I think big Tech is currently cheap, and I want explain why?
That is the theme of today's video.
So we're going to be going over Amazon, Microsoft, Apple, Google
and meta. I'll be doing a very quick
analysis on these companies. Just a couple minutes to explain
with the math, why? I think these companies are
cheap because it's easy to say but I think it's good to have a
reminder with actual number and data and some really quick
analysis which explains why these companies are actually
trading at very discounted prices.
Based off their future risks and future cash flows.
They'll produce. So we'll go through.
It will go through all five of the companies, I'll do a quick
rundown. You can let me know if you agree
or disagree after after taking a look.
Now, before we jump into, I want to First go into my portfolio
and give a quick update on it. This is the story fun.
Just a disclaimer. I've warned people repeatedly
not to follow this portfolio because I consider it extremely
volatile. It's a higher risk portfolio and
I've become completely aware that most Their tolerance for
volatility is very low, even though people say it's very high
as soon as stock start trading down, people become very
bearish. On these companies, they change
their thesis on them. So this is a very volatile
portfolio. I have another portfolio, which
I have a much larger amount of money and called the passive
income portfolio, that one is a dividend growth.
One focused on high-quality Compounders, it has a different
investment thesis. I consider it less risky.
And so, keep that in mind, this is a smaller portion.
Portion of my invested money. I have another around 350,000
dollars in a different portfolio, but regardless I want
to take a look at this. If we look at the Holdings here,
I think this gives a pretty clean picture.
We're down 30.1% right now. Not optimal.
We've taken a hit the qqq's come down and it's drag down
everything with it. You can name basically any
different tech company and they've all come down, but
surprisingly a lot of people think I've lost the most money
on Netflix, that is not the case.
Netflix is actually been not the worst holding in this portfolio.
The worst one is Amazon. That's where I've lost the most
money because not only has Amazon come down a ton and
price, but I also put a lot of money in it.
It's a dangerous combination. So I'm actually down, 42% on
Amazon. I'm only down 31% on Netflix
which is still a lot. But you see right there, Amazon
right now is my biggest, it's the biggest pain point in this
portfolio. Then We have Netflix.
I'm down ten thousand dollars which is 31 percent.
We have Google. I'm down 25%.
Microsoft, I'm down 16%. And Adobe Em Down. 19%
Salesforce, I'm down 31% Apple. I'm basically flat right now
especially with the dividends included.
So I do own a couple of these big tech companies that has to
be said in terms of disclosure we're discussing my thoughts on
them. But if we look at the overall
portfolio here, the performance has not been good.
If I compare it against the S&P 500, Rid.
This is what it looks like. The S&P 500 performance is in
red. My performance of the story fund
is in blue. You can see it trailing along
over the past year and we have not been able to close the gap.
That's what I'm trying to do. That's what I think will happen
over the next two to three years.
So we're about a year and a half into this.
We have another couple of years to go until we get to the first
Landmark at the end of 20 25, we're going to be looking at the
overall performance. So that's where it is right now.
We're down around. Ninety-two percent below spy,
but things can change quickly. I still, I still have hopes that
we can come and beat the S&P 500.
If these companies, if there's stories and my thesis is
actually play out over time, but it may take a little bit longer.
Now, having said that, let's go ahead and jump in to my, my
thoughts here on why I think big Tech is currently cheap and
we'll start off with Amazon. Amazon is my most troubling
stock right now. It's That I thought was cheap at
roughly double the price that it is now.
So, I really think that it's cheap right now, that's a bit of
an understatement. If we pull up Amazon here, this
is using qualtrics insights. This is part of a tool that I've
been developing as part of that Patron memberships.
If you want to try this out, you can do so at no risk, you can
sign up for the patreon. You don't pay up front.
You get a free trial, period. So try it out.
See if you like it. But what this shows is the
fundamentals of what's going on with Amazon, On and this is a
bit deceiving, not qual term, but the actual data being showed
her with Amazon. Because if you're not careful,
your analysis might lead you in the wrong direction.
For example, right now, Amazon trades, a day, 44 forward, P/E
ratio roughly, there's some estimates that it's like out of
50, Ford. Something that's out of 40 Ford
PE ratio, but that's not cheap. If you're valuing this on an
earnings basis 44 PE that means that you're paying 40.
