Welcome back, everyone. We have a lot of news to get
into in this episode. We have an update on an episode.
I did last week, I did one on stock-based compensation, and in
particular with Google, Google has a growing problem with
stock-based, compensation, because they hire so many
employees. And they pay those employees so
much money and this has caused a lot of issues.
That's costing investors a lot of money to pay all these
employees and even active managers, like Josh Homme has
stepped in and said, look Google you need a fire, some of these
employees. You need to pay some of them
less because this is ridiculous and I want to know what they're
actually doing at the company. Well, we have a research paper
here, this new article that dug into it.
That actually answers that exact question, and I think it's very
interesting. So we're gonna be going over it
in this episode. Now we have some other news were
going to be getting to as well. AMC is firing people, Disney's
focusing on profits, I'll go over what I think this means for
Netflix, and their positioning in the streaming market.
And then we have some rather disappointing news about one of
my largest Holdings, which is Apple, it appears that they're
bending the Need to the Chinese Communist Party, making it so
that protesters in China can no longer use the full air drop
feature, that they were reliant on to communicate.
And this is part of something where I think apple is running
into trouble. I think they're going down a
very dangerous road hair. We even have politicians like
the Santa's speaking out loudly against apple and it's awfully
reminiscent of what he did against Disney, which I thought
was a mistake for Disney to go into this political Arena.
So I'll be going over what I think's happening with Apple and
I think this could be a big mistake for the company.
Now, obviously, we have a lot to get into.
Let's go ahead and start off with a quick portfolio update.
This is the story fund. If you enjoy seeing this level
of transparency every single week and what I'm actually
investing in go ahead and follow the channel, hit the thumbs up
button, you can support it that way.
Now I have to say this is one of my two portfolios.
This one's a smaller one. I also have a much larger
dividend growth portfolio. That's doing actually really.
Well, it's kind of having the opposite performance of this one
while. This one's going down that one
continues to go up So the tech companies in general just have
not done. Well, Amazon is down like 40 or
50 percent on the year Netflix is down, huge, even, alphabets
falling and Microsoft is falling.
All of these companies are falling and I'm looking at their
fundamentals and it paints a different picture.
I see all of these companies growing generating more profits
and doing really well. The one company that I think is
possibly the most mismatched right now in terms of valuation.
And it's actual fundamentals is Google and this is a Any that, I
just recently purchased another two thousand dollars of.
So I actually just increase my steak of Google once again,
because I'm so bullish on this company and I think it's trading
at such a cheap valuation. When I look at Google, we can
look at the, the PE ratio of the company.
It's at an 18 forward P/E, that is cheap in and of itself, just
above the rest of the market. But you also have a company that
has a hundred and sixteen billion dollars in cash.
If you netted out the cash and assume they use that for
BuyBacks that. It's treating more like a 16 PE.
So this company is trading extremely cheap.
It is a very cheap stock right now and it's also basically a
monopoly, it's a monopolistic, highly profitable, very cheap
company but Google has one big issue that is facing, I think
one Challenge and that's getting more attention.
That is the stock based compensation on cultural
insights, which this websites available to all Patron members.
You can try it out for free, in the link in the description
below on quatrain sites. You can see See, not only the
free cash flow quarter by quarter when we can also see it
with the amount of stock-based compensation, the stock base
compass in purple. Now, stock-based Compensation,
is basically a different form of paying an employee.
You pay them some in cash, and you pay them some in stock.
A lot of people argue that these are very different and they
should be accounted for differently.
I don't think so. I think it's basically a payment
in kind, if you pay someone fifty thousand dollars in cash
and fifty thousand dollars in stock.
That cost the investor the owners of the company.
One hundred thousand dollars worth of value.
Exactly the same whether you pay someone ten thousand dollars in
stock or ten thousand dollars in cash.
It is the same at the time of payment and what we see here is
even though Google is generating a lot of growing free cash flow.
