Welcome back, everyone. We have a lot to jump into in
this video. First of all, the market across
the board from the Dow Jones, to the NASDAQ is in the red and
they say that it's based off of economic concerns worries Mount
about economic growth, right? That is the concern.
And I think it's a valid one. We have Jamie dimon here.
The CEO of JPMorgan telling people to brace themselves for
economic hurricane caused by the fed and the Ukraine war.
So, we have the CEO of the largest bank in the world
telling people to break. Themselves, that's not really
what you want to hear and I think that him saying this may
have actually caused the markets to swing into the red.
I think this has a lot of impact, but regardless today,
even despite all this Gloomy news and the markets moving down
Salesforce. One of the nine Holdings in.
The story fund is up 10% And this move is off the backs of
their recent earnings report. Obviously investors found
something or a couple things that they really liked in this
earnings reports. So I went ahead and I reviewed
it. We're going to dive into it.
Gather, we're going to look over the financials.
We're going to look over all the important things to look at with
a company like this, the growth of it, the margins, the
dilution, right? The sustainable moat as well as
the valuation. I've ran multiple models of cash
flow analysis and how to Value this company.
So we're going to be diving into that as well.
So we have a lot of fun news to get to in this episode.
Now, before we jump into Salesforce specifically, I want
to give an update on the story fund.
If you're one of the new subscribers to the channel, if
you're one of the new members here, we've gained a lot of sir.
Scribers over the past couple of months.
This is a real portfolio. And the reason that I show this
every week and keep updating every week is to show
transparently real investing and I think that that's actually
important if you get just Snippets of what people are
doing and you see their portfolio updates, once every
six months, you don't really see the pain.
That happens between transitions like what's going on right now.
The past six months has been very difficult for growth
companies. So what I decided to do was to
transparently And weekly track my portfolio and give everyone
else in insight into what's going on, good or bad.
And we can see the the sell-off Senate, we can see the market
gains and everything happened. But this is a real portfolio.
It's my money invested in it. I'm trying to make as much money
as possible, the goal of the portfolio.
The game that I'm playing here is to try to outperformed the
S&P 500. By the end of 2025 and I track
that as well, in a benchmark. So I Benchmark this performance
against the S&P 500. We can look at That right here.
This is the chart and my portfolio.
The story fund is the Blue Line. The S&P 500 is the red line so
we can see that throughout the duration of it.
I was keeping up with it. I was even outperforming to some
extent at some time periods. But since November, when the
sell-off really happened, the big transition to the consumer
staples and the big rotation out of tech did hurt my portfolio
and then there's been some other things as well.
But there's other videos where I go into this in more.
Detail, but as of right now, this is what the performance
looks like. The story fund, actually had a
good week. We actually gained on the S&P
500 last week. And I think this is illustrative
of probably what I think is more to come in the future.
Meaning that if we have bullish sentiment, if the markets do end
up moving up at all. I think these type of companies
will move up at a much quicker Pace than the big defensive
Consumer Staples. So the market right now is in
Risk off. Mode, everyone's wanting to be
defensive when the market becomes a risk on again, which I
think will happen at some point within the next three years.
I think the market will want to take on some risk at some point.
When that happens. I think that these companies
will do better. And you saw that last week, my
portfolio went from being down 32% to being down 23.5%.
So moved up a pretty significant amount and the S&P 500 went from
point, eight percent to four point three, so we're gaining on
it, but that's only when the Has some type of bullish sentiment
and you want to take on some risk.
So as of right now, we're still below the S&P 500.
But we're not we're not completely out of the range of
catching back up and you can see again how quickly things can
change in just one week's time. This portfolio is up 9%.
In just the past five days. The S&P 500 is up four and a
half. So we gained a lot of ground,
seven thousand nine hundred dollars in one week.
A lot of that is due to Amazon. My largest position moving up
14% That's a 4500 gain from Amazon alone then.
Google moved up quite a bit. We have Ali Baba, moving up over
the past five days. We have Salesforce just today
moving up, 10%. So let's go ahead and jump into
Salesforce specifically. Now Salesforce is one of the
companies that I've referred to, as many Microsoft and I say that
because it reminds me a lot of Microsoft.
