Look, it's a it's a it's a it's a gut punch and you know running a company and I've been doing this. It is a gut punch. What Salesforce is going through right now is a gut punch. Now, also the fact that Salesforce is down 47 percent year-to-date, that's a gut punch but that's not even what Marc benioff the CEO of Salesforce is even talking about here. He's talking about the fact that seemingly nobody wants to work with him.
We have sales force. Executives not just employees but Executives across the board fleeing, the company, an exodus of Executives. We still have the CEO of the company, Marc benioff. But even last earnings report, the last Salesforce earnings report was a disappointment to investors causing yet another sell off. So the stock is down, big this year, executives are leaving the CEO is still currently here and we have to ask the question.
What do we do in this situation? Do we buy more Salesforce? Do we double down on it? Do we? Just hold strong and kind of try to wait through this, or do we sell out and move on to something else. Something that has a brighter future and less red flags. That's what I'm going to be diving into, in this episode. We're going to be looking over Salesforce and trying to dig down into what's really going on and what I plan on doing with my holding. So, let's first start off by
jumping into a portfolio update. If your new hair, this is going to be something a little bit shocking, but I show my portfolios with complete transparency on a week-by-week basis. No matter what direction they're headed. So, even though this one's in the red, right? Now and this one's performing poorly. I'm going to continue to show the progress of it every single week for at least the next couple of years until at least 2025 and I might show it beyond
that as well. So if you want to follow along and track this portfolio live with real updates, just subscribe to the channel and you can follow along for free. Now, when I look at the performance here, and I look at the individual Holdings. I notice a common Trend here, basically, every company in this portfolio, aside from Berkshire, Hathaway, all of them are out of favor in this market.
Investors don't Anything to do with these type of companies grow center technology companies, they're not in favor right now. We have the Federal Reserve just yesterday going on and on about how they're not done. That's the message they said we're not done. We're more hawkish, we have interest rates going up over the next year. We're going to hold them very high. We're going to have the most restrictive monetary environment that we've had in decades.
It's going to be brutal for any company. Like these ones, that's what drone Palace said and every single time he holds a meeting these Please go down in value more, and more. You can look just today one day after the meeting. And we're down 5% 4.75%, another five thousand dollars. So these type of meetings with drone, pal, being incredibly hawkish and talking about how much he's going to raise interest, rates causes investors to run out of these companies into the more defensive ones.
That's the environment we're in. Now, I've said this many times I would not copy this portfolio, I don't recommend copying it. In fact, I'd recommend not doing so because it's highly volatile. These companies trade up and down 40, 50 percent in a single year and it's in an environment right now, we're again, these type of companies are out of favor, so, don't copy this
portfolio. I'm doing this more of a fun thing to watch from the sidelines, but I wouldn't jump in unless you're ready for all the risks. All the volatility that comes along with this volatility is one of those things that's much easier said, than done. It's easier to look into the future and say, yeah, I can handle volatility. I'm okay with that. But once you're actually in it like this, it's much more difficult. To handle, it's much easier said
than done. Now, when I Benchmark this against the S&P 500, as if I deposited money at the same time in the same amounts, this is what it looks like. The S&P 500 is the redline the story fund is the blue line. So we are underperforming, the S&P 500 by 23% right now, a huge gap of under performance but we've been tagging along over the past six months, we're kind of hanging in there and we've actually closed the Gap a little bit for time period.
We're underperforming by 30%. So I think we're doing. Okay, we're slowly catching up a little bit but this is still not good. We're still under performing right now. Luckily I have a lot of time on my side. I can let these companies sit and grow over a very long period of time. I do not need this money anytime soon.
So that's my overall portfolio. If we want to look specifically at Salesforce ticker symbol CRM, it's right here, the very bottom row, I can look at my return so far since I've bought it throughout the year and not right at the beginning. Beginning of the year, I'm down 35 percent. So the stock overall this year is down 47%, but my personal position and it is down, 35% not optimal. We're in the red by over two thousand dollars on this
holding. And we currently have a holding value of thirty eight hundred dollars. And as I've outlined, we've had a lot going on with this specific holding the big news item. The most recent one, is it, a lot of executives are bailing on Salesforce. They're just leaving the company. We have right here that Salesforce just lost another CEO.
