Welcome back everyone. It has been a huge day in the
market so far. We made it through the big test
of this earnings season. NVIDIA reported earnings
yesterday and they did not disappoint.
NVIDIA is up 15% today once again after earnings blowing
away expectations, they're now currently up 61% year to date.
No, that's not over the trailing year.
That is year to date, like 2024, like the last two months.
Now if you're not a market expert, let me just remind you,
being up 61% in less than two months is considered good.
And it's not just NVIDIA sharing in on the action here.
We also have AMD, the forgotten chip maker that's up 11% on the
day. AMD is up more after Nvidia's
earnings report than they are on their own earnings report.
This NVIDIA earnings report is seemingly lifting the entire
market. Everyone seems to be getting
involved. The Dow Jones is up .77, the S&P
500 is up 1.74%, and the Nasdaq's up 2 1/2 percent.
A massive rally for the NASDAQ. These big companies are crushing
it and likewise My Portfolio is having a nice rally today.
Now it looks like M1 Finance changed around the user
interface here. Normally it has the total gains
like right here has a total value here.
It looks like they move the value right here in the pie.
So I have a total value of 654,000 and then we have to
Scroll down to see the gains and it looks like they segmented it
into two categories. We have the dividends earned
$27,800 and the market gain which is capital appreciation of
162,000. The total return is your capital
appreciation, which is the market gain combined with the
dividends earned. So when I look at my total
returns, it's around $189,000 in gains.
We're creeping up to $200,000 in gains, which is incredible.
Now of course the goal is to continue to compound this
portfolio at an attractive rate and earn good returns on the
investments I make. So I can make this $200,000 in
gains, 300,400 thousand and so on.
That's the goal long term, but I'm sure I'll run into some
hurdles along the way. But overall things are going
really well and today has been an incredibly good day off the
back of NVIDIA earnings. For example, if I look at my one
day performance, we just zoom in to today alone, I'm up $10,000
and you'll see on your portfolios as well that you're
likely in the green by a large amount.
When I look through My Portfolio, I notice a lot of the
companies are doing really well. They're trading up in price,
they're making gains. Many of them are at record
highs. I believe a lot of them have
moved up substantially in the past year and they're now close
to their intrinsic value. But when I look through all of
my companies, there's one of them that I believe is not being
treated quite fairly, and I still believe it's not being
recognized for its intrinsic value.
That company is Google. Google has recently gone through
a string of being unprepared, fumbling presentations and bad
news, and this has caused investors to question the future
of this company. The streak of Googles criticism
started off with their capital allocation.
The company hired around 50,000 new employees and only a nine
month period. Investors became concerned that
they were being careless with the amount of compensation, the
amount of staff that was required to run the company.
Google implemented layoffs and it was revealed during the
layoffs that they fired an extensive amount of massage
therapists. But capital allocation wasn't
the only issue. Microsoft also got a leg up on
Google in the AI race, taking a lot of the shine off of Google
and showing that Microsoft had a product it was at least very
competitive, if not better than what Google was working on.
Google quickly rushed their AI chatbot bar demo, which had
factual errors, which was embarrassing for them on
Twitter, but they also made a mistake during the demo itself.
Employees at Google said that this seemed like a rush response
after the botched bar demo. Google also released another
demo for Gemini where they showed footage of someone
seemingly talking to the computer, but it was later found
out that much of the demo was exaggerated.
Speed up and the prompts were different than what he was
saying. Overall, they called the demo
faked. This is another piece of bad
publicity for Google as they're trying to build trust in their
AI program, and the controversies continue to this
day. The latest one is that Googles
AI Gemini is automatically swapping prompts to make them
more diverse and in some cases causing Gemini to offer
inaccuracies in historical images.
And Google has already released a statement apologizing for
this, saying that they're missing the mark and they're
trying to fix the issue. These type of things are
continuing to happen seemingly all the time with Google and it
does have an impact on how investors view the company and
the stock price. To add on to all of this, we
also have reports from CNBC videos like this one titled Is
this the end of Google Search? How the giant could lose its
lead that has a staggering 630,000 views a lot of investors
are at least concerned about or they want to look at the
potential failure of Google, the inability for the company to
continue on with its dominant lead in search And reporters
from CNBC are not the only ones with this concern.
The long term tech focused investor Brad Gerstner recently
went on to TV and explained why he thinks that the dominant
position of Google is coming to an end.
Now when I look at all of these missteps that Google has made
and all of these bearish predictions on it, I have to
consider whether or not I still want to hold this company.
I don't hold Google in my passive income portfolio, so
it's not in my main one, but I do hold it in the story Fund.
The story funds a smaller portfolio where I only invest in
a handful of companies, and Google's one of them.
I've held this company for a long period of time in this
portfolio, but I have to consider whether or not I want
to keep this as a large concentrated position.
What I've ultimately decided is that I don't buy into these
arguments. I don't believe that Google is
doomed, and in this episode I wanted to highlight some of the
biggest reasons. I think that Google not only is
not doomed, but I think the company has a great future ahead
of it. We're going to go through this
point by point. Now.
The first thing I think is important to outline is that
great companies like Google, they fumble.
