Welcome back everyone. Today on the Joseph Carlson
Show. We are in the midst of earnings
season. We have a lot of companies that
have already reported their earnings and a lot more to go.
This is right in the middle of the busiest part of the week.
And we're going to be taking a look at what's happened and what
we expect to have happen in the future.
Now, of course, we got to look at Microsoft.
The stock is down 5.9% after hours.
And this is mostly due to the cloud number.
Cloud didn't come in as strong. But we're going to take a look
at Microsoft's overall report and try to get a full picture of
what's going on here and what to expect.
We've already had a number of big companies report their
earnings, like Google. This is one that I have as a
core position in my growth portfolio.
We have S&P Global, which just reported earnings this morning.
I have a position worth $100,000 in S&P Global.
This is my largest individual investment.
Moody's is another large position in My Portfolio.
It's currently a $45,000 position and Moody's reported
earnings last week. Now we also have some companies
that I don't own. PayPal reported earnings this
morning and they're up almost 8%.
We'll be looking. At some of the key metrics and
seeing how things are developing for PayPal.
And then of course, we can't forget Texas Roadhouse.
This is a company that I invested into a couple years ago
and it's turned out to be so far my most profitable investment in
both of my portfolios. Texas Roadhouse has performed
phenomenally well. It's now a position in My
Portfolio worth $70,000, forty, $1000 of that being games.
So this has been a massive winner and they continue to
execute. We'll be diving into the numbers
and what's making this company run so well when other
businesses aren't. Now, of course, we have some
other news to get to as well. Open AI announced a Google
competitor called Search GPT. I'll be going over how I view
this as a Google investor Delta Airlines has hired.
David Boies to seek damages from Crowdstrike and Microsoft after
the outage. I'll be going over the reason
that Microsoft's included in this lawsuit, even though they
shouldn't be included at all. And finally we have news that
the Co founder and previous CEO of Netflix, Reed Hastings,
donated a massive $7,000,000 to the Kamala Harris campaign.
Now, of course, this was met with a bit of controversy.
A lot of conservatives and Republicans that don't like
Kamala Harris were upset that Reed Hastings donated this money
and they took to Twitter to X to call for a boycott to show that
they are cancelling their subscription to spread the
hashtag cancel Netflix. I'll be explaining why this
boycott of Netflix will ultimately be ineffective in
impacting the company. I think it's worth mentioning at
the start that a lot of these companies I'm talking about are
ones that I own and I have large concentrated investments in.
I invest in what I term compounding machines, which are
companies that are incredibly strong.
They have wide. D Promotes and they continually
grow their free cash flow per share at a rate above 15%.
That's around double the average of the S&P 500.
So these companies are growing their intrinsic value at roughly
double the speed of the rest of the market.
And that's how this portfolio has had market beating
performance for the past three years.
It's a combination of having a both high quality and
concentrated portfolio, selecting stocks that are
growing at a reasonable pace and buying into them at reasonable
valuations. Some of these companies I've
owned for years, Costco, I was a company I started buying way
back in 2018. That's when I started to build
my position. Booking holdings on the other
hand, is brand new to the portfolio.
This is one that I'm looking forward to their earnings and I
have currently 1/2 position in. But when I look over my
holdings, I'm always trying to do analysis on whether or not I
have this portfolio position as well as possible.
And so far I've been very happy with the returns.
I feel like the. Positioning the current holdings
and the weighting of them has been good, so as of now, I
continue on this journey. Of holding highly predictable
compounding companies and holding them for as long as I
think they're the best opportunities in the market.
In most cases that is a multi year basis.
So I don't have a lot of turnover in the portfolio.
I consider things smooth sailing for My Portfolio.
I don't hold struggling companies.
None of these are difficult companies that are turn around
plays that I'm crossing my fingers and biting my nails that
these companies will have decent earnings.
These are the most powerful, predictable companies in the
market and so far they've proven to have incredibly good
execution. So I go into this earnings
season sleeping just fine at night.
None of this feels like a gamble.
And I believe if you do feel like you're taking a gamble, if
you're losing sleep over your holdings, if you're really
concerned about how things will turn out, that may be an
indication that you might want to change around your portfolio.
You should be investing in companies.
You have a high degree of predictability.
Things are going to turn out well.