So the way that they ran the company is Marc, benioff was the CEO and then he hired a co co similar to Reed Hastings and Ted strandos, the co-ceo is something that's uncommon, but it works in some cases. I don't necessarily love co-ceo relationships but in some cases, if you have two individuals that have been basically in the company so long, they're each taking on about 50% of the work, they're each running half the company and they're both basically co-ceos.
So you may as well just give them the title. That's how Reed Hastings intense rounds have been. So they just made something that was unofficial official. Well, Marc benioff did the same thing, he was the CEO of the company and then you made someone else, the co-ceo in the last two weeks, Salesforce has lost two of its most senior leaders first. The company announced that co-ceo Bret Taylor would leave in January.
Then on Monday, the company said, that Stewart Butterfield, the founder and CEO of slack, which sales force acquired in 2020 for almost 28 billion. Would also leave next month. So we have the CEO bailing early next year and then we have the CEO of slack which they purchase leaving early next year as well. They're both leaving January, they say to be fair. None of the people leaving said anything negative about CEO Marc benioff, in fact, Butterfield didn't mention him at all.
That's a little odd in my opinion, you know, and not saying something - that's good, I guess. But the fact that he didn't mention him at all, that tells me in my experience in the workforce. If someone leaves and are a high-ranking position and they leave a very public high-profile position and they don't even mention the team that they worked with. They don't say anything at all. That strikes, me is. If you have nothing nice to say, don't say anything at all.
If you had anything positive to say about Marc, benioff, he would have said it so that shows me that they had some disagreements. They didn't like how he was running the company. Maybe there is problems with the acquisition that frequently happens but regardless I think it's good. He didn't say anything - but I think that Is probably some bad blood there. He did mention Taylor only to say that the timing was purely coincidental. This is another thing.
Both of these executives are leaving Salesforce at the exact same time, and then they're saying, you know what, this wasn't like some planned thing. It was just coincidental which a lot of people have outlined as something positive. Hey they're just leaving coincidentally, that's not so bad. Again, in my opinion I read this is almost worse. The fact that you have multiple different Executives bailing on the The same company at the same time without coordinating at all.
That shows that something might be going on. And that's a big red flag. They say it is however, an interesting coincidence. Considering Taylor's largely considered responsible for shepherding, salesforce's acquisition of slack in the first place. So yeah, we have a lot of speculation here. So to me this first news item that we have multiple high-ranking Executives leaving at the same time. I think it's a red flag. I have no other way to really
describe it than that. It is not a good sign. Anytime you want to company and there's employees internally bailing on the company and higher up positions, leaving the company left and right, that's a red flag. That means that they have an inside view of something going on. And they're saying, I don't want part in this, I'd rather just go and find my way somewhere else. Even though I'm getting a paycheck here, I want out. That is not a good sign for the company.
So whether this has a long-term negative effect on the stock, I can't say, I don't know, but I think this is clearly a red flag in something to pay attention to was Salesforce. Now, the next part is Salesforce is what the actual operating results of the company are doing, how is the company doing operationally with their profitability and with their
progress and growth. Now, the first thing that I want to go into, is the obvious elephant in the room here, which is the stocks performance this year, which has been is just awful, it's down, 47 percent year-to-date. So this company has been a poor investment for the past year, but I like to start off with the stock performance before even going into the operating performance because a stock performance sets the tone How people view. The company sentiment is driven by stock price.
If Salesforce is up 50% this year and it had the same operating performance people, just view it more positively, they'd look at it and they'd say this companies probably doing something, right, right? Sentiment is dictated by the stocks performance. So this sets the tone Salesforce is down big and so now people are highly critical of the company, but I also want to put this in context. Let's just do some quick comparables here. Here we have crowds Strike another Cloud company.
This is one that's in cybersecurity. It has very strong fundamentals, high-revenue, net retention rates and things like that. It's down 41 percent. This year, we have Amazon the Juggernaut Cloud hosting online retail, you know, the third party services. This is one of the most powerful companies in the world down 48 percent. We have atlassian, this company again has grown rapidly this year. The profitability metrics are moving in the right direction
down. Fifty-eight percent this year, Netflix is down, 51 percent, Tesla's down 60%, then we even have the software Tech sector ETF. And this is down 34 percent, year-to-date the entire software Industries down 34 percent, we have the cloud industry, wisdom trees, cloud computing ETF is down 49 percent. So, of course, it's disappointing to see Salesforce down 47% this year, but I like to put it in context with the entire Cloud industry to show that.
