Welcome back everyone. It has been a huge day in the market so far. We made it through the big test of this earnings season. NVIDIA reported earnings yesterday and they did not disappoint. NVIDIA is up 15% today once again after earnings blowing away expectations, they're now currently up 61% year to date. No, that's not over the trailing year. That is year to date, like 2024, like the last two months.
Now if you're not a market expert, let me just remind you, being up 61% in less than two months is considered good. And it's not just NVIDIA sharing in on the action here. We also have AMD, the forgotten chip maker that's up 11% on the day. AMD is up more after Nvidia's earnings report than they are on their own earnings report. This NVIDIA earnings report is seemingly lifting the entire market. Everyone seems to be getting
involved. The Dow Jones is up .77, the S&P 500 is up 1.74%, and the Nasdaq's up 2 1/2 percent. A massive rally for the NASDAQ. These big companies are crushing it and likewise My Portfolio is having a nice rally today. Now it looks like M1 Finance changed around the user interface here. Normally it has the total gains like right here has a total value here. It looks like they move the value right here in the pie.
So I have a total value of 654,000 and then we have to Scroll down to see the gains and it looks like they segmented it into two categories. We have the dividends earned $27,800 and the market gain which is capital appreciation of 162,000. The total return is your capital appreciation, which is the market gain combined with the dividends earned. So when I look at my total returns, it's around $189,000 in gains. We're creeping up to $200,000 in gains, which is incredible.
Now of course the goal is to continue to compound this portfolio at an attractive rate and earn good returns on the investments I make. So I can make this $200,000 in gains, 300,400 thousand and so on. That's the goal long term, but I'm sure I'll run into some hurdles along the way. But overall things are going really well and today has been an incredibly good day off the
back of NVIDIA earnings. For example, if I look at my one day performance, we just zoom in to today alone, I'm up $10,000 and you'll see on your portfolios as well that you're likely in the green by a large amount. When I look through My Portfolio, I notice a lot of the companies are doing really well. They're trading up in price, they're making gains. Many of them are at record highs. I believe a lot of them have moved up substantially in the past year and they're now close
to their intrinsic value. But when I look through all of my companies, there's one of them that I believe is not being treated quite fairly, and I still believe it's not being recognized for its intrinsic value. That company is Google. Google has recently gone through a string of being unprepared, fumbling presentations and bad news, and this has caused investors to question the future of this company. The streak of Googles criticism started off with their capital allocation.
The company hired around 50,000 new employees and only a nine month period. Investors became concerned that they were being careless with the amount of compensation, the amount of staff that was required to run the company. Google implemented layoffs and it was revealed during the layoffs that they fired an extensive amount of massage therapists. But capital allocation wasn't
the only issue. Microsoft also got a leg up on Google in the AI race, taking a lot of the shine off of Google and showing that Microsoft had a product it was at least very competitive, if not better than what Google was working on. Google quickly rushed their AI chatbot bar demo, which had factual errors, which was embarrassing for them on Twitter, but they also made a mistake during the demo itself. Employees at Google said that this seemed like a rush response
after the botched bar demo. Google also released another demo for Gemini where they showed footage of someone seemingly talking to the computer, but it was later found out that much of the demo was exaggerated. Speed up and the prompts were different than what he was saying. Overall, they called the demo faked. This is another piece of bad publicity for Google as they're trying to build trust in their AI program, and the controversies continue to this
day. The latest one is that Googles AI Gemini is automatically swapping prompts to make them more diverse and in some cases causing Gemini to offer inaccuracies in historical images. And Google has already released a statement apologizing for this, saying that they're missing the mark and they're trying to fix the issue. These type of things are continuing to happen seemingly all the time with Google and it does have an impact on how investors view the company and
the stock price. To add on to all of this, we also have reports from CNBC videos like this one titled Is this the end of Google Search? How the giant could lose its lead that has a staggering 630,000 views a lot of investors are at least concerned about or they want to look at the potential failure of Google, the inability for the company to continue on with its dominant lead in search And reporters from CNBC are not the only ones with this concern.
The long term tech focused investor Brad Gerstner recently went on to TV and explained why he thinks that the dominant position of Google is coming to an end. Now when I look at all of these missteps that Google has made and all of these bearish predictions on it, I have to consider whether or not I still want to hold this company. I don't hold Google in my passive income portfolio, so it's not in my main one, but I do hold it in the story Fund.
The story funds a smaller portfolio where I only invest in a handful of companies, and Google's one of them. I've held this company for a long period of time in this portfolio, but I have to consider whether or not I want to keep this as a large concentrated position. What I've ultimately decided is that I don't buy into these arguments. I don't believe that Google is doomed, and in this episode I wanted to highlight some of the
biggest reasons. I think that Google not only is not doomed, but I think the company has a great future ahead of it. We're going to go through this point by point. Now. The first thing I think is important to outline is that great companies like Google, they fumble. They fumble semi frequently. Zuck caused a large sell off by talking about the Metaverse way too much on earnings calls. It was basically the only thing he was focused on.