And if you don't have that predictability, I think that's
an indication to change. Now before we look at companies
that are going to report later this week, I think it's good to
look at ones that have already done so.
Now, of course, we have to talk about Microsoft.
It's currently down or around 5% after reporting earnings.
Investors are trying to digest what just happened.
Now, before we even look at the results itself, I want to take a
look at my predictions going into Microsoft's earnings.
This is what I had to say just yesterday.
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 a USUS 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 the 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. So I can't say that it's
necessarily shocking that Microsoft both beat on the top
and bottom line. They beat both of their
expectations and the stock is still down after hours.
This was the expected outcome. Microsoft had to do so well that
not only did they beat on the top and bottom line, but they
also had a show incredibly good numbers with the cloud and there
was some slight weakness with the cloud.
The big one here is Azure. This is the primary thing that
people are looking at with Microsoft.
They're comparing Microsoft Azure with Google Cloud.
We know that Google Cloud is growing really strong.
It's growing around 29% year over year.
And Microsoft Azure was expected to just grow slightly more than
Google Cloud, but it came in around the same.
So investors were expecting around 31% growth, at least 30%
growth, and Microsoft reported Azure growth of 29%, so slightly
below. And this is the silliness of
Wall Street. This is what it really comes
down to owning these stocks, Having these slight changes in
growth rates from 31% to 29% causes the stock to move
hundreds of billions of dollars in market cap.
It's really incredible to see the little things that investors
get hung up on. If we actually take a look at
the numbers here and see the overall picture of how this
company's doing, it is growing intrinsic value like clockwork
every single quarter. This quarter, revenue was up 16%
on a constant currency basis. Operating income was up 16%, Net
income was up 11%, EPS was up 11%.
All of these numbers look great. And even the cloud growth that
was disappointing by investors, I didn't think was so bad.
So we can look at the overall picture of Microsoft and I think
it looks very positive. The personal computing I believe
is the least important, but this still grew 14%.
People are buying Windows devices.
Then we look at the intelligent cloud, this includes Azure and
it grew 18.85% overall. Azure itself is growing much
faster, but you can see solid trends of long term growth here,
ebbing and flowing quarter over quarter.
Then we get into the productivity and business
processes. These are things like Excel that
every Fortune 500 companies using together.
It paints a nice picture of a company growing 15%.
Overall, I like what I see here with Microsoft.
We can even look at the amount of subscribers they have. 365
consumer subscribers gaining around 2,000,000.
New subscribers growing 23%. Year over year.
And in terms of their cash flow, we can do a quick calculation to
find their free cash flow. They posted net cash from
operations of $37 billion and then they did additions to
property and equipment. This is CapEx of $13.8 billion.
You net that out and you get $23,322,000,000.
So we have a $23 billion quarter and if you want you can take out
stock based comp of $2.6 billion.
It's still a very impressive quarter posting over $20 billion
even adjusting for stock based comp.
So what I see here is the most predictable outcome from
Microsoft. They posted all around decent
numbers. The stock is down slightly after
hours because of companies trading at a relatively high
valuation. There was a lot expected of this
company. It needed to perform slightly
better with the cloud. I think if they hit the 32%
growth mark, the stock would be up, but as we have it right now,
we're down a few percentage points.
In the overall long term story, investors won't remember the
growth rate from this quarter in 2024.
What they'll look at is the growing free cash flows of this
company. The intrinsic value with organic
revenue growth, free cash flow per share growth and the
predictability are all improving.
So as far as I'm concerned, Microsoft is still a hold.
Google just reported earnings last week.
I thought that Google would do well, and Google did do well.
They beat on the top and bottom line.
Google grew their overall revenue by 13.45%.
That's a nice growth rate for the company.
A lot of people are concerned about the potential for
disruption with Google Search, in particular with Open AI
announcing Search GPT. When I look at this news and I
see what Open AI is doing, I think it's impressive.
I have a deep respect for their technology, for how advanced it
is and how cool it is to use. I still think it's going to have
minimal impact on Google. People are glued to Google
search, and they're used to using what they're used to.
Using Google Search is also highly advanced.
When you search specific things like movies, theaters, maps,
when you search different products, they have unique
landing pages for each one that have been specifically designed.
For that search quarry, this takes a lot of time to do and I
think it's going to be difficult for people to want to move away
from that to an entirely new LLM search engine.
