At the start of this year I came out with a video titled Big Tech is Cheap. It was published right at the beginning of the year, January 6, 2023, and in the video I made the argument of Big Tech being very cheap. At the moment, I think Big Tech is currently cheap and I want to explain why. I went through all the different companies fundamentals and financials and explained why I thought each of them individually was selling for
cheap. We talked about Amazon, Apple, Microsoft. We went over Google and Meta as well. And after reviewing the fundamentals and valuation of Big Tech, here is my conclusion. 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 you think. So that was it. Pretty straightforward. At the beginning of this year I thought these companies were cheap and I said so loudly, but I didn't just say so. I also bought into these companies heavily. In my passive income portfolio. I own a very large stake in Microsoft and Apple. Each of these companies is well over a 10% position, so they're far over weighted from what the
index has. I also have a smaller, more tech centered portfolio where I own a lot of Google, a lot of Amazon, and even more Microsoft and a little bit more Apple. These are companies that I'm heavily invested in. When I'm doing research on companies, they continually pop up as the best companies in the world. So overall, I think you'd be hard pressed to find a bigger advocate of buying big Tech than the Joseph Carlson Show.
I've been long Big Tech for a long period of time and I've continually added to these companies a long dips, especially when they get cheap, especially when they sell off. That's the time periods where I've added the most to these companies. But a lot has changed since I released that video 10 months ago saying that Big tech is cheap. One of the biggest things that's changed is the price. Let's take Apple for example, Apples year to date performance is a staggering 48%.
It's gone from $129 now up to 184. Apple is a far more expensive company now than it was the beginning of the year. Now Apples performance is fantastic. It's market beating by a huge extent, but it's beat out a little bit by Google. This year Google beats out Apple by a few percentage points with a 49% return year to date. That is incredible, and as good as that is, it's beaten out by Microsoft's performance. Microsoft is up a staggering 53% year to date.
It's gone from prices of $220 per share up to 367 now. Even as good as Microsoft's performances, it's beaten out by Amazon. Amazon is up 66% year to date. This company was trading at around $80.00 per share announced up to 142. Now of course, even outside of big tech, we have the new entrance to the Magnificent 7. In this case we have Tesla, which if you think Amazon's performance has been good year to date, let's check out Tesla's. Tesla's up 107% year to date.
It's doubled this year and it's hard to imagine that being beaten by an even bigger company. But here we have meta with an incredible recovery. Meta beats out Tesla by wide margin, being up 165% year to date. And of course we can't forget about the last member of the Magnificent 7, NVIDIA, climbing up a staggering 241% year to date. NVIDIA now both say market cap bigger than Metas. It is a $1 trillion plus company. The reason that the S&P 500 is up 13 percent is simply because
of these companies. But with the incredible performance they've had with their price increasing, that does have implications on their valuation. So I think it's time that we go back to this original question. Yes, big Tech was cheap ten months ago, but is it still cheap today? That's what we're going to be discussing in this episode. Now of course, as always, we have some other news we'll be covering as well. This new demo by a company called Humane that made an AI
clip. We'll be looking at this Airy demo. We also have Moody's down grading EU s s credit to negative and we have the new Disney movie, the Marvels struggling at the box office. What does this mean for the Marvel Universe and for Disney's content? We'll be discussing that as well, so we have a lot to get to in this episode. Let's go ahead and jump right in. Just today, Dan Ives went on to CNBC and yet again reaffirmed his opinion that big tech is still cheap.
Now it's the first, second derivative and we believe the 3rd and 4th are going to hit in 2024, which is what in my opinion, the new tech bull market. Has begun. Not only are they cheap right now, but all of this AI stuff being intermingled into big tech means that these companies are set for a brand new bull market. They're going to have another big run.
