,000 dollars, 19,200 in the green.
So we have some some big positions here, Amazon, Netflix,
and then we have smaller ones like Google, Microsoft and S&P
Global. But Amazon is by far the
biggest. Now when we look at Amazon,
there's a couple of reasons that I'm super bullish on this
company and it has to do with the lines of business that
Amazon is in and the math. I think the company's still
undervalued even today, even at 183, I think it's around 20 to
30% undervalued. If I was to give a price target,
which I, I don't typically do that, but if I was to give a
price target, I think that Amazon could be around 220 by
the end of this year. I see around a, a 40% return
this year. It's already up 21%.
I think it can go up to around a 40% return this year.
Now don't bet on that. There's nothing guaranteed.
I can't see the future, but that's my prediction.
And that prediction is based on math.
It's based on the fact that I think that Amazon this year will
generate around $70 billion in free cash flow.
When you take 70 billion and you divide that by the total market
cap, 1.9 trillion, you get around a 3.6% yield.
So I believe that Amazon right now is trading at a 3.6% free
cash flow yield. Let's go ahead and just compare
that to some other large successful big tech companies.
We have Microsoft. Microsoft's a bit more
predictable than Amazon, but Microsoft trades at a much lower
free cash flow yield of 2.2. We look at Apple and Apple
currently trades at a 3% yield, so that one's the closest.
But you also have Amazon, which is growing faster than all of
them, faster growth in both free cash flow and revenue than all
of those companies. And based on this year's
projection that I have, it would also be the cheapest.
So it's the cheapest big tech company growing its cash flows
the fastest. That's a combination I really
like and that's the reason why I've overweighted this position
so much in My Portfolio. I think I have the best chance
of outperforming the S&P 500 in the QQQ by having a strong
overweighting of Amazon given the company score businesses,
its valuation, my projections of its free cash flow and I think
the predictability of the company.
Amazon operates in a number of different market segments, but
the ones that are really important are the services
business. So we can take out their first
party online sales. Let's just remove that.
We can take out physical stores. That's not a big part of Amazon
either. That's not a huge growth story.
We can take out other, which is just random stuff they bucket.
It's a small amount and then we're left with the services
businesses. These are the best part of
Amazon. We have the third party seller
services. So if you store things in an
Amazon warehouse, if you distribute it using their
system, if it's fulfilled by Amazon, that's the service they
charge and it's a higher margin business.
Then we have advertising. Amazon owns Amazon Prime Video,
they own Twitch, they advertise all over their website as well,
and Amazon.com. So you have the advertising
portion here, which is massive, and then you have the
subscription services and you have AWS.
You have four different service businesses here.
All of these are phenomenal and these ones combined are growing
at 17.21%. So again, if we add in the other
lines of business, overall Amazon's growing at 12%, which
isn't the fastest. When you filter out to just the
highest margin, most important segments of the company, the
growth is accelerated. It grows at 17.21%.
This is the part of the company that I think is the intrinsic
value driver of the company, the services high margin business.
This is the part of the company that will grow the free cash
flow. So having this grow at near 20%
is really impressive and I think it's going to continue growing
at a very fast pace. The third party seller services
business is growing at 16%. The advertising business is
growing at 24% and they must have margins of around 70 to 80%
with this advertising business. It's just phenomenal.
We have the subscription services growing at 11 percent.
This is like Amazon Music and and that type of stuff.
And then we have AWS, the biggest hyperscaler, the biggest
cloud company in the world, growing at 18.51% and that's
going to continue around that pace.
Qualitatively, Amazon sits as the large concentrated winner in
many meaningful markets. In cloud hosting, their number
one with AWS, in online retail, their number one with 40% market
share. In video streaming, you have
Netflix's number one, and you have Amazon Prime Video as
arguably #2 so they have a nice concentrated market position in
video streaming, and they're gaining in sports and
entertainment overall. You have advertising, Meta,
Google, and then you have Amazon as #3 that's a pretty good
position to be in. And I would argue again that
their advertising business, although smaller than Meta and
Google, is actually a Better Business because of how targeted
their ads are. So you have this company in #1
two or three of many important markets, and they're continuing
to dive into new markets all the time.