I think it's caused the stock to go down and that's the reason
why it's trading down after great earnings.
But this is nothing new for Google.
Google routinely trades down after posting good earnings.
A couple years ago, the big thing everyone was worried about
was Bing and being AI. Remember that was the big
concern for Google search. It turned out to be a big
nothing. Nothing changed with Google
search. They gained no market share.
So search continues to press forward.
Now if we move on from Google Search, we can filter and look
specifically at Google Cloud. And this is the best growth
story in Google. It grew just under 30% year over
year last quarter. Google Cloud has slowly moved
from a money losing portion of the business to now a profitable
portion of Google and the operating margins of.
Google Cloud specifically steadily climb higher and
higher. You can see this basic trend
line overtime going from -60% to now in the most recent quarter.
11%, the previous two quarters to that it was 9%.
Google has incredible control over the profitability of cloud.
They can make this more and more profitable every single year.
It's really incredible to see this much control over the
profitability of their fastest growing segment.
And this is going to continue. Google Cloud will climb up from
11% operating margins up to 15 and 20 all the way up to 30 from
there. It could even go higher in the
future. I thought Google Google's
earnings were great. I don't think the stock should
be trading down over the past week.
I think the reason it is, is by unfounded concerns over Search
GPT. Once investors realize that
Search GPT is not going to steal any meaningful market share from
Google, I think investors will see this stock as more valuable.
Now, two other companies in My Portfolio that have recently
reported earnings are in the financial category.
And even though I don't talk about these companies a lot
because they're rather boring, they're not the most exciting
companies. They're two of my largest
holdings. Because they're two incredibly
high quality, dominant companies.
They have a knack for growing their earnings and free cash
flow every single year. The companies are S&P Global and
Moody's, the two credit rating businesses.
They do have some different parts of their business, We'll
go into that a little, but both of these companies posted very
strong earnings. Let's first go ahead and take a
look at Moody's. This company has done really
well this year. It's up 18.56% and it's actually
gone up a lot over the past three months.
So the past quarter it's gone up 21%.
So we're seeing good momentum in Moody's.
Investors are re enthused by this company.
If we dive into some of the KPI charts here, we have the revenue
by segment. Moody's is unique in that it's
divided into two halves. So Moody's is the parent
business that owns Moody's Analytics and Moody's Investor
Services. Moody's Investor Services is the
credit rating business. This is the one where other
funds and businesses have to get a credit rating on their debt.
So as a credit rating business, we can see how important the
recovery of the debt market is. Debt went down during 2021.
A lot of companies were concerned about issuing more
debt. They didn't want to do it.
So the amount of issued debt started to go down and so did
Moody's Investor Services earnings.
They earned less revenue over the quarters from 2020 to 2022.
Now that the economy seems like it's fine and businesses are
doing OK, they're starting to issue more debt.
So you can see the rapid increase in their investor
services revenue. That is the debt renewal wall.
And this is going to continue over the long term.
The secular trend is clear. The amount of debt that
corporations issue worldwide is going up, and that's likely
going to continue in the future. If you believe the amount of
corporate debt worldwide is going up in the future, this is
going to be a good business to be in Now.
The other half of their revenue is Moody's Analytics, which is
far more stable and consistent. This is a subscription company.
We can look at this overall, but we can also break this down
further. We have another KPI chart here
showing specifically this Moody's Analytics breakdown.
The breakdown is in decisions and solution, research and
insights, data and information. Moody's offers a lot of
different credit services where they offer risk solutions to
different companies. They offer data and analytics
platforms. They offer all sorts of
different services that are considered consulting, but they
sell them in a subscription format.
So this Moodys Analytics portion of the business continues to
grow around 7%. Overall.
The combination of the more volatile Moodys Investor service
credit rating and the consistent Moodys Analytics business
equates to an overall incredibly high quality company.
We can take a look at the free cash flow.
Last quarter it was 593,000,000. Moody's beat on their top and
bottom line and they're raising the estimates of their free cash
flow. Overall, there's not much else
to say. I think Moody's is going to
continue to do well as there's more and more debt in the future
and data becomes more valuable. Now we also have the larger
holding the other significant bet, S&P Global, which is a
somewhat similar company to Moody's, but not entirely
identical, S&P Global posted. Their earnings today and it was
fantastic. The stock should not be down.