Four times next year's earnings and most companies right now are
trading at around a 17. So Amazon is two to three times
more expensive on an earnings basis of next year than most
companies, which would lead you to believe that.
This company is very expensive and it's not cheap at all.
I don't think that paints a clear illustration of what's
going on. In fact, I think that part is
misleading, the way that I look at valuing Amazon and I think
this is a very straightforward way.
Is we just look at the history of the p'nay here.
If we look at its free cash flow, which we can see right
here, this orange chart is the free cash flow by year.
We can see that in 2014. Amazon started a generate free
cash flows. It that really took off in 2015
at like tripled, you have like six or seven billion dollars in
free cash flow there. And it started to grow in 2018
to 2020, Amazon over these three years generated, 64 billion
dollars in free cash flow. So the story at that time was
Amazon, has this explosive growth and free cash flow?
The operating leverage AWS, all of it was playing together at
Harmony this. This nice Harmony of different
parts of the business. All generating cash flow and all
the operating leverage was swung in the right direction.
And if we look at this one year in particular, 2020, it was
twenty six billion dollars in free cash flow since then the
free cash flows have gone - the story.
Has changed the expenses, have gone up in Amazon continues to
lose money every quarter. So, looking back, how do we
value this company? Well, there's a couple things
I'd look at, and we can do this very quickly, swing over to
Amazon's latest earnings report. This is just the most recent
one, you can find on the investor relations website.
And I look at two different things.
Here will be ignoring literally everything in the business, but
two different parts. Amazon's AWS everybody knows
about this. Amazon's web services and then
we have Runs advertising Services here.
So if we look at these two different line items, what this
chart shows is the quarter over quarter numbers of Revenue of
these two different line items. We have AWS right here.
Last quarter doing twenty point five billion dollars in Revenue
20.5, and it's growing like 20 to 30% per quarter.
It'll probably slow down to the low 20s growth rate.
Last quarter was 28 percent, so it's not going to stay at 20
billion. Even with a Slowdown in the
economy, it's still going to grow because companies can cut
back on budget, but it's really tough to cut back on AWS.
That's something really difficult to do but regardless
we can assume that at least it will be twenty billion dollars
per quarter at a minimum for the next four quarters.
Then we have the ads portion here Nine billion dollars nine
point five billion last quarter. And this has been growing at a
very fast pace. Last quarter grew 30% Amazon has
a killer ads business. I think it's the best one in the
world. I think they have a better ad
business than Google. Because if you think about it,
you got meta and they have the social media ad business that
they rely on tracking, you around different apps, and
figuring out everything about you as a person and they have to
infer what your likes are to present you with relevant ads.
You have Google that you have to go to Google Search and type in
stuff. And then hopefully they put
products before the links that you're wanting to find.
Amazon is the most direct targeted ads in the entire
Market. You go to a website that has
stuff that you want to buy and you type in what you want to
buy. And they know from that search,
Corey exactly what you want to buy and they present you with
ads for those products. It's literally the most targeted
ads in the business. So it's growing up, 30%.
I make a simple assumption that it's going to be 10 billion
dollars per quarter for the next four quarters.
So, from these assumptions we can write right here.
The ads business will do 40 billion in ad Revenue over the
next year. I think that's very very
reasonable. I think it's even conservative
and I think that AWS will do 80 billion again very reasonable.
We're not assuming any growth at all.
We're also not assuming that it will slow down and I guess with
the ads were assuming five hundred million dollars worth of
growth. So a tiny bit of growth of the
ads but but not much and then with AWS were literally assuming
no growth at all. When we combine that we get 120
billion dollars, right? So we have 120.
So we have hair some very simple math and I think very reasonable
math. We have 80 billion dollars
that's just the Assumption of AWS and what they're going to do
in 2023 this year, then we have 40 billion dollars of what I
think the ads will do this year 2023.
And again, this isn't extrapolating out, some gigantic
growth in the company. This is literally assuming no
growth. I'm just taking last quarter's.
Numbers, timesing them by 4 and they've been growing at 20 plus
percent per year on both of them.
So this is I think under shooting it.
If we do that, we get 120 billion dollars.
Now, I'm going to assume the margins of both of these are
30%, 30% operating margins on both of them.
The reason why is I think it's safe to assume that With AWS, it
has gone below. 30 percent to twenty six percent on some
quarters. But the average over the past
two years has been 30% and many quarters that goes above 30%.
