Well, we have some breaking news Bill Ackman that bought in a billion dollars worth of Netflix just three months ago, sold entirely out of the company dumped his entire his entire position in it. Only three months after buying it and he did it after a 37 percent loss. So in this episode, we're going to be going over his letter of why he explains the reasons that he sold the company.
We're also going to be talking about my holding a Netflix, I haven't sold yet and I want to share my thoughts on if I'm going to sell or what my plans are. Going forward. And then we also have another subject I want to dive into in this episode, which is Amazon's upcoming earnings. Next Thursday, Amazon is by far my biggest position. We have their earnings just one week away and I have some thoughts on what to expect for their upcoming earnings. So we have a lot to get into.
Let's go ahead and Jump Right In. All right, so first of all, let's go ahead and look at the letter here, der Pershing Square investors. Today, we sold our investment in Netflix, so they sold the entire thing, which we purchased earlier this year, the lost on our investment reduced Pershing Square funds here today Returns by four percentage points so he had roughly the same position size. I did.
I lost maybe four and a half percentage points based on just that one day that 36 down, 36 percent down move. He says reflecting this loss. As of today's close Pershing Square funds are down approximately two percent year-to-date. So people that are are kind of dunking on Bill Ackman. Like he's a bad investor because he bought it and then sold it quickly. Realize that he's down two percent year-to-date. So take a look at your portfolio, your today.
Day, see how you're doing and see if it's better than 2%. Anyways, he goes on and says, while we have high regard for Netflix's management and the remarkable company, they have built in light of the enormous. Operating leverage inherent in the company's business model changes. In the company's future, subscriber growth can have an outsized impact on our estimate of its intrinsic value in our
original analysis. We viewed this operating leverage favorably, due to our long-term growth, expectations for the company yesterday in response to Continue disappointing customer subscriber growth. Netflix announced it would modify its subscription-only model to be more aggressive in going after non-paying customers and to a corporate advertising an approach the Management's estimates would take one to two years to implement. While we believe these business model changes are sensible.
It is extremely difficult to predict their impact. On the company's long-term subscriber growth future revenues, operating margins and capital intensity. Now, he goes on saying his requirements for any Investment. We require a high degree of predictability in the businesses in which we invest due to the highly concentrated nature of
our portfolio. While Netflix's business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company's future prospects with a sufficient degree of certainty. Based on Management's track record, we would not be surprised to see Netflix continue to be a highly successful company and an excellent investment from its current market value.
That said, we believe the dispersion of outcomes has widened to a sufficiently large extent, that it is challenging for the company to meet the requirements for a core holding one of our learnings from the past mistakes is to act promptly. When we discover new information about an investment that is inconsistent with our original
thesis, this is why we did. So, here we are in the midst of an opportunity, Rich environment for Pershing Square due to the dramatic shifts in the Federal Reserve policy, a highly inflationary environment, geopolitical uncertainty and The resulting High degree of scrutiny price volatility, we therefore expect to find good use for the Netflix proceeds.
So when I read this letter, I think as a fancy way well-worded, way of Bill Ackman, just saying look this last earnings report was shocking, we didn't expect it. This is way different than our normal investment thesis and we're just taking our losses and move on. And moving on to something we expect, that's basically what I see him saying. We just did not expect this outcomes so I don't blame Bill Ackman for selling. In fact, I think it fits with his investing framework pretty
well. The question is what do I do in this situation? I am down twenty thousand eight hundred dollars in his portfolio and the huge majority of these losses 16400 is from Netflix alone. The big majority of my overall losses in this entire portfolios from one company. So Netflix so far has been a disastrous investment. It's throw me into the red and every single time we climb back to the green and I start making
progress actually making gains. Netflix has another quarter which just knocked me right back into the Ed. So this has been more than a frustrating investment, it's been a terrible investment, but I want to go over what I think, I did wrong and what I plan on doing now. So let's go ahead and first talk about what I did wrong.
A lot of people go right away to blaming valuation, they say, the reason that you're in the red on Netflix is because it was overvalued, it was a valuation problem, you don't run discounted. Cash flow analysis, right. A lot of people say that. First of all, that's not true. I have a Discord where I discuss valuations all the time with lots of different investors. We go through different scenarios. Ariel's and discounted cash flow
analysis. And when I put this much money into any investment, I do a lot of valuation work on it, so this wasn't a lack of effort and valuation. And I think that simply saying the company was overvalued when you were buying it. I think that understates the real problems here, an important component of valuation is your expected growth of the company, that is one really important ingredient or or factor the factor into the valuation.