Currently it's down .62% after earnings and I believe that's
mostly due to the NASDAQ being down 1.6%.
But don't let that convince you that these earnings weren't
good. These were fantastic earnings by
S&P Global. Their market intelligence
portion of the business, which is around half of it, grew at
7%. The credit rating portion of the
business grew 33%, Commodity Insights grew 11%, Mobility grew
8.4%, and the indices grew 11. .78% The best part of S&P
Global's earnings report was that they raised the guidance
for the amount of free cash flow they're generating.
Previous to this quarter, the guidance was for $4.5 billion in
free cash flow and they just raised it by $200 million.
So it's now $4.7 billion for 2024.
This is what they are expecting and they're very, very good at
meeting these targets and surpassing them.
There's a chance they could raise it again, but even at this
expected free cash. Flow, with their current market
cap, they're trading at a 3% free cash flow yield, which I
don't think is too bad. So even right now as the
company's doing well this year, I think it still trades at a
reasonable valuation I'm happy with.
SMP Global and Moody's. I'm keeping both of these
companies now. Finally we get to one of the
best reports of this earnings season so far, Texas Roadhouse.
Once it became clear to me that this was a compounding machine
and I was able to buy it during a time where a lot of investors
were concerned about the future and it was trading for around
$70.00 per share, I thought that was one of the best risk rewards
in My Portfolio and it's turned out to be the case.
The company is currently the. Largest winner in My Portfolio.
This is the most profitable holding I I've ever had, given
the timeline going up over double in less than two years.
The problem with a company like Texas Roadhouse is anytime a
stock does this well, the big temptation is to want to lock in
the. Gains.
You don't want this excellent performance to be taken away
from you. You want to keep what you have.
The last thing I want to do is celebrate that I have $40,000 in
gains. And then slowly watch it dwindle
away to 30,020 thousand and then back to square one.
That is the worst feeling as an investor.
So a lot of us rush to sell great companies because they've
gone up too far too fast. With Texas Roadhouse, it's up
45% year to date. So it becomes incredibly
tempting to want to cash out on this company, but I've refused
to do that in this case and I'm glad that I have because Texas
Roadhouse continues to execute. Texas Roadhouse's earnings
report was fantastic. They grew their revenue almost
15%. They grew their net income and
earnings per share by 46% year over year.
Now there's some cyclicality with input costs, but Even so,
even factoring that in, this is very strong growth of this
company. The most important metrics that
I look at for this company are the amount of new restaurants
they're opening. They open up around 25 new
restaurants across their different concepts.
They have the company Texas Roadhouses.
They have the company's Bubba 30 Threes.
They have Jaggers, which is a fast food concept.
And then they have. The franchise Texas Roadhouse
and franchise Jaggers. So we have a.
Group of different concepts here and different means, but they're
still opening up around 7% new restaurants year over year.
Their goal is to open up around 8% growth per year, and as of
right now, their current pipeline of new openings goes
out around three years. So they already have 90 new
restaurants already outlined that they're going to be opening
up over the next three years. Opening up new restaurants is
one thing, but making them all perform well is the biggest
challenge. And we can see the performance
of Texas Roadhouse by their weekly sales.
This is the metric they give every single time, and it's
really an incredible metric. Back in 2012, 2013, they're
making on a weekly basis $78,000 in total revenue.
Now their most recent quarters, they're making $158,000.
Texas Roadhouse just grew their weekly sales 8% year over year.
McDonald's had their weekly sales go down by 1%.
So other very strong concepts, very strong brands like
McDonald's are having shrinking sales while Texas Roadhouse is
gaining total market share, growing their sales weekly.
Now Texas Roadhouse also has a very important to go order
business last year. Quarter over quarter it grew 8%,
which is really good growth. Now this is a tricky 1 because
during COVID this spiked up dramatically.
That's an unnatural spike because the only way people
could get their Texas Roadhouse is by ordering it to go.
And then after that, the to Go business did really well, but it
started to go down a little bit. Now we're seeing a regrowth of
the to Go business and right now it's around a $20,000 a week
business in and of itself. One thing that Texas Roadhouse
said they're doing with their To Go Order business is they're
making cloud kitchens. Which is a digital kitchen
specifically for the to go orders to make everything more
orderly, to make everything easier for the chefs.
