Welcome back, everyone. We have a lot to jump into in this video. First of all, the market across the board from the Dow Jones, to the NASDAQ is in the red and they say that it's based off of economic concerns worries Mount about economic growth, right? That is the concern. And I think it's a valid one. We have Jamie dimon here. The CEO of JPMorgan telling people to brace themselves for economic hurricane caused by the fed and the Ukraine war.
So, we have the CEO of the largest bank in the world telling people to break. Themselves, that's not really what you want to hear and I think that him saying this may have actually caused the markets to swing into the red. I think this has a lot of impact, but regardless today, even despite all this Gloomy news and the markets moving down Salesforce. One of the nine Holdings in. The story fund is up 10% And this move is off the backs of
their recent earnings report. Obviously investors found something or a couple things that they really liked in this earnings reports. So I went ahead and I reviewed it. We're going to dive into it. Gather, we're going to look over the financials. We're going to look over all the important things to look at with a company like this, the growth of it, the margins, the dilution, right? The sustainable moat as well as
the valuation. I've ran multiple models of cash flow analysis and how to Value this company. So we're going to be diving into that as well. So we have a lot of fun news to get to in this episode. Now, before we jump into Salesforce specifically, I want to give an update on the story fund. If you're one of the new subscribers to the channel, if you're one of the new members here, we've gained a lot of sir. Scribers over the past couple of months.
This is a real portfolio. And the reason that I show this every week and keep updating every week is to show transparently real investing and I think that that's actually important if you get just Snippets of what people are doing and you see their portfolio updates, once every six months, you don't really see the pain. That happens between transitions like what's going on right now. The past six months has been very difficult for growth
companies. So what I decided to do was to transparently And weekly track my portfolio and give everyone else in insight into what's going on, good or bad. And we can see the the sell-off Senate, we can see the market gains and everything happened. But this is a real portfolio. It's my money invested in it. I'm trying to make as much money as possible, the goal of the portfolio. The game that I'm playing here is to try to outperformed the S&P 500. By the end of 2025 and I track
that as well, in a benchmark. So I Benchmark this performance against the S&P 500. We can look at That right here. This is the chart and my portfolio. The story fund is the Blue Line. The S&P 500 is the red line so we can see that throughout the duration of it. I was keeping up with it. I was even outperforming to some
extent at some time periods. But since November, when the sell-off really happened, the big transition to the consumer staples and the big rotation out of tech did hurt my portfolio and then there's been some other things as well. But there's other videos where I go into this in more. Detail, but as of right now, this is what the performance looks like. The story fund, actually had a good week. We actually gained on the S&P
500 last week. And I think this is illustrative of probably what I think is more to come in the future. Meaning that if we have bullish sentiment, if the markets do end up moving up at all. I think these type of companies will move up at a much quicker Pace than the big defensive Consumer Staples. So the market right now is in Risk off. Mode, everyone's wanting to be defensive when the market becomes a risk on again, which I think will happen at some point within the next three years.
I think the market will want to take on some risk at some point. When that happens. I think that these companies will do better. And you saw that last week, my portfolio went from being down 32% to being down 23.5%. So moved up a pretty significant amount and the S&P 500 went from point, eight percent to four point three, so we're gaining on it, but that's only when the Has some type of bullish sentiment and you want to take on some risk.
So as of right now, we're still below the S&P 500. But we're not we're not completely out of the range of catching back up and you can see again how quickly things can change in just one week's time. This portfolio is up 9%. In just the past five days. The S&P 500 is up four and a half. So we gained a lot of ground, seven thousand nine hundred dollars in one week. A lot of that is due to Amazon. My largest position moving up 14% That's a 4500 gain from Amazon alone then.
Google moved up quite a bit. We have Ali Baba, moving up over the past five days. We have Salesforce just today moving up, 10%. So let's go ahead and jump into Salesforce specifically. Now Salesforce is one of the companies that I've referred to, as many Microsoft and I say that because it reminds me a lot of Microsoft. They're kind of a business to business company. They sell software as a service and they are entrenched in companies that use their products.