And in that growth, there's two important components There's how quickly you think the company will grow and for how long do you think it will grow those two variables alone? Determine a huge part of the terminal value or the intrinsic value of a company. So if you have a company that you believe will grow at a very brisk pace and you think it will grow for a very long period of time 10 plus years.
That is a company that you're willing to pay more for the one that you think is just going to stay flat and not really grow but it's just going to kind of stay where it is. That one would deserve a lesser multiple and a lower valuation. So the growth In the expected, growth of the company is a huge component of the price that you should be paying for the company. My assumptions with Netflix is that right now today it would have over 250 million
subscribers. That was my growth assumption. They're struggling to get past 220 million, they got 2222 and they're expecting to shrink. So it's kind of part of my valuation. The growth assessment is part of my valuation, but more specifically the big thing that I got wrong with my analysis on Netflix is the expected. A growth rate of the company they're running into resistance with their growth rate far quicker than I expected.
I expected at a minimum that they would be able to get to 350 million subscribers before, seeing a lot of resistance in their growth. And here we are at 220 million and they're seeing a lot of resistance. So again, you can see this was a valuation problem while that's technically true within the scope of valuation is the growth assumptions and that's specifically the part that I got wrong. If Netflix continued to Row, according to my valuation analysis.
What I thought it would continue to grow at. Then I'd be still fine paying the price. I originally paid if they grew to 250 million subscribers and they're adding more subscribers every single quarter, I don't think we'd be seeing the massive sell-off set. We're seeing I think the price I paid for it would have been completely fine. So of course, we're Netflix has run into trouble. Is their growth has completely
stopped. Its came to a grinding halt announced the question of whether or not they can continue to grow at all. That's the question investors face. So that requires a pletely different valuation. And I think the multiple contraction associated with that, the rewriting of the company makes sense. I think it's deserved. I got the analysis wrong. I thought the company would grow with ease. It's not growing with these. It's running into a lot of trouble, so it deserves to be
rated at a lower valuation. So the question for me is what do I do at this point? Do I do it? Bill Ackman, didn't just dump the holding a move on or do I hang onto it and by the way, before you leave your comment of this is why you don't follow Bill Ackman into a holding. I did not follow Bill Ackman into buying. Flex. I've held this company long before he was ever involved in it. So before you leave that comment, I didn't buy the company because Bill Ackman bought it.
Now, the question remains, what do I do with my remainder of Netflix? I currently have eleven thousand two hundred dollars of value and I haven't sold a single share. I've not sold out any part of this company. I've decided that I'm going to hang on to it. I just want to see a full Year's performance.
And if this is a consistent trend of declining subscribers for the foreseeable future, or if they can reverse this and start to gain subscribers towards the end of the year, which is usually their best months. Because right now, Netflix has traded down so much, another 36 percent in one day. And then another 3%, that there is a ton of pessimism built into this stock.
It's been completely re-rated, it's down to a 24 PE ratio so all the growth investors have dumped out of this stock they've moved on and now it's being priced with much lower expectations. The expectations are very low for Netflix as of right now so I could continue to lose money with Netflix. They could Continue to disappoint, even below the current low expectations, but I think the expectations are very low, I think pessimism is very
high. People are becoming very bearish on streaming and Netflix in general. So I think the opportunity for them to actually outperformed, expectations are high right now than they were a year ago,
certainly much higher. So I'm going to hold onto Netflix for at least the next quarter, I'm going to be looking at next quarter and seeing if they guide down again throughout the rest of the year and how many subscribers they really lose their Rejecting a loss of 2 million subscribers, and if they lose more than 2 million, I'm dumping the stock.