They fumble semi frequently. Zuck caused a large sell off by
talking about the Metaverse way too much on earnings calls.
It was basically the only thing he was focused on.
He alienated most of Wall Street by nonstop talking about the
Metaverse. It was around this point that
Mark Zuckerberg continued to talk about the Metaverse and how
much he's going to spend on it, throwing a lot of cash flows and
CapEx into something that Wall Street wasn't sold on meta
stocks sold off for the following year, and then
Zuckerberg finally focused on costs and efficiencies.
Saying that we're going to have the year of efficiency, which
caused a rapid recovery in the stock.
Meta is not the only example of a company doing this.
Netflix also caused a large sell off by losing subscribers for
two consecutive quarters. It was right around this point
in time that Netflix first said they'd ever lose subscribers.
They said it was going to be around 400,000, but the trends
were going against them. The stock dropped dramatically,
going down around 30%. And then we had time #2.
The following earnings report, they said they're going to lose
about a million, so Netflix lost more subscribers causing the
stock to sell off again. Now I can obviously see the
following history. Netflix is right back where it
was before they lost subscribers.
Amazon is another example of a company that caused a large sell
off in the stock, this time by focusing on huge CapEx
investments which caused their cash flows to go negative.
In the years of 2021 and 2022, Amazon decided to go all in on
expanding their network, growing their CapEx.
This caused the free cash flow to plummet.
Investors didn't like that. You can see how much investors
didn't like it by the the fact that the stock price went from
$180 all the way down to 80. They lost over 60% of their
market cap. But again, you notice the trend
here. Amazon is now getting close to
an all time high. Great companies fumble from time
to time and we've seen ample examples of this over the past
couple of years. And the fumbles, the big
problems that these companies faced are usually quickly
forgotten by the market. They don't even think about it
the following couple of years. Think about Mark Zuckerberg and
the Metaverse. Is that really a concern for
anyone anymore? Does anyone really even talk
about that? No.
That was a time ago and investors have moved on.
They don't care about it anymore.
Look at the example of Netflix. Are investors still concerned
about them losing subscribers 7 quarters ago?
No. Investors have moved on.
They're forward-looking. I see this type of thing
frequently with investors. When you're in the moment
looking at the bad news, looking at the botched demos, looking at
Microsoft release their AI model first, they seem like really big
issues, and they can cause investors to make incorrect
assumptions about the future of the stock.
In reality, great companies, ones like Google, are typically
able to figure their problems out eventually.
They have enough market share, they have enough money, they
have enough talent to be able to move on from these stumbles.
If I had a guess, I believe that investors will forget about 90%
of these challenges within a year.
Now the second thing that I'd point out, which just adds in a
little bit of safety to this company is as Google trades at a
low valuation relative to the market.
Look at Google's PE ratio. It's currently out of 21.
Currently, the S&P 500 trades at a Ford PE estimate of 22.7.
Most companies of this equivalent quality trade much
higher than the market. Now after that, we also know
that Sundar, the CEO of Google, is getting costs under control.
One of the primary criticisms I had for Sundar Pichai is that he
wasn't focused on cost structure.
He was being a little LAX with how he's running the company,
but we can see that improving over time.
One of the things we can look at with Google is the number of
employees over the past four consecutive quarters.
For example, in the March quarter of 2023, they had
190,700 employees. That's a lot of employees they
hired rapidly to get to this point.
But look what they've done over the following year.
They went from 190,000 to 181. So they laid off roughly 10,000
employees, which is a big number, but compared to their
total employees, it's still a relatively small percentage.
Regardless, it was a reduction in the employee headcount and
then even after layoffs, they seem to be a bit more
disciplined in their hiring. They went from 181 to 182.
So in a three month period increasing by 1000 is not a big
deal for a company of this size. That's slow growth in their
employee headcount. And then in their most recent
quarter, they went from 182.3, 182.5, only hiring a net 300
employees, meaning that over the course of the full year, Google
seems to be paying far more attention to their expansion in
employees. They're being a lot more
disciplined in their approach and Sundar should be getting
credit for that. He is getting costs under
control. So I know that these stumbles
that Google has had are likely temporary.
We know that the company's trading at a relatively low
valuation compared to the market.
We know that the CE OS getting costs under control.
The next thing I'd point out is that Google's growing much
faster than the market. When we look at the free cash
flow growth of Google, it reached a record high in 2023 of
69.5 billion. That is growth of almost 20% for
the past decade. In the past five years it's 25%
on a compounded annual growth rate.
That is incredibly fast. There's only a handful of
companies that have been able to pull this off and this doesn't
tell the full story because Google has also done share
buybacks as they've grown. We can look at this illustrated
in the shares outstanding. There's a difference here with
the other charts. With shares outstanding, we want
to see them going down. So we actually want to see these
numbers in red. Red means a decrease.
And in shares outstanding decreases are good.
So we have the shares outstanding going down by 3.3%
over the trailing one year. That is an aggressive share
buyback policy. Sundar is really buying back
shares at an accelerated rate and the low valuation of Google
made this fairly easy to do. When we look at the buybacks and
incorporate that into the free cash flow growth, we get the
free cash flow per share, which is even faster.