They also made a new update with digital tickets on all their
orders. So instead of the cooks having
twenty different receipts on a big iron board, now they have to
go orders on a digital receipt that shows them specifically
what they should be working on. The biggest benefit for this is
it just makes the job easier for the cooks.
They're less stressed, they don't have as much to worry
about. They're more organized, so
they're improving things in the kitchen for the cooks to make
their life easier. I'm obviously happy about Texas
Roadhouse's report. It's been such a wonderful
company to own, and I'm not at a point now where I'm too
concerned about the valuation. Given the qualities of the
company, I think the valuation is still reasonable and I expect
Texas Roadhouse to continue to outperform the market from here.
There's some other companies that I've recently reported that
are not in My Portfolio. These are ones that I have so
far avoided, one of them being PayPal.
Paypal's having a nice bump after earnings, it's up 8.78%.
And I want to go into the reasons that Paypal's trading up
reason #1 is the valuation. Paypal's valuation is very low,
leaving a lot of potential upside if they have any positive
news to share to investors. So with that type of pricing,
what PayPal needed to do was just show that things are headed
in the right direction. And they did that kind of.
Let's go ahead and take a look at two of the key metrics here.
The first one is the amount of active accounts on PayPal.
This is with the most recent quarter entered in.
The most recent quarter was actually down year over year.
So it was down just slightly from one year ago, but that's
not too big of a problem because it was up consecutively from the
most recent quarter. So even though it was down a
little bit year over year, it was up quarter over quarter.
And on these type of charts, investors are looking more on a
consecutive quarterly basis. They like seeing that the prior
quarter it was at 427 million and it bumped up to 429,000,000.
So they gained plus 2 million active accounts.
The other thing that's even more impressive and I like this chart
more for PayPal is the amount of transactions per account.
So we know that we have that 400 million users, but how many
transactions are they doing? How much are they using the app?
Well, year over year it was an increase 1133 O the people using
PayPal are actually using the A more frequently.
So we have those two critical KPIs, both moving in the right
direction on a consecutive quarterly basis, which is a good
thing to see for the company. Then we also have them say on
the earnings call that they have dedicated a lot of money to
doing buybacks and this is one of the growth stories for the
company. They do have a high free cash
flow yield which allows them to eliminate their shares
outstanding. It's gone down 5.47% year over
year, which is a positive thing for the investors.
As these shares go down, the earnings per share grows and the
free. Cash flow per share grows.
So I like seeing PayPal do these buybacks.
I think this earnings report was OK.
It wasn't amazing, it didn't blow me away, but at least it's
enough to keep the stock moving in a positive direction.
Now, even though it's up 8.7% today, it's still up 4% year to
date. So it's trailing the market.
PayPal needs to continue posting quarters like this for the stock
to gain a resurgence. So, so far, so good with
earnings. Now later this week, we have
more big tech important companies reporting earnings
like Apple, Meta and Amazon. If you want to see my thoughts
on those earnings and post analysis, just make sure you
subscribe to my other YouTube channel, Joseph Carlson.
After hours I'll have in depth videos going over those
companies and those reports. So check out that Channel if you
haven't already. Now moving on, we have the
continued downfall of crowd strike.
This company's stock is down 11% today after a new report came
out that Delta Airlines, well, they're not happy about what
happened. If we recall, Crowdstrike
released an update that was specific to Microsoft devices
where the update had a critical error.
Now, this is just a simple content update.
And in terms of Crowdstrike's risk, they consider this update
to be very low risk. So they distributed this update
to all of their customer base, but they didn't know that once
their customer started using it, it would brick all of their
computers. It would give them the blue
screen of death. Now, this is only applicable to
Microsoft. It was only Microsoft devices
where this had the problem. And this wasn't something where
they could easily push an update to fix all of it.
In fact, every single one of the hundreds of thousands of
computers that went down had to be manually reset by an IT
person. So one by 1:00, every single
computer needed to be fixed. This was the largest IT outage
that we've experienced in this country for years, and some
companies got hit far worse than others.
The ones that had the most reliance on using crowd strike
for their cybersecurity were the ones hit the hardest.
And in particular, the companies that had the longest outages,
which were the most costly, were the airlines.
The worst airline to get hit was Delta Airlines.