It's not much of an outlier. It's not like the cloud Industries up, twenty percent this year and Salesforce is down. 50% that would be more troubling but the relative performance of Salesforce to all of its peers to the entire industry the entire Tech cloud computing industry. It's basically in line maybe slightly worse slightly better.
It's basically in line with the rest of the industry and like I said on the onset, like I said with my portfolio update, these type of companies are out of favor with Pastors, if you're investing in tech companies, cloud computing companies, you're going to have a rough time until j-pal cools off a bit. That's just a story. That's the macroeconomics. I think that's something you have to keep in mind. Now let's go ahead and look at some of the real measurements here.
Last quarter, they reported growth of 14 percent year-over-year. I still see that as strong growth in this environment. I think that's very strong growth. And again, this is a major focus of Marc benioff. If we look at his tweets, this is his pinned, tweet the thing. He wants you to see out of all the things he tweets, salesforce's Revenue growth year
after year, after year. He has twenty six point five billion dollars in revenue and 2022, and then Thirty 1 billion dollars in guidance for next year.
So again, top line revenue growth is obviously the big Focus for Marc benioff and I think you actually focuses on this metric a little too much because although this is good for bragging rights, you can pin this on your Twitter, you can brag about it on CNBC how you're bigger than all these Other cloud computing, companies viewers of the gels of Carlson show. No, well by now that revenue
does not pay. You dividends Revenue, doesn't give you BuyBacks Revenue, doesn't pay the shareholders and revenue doesn't give you free cash flow. Profitability gives you all of those things margins. With the revenue is what gives you those things? And I think that should be a primary focus for Salesforce. Let's go ahead and look at a couple other metrics here, we have the ibadah, generally speaking going up over time, but not nearly as smooth as the revenue.
We have the free cash flow hair. It shows a strong trend of going up over time, in fact, the free cash flow looks fantastic. Just amazing. Look at this free cash flow Co-op year after year, it's absolutely incredible. It reminds me of companies like Nike and Estee Lauder, the best of breed companies in the market. But then we do something here, we toggle over the stock based compensation and it makes the picture. Look a little less glamorous, a little less good.
In fact, the amount of free cash flow that Salesforce earns is basically chopped in half by the amount of dilution that they do. And this is one of the points that I think investors are the most troubled with this stock. We can see this most clearly if we switch over to annual hair, we have the free cash flow in Orange. We have the stock based compensation and purple and notice how the free cash flow is basically chopped in half year over year by the amount of
stock-based compensation. So we could cut all these numbers in half and say and 2018 since its 2.2 billion dollars in free cash flow. We chop that in half because the stock based compensation and we have one point 1 billion dollars left. Dover after dilution 2019, we have one point for in 2020. We have 1.8 in 2021, we have two and then a 2022. We have two point five so far. So even if you did net out, the stock based compensation, this
company looks pretty strong. Another metric we can look at is the free cash flow per share. This is where we take the amount of free cash flow, the company generates and then we divide that number by the shares outstanding. So if they are diluting the shareholder, that's factored into this. Calculation and we can see that they're growing, the free cash flow per share over the past 10 years by 21.7%. Kegger, that's a very fast growth rate of the free cash flow per share.
So again, this looks terrible because half the money is eaten up by stock-based compensation. That's a big negative for the investor, but even when you factor that in their still growing, the free cash flow above that at a very attractive rate. Now if we move on from the cash flows and we look at the actual balance sheet of this company. What we have here is a chart that That shows the cash the debt in the capital leases, the debt is long-term debt in the
capital. Leases are basically like rental agreements but they, they organize them in a different way where they call them Capital leases because they might have some ownership rights so we can simply filter and look at the cash for. It's the long-term debt. They currently have eleven point nine billion dollars in cash, and then eight point eight five billion dollars in long-term
debt. And the long-term debt is steadily going down quarter after quarter, then we have the capital leases here, if you Actor in the capital leases it's barely above the amount of cash they have, but I don't consider this problematic. This company does have a very strong balance sheet that needs to be said about Salesforce. They're in a very good situation, they're going to have no problems with the liquidity crunch.
Now, finally, the last thing in this one is a killer for Salesforce, is the shares outstanding over time. We've seen these charts before investors hate this and I think, for good reason, when we see a long history of the amount of shares outstanding, Going up, that means that your ownership in the company is being diluted over time.