I think that Amazon is also a company that will benefit
dramatically from robots over the next 10 years from LLMS and
machine learning. They are well positioned to be a
company to have enormous efficiency gains in their
warehouses. So there's a lot of reasons to
be bullish on Amazon. The low valuation, the steady
reliable businesses, the company is concentrated in key markets.
All of that put together makes me feel good about the company.
Now, there are some risks to it, and I'd say that the risks are
similar to metas in a way. Amazon really doesn't care about
short term gains in the stock. They're not a company that
focuses on pumping the stock in the next quarter.
And in many cases, they'll do things like say that they're
going to double the amount of money they spend on CapEx and
they don't really care how investors respond.
So you can see the massive CapEx explosion in 2020.
They did that because they needed more fulfilment and that
causes the stock to go down a lot.
So Amazon has done things that investors don't like from time
to time, but they always focus on what's best for the future of
their business. One thing that I think that
Amazon could do that I think will upset investors again is
they'll say that they're not returning any money back to
shareholders. They're not going to do really
any meaningful buybacks. So they're not returning capital
through buybacks and of course, they're not paying a dividend.
And I think that's the biggest challenge for Amazon so far.
They've shown no interest in returning capital back to the
shareholders. And investors of course, love
companies that return money back to the shareholders.
I think Amazon, though, eventually will be forced to
return capital back to the shareholders because if they
grow their free cash flow by double up to 60 or $70 billion
from 32 billion last year, they're going to have too much
cash. Simply put, they're just going
to have too much. They're not going to be able to
spend it all, and they'll be forced to either do a dividend
or start doing aggressive share buybacks.
I know that the stock can go up or down based on a few metrics
or AWS growth or margins. There's always a couple things
that can really set off investors in the algorithms.
But overall, I'm looking at the consistency of growth in those
core businesses. So as we go into Amazon's
earnings, I'll be looking at the overall intrinsic growth of the
company and I'll be reviewing it on this channel.
Now moving on, we have Apple reporting earnings at the same
time. Let's go ahead and talk about
Apple. First of all, Apple's another
company in My Portfolio. A lot of these, these big tech
companies I've been saying are the best investments.
These are the ones that I think are just great investments over
the past five years and they've far outperformed the market.
The reason that the S&P 500 and the QQQ has has done so well
over the past five years is driven by companies like Apple
and Microsoft. Now, Apple's a company that I've
made substantial gains in owning this company since around 2018.
I started buying the stock on the basis that they're more than
just a hardware company. They're transitioning from a
hardware company to a full ecosystem of products and
services. And they'd have a lot of
opportunity to market and advertise and monetize their
their nice products that they make.
So that was the thesis and at the time that was a novel
thesis. Now that that's well known,
that's what Apple's really done and that thesis has played out
to to great success. So we see the position right now
as a $48,000 position, $31,000 of that in the green.
So the majority of the position right now is gains, and I've
actually started to trim Apple a little bit over the past year.
I'm taking some off the table even though this remains a very
high quality company and I want to explain why I've done that.
The issue with Apple right now is a company struggling to grow.
It's struggling to grow. It's organic revenue and it's at
a high valuation. It trades at a 34 PE ratio, a 3%
free cash flow yield. So it's not terrible.
I wouldn't say it's the most overvalued stock in the market
by any means, but Apple's not a cheap company and it's trading.
As though it's going to have a meaningful amount of free cash
flow and earnings per share growth.
But free cash flow and earnings per share growth is driven
primarily by revenue growth. You have to grow the top line to
be able to find some margin there.
If we look at the revenue growth, we can see the total
revenue. It's been flat sort of over the
past couple of years. But I think this becomes clear
if we break it down on a revenue segment basis.
We can see that here in Qualtrum, 2024 only has Q1, so
this is only 1/4 of the year going through.
So you'll see this go up overtime as we get through the
next quarters. But if we look at the most
recent five years, we can see that in 2019 to 2020, it grew
soundly. And then in 2020 we had a pull
forward of demand, massive demand for Apple products as
people are getting their stimulus checks as the only
thing you could really do is work from home and be online,
lots of people buying their products.
So massive growth in the product sale and specific massive growth
in the iPhone. The iPhone went from 147 billion
to 198 billion. So all of Apple's hardware
products have shrunk since 2021. The one portion of the business
that continues to grow every single year is services.