The damage that crowd strikes problematic update did to Delta
Airlines alone. It's still unknown, but it's
currently being tabulated and calculated by Delta.
They estimate right now that the damage could be up to $500
million. And they're calculating this
very mathematically. They're adding up the amount of
cancellations. They've had hundreds of
thousands of cancellations due to this one outage.
Delta lost hundreds of millions of dollars worth of business,
and they're still having to make up for those cancellations and
give different people their money back.
And ironically, Crowdstrike is one of the companies they pay
specifically to avoid this type of event.
Delta Airlines is the first company to seek compensation
from Crowdstrike and Microsoft. They've now hired lawyers, and
they're going to go after them to make them whole.
So this so far has been a horrible event for Crowdstrike,
for the CEO of the company, for the reputation.
It's very difficult to actually quantitate how bad this has been
for Crowd Strike, but I don't think the stock price fully
reflects it, even after the 11% decline today.
In fact, if we look at Crowd Strike stock since the beginning
of this event, it's down. Around 40 to 50%, and then once
this event happened, it immediately dropped around 20%
and it continues to drop as investors assess the outcome.
The difference with Crowdstrike's failure is not
that the company failed and it caused an outage.
The problem is how difficult it was to get things back up and
running, for example, when we look at any type of similar
event throughout history. There's none that really come
close. We've had instances where stuff
like AWS has gone down and that caused a lot of problems with
websites going down for a couple of hours.
But the difference is, once Amazon fixed the issue and AWS
went back online, all the websites continued to work.
With a simple refresh, everything was back up and
running. When Google went down with
Google search or with YouTube going down?
That's a bummer, and it highlights how many people miss
YouTube and Google when they go down.
But as soon as the website was back up, everybody could
immediately visit the website and use it again.
The issue with Crowdstrike was not that the company went down
for a couple hours, it's the fact that it bricked the
computers. It made it so they had to be
manually restarted with an IT person for every single
individual computer. This was a critical disaster,
one that caused an immense amount of damage and one that's
very difficult to repair. The damage this also did to the
reputation of Crowd Strike is still unknown.
Crowd Strike's going to have to change a lot of things about the
company, including their sales technique, their branding, their
public appearances. One of the blunders that the
Crowd Strike CEO did was one of the interviews he did on the
news following this outage. Where bug can have such a
profound and immediate impact. Well, when you look at the
complexity of cybersecurity, you're always trying to stay
one. Excuse me, One step ahead of the
adversaries. Excuse me.
And just one second, please. Oh, yeah.
Take take a drink of water. Yeah.
Sorry. Sure.
Always trying. It's been a long night.
We're always trying to stay one step ahead of the adversaries.
Now he just lost his voice a little bit there.
He coughed and couldn't speak and had to drink some water,
which on any other day would have been fine.
That's something that you can do on a podcast or in a normal
setting and it's no big deal. But when you're coming on to
explain causing the biggest IT outage in history, that just
adds a little bit more attention to the outage.
Crowdstrike also was quick to remove a lot of their branding
and change a lot of their messaging.
They're being forced to change their sales techniques.
For example, on one of their pages, they said Crowdstrike
versus Microsoft with the subtext.
Microsoft security products can't even protect Microsoft.
How can and they protect you? Well, quickly after the IT
outage caused by Crowdstrike, that subtext was removed.
Because now Crowdstrike has suffered the same thing as
Microsoft. They can't seem to protect
themselves. Another web page from
Crowdstrike's website was completely removed saying 62
minutes could bring your business down.
That's the average time it takes an adversary to land and move
literally through your network when your data, reputation and
revenue are at stake. Trust the pioneer and adversary
intelligence this messaging. Is completely gone because they
can no longer say it's 62 minutes to bring your business
down when Crowdstrike themselves just brought down your business.
So this creates a challenge for their sales and marketing team.
The reputational damage to Crowdstrike creates further
obstacles to selling the product in the future.
So a lot of investors just jumping into this one, buying
swaths of Crowdstrike stock right after the initial dip
without any time to process fully what's going on, I believe
may have jumped in a little bit early.
Kathy Wood being amongst them. She jumped in almost immediately
after the first dip buying up this stock.
And while I I applaud the idea of trying to buy good companies
once they've fallen or stumbled, I think it's also important to
look at how these events actually impact the fundamentals
of the company. So far, Crowd Strike has been an
incredibly good company. The fundamentals are insanely
strong. The revenue chart looks almost
fabricated. It's a continually step.