So, does it depends on how much capex, they do.
How many Investments they do? But most of the time AWS average
is around, 30%, operating margins.
So I'll soon 30% operating margins on AWS for the ads
business. I'm also assuming 30% operating
margins. This case for the ads, they
don't release this Amazon. Doesn't talk about their
operating margins for their ad services, but I think it's safe
to assume it's 30% because meta which is an advertising company
has around 30 percent, operating margins and Meadow is working
with very untargeted ads. They have to try to track you
and infer, lot of data. Amazon literally has the search
box. They have even more targeted ads
than meta, so I don't see how they could have lower.
Our operating margins than meta when they have more targeted
ads. So I think again, that's a safe
assumption to make thirty percent of 120 is 36 billion
dollars. That's it. 36 billion from just
these two things. No, other part of the company,
I'm not looking at the other services.
They have third-party sellers Services which they make a lot
of money from it has high margins.
I'm not looking at the prime business, not looking at the 200
million members and the Prime subscription In.
I'm not factoring any of that in.
This is literally just AWS and the advertising Revenue.
We get 36 billion dollars on a very safe.
Conservative assumption. Now, going back to this, we look
at this right here and if they posted 36 billion dollars in
cash flows from this, it would be right around here based on
this chart, that's where it would be.
So if you see that picture and all of a sudden, Amazon is
posting a chart that looks like this, you know, that that It's a
very good picture that shows growing free cash flows.
The problem with Amazon right now is they're not doing that
because they're spending so much money on these other stuff.
So if we assume that they can just get their expenses under
control with the retail business, which I think they can
and that will net out to just a 0 and it will literally make no
money. We can assume no income.
No, operating income from the retail business, they could
still post 36 billion dollars in cash flows.
Now if we do the math on this, And we divide the 36 billion by
the market cap to get the free cash flow assumption based on
that amount of free cash flow that is a free cash flow yield
of 4.1%. So, Amazon would all of a sudden
go from having a minus 3 percent free cash flow yield to a 4.1
which is really good. That's, like, in the consumer
staple category. And again, this is assuming just
the ads business just the AWS business in everything else
being Net neutral not losing money or not making money.
I still believe the other parts of Amazon can be profitable.
I think retail can make a profit 2020, retail made a profit,
2019, retail made a profit. It does make profit from time to
time, but it's often swung into the - because they're doing
major Investments. So, if we just neutralized it,
it'd be four point one percent, but if the other stuff, any of
the other stuff at all, starts to make any money and that free
cash flow, yield would even go up further.
Saving Amazon is going to cut down on their employee count I
think they over hired. I think that's what's causing a
lot of their - free cash flow and that is a problem, that's
not too difficult to fix. I think Amazon can get this
under control. So overall I think expenses are
going to be getting cut. I think employee expenses
getting cut, I think Warehouse expenses getting cut.
I think that the operating income of AWS and and the ads
business is growing, I think the company right now is cheap.
And when we get out to the The second half of this capex
investment cycle, I think we're going to see pretty explosive
free cash, flow growth. So that's my assumption right
now. Amazon is cheap in my opinion.
Next up, we have apple which admittedly I own this company
and both my portfolios, the story fund, and the passive
income portfolio and I'm an apple Fanboy.
I like the products, I like what they do.
I think they make good stuff. But more than that I think the
stock is a good stock. I think it's actually a cheap
stock currently. The reason that I say that and I
know that this Is more debatable because a lot of people think
that Apple's expensive and it just won't come down in price.
And they don't understand while why Apple deserves this premium
of a 23 forward P/E ratio, 110 years ago, it traded at like a
17. So, shouldn't it go back to a 17
where it rightfully belongs. That's what the Bears say, what
the Bears. Get wrong in this situation.
Is that Apple? Today is not the same company.
It was 10 years ago. So you're saying a different
company, the Apple today should trade the same as it was a
different company. Apple, 10 years ago, what has
changed over that time? Apple has moved to become a
service oriented subscription oriented business.
That gets a ton of money from high-margin digital income,
before it was a, a, I think a shallow mode or it rather a
narrow moat company that just sold, a couple items and it had
no digital subscriptions to speak of.
That's an entirely different company.
If apple is just still selling, Phones and it had no huge app
ecosystem with 30 million developers on it.