Services include things like Apple TV, Apple Fitness, Apple
Music, and it also includes the Apple insurance on your
different products. And it includes the game revenue
they get from the Apple Store. So all the different apps you
download, the microtransactions, the little games you play, they
get a lot of money from that. They also make a lot of money
from different companies like match.com or they have dating
apps and they do transactions in the App Store.
So as all of those companies are growing outside of Apple, all
those little video game companies and dating companies,
Apple's taking a fee, a license from that, similar to like
Universal Music Group taking a fee anytime a streaming service
plays their song. And that's growing Apple
services year over year. So we see that reach $87 billion
in 2023. It's going to grow in 2024 as
well. In the first quarter, it's
already $24 billion. So massive service revenue.
The question is whether or not the service revenue can make up
for the lack of growth in the rest of the business.
And investors are debating that. They're trying to figure out if
that's the case. Apple has also said that they're
moving in to the artificial intelligence sphere.
They're moving into where now their ecosystem of products is
going to be AI driven with AI, Alexa and lots of different LLM
tools and AI tools. We've seen all those
demonstrations, so a lot of investors became very bullish as
soon as they went into the AI sphere and they gave a good
presentation on that. Apple's a high quality company,
but this upcoming earnings on Thursday, I think is going to be
challenging. They have to show a clear path
of growth and future for the company.
They have to show that they're not saturated.
They have to show that they can overcome the different
challenges with regulation and slow down in China.
So there's a lot of different hurdles for Apple and on top of
the high valuation, which leaves little room for multiple
expansion, I think it's just a more challenging earnings.
So I'm not expecting a lot from Apple going into this earnings
and that is the reason that I've been taking some off the table
for this stock. Hopefully it does well, but I
think it's going to be a tougher 1.
Now finally, at the same time, we get into Booking Holdings.
This is a new holding to the passive income portfolio that
I've been buying into. Booking Holdings is the largest
online travel agency in the world.
It is a super profitable company that trades at a low valuation.
Now let me give you some scenarios on this upcoming
earnings. Let's just have the scenario
here. Let's pretend for a bit that
Booking Holdings has a terrible earnings report.
They guide that there's going to be a cyclical slowdown in travel
as people are pulling back. They're pulling back on
McDonald's, they're pulling back on spending all together.
Let's say for example, that they decide that they're pulling back
on travel and Booking Holdings is seeing less bookings, you
know, less people using their platform.
Over the next three months, if the stock drops 2030%, we have
an epic sell off in Booking. That's not the worst thing for
this holding in most cases. I would be pretty concerned if
that happened. But if we look at booking
holdings here, we can bring up the stock and see that part of
the investment thesis here is the enormous buybacks.
They're able to consistently do booking trades at such a low
valuation. Their PE ratio is at a 20 and
their free cash will yield, even after accounting for stock based
compensation is nearly 5%. So they're generating a 5%
yield, similar to a treasury bond, and they use that money to
both pay a dividend and buy back their shares aggressively.
They are a buyback machine and that is part of the reason.
In fact, that's a very central part of why I like this company.
The stock consistently trades at a low valuation for fare of the
cyclicality of the travel industry, causing their buybacks
to be extra accretive and effective.
Last year, year over year, they bought back roughly 9% of their
market cap. They reduced the shares
outstanding by 8.63% and you can see that over time, the share
count is dropping like crazy. This gives the owners of the
company more equity in it. It grows the earnings per share
faster. It grows the free cash flow per
share faster by reducing the total amount of shares
outstanding. So in the scenario where Booking
Holdings guides with disappointment and they see a
slowdown in the travel industry, that's a temporary concern that
will cause a sell off in the stock.
If the stock sells off, Booking will buy back their shares at an
even cheaper price, raising the earnings per share, raising the
free cash flow per share. So this is one that I'm just not
concerned about. Even if there is a slowdown,
eventually things will speed back up.
The travel industry is in a secular growth trend for the
next 10 years. People will continue to travel
more and more, and this is a stock that continually earns
high amounts of free cash flow. Even if there is slowdowns in
travel, they still generate positive free cash flow if the
price goes up after earnings. I already have $22,000 invested
in the stock and I'm happy that way as well.
So either way, I'm looking forward to their earnings
report. I'm really not concerned about
it at all. Now that's an overview.
Looking ahead this week, if you want to see reactions and
analysis of these earnings reports, make sure you subscribe
to the channel and I'll be going over each of them.
That's all for now. See you in the next one.