Up quarter after quarter. This is because of their.
Residual recurring revenue, their subscription service makes
up the majority of that. So I don't know how long this
will take for Crowdstrike to recover fully, but I do think it
will take a bit longer than investors are expecting.
Now, on a side point, in this lawsuit, Delta also named
Microsoft. They included Microsoft and part
of this lawsuit saying they're at fault because it was
Microsoft devices that went down, it wasn't Apple devices.
We can look at a simple illustration of what Crowdstrike
did here and the critical errors they made.
First of all, to run Crowdstrike and to run this type of security
software on each device, you need to have core access to the
device. Crowdstrike requires that, so
you need the core kernel access, which means you have the deepest
root access to the device that even the operating system of the
device has. The operating system can't do
anything to protect you at that point.
Crowdstrike has complete control over your device.
They can do whatever they want, and by installing their software
on your device and giving them those incredibly deep
permissions, you're allowing them to have that control.
Now, Microsoft warns against this.
Microsoft says that you should be really careful about who you
give that level of control over your device.
But Microsoft still allows you to do this because after all,
it's your decision and it's your device.
So companies that installed Crowdstrike onto their devices
willingly and knowingly gave Crowdstrike this route access.
Now Crowdstrike, with that access, decided to push the
update out like this. If the update is in blue, this
is what Crowdstrike did. And one day at the same time,
they pushed out the update to all of their customer base.
Now, there's lots of rationalizations and
justifications of why Crowdstrike would want to push
out this update to all their customers at once.
They wanted to be quick. They wanted to have routine
updates every single week for security reasons.
They want to be very fast to get ahead of the adversary.
But at the same time, every developer knows you shouldn't
push out an update to all of your customer base at once,
especially without thorough testing.
The way that Crowd Strike should be dealing with these updates is
pushing out the update first to 5% of their customer base, the
least critical 5%. They should push it out to
customers that aren't running businesses that are crucial to
travel and infrastructure. Then once that goes well and
these customers don't report any problems, they should push out
to another. 10% and then the next 10% and then the next 10%.
This is common developer knowledge to have staggered
updates, especially for things that have root access to your
computer. If Crowd Strike would have done
this method, their update only would have affected 5% of their
customer base and the least critical portion of their
customer base. And doing this method would
allow Crowdstrike to push their update out last to hospitals and
airports and important infrastructure, making sure
everything is working perfectly by the time those companies
receive the update. Crowdstrike is now instituting a
policy where every update they push out is going to be pushed
first to a small portion of their customer base and then an
increasingly bigger portion of their customer base over time.
Now, to be clear, again, this is 100% Crowdstrike's fault.
It's their fault that they required core access to run
their software. It's their fault also that they
pushed out an update to all of their customers at once and
didn't follow smarter update procedures.
So this is Crowdstrike's fault. And the reason I believe Delta
is including Microsoft is because Microsoft has a lot of
money. I think that's the primary
driver behind this. This company's profitable and it
does have cash to be able to pay that, but that's still an
enormous amount of money for this company.
And if more and more companies sue Crowdstrike, it'll become
more and more difficult to pay those companies off.
Whereas with Microsoft a accompany this large $500
million is like a little speeding ticket.
It's nothing for the pocketbooks of Microsoft.
So I believe the primary reason why these lawyers want to
include Microsoft, even though they're not at fault, is in a
hope that Microsoft will be dragged in to paying a portion
of this, to settling the lawsuit and dishing out some money to
put this behind them. And I think there is a chance
that the lawyers get what they want, that Microsoft is forced
to pay a portion of this even though they're not at fault.
Now finally we get to news that one of my core holdings, Netflix
in my story fund, has found itself in a bit of controversy
once again. This time it was caused by the
Co founder and previous CEO of the company, Reed Hastings.
Now Reed Hastings was the Co founder, he was the CEO, but
he's no longer anymore the CEO. In fact, he took a little bit of
a backseat to the chairman position.
So he's kind of like Jeff Bezos with Amazon.