They're kind of a business to business company.
They sell software as a service and they are entrenched in
companies that use their products.
They have a sticky service meaning that when a company
signs up for Their product and they start to implement it, they
start to get used to it. They start to build upon it and
use apps and Integrations. It becomes entrenched in the
company where to unroot that and move to a different service is
cumbersome and expensive. So it takes a lot of effort to
move out of Salesforce to a competing service and most
companies. Once they sign up for
Salesforce. They stick with them, that's
called switching costs. The switching cost from
Salesforce to a competing service is very high.
So that leads to high customer retention.
Now for those Of you who are not familiar with Salesforce.
I want to show this quick video that explains it from a
marketing standpoint. So this is marketing material
created by Salesforce that they use to sell to different
companies. Only put on my headphones here.
We'll watch this together. Welcome to The Trusted
Enterprise. This is the digital world where
we no longer have to be in a building to start building.
Unless, of course, we want to be building better customer
relationships employee experiences, workflows
Partnerships apps, and Roi. So let's build on that.
With Salesforce customer 360 and slack on one integrated
platform. We're talking if you don't
remember, Salesforce did acquire Slack.
They use dilution and some debt and some cash to do it.
In my opinion. I think it was a great
acquisition. So a lot of investors were very
cautious about it because slack was an expensive acquisition to
have. But slack is like the go-to
business-to-business chat application.
It's competing with Microsoft teams, but I kind of compare
slack to businesses like Discord is to online communities.
It really is a really good acquisition for Salesforce, in
my opinion, but the full on digital transformation energy.
So, those headquarters of yours are now, wherever the work
happens. This is your digital HQ the
place for every employee to better connect with each other
and customers. This is where all your team's
Unite with a single shared view of your customers, delivering
incredible, customer experiences, incredibly
efficiently because it's all asynchronous.
Meaning work stays fluid. So that meeting everybody was
too busy to attend is still attended by everybody on their
time through a shared Channel access.
I think every important document presentation and recorded
message left for each other, with live captions, baked in
making it accessible to anyone. This is where all your customer
data is gathered to generate pipeline reports for marketing.
So they know when the quickly spin up, they also own Tableau.
So that was another acquisition. They did, it's an application
that shows you charts and graphs and visuals and I think another
one that turned out to be really good for Salesforce.
So this is a company that like Microsoft, they keep picking up.
Different Acquisitions that are strategic and they actually have
Synergy there not just Acquisitions to buy random
companies and to increase their revenue, but they actually end
up building them into their core service.
That the genius, new campaign boosting idea with their agency
partner securely through slack connect and where it integrates
apps to improve data, accuracy and productivity.
For everyone. This is where customer
engagement takes off. It's where sales sets up a
digital deal room with Commerce to strategize around
capitalizing on the Pain, boosting momenta inviting legal
operations, support Carl from finance and more creating
workflows a streamline at all. Now meeting notes are
automatically added new contacts are automatically created and
reps are instantly notified of account updates wherever they
are. This is where leads become
customers customers who can count on the best support
around. Because this is where service
portals with knowledge articles and chat Bots are at the ready
to solve issues and when something needs to be escalated,
Agents can swarm identifying the right team members based on
skills to take immediate action. And every team is United.
So marketing emails and sales calls are temporarily Faust.
Until the case is resolved because nobody wants to be
marketed or sold to when they're having an issue.
This is where Trailblazers listen to customers and create
platforms for change. This is where customers become
customers for life. Then swap out sales marketing
and service with Landers Brokers and investors.
Helping entrepreneurs, open their next location or
Healthcare or retail or manufacturing or entertainment.
Because it's built for every industry imaginable.
This is where every employee in every Department working from
anywhere is aligned with a single shared 360 degree view of
every single customer. Your customers are everywhere
and your new digital HQ is how you connect with them to succeed
from anywhere. This is Salesforce customer 360
and slack on one integrated platform.
This is where workflows and customer success grow.