If it had no insurance has it they're getting all this money
from selling phone insurances. If it had no network of products
of all their MacBooks and there are pods in their apple watches,
and everything that they sell combined together, all working
and cohesion with imessage, and all these these Digital Services
that form this beautiful ecosystem.
If that wasn't the case, I do think that Apple should trade at
a 17 but that's not the case anymore.
Apple. Has grown it, Seekers ecosystem.
The ecosystem is the moat, the digital subscriptions, and
things that tie all the products together is the mode.
So I look at them as growing a substantial moat, a moat means
that the PE Ratio should be higher than a company that
doesn't have a moat apples. Moat has improved.
I think the valuation should go up as a result.
And in my opinion I still think that this is low considering how
economically powerful this company is for example that
Casual yield of apple right now is a five point four, five
percent, that's already very good.
And this is with what I still consider to be significant
reinvestment apples always doing reinvestments into different
products. I did a recent report on my main
Channel about the new Apple mixed reality headset.
It's going to cost like three thousand dollars.
It has all these sensors in it it's this premium device that
they'll work into their ecosystem.
They're going to make it work with their Apple TV + and Live
sports and different applications for it.
So Apple has this massive ecosystem.
It has a 5.4 percent free cash flow yield which I think is is
very high and we look at it. The company is also very good at
generating cash flows without diluting the shareholder.
Look at this quarter by quarter, not a lot of companies can pull
this off last quarter. It was twenty billion dollars
quarter before that 20.7 quarter before that 25.6 quarter before
that forty four billion. That's Our iPhone cycle.
So every once in a while to have this massive free cash flow
quarter and then it's followed up by pretty good ones, not bad.
20 billion that's in the range of Microsoft right there, even
above Microsoft and there's no big dips.
It's becoming more more smooth out because they have the
services. So I think the story for Apple
right now is investors are scared about the economy.
Slowing down and Apple getting its earnings revised lower.
But I think that they're forgetting that this company is
moving more to digital. I think they're going to raise
prices on all their subscriptions and that will
generate meaningful amounts of free cash flow.
And another thing with this company, a lot of companies
can't do anything. If the stock price goes down,
they simply don't have the cash flows to act defensively.
Apple can act defensively meaning that if the stock price
plummets, let's say it goes down 30%.
All right. And that case, what Tim Cook is
going to be doing is a lot of BuyBacks the free cash flow.
Yielded be like 7%. They could buy back a chunk of
the company every single year bringing that stock price back
up, they have the cash flows to do it.
So I see this is also a bit of a defensive bed in my opinion.
I think the companies cheap in the low 20s, doesn't mean it
can't go lower but I think apple right now II just think it's
good value. Now, next up, we have Microsoft,
which is another company I think is cheap by own.
This one in the story fund and my dividend portfolio, looking
at this one, the big problem. With Microsoft is the forward
P/E ratio, that's what everybody's looking at in
today's market, which I think is good, but we have to look at a
couple things here on quadrant says the forward P/E ratios
based. It's a 27 and keep in mind, this
is based on analyst estimates of next year's earnings.
And this is where we have some disagreements.
I think this is very low. It's assuming an eight dollar
earnings per share, next year. When we look at a lot of
different assumptions, we have this right here, which is a
table of Print analysis, assuming nine dollars.
And fifty four cents next year. My assumption is that Microsoft
can earn around ten dollars next year.
If Microsoft earned ten dollars next year, which again, I think
they can. It's no guarantee worst case
scenario. They earn eight and it's really
a 27 Ford PE ratio. But if they earned eight dollars
or sorry ten dollars next year, instead of eight the Ford PE
would be 22 right now. You'd be buying Microsoft at a
20 to Ford PE. If we look at that historically
that means that Microsoft right now today is the cheapest it's
been since 2019 for just a couple trading days there and
then all the way back to 2017. That's the last time you'd be
able to buy Microsoft at today's price and people are saying that
Microsoft is so expensive. Now it's such an expensive
company, look at the high. Multiple Microsoft was just
trading at a 35 Ford PE for over a year.
That's where the Company trades during bull markets with how
powerful it is. It has a credit rating better
than the US government. It's a diversified monopolistic
business that has its hands in every part of corporate America.