He will poke his head into the office once in a while to see
how things are running. But he's no longer in charge of
the company. He's not running Netflix right
now. Netflix has two really good Co
CEOs that run the company. But regardless, Reed Hastings
donated $7,000,000 to the Kamala Harris campaign, sparking
outrage online by conservatives and people upset that he's
supporting her campaign money with money that he made from
Netflix. Now this started off small and I
saw it spread online to be a much bigger thing.
Major YouTube channels like the Quartering made video after
video urging his massive follower account to cancel
Netflix. Hashtag cancel Netflix.
Thousands of people posted screenshots of them cancelling
their Netflix accounts in protest of Reed Hastings
donations. Now I realize I'm a shareholder
of Netflix here, so I come at this from a different
perspective. The first thing I want to
mention. Is I think boycotts are fine and
I think supporting which businesses you want to support
are completely fine. If you don't like what a
company's doing and you don't like the stances it has, you
don't like the message they're sharing, then I think you should
boycott a company. I think you should stand for the
principles that you want to stand for.
And in this case, if you're upset that the Co founder
donated $7,000,000 to Kamala Harris, then I think it's fine
to want to protest that and want to show your disapproval of it.
I support all of that, but at the same time, I think it's
important to make a certain distinction here.
Netflix is being blamed for the private donation of the previous
CEO of the company, someone who started it.
But now he's on his own, donating his own money.
And I wonder what Netflix is supposed to do in this
situation. Netflix did not donate this
$7,000,000 to Kamala Harris. They haven't donated any money
to any candidate and Netflix can't control what the Co
founder does with his own personal pocketbook.
What are people expecting Netflix to do?
Pay an employee money and then dictate how that employee spends
the money that they just paid them?
Is Netflix supposed to write into their paycheck a contract
saying here's how you can spend the money?
You can't donate to political candidates with the private
money you earned. I don't think that's possible.
I don't even think that's legal to do.
Netflix has zero control over how its employees spend their
money after they've earned their paycheck.
Any employee, once they're paid money, can do what they want
with it. And that's exactly what Reed
Hastings is doing. He started Netflix, he ran the
company, he made a bunch of money, and now he's stepping
back from it and using the money privately how he wants.
And Netflix as a corporation can't say anything about it.
They can't do anything about it. Canceling Netflix doesn't send
any take away message because Netflix is not the one giving
Kamala Harris $7,000,000. So although I support your right
to protest how you want to and support which company you want
to, just keep in mind if you're protesting Netflix over the
donations that Reed Hasting is doing privately, it's not going
to do anything with Netflix. They can't change anything
they're doing. They can't dictate and control
what someone does with their own pocketbook after they've paid
them money. So there's no take away here for
Netflix. There's no lesson they can
learn. There's nothing they can do
differently than they're doing right now.
The other thing I'd like to mention from an investment
standpoint is this is likely to have minimal to no impact on
Netflix. We can take the most comparable
boycott that happened way back in 2020.
It was over the film Cuties. This is one of the many films
that Netflix brought on as licensed content.
Now, I never watched the film. It doesn't interest me at all,
but I heard it had questionable subject matter.
A lot of people were upset that they licensed this content and
accordingly they boycotted. They protest, which again is
your right to do, and I support people's right to do that.
But if we look at the impact that Cuties had on Netflix in
the following months, it spiked their churn rate almost double
from 2% to 3.5%. That means that a couple million
people cancelled their account. This is the largest spike in
churn that Netflix has experienced in years.
Typically it's around 2%, and again, it's spiked almost double
in just a couple of months. Even after a price increase, the
churn rate doesn't go as high as it did with Cuties.
So this is a very effective boycott.
Millions of people cancelled Netflix.
This hit them about as hard as the public could hit them.
But what's happened since that boycott?
When that last boycott happened, they currently had 203,000,000
subscribers. Today they have 277 million.
So Netflix has gained a total of 73,000,000 subscribers since the
effective and impactful Cuties boycott.
So again, I think it's important to support the companies you
want to support and stand up for what you believe in.
But from an investment perspective, I believe that this
boycott will have very minimal, if not no impact on the long
term of Netflix, especially because I believe this boycott
in particular is less warranted than the Cuties boycott.
There is real reason for people to boycott the movie Cuties, but
with cancel Netflix because an individual donated their own
individual money, that makes far less sense in my mind.
We'll see how things develop, but as of right now, I believe
this will have minimal impact and I'm still holding my
Netflix. If you want to see more
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