This purple line, the stock-based compensation is
growing at a very fast pace. It now makes up basically one
third of their free cash flows. So about a third of the free
cash flows is deluded away from A from the shareholders that's
value being transferred away, from the shareholders to the
employees. And stock-based compensation is
paid to two different groups. Either, the executives or the
employees. In this case, it's mostly going
to the employees. Now, this issue of excessive
stock-based compensation has become such an issue for
companies like Google that is drawing the attention of
activist investors. Super investors that control a
lot of money. Chris home who has six billion
dollars invested in Google wrote a letter saying.
Head count is too high employees are being Paid too much.
He's instructing Sundar to cut down on this expense because
it's taking away from me. The investor who owns this
company. Now, as all of, that has been
unfolding, my question the entire time has been.
Why are all these employees being hired?
What is Google doing with an additional 30,000 employees in a
single year and this article answers those questions where
Google has grown buckle up, Google has increased headcount
across the company in the past three years, but some units have
grown faster than others. This chart here shows how fast
different Departments of Google have.
Actually grown. We have the headcount and 2019,
you can see Cloud sales Hardware, Android ads products
search and YouTube, then we fast-forward to 2022, and we can
see the change. Now, that's a pretty big change,
but one part changes more than others.
Let me put them both on the screen here so you can see the
difference. Here is 2019 at the top and
there's 20 22 at the bottom. Notice one Department in
particular has grown its Count far more than all the others.
It's Google Cloud. That's where all the growth has
come from. That's the first thing that they
highlight here. Alphabet has doubled, the
headcount of its Google Cloud unit.
The Google Cloud unit has doubled since early, 2019, the
rapid growth helps explain why Google clouds losses continue to
widen even as the revenue grows rapidly.
So even though the cloud units growing a revenue, they're
growing, the amount of employees like crazy, making it so that
the margins aren't coming up as fast as they normally would.
Google's Hardware unit and YouTube also each roughly
doubled headcount between the first quarter of 2019 and fall
now that's true. YouTube has doubled in head
count, but if you notice the difference here starting in
2019, YouTube was was Tiny. It's like 3,000 people.
That's YouTube in 2019, which is just remarkable to me that
YouTube is running with that head count.
So, we have something here that I think is very interesting.
Look at the growth and head count of the cloud business.
This Left bar. Just incredible.
It started off with a lot of people working at Cloud 25,000.
Then it grows all the way to 50 thousand, 50 thousand people
just working at Google Cloud, that one division.
Meanwhile, we look at YouTube, YouTube started off with like
3,000 people 3000 compared to the clouds 25,000 and then the
growth was doubled to maybe 6,000.
But I look at this and I think it's very interesting because
you YouTube is often cited as one of like the biggest parts of
Google, when you are, I look at Google and we look at investing
in this company. A lot of it is because of the
search business because of YouTube because of Android.
And then the cloud is kind of like a little side thing.
It's like a little a little side part.
It's nice to have as part of Google, but the main properties
are YouTube. We look at this, in the YouTube
portion of Google takes up a tiny portion of their overall
employees. This is YouTube, YouTube must be
one of the most efficiently. Ramparts of Google Running that
huge company with only 6,000 employees in the meanwhile, we
have this part over here. The cloud portion, that isn't
even profitable that has 52,000 employees working at it.
This is a money-losing part of the company, just staggering
when we actually break this down.
And look at where the jobs actually are going.
And what part of alphabet, we actually look at and
acknowledge, I think it's crazy to see that almost all of the
new employees are going to Cloud when that's a part of Google
that most investors, don't pay much attention to their usually
focused on search. They're focused on YouTube and
Android. And the cloud is just this
little side thing, but right now, they have 51 52 thousand
people working at Google Cloud. So if you're an investor in
Google, you have to know that cloud is a major part of the
company, not just some side project.
Now, moving on, we have some other news regarding apple and
this is rather disappointing news apples.
One of my better Investments, I've made money in this company
in both the story fund and I have it in a dividend portfolio
where I have around 50,000 dollars in the company, it has
been a fantastic holding. I think it's a great.
Me. So this is especially
disappointing to read. We have news.
That apple is limiting airdrop in China after it was used to
spread protests messages. So we read into this and it
just, it doesn't, this is not a good look for Apple.