I don't see this company going away for another hundred years,
so even if the earnings come in a little bit lower next year,
worst case scenario, you're getting it at a 27 Ford PE
ratio, which I still think is inexpensive for Microsoft, but
best-case scenario. You get out of 3:40 p.m.
Ee because next year they earn ten dollars in earnings per
share. And again I don't think that
that's out of the question. I think there's a decent chance
they can earn nine and a half ten dollars.
So, looking at this company, the fundamentals are there it has
everything we've reviewed this company, many times, I think the
free cash flow growth will probably slow down a little bit,
but I still think this company will generate significant free
cash flow and if they're able to close that Activision, Blizzard
deal, I think they'll be another positive thing for Microsoft.
So right now, I think the worst-case For Microsoft is
pretty good, and I think the best case scenario is really
good. I just don't see too much
downside with today's price. And then finally, we have Google
and meta. And I'm going to group these two
together because they're both ad companies.
And I think the thesis on both of these of why they're cheap is
very similar. Let's take a look at Google
here. 17.8 forward, P/E ratio. Do I need a say too much more
5.5 free cash flow yield. Now it is true, the downside of
goo Google is, it's been highlighted by some activist
investors and channels like mine that they spend a lot of money
on paying employees and when you net that out of the free cash
flow, it makes it free casual yield a little bit lower around
three percent. So it's not quite as cheap as it
first appears. But even netting out, the stock
based compensation, the company still getting really cheap.
I don't think Google should be trading at a 17 forward P/E
ratio, given the moat durability and predictability of this
business. Keep in This company grew its
Revenue, a ton 40%, then another 20 percent over a two-year basis
and it's barely giving up anything that is a very sticky
business when you grow revenues that fast and then you give up
basically nothing. And I think the ad, pocalypse is
a little bit overstated, there's lots of advertisers that want to
advertise on multiple platforms. I think, even though Amazon's
growing and Netflix is getting into ads, I think that Google's
ad business will continue to grow as the Higher Market grows,
it's kind of like retail. There's just lots of growing
Market space in that area and I say, many similar things about
meta the companies even cheaper on paper. 15 for PE ratio is
very cheap. I would say the commodity
multiple right now is around a 12 forward P/E ratio, meaning,
that that's the price at which, a company trades.
That if you think, it's not creating any value.
So metas, just above that commodity multiple.
It's below the rest of the S&P 500.
The company trades at a Casual yield of 7.6 and the core
business of meta is very strong, the advertising business.
I don't personally like this company as much from a
qualitative perspective. There's other bets that I like
more but you have to admit that meta has a very strong Core
Business. The free cash flow plummeted
over the past year and that coincided with a lot of capex
growth. And that also coincided with
Mark Zuckerberg, talking about the metaverse non-stop, which
spooked investors. So There's this this large
amounts of different things happening at the same time
causing meta, stock price to go down and investors to lose
confidence in the company. But I think we're going to see
some of that heal over time. Some of the get better.
I think the capex spend which Zuckerberg said is mostly for
the core businesses, not for the metaverse, I think this is going
to level off and stop increasing.
I think the free cash flows will also start to go up because
again, the capex spend is going to be going down and I think
that Mark Zuckerberg The message that investors do want him to
focus on the core businesses, not just the metaverse.
So he wrote letter, he cut costs.
He actually laid off some employees and I think he's
taking the company in a good direction right now.
And again, you don't have to argue this one too much from a
free cash flow perspective. From a PE perspective, it's very
cheap. It already has priced in a lot
of negativity and I think it has some room to surprise to the
upside so I consider meta and Google cheap as well.
So that's over all my quick. Take on these ones and keep in
mind. That cheap does not mean the
companies won't get cheaper. When the pendulum swings from
one end to the other often times it goes a little too far stocks.
Don't go down right to their fair value and then stop.
They go down, far below it. And Peter Lynch said that the
hard part about investing is not buying good companies, that's
the easy part. The hard part is hanging on to
him, not getting scared out of them.
So I think it's good even though most people right now, I assume
think that big Tech is mostly cheap.
I think it's good to get a reminder and just look At the
numbers, even by the Numbers. These are pretty cheap companies
and they still have incredibly good core businesses.
Incredibly economically powerful companies with strong Market
positions, unlikely to be disrupted, I think they have a
long Runway of growth and they're trading at valuations
they haven't for years. So my opinion I think they're
cheap. Let me know what you think.