So that will be the final straw. I'll sell the company at that point at a big loss, but I just want to see if they're being very conservative, if they actually beat the expectations of the - 2 million subscribers and what they guide for the remainder of the year, because that's usually a strong quarter for them. So I think that next quarter will be very revealing of Netflix and what their future path is and I just don't feel comfortable dumping out of the
story as of right now. So, that's what I'm choosing to do. But I understand if people, Hold it. I understand if people bought in right now, everyone has different views and expectations on Netflix. But that's what I'm doing. I'm going to be holding onto Netflix for one more quarter and seeing how this shakes out for the rest of the are now. Moving on, I want to talk about Amazon. This is by far. My biggest holding, I have 41.8% of my portfolio into Amazon. I feel very confident in this
holding. It has a couple things that I think Netflix lacked as an investment primarily it has a margin of safety. I think that AWS as a business acts as this enormous margin of safety. Safety to put it in perspective, there's companies like a Netflix, Disney there is Warner media. There's all these streaming companies like Starz and Showtime and, you know, all these different ones competing to be the best streaming service, but no matter which one wins. It doesn't matter, Amazon wins.
They're hosting the data for every single streaming service virtually, all of them, except for apples right there. Hosting the data for every single streaming service. So, the kind of like this real estate landlord of the streaming services. They win, no matter who becomes a Taurus, whether it's Netflix, or or Disney, both of them, use AWS. So I look at Amazon as an inevitable winner. It's a platform that has a growth path that I think is very unlikely to be disrupted.
And I think that that brings in a much larger margin of safety than the smaller bets of companies, like Adobe or Salesforce. I think the Amazon is a much safer bet. Now, having said that, let's go ahead and look at some of the valuation of Amazon and their fundamentals. Like I said, the earnings are
right around the corner there. Next Is day for Amazon and that's very important for my portfolio because I have over 40 percent of my portfolio in this one company, I can recover from a loss in Netflix, I can recover from a loss in Ali Baba, but I cannot recover from a loss. In Amazon, this company doesn't perform well over the next four years. Then I'm not gonna be able to outperform the S&P 500. So having said that, let's go ahead and jump right into this.
The market cap is one point five seven trillion dollars. So one and a half trillion dollar market cap, a lot of people The Ford PE of the company and based Amazon's valuation off of that. I think that's an incorrect way of looking at it because Amazon, they do things with their earnings that I don't think are fully reflective of their
profitability. For example, we can look at the annual free cash flow here, notice how it goes up into the double digit billions for 2018, 2019 2020, it's grown consecutively every single year and then Amazon has - free cash flow 15 billion in 2020. One. Now did Amazon struggle in 2021? Did the company was it? Like Netflix where they're just losing customers know. This company is on fire, they're growing like crazy.
The reason that they have negative fifteen billion dollars of free cash flow in 2021 is because they did massive capex investments in their retail business. They hired hundreds of thousands of new employees. They open up hundreds of warehouses, they bought planes, they bought shipping trucks, they bought Vans, they did massive Investments, that they expect to get a return on in the future. Now, having said, Of that. Let's go ahead and jump into the sum of the parts valuation.
This is where you break out the different aspects of Amazon and give each of them, their own unique valuation based on future assumptions. And I think that this is pretty accurate, conservative assumptions. So, we have the first thing that we can look at which is one party first-party Revenue. This is the stuff that Amazon sells themself on their website, not 3rd party seller.
So when Amazon sells their own items on their websites in many cases, it's stuff that other people don't want to sell Amazon doesn't really want to compete with all their Cellars, they'd rather fill in the gaps and make the shopping experience more complete. They want you to have a wide selection of stuff. So they look for the stuff that doesn't have great margins and that's what they try to sell. So their first party revenues is a lot like Walmart.
It's just not high margin. It's very low, marginal revenue and because of that, we're going to only give this a 1 times price to sales. So just a one price to sales, this part of the company will be valued at one year's worth of Tails, they're expected to do in 2023 three hundred and thirty six billion dollars. In first party sales. It's a lot of sales, but this is Amazon, we're talking about.
And if we give that a 1x on the price to sales, that's three hundred thirty, six billion dollars market cap. So, right there, we have three hundred billion dollars in market cap for Amazon. Now, the third party sales which is hundreds of thousands of small businesses selling on Amazon's Marketplace. This has a much higher margin because Amazon basically just fulfills the product and they don't count the entire thing as Revenue. They only count the part. That they make money on their
fees as a revenue of the sales. So this is understating how much they actually sell in third party sales. If you look at the total revenue of third-party sales, it would be multiples bigger than this, but since Amazon only counts, their fees as Revenue, its 159 billion dollars. And because this has three times a margin of first party sales, we're going to give it a three times price to sales. That brings a valuation to four hundred and seventy seven billion dollars in the market cap.