It's not something that I like to see.
And I think it's disappointing, they're doing this.
They say, the apple is restricted, the use of airdrop
on iPhones, in China, after protesters use the wireless file
sharing feature to secretly spread messages criticizing the
Chinese Authorities. So people are using this
technology are drop, which if you're not an Apple user, you
can basically just instantly share files with basically
anyone and it is instant like you you are drop something in
three seconds. Later a big file will be
transferred from one phone to the other.
It's a pretty amazing feature, but it looks like these
protesters were using it to do something, the Chinese
government didn't like Chinese users who updated their iPhones
diversion. 16.1 released Wednesday will be able to use
the feature to receive files from strangers.
Only for 10 minutes at a time. See, there's the Restriction
right there. They added in a time limit,
previously, the setting to accept files from everyone had
no time limit. Now, after 10 minutes, the
device will fall back to accepting files from contacts.
Only they say that. That feature airdrop was one of
the few relatively untraceable methods of sharing digital files
in China, where the social media platforms and even private
messaging apps are scrutinized by moderators and the government
censorship apparatus. So the Chinese government has a
tight control on basically every form of messaging.
This is one of them that they there now clamping down on.
So basically, the Chinese government does not like airdrop
anymore because it's being used as a way of transferring, these
photos that are critical of the Chinese government.
And unlike the us where we can make fun of anyone including our
leaders and our presence which we often do.
We can say that Trump looks orange or that bite and looks
lost. And doesn't know what state he's
in. We can mock openly our presents
which I think is amazing and I think presidents should Made fun
of, that's part of the job. But you can't do that in China.
And this puts Apple between a rock and a hard place.
They're in the situation where they can either be defiant
against the Chinese government, which would cause Apple to
simply not be able to do business in China, or they can
be compliant with the Chinese government, their rules, and the
regulations, which is what Apple has chosen to do because that
allows them to continue to operate within China.
Now, this also has the added impact of becoming a political
Target within the us and we're starting to see this.
Open with Rhonda Santa's. Now I've gone over before how I
think Rhonda Santa's. Basically, dismantled Disney in
the political Arena. I think that he won.
That exchange was bad for Disney.
I think it was good for on DeSantis.
The fact that he got re-elected by a 20% margin.
I think shows that people like that exchange of him fighting
against Disney and calling out their aggressive attempts to
change policy within a state. And now his Targets in his
sights have changed from Disney to Apple.
Listen to this little speech. He gave this morning.
His reports that apple is not allowing the protesters to use
this airdrop function, where they're trying to communicate
that obviously is providing Aid and comfort to the CCP.
And so you see that report and that's very concerning and then
when you also hear reports that apple is threatening to remove
Twitter from the app store because Elon Musk is actually
opening it up for free speech and is Restoring a lot of
accounts that were unfairly and illegitimately suspended for
putting out accurate information about covid.
That's like one of the main things that's being reinstated,
so many things, these experts were wrong at and you had people
on Twitter that were calling that out and Twitter.
The old regime in Twitter, their response was to try to just
suffocate The Descent and an Elon must knows, that's not a
winning formula and so he's Riding free speech.
And so if Apple response to that by nuking them from, from the
App Store, you know, I think that that would be a huge, huge
mistake, and it would be a really raw exercise of
monopolistic power that I think would Merit a response from the
United States Congress. And so there's the warning right
there if Apple, after having worked with the Chinese
government and placated to them and did an update that helps
out. The Chinese government, right
after doing that, if they took down Twitter in the same, in the
same length of time, I think it would be a massive mistake and
you have Governors like this. They have a lot of political
influence, Rhonda Santos. I think is one of the most
influential governors in the country right now.
Openly threatening just saying, look Apple, if you do this, the
US government and Congress is going to respond because this
portrays apple as not only working with the Chinese
government but also a huge monopolistic power.
That's Rolling other companies like Twitter.