Okay, that's a little again that's marketing material from
Salesforce. So they're trying to sell that
to other businesses, but I think it does give you an idea of what
the company has to offer. And I think that also gives you
an idea of why when a company starts to use Salesforce, it
becomes very difficult to move off of it.
The switching costs are very high.
So now that we're a little bit more familiar with the services
that Salesforce offer, the value, that it brings to other
businesses. Let's go ahead and talk about
the fundamentals of the company. What's going on with the balance
sheet, the financials, all of that, good stuff.
As well as the valuation. First of all, this was one of
the companies that like we saw right here in November that
time, period, that magical November time period.
When all these companies had a high started to trade downwards
and it's down 43%. So Salesforce is one of the
companies, the cloud leaders, the big tech companies that got
sold off with the rest of them. It wasn't sold off as much as
some speculative ones, but was sold off more than any non tech
company. Right now, if we look at the
fundamentals of the company, we have the most recent earnings
report data included in this. So This is called term insights.
This is an application you gain access to.
If you're a member of the patreon, and this is the beta
version of the new ones. So we are plugging in some stuff
and doing some things here. It's kind of a work in progress,
but this is going to be the new version of it.
We look at Salesforce overall, the company on a PE basis, looks
kind of expensive, but most people aren't valuing it.
That way, if we look at the most recent financials, we get a
clear view here. This again includes last
quarter. So, last quarter right here,
they Revenue 7.41 billion dollars, 7.41, that is a revenue
gain year-over-year of 24 percent and it beat their
analysts estimates. So they out performed on a
revenue basis. There up twenty four percent
year over year, which is very strong Revenue, growth for a
company, the size of Salesforce. And I anticipate that they'll
continue have solid Revenue growth for very long period of
time. Now, the other thing that I just
want to point out real quickly, here is looking at the revenue
chart. Do you?
You see how consistent it is. Almost like this.
Perfect, growing. Gradual slope
quarter-over-quarter. I've looked at a lot of Revenue
charts and there's not many of them that look like this.
Most companies have very inconsistent Revenue.
Some quarters are making more than others because they're
encyclical markets. Will this is the benefit of a
SAS company. Salesforce is a cloud SAS
company that has high retention rates.
Long contracts, continual billing.
They have continual price control and they can increase
their prices over time. And that has the effect of
having this. Really nice flowing Revenue
growth over time. Now, the revenue growth for a
company like Salesforce is incredibly important because a
company is priced to have a very long-term secular growth path.
Meaning the company is being Priced Right Now by investors
assuming it's going to grow at a very decent mid double-digit
pace for the next 10 years. If the company suddenly showed
that it stopped growing like the revenue just started to flatten
or completely decline. You'd have a bit of a Netflix
situation there. We saw how Netflix.
Investors reacted when the company stopped growing that is
the same risk for Salesforce. If it stops growing, the stock
price will crumble, but I think again with Salesforce, the
assumption is, it's going to keep growing and I think there's
a very good reason to believe that.
Now the revenue is important, but we also want to look at the
other economics of the company. Not just how much money they're
taking in but how much they're keeping the ibadah is a proxy
for their earnings of the company.
And it tries to smooth this out over time last quarter.
They had 991 million dollars of ibadah, which is Decent.
This was again above expectations then their free
cash flow, which is possibly the best metric to look at for a
company over time. This is a record high from
Salesforce three billion four hundred and ninety seven million
dollars in free cash flow. Now one important thing you want
to look at especially with tech companies, when you're looking
at the free cash flow of the company is you want to put this
into context of share dilution, because a lot of tech companies
in particular, they pay their employees by stock-based
compensation. Sensation.
And the way that you get stock-based, compensation is by
issuing more shares. So you dilute the shareholders,
you issue more shares, you use that money as cash flows to pay
the employees and that does show up on the free cash flow line
item here. Now, the amount of stock-based
compensation that Salesforce did last quarter was seven hundred
and seventy six million dollars. What I did was, I went into
their earnings report right here, where they mention their
stock based compensation expense.
And then I just added up each of these items.
They had the cost of Revenue. News of 112 million, they had a
research and development of 279. They had marketing and sales of
291 and they had General and administrative of 94.