So you own less and less of the company as their printing out and giving away more shares to employees over and over again they're diluting your stake and giving that Equity to employees and that's how they run the business. And a lot of times companies do this because it looks better on paper to pay employees through Equity than it does through cash. So they have incentives to do this. And Salesforce has been a highly diluted company over the past two decades.
So this aspect of The dilute of nature of it is one part of it that I think it's been a big downside for a long period of time. And this brings me to my next point about Salesforce, something that I don't like about this company is I think it's very difficult to do real analysis on. I think a lot of the numbers and a lot of the things they say you have to do a lot of detective work to decipher them. Let me give you one example.
Here I'll bring up the latest earnings report from Salesforce is just the most recent quarter a couple weeks ago. We have November 30th. 20 right or 2022. Sorry, we look at this and we have all the numbers here, they do the highlights. They try to brag about what the company is doing. We have the revenue growing 14% 19% in constant currency. I think that's fine. Top line revenue, growth is great.
Again, that's the big Focus for Marc benioff, but it's when you get into the profitability metrics where I have issue with how they relay what they're doing. Let's go ahead and look at one example, we have right here, they say they return. One point seven billion dollars to shareholders in the third quarter in the form of share repurchases, that is share BuyBacks so they said that they're returning one point seven billion dollars back to
the shareholder that's money. Going to you they pointed out there. Claire's day returned, 1.7 billion to shareholders in the form of share repurchases. Now we should know what share repurchases are. I'm going to have a full video on this in the future but a share repurchase is called a share buyback. It's when they buy back shares outstanding During which is the
opposite of dilution. So the thing that investors have been complaining about the shares outstanding going up, Sherry purchasing is doing the opposite and we should see this number come down. But the interesting thing is look at last quarter's numbers, we ended the quarter with 997 million shares outstanding, the quarter before. We had a 997 million shares outstanding. So the share count is the exact same. The exact same quarter over quarter.
Belgium is correct here. My website is showing these numbers correctly. The share count didn't go down at all. So they spent one point seven billion dollars on BuyBacks saying that they return that to the shareholder. When in reality, they don't return anything to the shareholder. The share count didn't go down at all. All they did was offset the amount of dilution that they're already doing. So, this is such a tricky way. I absolutely hate that companies.
Do this. I think it's incredibly misleading. I think it. Honestly, in my opinion, I think this type of thing should be a Illegal to say, I think a gaap accounting should update their rules and come out and be much more clearer with the effect. This is having to shareholders because basically, what Salesforce is doing here is saying that we're diluting you to pay for our employees, but then we're buying back the dilution and off setting it to 0.
And what they're saying is we're returning that money back to the shareholder, in my opinion, that's not accurate. That's like me saying. I'm going to take a dollar from you and then I'm going to give it back to you. And then at the end of this, I'm going to say I just gave you a dollar. Well, that's Really the case I took one and then I gave it back. We're basically netting out zero in this case we're literally
netting out. 0 investors did not gain any equity in the company at all, share counts the exact same and this is the true tell of if you're gaining Equity. We own common shares outstanding, if you're gaining equity in the company, the common shares outstanding will come down.
So again, when I look at these reports and I see them claiming right at the headline there, that they're returning one point seven billion dollars to shareholders in the form of BuyBacks. And really, all they're doing is offsetting the Current dilution, I just think that's so misleading. I think that Gap accounting will eventually be updated, and they won't be able to make these
claims anymore. In the meantime, we have to do a little bit of detective work to figure out what's really going on with our companies. So I use different ways of looking at it than just just the headline sentences here. So, so far, the bad news that we have about Salesforce is one. We have Executives leaving the company to, we have the fact that even when they do BuyBacks, we're not seeing a reduction in shares outstanding. So we have some problems there
with them, actually returning. Capital back to the shareholder. And I want to highlight what I consider to be the third, big problem for this company and that is Tech employee layoffs. We see in this chart and I'll zoom in for you so you can see it as well. Let's take a look here. I'll see if we can zoom in more. This is the amount of tech employees. Let Go by different companies every single month. So we can see all the different companies stacked on top of each other.
And then the total amount of employees in November, we had 60,000 layoffs announced by all these different companies He's in December so far. It's 13,000, but you're seeing this progress over time. If we go back to January of this year it was 600. There's like no layoffs. Everybody was hiring but now the layoffs are starting to mount their starting to get higher. And then the number of companies, this is another troubling thing.