He alienated most of Wall Street by nonstop talking about the Metaverse. It was around this point that Mark Zuckerberg continued to talk about the Metaverse and how much he's going to spend on it, throwing a lot of cash flows and CapEx into something that Wall Street wasn't sold on meta stocks sold off for the following year, and then Zuckerberg finally focused on costs and efficiencies. Saying that we're going to have the year of efficiency, which caused a rapid recovery in the stock.
Meta is not the only example of a company doing this. Netflix also caused a large sell off by losing subscribers for two consecutive quarters. It was right around this point in time that Netflix first said they'd ever lose subscribers. They said it was going to be around 400,000, but the trends were going against them. The stock dropped dramatically, going down around 30%. And then we had time #2.
The following earnings report, they said they're going to lose about a million, so Netflix lost more subscribers causing the stock to sell off again. Now I can obviously see the following history. Netflix is right back where it was before they lost subscribers. Amazon is another example of a company that caused a large sell off in the stock, this time by focusing on huge CapEx investments which caused their cash flows to go negative.
In the years of 2021 and 2022, Amazon decided to go all in on expanding their network, growing their CapEx. This caused the free cash flow to plummet. Investors didn't like that. You can see how much investors didn't like it by the the fact that the stock price went from $180 all the way down to 80. They lost over 60% of their market cap. But again, you notice the trend here. Amazon is now getting close to
an all time high. Great companies fumble from time to time and we've seen ample examples of this over the past couple of years. And the fumbles, the big problems that these companies faced are usually quickly forgotten by the market. They don't even think about it the following couple of years. Think about Mark Zuckerberg and the Metaverse. Is that really a concern for anyone anymore? Does anyone really even talk about that? No. That was a time ago and investors have moved on.
They don't care about it anymore. Look at the example of Netflix. Are investors still concerned about them losing subscribers 7 quarters ago? No. Investors have moved on. They're forward-looking. I see this type of thing
frequently with investors. When you're in the moment looking at the bad news, looking at the botched demos, looking at Microsoft release their AI model first, they seem like really big issues, and they can cause investors to make incorrect assumptions about the future of the stock. In reality, great companies, ones like Google, are typically able to figure their problems out eventually.
They have enough market share, they have enough money, they have enough talent to be able to move on from these stumbles. If I had a guess, I believe that investors will forget about 90% of these challenges within a year. Now the second thing that I'd point out, which just adds in a little bit of safety to this company is as Google trades at a low valuation relative to the market. Look at Google's PE ratio. It's currently out of 21.
Currently, the S&P 500 trades at a Ford PE estimate of 22.7. Most companies of this equivalent quality trade much higher than the market. Now after that, we also know that Sundar, the CEO of Google, is getting costs under control. One of the primary criticisms I had for Sundar Pichai is that he wasn't focused on cost structure. He was being a little LAX with how he's running the company, but we can see that improving over time.
One of the things we can look at with Google is the number of employees over the past four consecutive quarters. For example, in the March quarter of 2023, they had 190,700 employees. That's a lot of employees they hired rapidly to get to this point. But look what they've done over the following year. They went from 190,000 to 181. So they laid off roughly 10,000 employees, which is a big number, but compared to their total employees, it's still a relatively small percentage.
Regardless, it was a reduction in the employee headcount and then even after layoffs, they seem to be a bit more disciplined in their hiring. They went from 181 to 182. So in a three month period increasing by 1000 is not a big deal for a company of this size. That's slow growth in their
employee headcount. And then in their most recent quarter, they went from 182.3, 182.5, only hiring a net 300 employees, meaning that over the course of the full year, Google seems to be paying far more attention to their expansion in employees. They're being a lot more disciplined in their approach and Sundar should be getting credit for that. He is getting costs under control. So I know that these stumbles that Google has had are likely temporary.
We know that the company's trading at a relatively low valuation compared to the market. We know that the CE OS getting costs under control. The next thing I'd point out is that Google's growing much faster than the market. When we look at the free cash flow growth of Google, it reached a record high in 2023 of 69.5 billion. That is growth of almost 20% for the past decade. In the past five years it's 25% on a compounded annual growth rate.
That is incredibly fast. There's only a handful of companies that have been able to pull this off and this doesn't tell the full story because Google has also done share buybacks as they've grown. We can look at this illustrated in the shares outstanding. There's a difference here with the other charts. With shares outstanding, we want to see them going down. So we actually want to see these numbers in red. Red means a decrease. And in shares outstanding decreases are good.
So we have the shares outstanding going down by 3.3% over the trailing one year. That is an aggressive share buyback policy. Sundar is really buying back shares at an accelerated rate and the low valuation of Google made this fairly easy to do. When we look at the buybacks and incorporate that into the free cash flow growth, we get the free cash flow per share, which is even faster.
