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 exclusive episodes and get access to qualtrum.com, you can do so by trying out the Patreon. It comes with a free trial.
That's all for now, see you in the next one.