We have here, a chart that shows the number of companies that have actually announced layoffs every single month and you can see since May it basically exploded and it's getting more populated over time so we see more employees being laid off. More companies deciding to lay off employees. Now, the concern here really isn't that there's going to be a recession per se, but it's a fact that Salesforce is a business to business company and they sell licenses, they sell
seats. So if I have a company that employs, 50 people and eye contact sales force to say, I need, I need to get set up. I need your software. They will charge me based on the amount of seats. I have the amount of licenses if my company grows rapidly to 100 people. Then I have to pay sales, force more, maybe $20. As per month, per new employee, right? That adds more Revenue to Salesforce. Well, if I start firing employees, I have less of them to pay for.
I tell Salesforce, I only have 30 employees. I no longer have 50. So, the amount of Revenue, I'm giving Salesforce goes down because I have less seats to fill. This is a concern. If the economy contracts, even though sales force doesn't do business with the end user, they do do business with other businesses and if those businesses are, firing off Tech
developers and Tech workers. And Summer support agents, they're going to need less licenses and I could see that have a short-term impact on sales force for the next year, especially if the economy contracts. So, I do think it's somewhat susceptible to the economy, especially the tech economy. If we keep seeing these trends of growing Tech layoffs. So, overall to put this in context, we have three different areas that I'm concerned about Salesforce. The first is Executives, leaving
the company. I think that's a red flag. The second is a fact that they do things that just bug me like they say the returning 1.7 billion back to shareholders when in reality the share count hasn't gone down at all. That's something that I just don't like to see a company do. And then, the third one is, there's lots of tech companies that are tightening their budget.
And part of that is reducing amount of spend, on companies like Salesforce. So, we have some things that I'm concerned about some red flags but then there's also parts of Salesforce that I really like I like the fact that the revenue is growing. I think that's a good thing, especially in an economy like this. I like the fact that the company is growing Free cash flow per
share at a steady clip. This factor is in dilution and Salesforce is still growing their free cash flow, even with dilution factored in, and I like the fact that the company's unlevered, they have no debt. So they're in a very good situation to be able to weather any storm in the future. And I also like the fact that right now Salesforce is trading at a much more. Conservative valuation trading at a 2340 PE. That's not bad for a company. Like Salesforce, a low 20s. Multiple.
The free cash flow yield is 4.3%. Percent if we factor in dilution, that's maybe 2.2%, so even the free cash flow yield right now, is not that bad, especially for a company that continues to grow their free cash flow per share. So to put this in context there's some good and there's some bad with a company. When I try to look at this overall, I'm focusing on three
main points. I'm focusing on buying companies that have very good economics companies like Salesforce that have reoccurring Revenue, they have powerful Market positions, they have wide modes overall, it's just an economically. Good company. The second thing I'm looking for is companies that have a long runways of growth, they'll be able to Simply grow for a long period of time with minimal Interruption the growth gets slowed down a year hair year.
There that doesn't matter. But I want the company to be around for another 20 or 30 years. Companies, like Salesforce, these companies that operate in cloud computing are incredibly sticky. Look at Oracle for example, look at IBM, it's difficult to destroy these companies. They've been around forever and they're probably going to be around for the next 30 Years. And Salesforce is one of these cloud computing companies that's heavily ingrained in society and in our corporate world.
So it has a long continuous runway for growth, I think with minimal disruption. And then the third thing I look for is buying these type of companies at a reasonable valuation and again at a 23, Ford PE at a 2.2 free cash flow yield. I think the companies at a
reasonable valuation. So even with all the red flags, even with all the things that I don't like there's enough stuff that I continue to like with this stock that I'm Continue to hold it and I know that over the next year it's probably not going to perform well there's so much bad news for tech companies drone pal, still talking about hiking up, interest rates another full percentage points and we're going into a potential recession. So I don't expect.
It will have good returns over the next year. But again, I'm holding these for the next five to ten years. I'm looking at this at a very long-term perspective. So, in my opinion, as far as I'm concerned, I'm still planning on holding Salesforce. I have no intention of selling it. We'll see what happens over the next three to five years, I'll show you the outcome. Either way, but that's my take on the latest sales, force, trauma and the operating results of the company. See you in the next.