And the fact that they're now focusing on costs and likely growing their top line faster than growing their expenses, we'll see some margin improvement, which will mean more free cash flow, which will mean more buybacks going back into the company, reducing the share count. So I can't say for certain what will happen in the future, but based on all the data we have, it looks very positive.
The next thing I want to address is a major concern about Google with the future of the company and AI. Brad Gerstner is a tech investor that runs a massive fund called Altimeter, and one of the companies that he is avoiding investing in is Google. Harris's reasoning behind it. Here's my fundamental position. Search is going to be replaced by agent LED information discovery. I see it every day. My 15 year old son says Dad, I don't use Google anymore. I just use Chat GB.
TI talked to 2000 people at the Javits Center. How many people have used ChatGPT instead of Google? Over the course of the last two days, 1000 of hands in the room go up. I asked my analysts who are sitting on their desk. They're replacing their use of Google with ChatGPT. We are having a fundamental structural shift in how people retrieve and discover answers to the questions they have. So Google is going to have to compete in this new thing, OK, Meta's going to compete.
Apple's going to compete. Microsoft with Copilot, ChatGPT, etcetera. They're going to be 678 incredible competitors there. Google will be one of those competitors, and let's assume that they're a very competent competitor because they have all of these assets. The question to you do you what do you think the likelihood is that they're going to reconstruct is dominant of monopoly in this new thing as they have in search?
Now I must say, with great respect to Brad Gerstner, I could not disagree more fully with him. I think he's completely wrong here. First of all, the whole premise of his argument is that people are fleeing Google search and rushing to ChatGPT to get information, and he references a lot of anecdotes of people he knows using ChatGPT and not using Google. My 15 year old son says dad, I don't use Google anymore.
I just use Chat GB. TI talked to 2000 people at the Javits Center. How many people have used ChatGPT instead of Google Over the course of the last two days, 1000 hands in the room go up. I asked my analysts who are sitting on their desk. They're replacing their use of Google with ChatGPT. He believes that everyone around him is moving away from Google search to ChatGPT, and my experience could not be more different. Everyone I know doesn't care about ChatGPT.
Everyone I know that lives in the real world. The average person that's just wanting a bit of information goes to google.com and gets a search of what restaurant they want to visit, what different books they're looking at, different subjects they're interested in. None of them are using large language models and Gemini and Chachi PT. In fact, I notice that the type of people that are most drawn to Chachi PT aren't the average
person. They're typically super tech focused people like Brad Gerstner. So it makes sense to me that people in his immediate circle are more biased towards this new technology, but I don't think that that's accurately representing the broader world. So I believe that his anecdotal experience in this is not representative and it's way off the mark of the average
experience. I believe the biggest thing that investors miss is that AI text like ChatGPT, and large language models have different use cases than Google search. They are different and people use them for different reasons. Here's a Venn diagram that I believe accurately represents the overlap in use cases from ChatGPT or different AI text models to Google search. If the blue circle represented Google searches use cases, the black circle represented Chatchy
BT's use cases. The majority of their use cases are completely different. Chatchy BT is used for things like math equations, coding problems, customer service, writing out e-mail templates. Then Google search is used for things like looking up information on a new movie or an actor looking up information on a historical event. The huge majority of their use cases are unique, but they do
have some overlap in the middle. There are some cases where you could use either one, but that is the minority of cases. Even if Google lost the battle in AI text and GEM and I didn't compete with ChatGPT, they would still make a fortune with their search engine over the next 10 years. That's assuming they completely lose this battle in AI. So I completely disagree with this assertion that Google search is being replaced by AI text programs. Now we can see this in the numbers.
Most of these short term risks have not shown U in the numbers at all. You think you'd see them by now with an entire year of people using Chat GT, but being which is powered with Chat GT did not take 1% market share from Google last year. This was the big year for Microsoft to take market share. They promoted it in every single tech conference. They put it on the front page of
being. They tried to make it as powerful as possible to compete with Google Search, and from those efforts they couldn't gain a percentage of market share. And then finally, one thing that's underappreciated by investors time and time again is the difficulty in changing user behaviors and habits. People, generally speaking, are very lazy. They like doing what they've done before. It's easier to Kee people using Google alications with Gemini just being one click away from
googlecom. You can find access to a large language model that's satisfactory, or you can download Chat GT, which will require you to go to the App Store, download a separate app, and log into a separate account. So I would not use Twitter or YouTube tech reviewers as an indicator of normal human behavior. Most humans will use the easier route, which is sticking with Google because they already use it. So overall, Google has been through a little bit of a bumpy
Rd. over the past couple of years. There's been a lot of doubting that's happening recently. I just wanted to throw my opinion in that I think the company's fine and I do not believe that Google search is doomed. That's going to be it for this episode. I hope you enjoy it and I'll see you in the next one.