So Salesforce pays a lot for this marketing and sales and
research and development in terms of diluting the
shareholder. So basically all we need to do
is look at the free cash flow. And if you want to factor in
share dilution, you can - out the 7 76 million and that's what
you're left with after dilutions taken effect.
And even though Salesforce is diluting the shareholder and You
can clearly see that Illustrated.
Even in call term here. This is the amount of shares
outstanding over time since the beginning of the company on a
quarterly basis. We can see that they are
diluting the shareholder and this is something that I hate to
see, I really exclude a lot of companies.
I don't buy a lot of companies because they love to just pump
out more shares, pay their employees and their Executives,
very big pay packages, right. The executives make a fortune
while neither shareholders, just being diluted.
And a lot of times they're not doing a creative things with
that dilution. They're not taking the money and
doing something to make me more money.
So Salesforce and their dilution is something that I don't like.
But having said that, this is one of the exceptions I make
because Salesforce is generating cash flows at a much quicker
rate than their dilution. So if you were to Pace out the
dilution and then you're at a pace out the free cash flows.
They're still growing their free cash, flows on a diluted basis
much quicker than the average company.
So, overall, putting this in context, it is true that
Salesforce is diluting shareholders.
They did around 7%. ENT last year, but they are
growing their free cash flow at a much more rapid pace.
And over time. I think this rate of dilution
will go down like most mature tech companies do with Adobe, it
went down and now they're doing share BuyBacks with Microsoft
and Google and all the big tech companies that used to dilute.
Now. They're not doing this anymore.
So I think that over time, this chart will go up with dilution,
then it will level out. Then when they become so free
cash flow positive. They'll start to do share
BuyBacks. That's why I think this will end
up over time now, moving on to another important.
To look at what the company like Salesforce is, the amount that
they're spending on different expenses here.
We have added in a graph that shows the capex that's capital
expenditures, that's like trucks and warehouses and different
physical Goods that they have to store and build.
So that is the blue chart hair or the blue line.
Then we have the sales and marketing which is the Big
Orange part hair and you notice that sales and marketing, take
up the huge majority of sales forces expenses for the company.
So we have the sales. Marketing care in Orange.
Then the general and administrative expense here in
red, which is not a huge amount. It's still kind of high but it's
nowhere close to the sales and marketing then we have the
growing research and development.
So if we look at this overall, we can look at the sales and
marketing growth. I can filter this out and we can
see that Salesforce as they grow their revenues.
They grow their sales and marketing spend over time in
this eats in to their ibadah and their profitability.
So Salesforce is saying instead of becoming really profitable
right now by pulling Back on sales and marketing.
We're going to spend more and more on sales and marketing.
We're going to eat into our profitability, but we're going
to have that Top Line growth that Revenue growth.
And as long as they continue to have that Revenue growth as a
consequence of doing the sales and marketing.
I still think it's a positive thing.
But this is an important thing to keep in mind because we look
at this last quarter. They spent three point three
seven billion dollars on sales and marketing.
Three point three seven billion and again their total revenues
last quarter where point for 1 billion.
So total revenues 7.4 total sales and marketing 3.4 meaning
that they spent roughly half of their revenue on sales and
marketing, 50% gone to sales and marketing.
That is a very high ratio of Revenue to sales and marketing.
It's not the worst. There's some companies that they
spend almost a hundred percent of their revenues on sales and
marketing. So there's companies that are
worse than Salesforce at this but they are sacrificing half of
their revenues to sales and marketing alone.
So looking at these expenses Overall, the idea behind the
company, the way that this can scale and grow their margins is
over time, the sales and marketing should make up a
lesser and lesser percentage of their overall Revenue.
Because if you look at very mature companies, in this
industry, they have to spend less and less percentage of
Revenue on sales and marketing. If we look at an example of
this, we can look at Microsoft, right?
Microsoft is like a big, huge mature version of Salesforce.
And if we look at their sales and marketing, we can filter
this out last quarter, Microsoft.
At five point six billion dollars, so 5.6 and Microsoft's,
total revenue last quarter was 49 billion.