And the fact that they're now focusing on costs and likely
growing their top line faster than growing their expenses,
we'll see some margin improvement, which will mean
more free cash flow, which will mean more buybacks going back
into the company, reducing the share count.
So I can't say for certain what will happen in the future, but
based on all the data we have, it looks very positive.
The next thing I want to address is a major concern about Google
with the future of the company and AI.
Brad Gerstner is a tech investor that runs a massive fund called
Altimeter, and one of the companies that he is avoiding
investing in is Google. Harris's reasoning behind it.
Here's my fundamental position. Search is going to be replaced
by agent LED information discovery.
I see it every day. My 15 year old son says Dad, I
don't use Google anymore. I just use Chat GB.
TI talked to 2000 people at the Javits Center.
How many people have used ChatGPT instead of Google?
Over the course of the last two days, 1000 of hands in the room
go up. I asked my analysts who are
sitting on their desk. They're replacing their use of
Google with ChatGPT. We are having a fundamental
structural shift in how people retrieve and discover answers to
the questions they have. So Google is going to have to
compete in this new thing, OK, Meta's going to compete.
Apple's going to compete. Microsoft with Copilot, ChatGPT,
etcetera. They're going to be 678
incredible competitors there. Google will be one of those
competitors, and let's assume that they're a very competent
competitor because they have all of these assets.
The question to you do you what do you think the likelihood is
that they're going to reconstruct is dominant of
monopoly in this new thing as they have in search?
Now I must say, with great respect to Brad Gerstner, I
could not disagree more fully with him.
I think he's completely wrong here.
First of all, the whole premise of his argument is that people
are fleeing Google search and rushing to ChatGPT to get
information, and he references a lot of anecdotes of people he
knows using ChatGPT and not using Google.
My 15 year old son says dad, I don't use Google anymore.
I just use Chat GB. TI talked to 2000 people at the
Javits Center. How many people have used
ChatGPT instead of Google Over the course of the last two days,
1000 hands in the room go up. I asked my analysts who are
sitting on their desk. They're replacing their use of
Google with ChatGPT. He believes that everyone around
him is moving away from Google search to ChatGPT, and my
experience could not be more different.
Everyone I know doesn't care about ChatGPT.
Everyone I know that lives in the real world.
The average person that's just wanting a bit of information
goes to google.com and gets a search of what restaurant they
want to visit, what different books they're looking at,
different subjects they're interested in.
None of them are using large language models and Gemini and
Chachi PT. In fact, I notice that the type
of people that are most drawn to Chachi PT aren't the average
person. They're typically super tech
focused people like Brad Gerstner.
So it makes sense to me that people in his immediate circle
are more biased towards this new technology, but I don't think
that that's accurately representing the broader world.
So I believe that his anecdotal experience in this is not
representative and it's way off the mark of the average
experience. I believe the biggest thing that
investors miss is that AI text like ChatGPT, and large language
models have different use cases than Google search.
They are different and people use them for different reasons.
Here's a Venn diagram that I believe accurately represents
the overlap in use cases from ChatGPT or different AI text
models to Google search. If the blue circle represented
Google searches use cases, the black circle represented Chatchy
BT's use cases. The majority of their use cases
are completely different. Chatchy BT is used for things
like math equations, coding problems, customer service,
writing out e-mail templates. Then Google search is used for
things like looking up information on a new movie or an
actor looking up information on a historical event.
The huge majority of their use cases are unique, but they do
have some overlap in the middle. There are some cases where you
could use either one, but that is the minority of cases.
Even if Google lost the battle in AI text and GEM and I didn't
compete with ChatGPT, they would still make a fortune with their
search engine over the next 10 years.
That's assuming they completely lose this battle in AI.
So I completely disagree with this assertion that Google
search is being replaced by AI text programs.
Now we can see this in the numbers.
Most of these short term risks have not shown U in the numbers
at all. You think you'd see them by now
with an entire year of people using Chat GT, but being which
is powered with Chat GT did not take 1% market share from Google
last year. This was the big year for
Microsoft to take market share. They promoted it in every single
tech conference. They put it on the front page of
being. They tried to make it as
powerful as possible to compete with Google Search, and from
those efforts they couldn't gain a percentage of market share.
And then finally, one thing that's underappreciated by
investors time and time again is the difficulty in changing user
behaviors and habits. People, generally speaking, are
very lazy. They like doing what they've
done before. It's easier to Kee people using
Google alications with Gemini just being one click away from
googlecom. You can find access to a large
language model that's satisfactory, or you can
download Chat GT, which will require you to go to the App
Store, download a separate app, and log into a separate account.
So I would not use Twitter or YouTube tech reviewers as an
indicator of normal human behavior.
Most humans will use the easier route, which is sticking with
Google because they already use it.
So overall, Google has been through a little bit of a bumpy
Rd. over the past couple of years.
There's been a lot of doubting that's happening recently.
I just wanted to throw my opinion in that I think the
company's fine and I do not believe that Google search is
doomed. That's going to be it for this
episode. I hope you enjoy it and I'll see
you in the next one.