Dan argues that because these companies have such massive install bases of commercial clients, AI is going to help them further their profits in the coming years from AN. Install based perspective. You look at Adobe, you look at names like Oracle, you could Salesforce. And of course, right now at the top of the mountain is, of course Microsoft. So you look at what AWS are doing, that's a huge monetization opportunity for
them. And I believe right now that's the golden goose, that's what this is going after and we think it's a trillion dollars of spend over the next decade. It's going to hit the shores attack. Now, I don't necessarily disagree with Dan Ives. I don't think he's crazy with these assumptions. It is true that a lot of money is going to be spent on AI, and it's probably true that these companies will eat up the lion's
share of that spend. They do have massive install bases and we've seen over and over again how quickly big tech
can grow their profits. And ultimately, Dan Ives believes that the valuation is not as concerning because he believes a lot of people on the sidelines of the stock market, a lot of the bears that have been in hibernation are going to want to jump back in. And I think right now a lot of bears, they're coming out of hibernation mode and I believe they go back in, in terms of what I view is just a tech. That ultimately could be up 8 to 10% more going into year end.
And he finally asserts that the continued momentum in Big Tech will bring it up another 8 to 10% this year, even before we get into 2024. So Dan Ives as well as many other investors are now very excited about Big Tech, especially after this massive rally. Seeing the stock price go up that fast draws a lot of attention and inevitably draws a lot of FOMO. That's why you get the momentum that you do in stocks, people
wanting to be part of the gains. If we take a minute and look at the valuation of big tech and what's happened over the past ten months, it paints a pretty alarming picture. Let's take a look at Apples valuation. The PE ratio has gone from a PE of 22 to a Ford PE of 28.6 from a 22 to a 28 is an expansion in multiple. Likewise the free cash flow yield of the company netted out with stock based comp is 3.08%. Now that's OK, but just a year
ago it was 4.5. On a free cash flow basis you're also getting much less than what you paid for a year ago. Apple is undoubtedly far more expensive of a company this year than it was last year. With Microsoft we can see the same. At the start of the year, the PE ratio was in the low 20s. Now it's 27. The free cash flow yield adjusted for stock based comp is 1.95. It's now under 2%. Microsoft is getting a heavy premium for being the AI king.
A lot of what Dan Ives is talking about when referring to in the future. All of this AI spend is already largely baked into this price. Google's one of the big tech companies is often looked at as still sort of cheap. On APE ratio it only trades at an 18 which granted it is far less expensive than Apple and Microsoft so this one doesn't look quite as bad. But when you look at the free cash flow factoring out all the stock based comp, you get a free
cash flow yield of 3.31%. This is still not that cheap even for Google. On a free cash flow basis Google trades around the same price as Apple. Met is another company that does a substantial amount of stock based comp dilution. We look at the trailing PE and it's out of 29. On a Ford PE, it's out of 15, so it appears mostly cheap on a Ford PE basis. But again, when we look at the free cash flow yield, at least on a trailing basis, it's below 3%.
Meta itself is getting more expensive by the day. Amazon has been consistently one of the most difficult companies to value. That is because they usually suppress their earnings power by reinvesting all of their cash flow in the future properties. Amazon's free cash flow has been negative over the past year as the company's done substantial CapEx investments. So the valuation of this one depends heavily on next year's cash flow.
Now terms of companies reliant on future growth, it only gets more aggressive. Tesla is currently pricing in a substantial amount of free cash flow growth in the future. Tesla is being priced at a 29 four E ratio with a free cash flow yield of only two 8%, meaning that right now the company is heavily reliant on growing free cash flow in the
future. And the company with the most aggressive assumptions of all is NVIDIA priced at a 39 Ford PE and a free cash flow yield adjusted for stock based comp of only .6%. NVIDIA bulls are assuming very fast free cash flow growth and earnings growth and if NVIDIA does not accomplish that, this company is dramatically overvalued. Now look, when I review these companies, I still come to the conclusion that there's some of the best companies in the world. They are true compounders.
They are growing their earnings and free cash flow overtime. So I still believe the quality of these companies is superb. It's the best in their class. But then we get to the question evaluation. I can't say with exact precision what every single one of these companies is worth, but I can say with a high degree of confidence that the price of these companies this year has raced up far faster than their intrinsic value and that should cause long term investors to be
cautious. Now, being cautious may mean different things to different people. When I speak of being cautious, that doesn't mean to race out and sell all of your big tech holdings. That's certainly not what I'm doing. I could lock in a lot of gains and sell out of these positions, but that also puts you in a difficult position.