They have a sticky service meaning that when a company signs up for Their product and they start to implement it, they start to get used to it. They start to build upon it and use apps and Integrations. It becomes entrenched in the company where to unroot that and move to a different service is cumbersome and expensive. So it takes a lot of effort to move out of Salesforce to a competing service and most companies. Once they sign up for Salesforce. They stick with them, that's
called switching costs. The switching cost from Salesforce to a competing service is very high. So that leads to high customer retention. Now for those Of you who are not familiar with Salesforce. I want to show this quick video that explains it from a marketing standpoint. So this is marketing material created by Salesforce that they use to sell to different companies. Only put on my headphones here.
We'll watch this together. Welcome to The Trusted Enterprise. This is the digital world where we no longer have to be in a building to start building. Unless, of course, we want to be building better customer relationships employee experiences, workflows Partnerships apps, and Roi. So let's build on that. With Salesforce customer 360 and slack on one integrated platform. We're talking if you don't remember, Salesforce did acquire Slack.
They use dilution and some debt and some cash to do it. In my opinion. I think it was a great acquisition. So a lot of investors were very cautious about it because slack was an expensive acquisition to have. But slack is like the go-to business-to-business chat application. It's competing with Microsoft teams, but I kind of compare slack to businesses like Discord is to online communities.
It really is a really good acquisition for Salesforce, in my opinion, but the full on digital transformation energy. So, those headquarters of yours are now, wherever the work happens. This is your digital HQ the place for every employee to better connect with each other and customers. This is where all your team's Unite with a single shared view of your customers, delivering incredible, customer experiences, incredibly efficiently because it's all asynchronous.
Meaning work stays fluid. So that meeting everybody was too busy to attend is still attended by everybody on their time through a shared Channel access. I think every important document presentation and recorded message left for each other, with live captions, baked in making it accessible to anyone. This is where all your customer data is gathered to generate pipeline reports for marketing. So they know when the quickly spin up, they also own Tableau.
So that was another acquisition. They did, it's an application that shows you charts and graphs and visuals and I think another one that turned out to be really good for Salesforce. So this is a company that like Microsoft, they keep picking up. Different Acquisitions that are strategic and they actually have Synergy there not just Acquisitions to buy random companies and to increase their revenue, but they actually end up building them into their core service.
That the genius, new campaign boosting idea with their agency partner securely through slack connect and where it integrates apps to improve data, accuracy and productivity. For everyone. This is where customer engagement takes off. It's where sales sets up a digital deal room with Commerce to strategize around capitalizing on the Pain, boosting momenta inviting legal operations, support Carl from finance and more creating
workflows a streamline at all. Now meeting notes are automatically added new contacts are automatically created and reps are instantly notified of account updates wherever they are. This is where leads become customers customers who can count on the best support around. Because this is where service portals with knowledge articles and chat Bots are at the ready to solve issues and when something needs to be escalated, Agents can swarm identifying the right team members based on
skills to take immediate action. And every team is United. So marketing emails and sales calls are temporarily Faust. Until the case is resolved because nobody wants to be marketed or sold to when they're having an issue. This is where Trailblazers listen to customers and create platforms for change. This is where customers become customers for life. Then swap out sales marketing and service with Landers Brokers and investors.
Helping entrepreneurs, open their next location or Healthcare or retail or manufacturing or entertainment. Because it's built for every industry imaginable. This is where every employee in every Department working from anywhere is aligned with a single shared 360 degree view of every single customer. Your customers are everywhere and your new digital HQ is how you connect with them to succeed from anywhere. This is Salesforce customer 360 and slack on one integrated platform.
This is where workflows and customer success grow. Okay, that's a little again that's marketing material from Salesforce. So they're trying to sell that to other businesses, but I think it does give you an idea of what the company has to offer. And I think that also gives you an idea of why when a company starts to use Salesforce, it becomes very difficult to move off of it. The switching costs are very high.
So now that we're a little bit more familiar with the services that Salesforce offer, the value, that it brings to other businesses. Let's go ahead and talk about the fundamentals of the company. What's going on with the balance sheet, the financials, all of that, good stuff. As well as the valuation. First of all, this was one of the companies that like we saw right here in November that time, period, that magical November time period.