So Microsoft didn't spend fifty percent of Revenue on sales and
marketing. They spent around 11% And I
think that over time, the same thing will happen for
Salesforce. They'll go from spending seventy
percent of their revenues on sales and marketing to 6250
where they are now to 40 to 30 20 and so on and as they get
that as a smaller portion of overall Revenue their earnings
and profitability go up. So All in summary on a
historical basis. There is a lot of things I do
like about Salesforce. I like the product, the moat the
switching cost. The secular growth Trend.
I think it's going to be a long-term growing company.
The revenue growth is very strong.
The ibadah growth is strong. The free cash flow is the
highlight of the company. It's been growing.
Its free cash flow on a very consistent and Rapid basis.
The balance sheet is very strong.
There's no problems with a balance sheet.
The part that we don't like about the company, is, it has
very high expenses. They rely heavily on their sales
and marketing. Team that they take up roughly
half of what they earn and revenue.
So, very expensive to run the company.
It's not lean right now. It's not optimized, and they pay
for those expenses by diluting the shareholder.
They've been doing seven percent plus dilution year-over-year,
and that's the other part that we don't like, but overall,
there's some parts that we do, like about the company, some
parts that I don't like about the company.
Now, let's go ahead and talk about valuation.
What I've done is I've ran through a lot of different
models on how to model out the future cash flows of Salesforce.
And ultimately what I'm deciding to pay for those cash flows.
So this isn't a perfect science. This is just based on some
assumptions, but I think it puts on paper.
Some of the the future I see in Salesforce.
This is a cash flow analysis on the company.
Let me zoom in here so you can see it.
Now. We have Salesforce.
We have a tenure cash flow analysis here.
So this projects out until 2031 and then I make some assumptions
based on historical information as well as characteristics about
the company, the mode of ignorance.
B, the secular Trends. One of those assumptions is, I
think the revenue will grow on an annualized basis around 16%.
So some years like next year it will grow faster 20%, Then it
will kind of slowed down. But overall, if you were to
annualize it over the next 10 years.
I think they can grow at 16%. The company has a long Runway of
growth if GDP and the US and every place they do business
continues to grow. They can sustain this level of
growth for a long period of time.
So, I don't think this Revenue expectation is Realistic.
Hopefully, I think it will be quite accurate.
That's the goal here. Now, the E bottom margin hair.
Is you take the revenue and you see the percentage of ibadah
they gain from that Revenue. So historically last year it was
25% and I'm assuming 35%. Why am I assuming a higher
ibadah margin? Because like I said, I think
over the next five to ten years sales force will gradually
become a higher margin business. Their margins will improve as
their revenue grows and outpaces, the gross of their
sales and marketing. And outpaces the growth of their
dilution. And as that happened there even
a margins should improve over time give different comparable
companies. Microsoft has an even a margin
of, like, 49% way higher than what this assumption even is.
Google's is way higher as well. Facebook is way higher, even
apples is at 40% and their hardware company.
So I don't see it as unrealistic to assume that a software
company that has a scaling product can grow, their ibadah
margins to a large extent over the next 10 years.
And I think, They'll do that on a very consistent basis.
So, last year, it was 25% at the end of 10 years.
I think it will be above 40 percent annualized.
I think I'll be around 35%. Now when I plug these numbers in
what this does is it projects out based on my assumptions the
growth rate of these things over the next ten years so I can see
what my revenue is going to be for Salesforce.
At the end of twenty Thirty one right there.
It's 93 billion dollars and then I can see what the ibadah will
be at the end of twenty Thirty One based on that, ibadah
margin, so that will be thirty two billion.
Ian 800 million now, because ibadah stands for the earnings
before interest taxes depreciation and amortization.
We have to add that stuff back. Otherwise, our model wouldn't be
correct. So we have the capex margin
here. This is the percentage of
Revenue spent on capex, which includes that depreciation
amortization and capital expenditures, but then we also
have to add back in the taxes which I'm using a flat effective
tax rate of 14%. So I calculate that in as well.
That's not right here as a variable.
And then, at the end of this, what we should have is, we have
the ibadah projections here. We have our Capital expenditures
here and how much we're spending on that.
We have our effective tax rate, that's right here.