When you sell out a big tech, you're basically betting against the S&P 500. You're excluding yourself from a massive portion of the overall earnings in the economy. So much happens within Apple and Microsoft and Meta. There's so much commerce going on with those companies. Having no exposure to them whatsoever puts you in a dicey territory where eventually you may want to get back in. When I'm cautious, rather than selling out, I simply hold back
on my buys. I wait for better opportunities to grow my position. So right now, for all of these companies, for Amazon, for Microsoft, for Apple, for meta, for NVIDIA, for Tesla, I consider these companies a hold. I consider some of them at the verge of being overvalued, and if they do push up in value further, I may trim my positions to some extent. For example, Microsoft is up to $367 right now. It's trading at a higher PE
ratio, a higher multiple. If the company raced up even further above $400.00 this year, I would look to trim my position. I would still invest in the company. I would still be bullish on its fundamentals growing over time. But I feel that this is the natural course of investing. Momentum is the most powerful force in the market for a reason.
When investors see companies like Apple or Microsoft making 50 and 60% gains in a single year, they want to be a part of it. They don't want to miss out, so they buy into the company, pushing up the price ever and ever higher, and eventually this can lead to stock prices being substantially above their intrinsic value. Stanley Druckenmiller has addressed this very specific phenomenon before. He says, I'm not going to lie to you, my first boss had a saying the higher they go, the cheaper
they look. There's something weird and I know everyone watching this has this experience. It doesn't make any sense, but when a security goes up, every bone in your body wants to buy more of it. And when it goes down, you're fighting and making yourself not sell it. It's just the nature of the beast. You can call it the nature of the beast or the psychology of investing. The higher they go, the cheaper they look. If we're disciplined investors, we can't get wrapped up in
momentum. As for me, I'm proceeding with caution right now. I'm not adding anymore to my big tech companies and I won't add more until the valuation comes down. Now moving on, I have to respond to this new demo of this AI clip product. This is interesting for a couple different reasons. First of all, the product itself is very interesting and I actually think pretty cool. But this is also interesting because of their demonstration. The demo video here is just a
bit different. This is the Humane AI pin. It's a stand alone device and software platform built from the ground up for AI. This demo video's 10 minutes long and he talks like that the entire time. There's no fluctuation, there's no voice variance. It's just this low, monotone, almost ASMR voice. And then I have to point out that it does have some Apple vibes. Feels a little bit like they're mimicking early Steve Jobs. It comes in three colour ways.
Got Eclipse, Lunar and Equinox. This is what I love seeing in these demos. It comes in three colour ways, Eclipse, Lunar and Equinox. You could just say the product comes in black, white and Gray now. The battery booster powers a smaller battery inside the main computer and this is how we achieve our all day battery
life. So if you ever exhaust the booster, you just reach into your pocket or bag and hot swap it. This is a perpetual power system that allows you to use your AI pin for as long as you want. They really seem to be copying the Apple playbook here instead of just saying you can carry around an extra battery. It's called a perpetual power system. Doesn't that sound much better? And your engagement comes through your voice, touch gesture or the laser ink
display. So you can talk to this thing, or you can have it project onto your hand. OK. Got my clock, whether the date. If I tilt my hand up got nearby, it tells me everything that might be around me and where I am at the same time. It seems pretty cool. It has a little projection thing that goes on your hand and that's like a control system for it. Or you can just tap the device itself and ask it a question directly. Ultimately what this presentation is is ChatGPT
connected to your chest. That's basically what the device is. In fact, the system itself costs $700.00, and then it's an additional subscription for $24.00 per month. I believe the reason you have to pay for that additional subscription is because you're paying for that ChatGPT, or whatever model they're using. Overall, I honestly thought this was kind of cool, and I like seeing companies come out with new devices like this.