When all these companies had a high started to trade downwards and it's down 43%. So Salesforce is one of the companies, the cloud leaders, the big tech companies that got sold off with the rest of them. It wasn't sold off as much as some speculative ones, but was sold off more than any non tech company. Right now, if we look at the fundamentals of the company, we have the most recent earnings report data included in this. So This is called term insights.
This is an application you gain access to. If you're a member of the patreon, and this is the beta version of the new ones. So we are plugging in some stuff and doing some things here. It's kind of a work in progress, but this is going to be the new version of it. We look at Salesforce overall, the company on a PE basis, looks kind of expensive, but most people aren't valuing it. That way, if we look at the most recent financials, we get a clear view here. This again includes last
quarter. So, last quarter right here, they Revenue 7.41 billion dollars, 7.41, that is a revenue gain year-over-year of 24 percent and it beat their analysts estimates. So they out performed on a revenue basis. There up twenty four percent year over year, which is very strong Revenue, growth for a company, the size of Salesforce. And I anticipate that they'll continue have solid Revenue growth for very long period of
time. Now, the other thing that I just want to point out real quickly, here is looking at the revenue chart. Do you? You see how consistent it is. Almost like this. Perfect, growing. Gradual slope quarter-over-quarter. I've looked at a lot of Revenue charts and there's not many of them that look like this. Most companies have very inconsistent Revenue. Some quarters are making more than others because they're encyclical markets. Will this is the benefit of a
SAS company. Salesforce is a cloud SAS company that has high retention rates. Long contracts, continual billing. They have continual price control and they can increase their prices over time. And that has the effect of having this. Really nice flowing Revenue growth over time. Now, the revenue growth for a company like Salesforce is incredibly important because a company is priced to have a very long-term secular growth path.
Meaning the company is being Priced Right Now by investors assuming it's going to grow at a very decent mid double-digit pace for the next 10 years. If the company suddenly showed that it stopped growing like the revenue just started to flatten or completely decline. You'd have a bit of a Netflix situation there. We saw how Netflix.
Investors reacted when the company stopped growing that is the same risk for Salesforce. If it stops growing, the stock price will crumble, but I think again with Salesforce, the assumption is, it's going to keep growing and I think there's a very good reason to believe that. Now the revenue is important, but we also want to look at the
other economics of the company. Not just how much money they're taking in but how much they're keeping the ibadah is a proxy for their earnings of the company. And it tries to smooth this out over time last quarter. They had 991 million dollars of ibadah, which is Decent. This was again above expectations then their free cash flow, which is possibly the best metric to look at for a
company over time. This is a record high from Salesforce three billion four hundred and ninety seven million dollars in free cash flow. Now one important thing you want to look at especially with tech companies, when you're looking at the free cash flow of the company is you want to put this into context of share dilution, because a lot of tech companies in particular, they pay their employees by stock-based compensation. Sensation.
And the way that you get stock-based, compensation is by issuing more shares. So you dilute the shareholders, you issue more shares, you use that money as cash flows to pay the employees and that does show up on the free cash flow line item here. Now, the amount of stock-based compensation that Salesforce did last quarter was seven hundred
and seventy six million dollars. What I did was, I went into their earnings report right here, where they mention their stock based compensation expense. And then I just added up each of these items. They had the cost of Revenue. News of 112 million, they had a research and development of 279. They had marketing and sales of 291 and they had General and administrative of 94. So Salesforce pays a lot for this marketing and sales and research and development in terms of diluting the
shareholder. So basically all we need to do is look at the free cash flow. And if you want to factor in share dilution, you can - out the 7 76 million and that's what you're left with after dilutions taken effect. And even though Salesforce is diluting the shareholder and You can clearly see that Illustrated. Even in call term here. This is the amount of shares outstanding over time since the beginning of the company on a
quarterly basis. We can see that they are diluting the shareholder and this is something that I hate to see, I really exclude a lot of companies. I don't buy a lot of companies because they love to just pump out more shares, pay their employees and their Executives, very big pay packages, right. The executives make a fortune while neither shareholders, just being diluted. And a lot of times they're not doing a creative things with
that dilution. They're not taking the money and doing something to make me more money. So Salesforce and their dilution is something that I don't like. But having said that, this is one of the exceptions I make because Salesforce is generating cash flows at a much quicker rate than their dilution. So if you were to Pace out the dilution and then you're at a pace out the free cash flows. They're still growing their free cash, flows on a diluted basis much quicker than the average company.