And then at the end we have a number that is the accumulative
calculation of this. So we have our ibadah
subtracting out our Capital expenditures subtracting out our
tax rate and then we have the number left over which is our
free cash flow line. So right here, we have the cash
flow. That is the Cash flow of the
company and in 2031, 10 years from now, I'm projecting 27
billion, 279 million dollars in free cash flow.
That's what this project sit. The company will produce some
free cash flows at the end of a 10 year basis.
And then what you have to decide is if we've modeled out, that
the company is going to create that much cash flow.
Now, we gotta decide how much were willing to pay for those
cash flows. What do we think?
The market will be willing to pay for the cash flows?
Assuming these assumptions are correct?
And what I did was I looked at the current price differences.
Cash flow of Salesforce and it's very high.
It's around 40 and they're not going to keep it that high.
So as they grow and mature in the company stops growing, quite
as quick at the end of 10 years, the price to free cash flow will
contract over time. I really believe that.
I think it will be something that you want to price in.
So what I did was I looked again at the end of story of matured
companies and I tried to understand it.
This meaning that I try to be very conservative with these
assumptions and if I attach a Price to free cash flow of 15.
This is what this model spits out.
What I did was I built a stock purchase distribution.
Chart here. This shows you the current price
of the company. Right now.
It's selling for 175, a share. And based on these conservative
assumptions. I should be earning an 8 point.
8, 7% return, if I bought it today.
Now, if the price goes down 5%, and I can buy at 167, then my
return goes up as the price goes down.
And the Assumption, stay, the same, the future.
Did return goes up. It goes down. 10%, 2158.
You could buy it for this price based on these assumptions.
It should be a 10%, annualized return.
Then if you could get it for 150, the return should be ten
point six, five percent and likewise.
If the price goes up 5%, if we see it at 180 for your returns
go down and ten percent returns, go down to seven point eight.
If it goes up to 200 and $2 a share based on these
assumptions. The return would be seven point
three six percent annualized but as of right now based on the
current Rice. And these assumptions, I should
be getting an eight point eight. Seven percent return on what I
believe again are intentionally somewhat conservative
assumptions, but I'm trying to tilt this model more
conservative. For example, if I want to be
less conservative with my assumptions, I could plug in
something like a 20 price to free cash flow exit.
So if we assume investors are going to pay a 20 price to free
cash flow, that changes the assumptions quite a bit.
They go from eight percent return based on today's price to
12 percent annualized and that's a Very good return for a company
like this. And if you think that these are
even aggressive assumptions that 20 price to free cash flow,
Microsoft right now, trades a day. 34.
So Microsoft is out of 34 currently even being as big and
slow growing as it currently is Salesforce is growing much
faster. So when I say that 15 is a
conservative assumption, I'm basing that on a lot of other
companies. Now just a disclaimer regarding
this discounted cash flow analysis.
I think it is important to model out your future assumptions for
the company, but a lot of people View discounted cash flow
analysis as the law and it determines whether or not you
should buy a company and exactly what price you should buy it.
And I don't really view it. That way.
I think it is important to do it as somewhat of a sanity.
Check the plug in your assumptions and make sure that
they make sense in regards to what you're paying for a
company. But having said that, there are
other major considerations that need to be made.
When buying a company, the mode of the company, the leadership,
the secular growth, the products and services that it sells the
switching costs, right? The qualitative aspects of a
business that you're buying our Paramount, they're incredibly
important. So while I use modeling and
discounted cash flow analysis as one tool and a tool belt, that's
the way that I view it. One tool to help aid in your
overall research process and I'm doing it for every company.
I'm trying to Value every company to reasonable
expectations, but I also want to own the absolute best companies.
I want to own the best companies at a fair or reasonable priced,
or better yet undervalued. That's what I'm trying to do
with this portfolio. So Salesforce is one of the
companies. I outline, it's one of the best
stocks one of the best companies in the market and my valuation
of it shows right now that it's reasonably valued.
It's not heavily undervalued. It's not an absolute still but
it is reasonably valued. So that's my thoughts on it.
I hope you enjoyed this video. If you want to check out more
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Other than that. I'll see you in the next one.