I think the biggest problem I have with potentially using a device like this is I almost never like talking to my phone. I don't like speaking into it because I noticed that a lot of times I'm around other people. If I want to check something real quick, I don't want to be tapping on my chest and speaking into a device while I have friends around or other people around. It just seems a little odd.
So I prefer having a display rather than having it primarily through audio or through a hand projection. But I think this gives you a glimpse of what the future is going to look like. There's going to be a lot of interesting devices released soon. Now moving on, we have the big news that came out Friday after market close. the United States credit rating outlook was changed to negative by Moodys. Overall, there's three main
credit rating agencies. The two big ones are S&P Global and Moodys. And then there's the 3rd place one, which is Fitch. Both S&P Global and Fitch have already removed the United States from the highest credit rating possible. Now we have Moodys threatening to do the same thing with this downgrade. Moody's Investor Service signaled it was inclined to downgrade the nation because of wider budget deficits and
political polarization. So Moody's hasn't officially downgraded the US, but it's putting the US on notice. Then, unless these things improve, unless budget deficits improve and political polarization improves, it's going to be downgraded eventually. And let me first say that I agree with this move from Moody's and I agreed with it from SMB Global, I agreed with it with Fitch. I think it's necessary that the United States gets treated like any other institution.
As the United States grows in its amount of debt, it becomes less credible. This chart clearly illustrates the problem. The orange line is the cumulative debt growth. So that's the debt going up over time. And the blue line is the cumulative real GDP growth. Now, debt growing overtime is not an issue if your income grows as well. In fact, if your income growth outpaces the debt growth, that's
not a problem at all. Ever since around 2009, the GDP growth has far trailed the debt growth, and every single year the debt and the deficit are accelerating. Here's an even more specific breakdown of the trailing year. The underlying US budget gap doubled in the past year alone. Expenses are increasing at an incredible rate, and same with the deficit. To complicate this problem, nobody in charge wants to address it.
Biden officials rejected Moody's shift to negative outlook pointed to Republican dysfunction. So rather than coming up with specific solutions, they're pointing the finger to the other side. At the same time, the current batch of Republican candidates seemingly never talk about the debt. They don't act as though it's a pressing issue.
So my hope is with all of this that the downgrade from Fitch and SP Global and Moody's moving this to negative will put further emphasis on it. I think it's good to have greater focus and pressure on this issue, and hopefully that's what it accomplishes. Now finally, we have some good news and bad news. The bad news is if you're a Disney investor, the new Marvel's movie did not perform well. It was the worst performing opening weekend of a Marvel movie ever with only $47
million. If we put that in context with the other lowest gross Marvel movies, we can see the scoreboard right there. We have the marvels at 47 million above The Incredible Hulk, Ant Man, Captain America, Thor and the Eternals. Now, film analyst said. The initial prediction saw the film opening at between 75 million and 80 million domestically, but those figures have shrunk to a range between 60 and 65,000,000. Ahead of Friday's opening, this movie is going to make a lot
less than previously expected. Now, I said that this is both bad news and good news. This is bad news. If you're invested in Disney and you want every single film to perform well for you. That might be a little bit of negative news. But I think overall that this is good news. It may force Disney to focus on something other than superhero movies from the Marvel Universe, and it may finally waken them up to the fact that people are getting a little bit Marvel fatigue.
This is something that's been happening year after year after year, and Disney does not seem to get the message. They're coming out with dozens of more Marvel movies, more superhero movies, more movies where people have flashy hands, can fly across the screen, can throw each other through buildings and brick walls with zero consequences. And for a lot of people that I think were at one point, Marvel fans, I think right now they're just getting fatigued.
They're over it. This movie has a 6.1 rating on IMDb. That's pretty low for a Disney movie. People are tired of seeing the same CGI story over and over and over again. They want original storytelling. So I think the glass half full here is that maybe, just maybe, if they continue to have low performance of churning out the same Marvel movies, they'll change plans and at least make them more unique, more rememberable with original stories.
That's all for this episode. See you in the next one.