Now, moving on, we have the retail subscription Revenue, this is very high. Marginal revenue and it's very consistent sticky Revenue. Amazon has one of the lowest churn rates in the industry right there with Costco and because this is high-margin revenue, we give a higher valuation of four times price to sales. Which again, I think is pretty reasonable.
Now, they're expected to have fifty two billion dollars of subscription Revenue in 2023. Which means that this aspect of the business would be worth two hundred eight billion dollars based on these assumptions. That's what it's worth. Now, moving on we have the AWS portion of Amazon AWS is by far the most important most profitable biggest growth, path,
least, disruptive. All biggest Mount part of Amazon. It is the key part of this business and I think that in 5 to 10 years that will become increasingly clear that when you're investing in Amazon, you're investing in this Powerhouse of a business called AWS with their little side thing that they do in retail and their Logistics business and their subscriptions. Those are all little site things around the Central Business,
which is AWS. And I think that this business in and of itself, This is on par with the likes of Microsoft so I hold AWS an incredibly high regard and I think that this will continue to be a big profit Center for Amazon now AWS right now, does 70 billion dollars in Revenue.
That's their run rate and their expected in 2023 to do 111 billion, which I think is a very conservative assumption based on their growth rate, the multiple that we're giving it is a conservative pain price to sales a 10 price to sales is a lower multiple than Microsoft which currently has an 11 or 12. And Microsoft is growing around half the speed of AWS. So, this is a very conservative multiple for this company.
There's arguments out there that you could give awsa 15 or 20 price to sales, but we're being conservative, giving it a 10 price to sales. That puts the Enterprise value of just AWS at one trillion. 100 billion dollars 1.15. So, just this portion of Amazon in and of itself, I think is worth over a trillion dollars. I think it's worth the Amazon. And if you value any of the other business above 400 billion dollars, which I think is extremely silly.
It's conservative. Obviously, it's worth more than that. I think the Amazon right now is heavily undervalued we can continue on with this, we have the other revenues advertising, advertising is a bigger business for Amazon than it is for YouTube. YouTube makes less money and advertising than Amazon does. In fact, Amazon's advertising business on their website. Amazon.com is not only Bigger than YouTube but it's actually growing at a quicker Pace, they're making more money at a
quicker Pace than youtube.com. We have expectations in 2023 that the advertising portion of Amazon will have fifty nine billion dollars in Revenue. In this is an extremely high margin business. This is one of the most high margin parts of Amazon. If we attach a five price to sales on that, which I think is conservative that is a 299 billion dollar market cap. So when we break down all the parts of Amazon and give them all different conservative valuations the company should be worth two.
Point four trillion in 2023, which currently is a 44% upside that would mean the price Target as of right now, pre-split would be 4850. So, the reason that I have Amazon is such a big conviction, such a big bet in my portfolio. The reason that I have 42% of my portfolio allocated to it is not because I like the logo or I like the website or you know Jeff Bezos isn't my hero. That's not the reason that I'm buying this stock. The reason that I'm buying it is
because of the valuation. I think this. Company is heavily undervalued based on a breakdown of the parts of the company and their future growth expectations. I think that investors are heavily under estimating Amazon. So with Amazon, I not only have very high expectations, but I also feel like I have a decent margin of safety. I don't think I'm going to lose any type of money on Amazon. Like I have with Netflix, I think that it has a much better
margin of safety. And one last thing that I'll mention on Amazon, this company is constantly still innovating. They're still creating new stuff all the time, Amazon unveils by with Expanding Prime, shopping benefits, Beyond amazon.com. So now third party websites can have a by with prime button where you pay with Prime and all the Fulfillment and all the customer service, even though you're on a third party website is still fulfilled through Amazon.
Justice news alone, took Shopify down 9% today. The fact that Amazon is now going outside of the bounds of amazon.com. Now, you're going to be able to order from Amazon and their fulfillment as a service Beyond just amazon.com. I'm very bullish on this company. I look forward to the earnings crossing my fingers that it goes well, but we'll see.