So I think the apple right now is in some dicey territory, I
think if they did boot Twitter off of the App Store, I think
that'd be disastrous for both Twitter, which it would
obviously, destroy their business but also Apple, it
would be disastrous for Apple because it would basically be
asking, hey congress, come in and regulate us because we're
way too powerful, we're way too much of a bully so we'll see how
things go. My guess is Apple will not be
booting Twitter off the App Store.
I think that'd be a massive miscalculation if they did that.
I Be questioning the Judgment of apples leaders.
It actually makes me question their judgment.
Now, moving on from that, we have some news coming from the
streaming and media World. Another One Bites, the Dust.
We have AMC here planning to do layoffs and this is networks.
This is an AMC Theaters. So AMC networks that has like
The Walking Dead and Breaking Bad.
Those type of shows they're planning to do layoffs.
And this is another company that tried to go into streaming
because streaming so easy to go into, so easy to become a
Netflix. It's something you can do
overnight, right. They're finding out.
It's much more difficult, it's much easier, said, than done.
We have a lot of companies, like MC, that continue to just say
that we can't make it in streaming.
We can't hack it. Getting to scale is incredibly
difficult and that's where Netflix already is.
They go over that. They have all these great
properties, Mad Men, Breaking Bad, The Walking Dead, right.
And they grew the streaming service AMC plus is the name of
the streaming service. They say, quote it was our
belief that cord cutting losses would be offset by he's in
streaming, so they'd have the losses in their legacy business,
but they'd have gains in streaming and overall it would
be neutralized. They'd be even, but that's not
happening. They say, quote, this has not
been the case. This is the problem.
With all of these other wannabe streaming companies, they're not
getting to scale and they can't get to scale and Netflix is
already gotten to profitability. They're already free cash flow
positive. So Netflix is already at scale
AMC's, not at scale. Another company that right now
is not it. Gail is Disney in this one
likewise is having just a lot of issues right now, we've seen the
profitability tank, even with the parks holding in and trying
to fund the rest of the company at the meeting.
I ge said, in his words, instead of chasing subscriptions with
aggressive marketing and aggressive spending on content,
we have to start chasing profitability.
Uygur said his team would have to take a hard look at costly.
Tried to ask swage concerns, that they wouldn't spend a lot
on content and so, there you have it.
We have Bob Iger back at Disney's.
Saying we're not chasing subscribers, we're chasing
profits now. And this is the problem.
With all of these streaming companies that aren't at scale,
whether it's Disney, or AMC, or Paramount, or Warner Brothers
Discovery, none of them are at scale, except for Netflix.
It's the only Standalone streaming product in the
industry. The only one that exists that's
at scale and profitable. Even Amazon Prime is likely not
profitable on its own. We don't have the Insight, they
won't give us the numbers, but my guess is that Amazon Prime is
a money-losing. Part of Amazon currently.
And I think that Netflix will continue to grow albeit at a
slower Pace, but that doesn't matter.
It's already a profitable company, they can continue to
grow at a slow pace. That can minimize their debt.
They can do share BuyBacks, this company can become a behemoth, a
massive company over time, 300 million, 400 million subscribers
and you have to be worried about them, not having cash flows like
Disney or AMC or any of the other streaming companies.
We have reports like this Glass. Onion could have made 200.
Million dollars in the box office but Netflix only, let it
play in theaters for a week. So we have Glass Onion in the
theaters right now, which is received really good reviews 8.1
out of 10 on IMDb. Now blast onions going to be
streaming on Netflix at the end of December, right around the
Christmas holiday. So they're targeting when a lot
of people are going to be home looking for something to watch.
And I think this is by far the best strategy, they can make a
lot of money, 60 million dollars in a single week by releasing
movies like this in the box office, it creates a lot of
hype. It's a lot of perceived value,
having it in the box office, then they immediately put on
their streaming service and monetize it again.
And if Netflix can continue to do this with highly rated shows,
like Glass Onion, I think they have a very good business model
here. So, I feel very confident in the
Netflix position. My sentiment has not changed
towards this company. It's free, cash flow positive.
It's coming out with good content.
I think it will continue to grow at a steady and slow pace.
And I think over time, I think I'll make money on the company.
So we'll see what happens. I'll keep you up to date.
That's all for now.