So, overall, putting this in context, it is true that Salesforce is diluting shareholders. They did around 7%. ENT last year, but they are growing their free cash flow at a much more rapid pace. And over time. I think this rate of dilution will go down like most mature tech companies do with Adobe, it went down and now they're doing share BuyBacks with Microsoft and Google and all the big tech companies that used to dilute. Now. They're not doing this anymore.
So I think that over time, this chart will go up with dilution, then it will level out. Then when they become so free cash flow positive. They'll start to do share BuyBacks. That's why I think this will end up over time now, moving on to another important. To look at what the company like Salesforce is, the amount that they're spending on different expenses here.
We have added in a graph that shows the capex that's capital expenditures, that's like trucks and warehouses and different physical Goods that they have to store and build. So that is the blue chart hair or the blue line. Then we have the sales and marketing which is the Big Orange part hair and you notice that sales and marketing, take up the huge majority of sales forces expenses for the company. So we have the sales. Marketing care in Orange.
Then the general and administrative expense here in red, which is not a huge amount. It's still kind of high but it's nowhere close to the sales and marketing then we have the growing research and development. So if we look at this overall, we can look at the sales and marketing growth. I can filter this out and we can see that Salesforce as they grow their revenues. They grow their sales and marketing spend over time in this eats in to their ibadah and their profitability.
So Salesforce is saying instead of becoming really profitable right now by pulling Back on sales and marketing. We're going to spend more and more on sales and marketing. We're going to eat into our profitability, but we're going to have that Top Line growth that Revenue growth. And as long as they continue to have that Revenue growth as a consequence of doing the sales and marketing. I still think it's a positive thing. But this is an important thing to keep in mind because we look
at this last quarter. They spent three point three seven billion dollars on sales and marketing. Three point three seven billion and again their total revenues last quarter where point for 1 billion. So total revenues 7.4 total sales and marketing 3.4 meaning that they spent roughly half of their revenue on sales and marketing, 50% gone to sales and marketing. That is a very high ratio of Revenue to sales and marketing.
It's not the worst. There's some companies that they spend almost a hundred percent of their revenues on sales and marketing. So there's companies that are worse than Salesforce at this but they are sacrificing half of their revenues to sales and marketing alone. So looking at these expenses Overall, the idea behind the company, the way that this can scale and grow their margins is over time, the sales and marketing should make up a lesser and lesser percentage of their overall Revenue.
Because if you look at very mature companies, in this industry, they have to spend less and less percentage of Revenue on sales and marketing. If we look at an example of this, we can look at Microsoft, right? Microsoft is like a big, huge mature version of Salesforce. And if we look at their sales and marketing, we can filter this out last quarter, Microsoft. At five point six billion dollars, so 5.6 and Microsoft's, total revenue last quarter was 49 billion.
So Microsoft didn't spend fifty percent of Revenue on sales and marketing. They spent around 11% And I think that over time, the same thing will happen for Salesforce. They'll go from spending seventy percent of their revenues on sales and marketing to 6250 where they are now to 40 to 30 20 and so on and as they get that as a smaller portion of overall Revenue their earnings and profitability go up. So All in summary on a
historical basis. There is a lot of things I do like about Salesforce. I like the product, the moat the switching cost. The secular growth Trend. I think it's going to be a long-term growing company. The revenue growth is very strong. The ibadah growth is strong. The free cash flow is the highlight of the company. It's been growing. Its free cash flow on a very consistent and Rapid basis. The balance sheet is very strong. There's no problems with a balance sheet.
The part that we don't like about the company, is, it has very high expenses. They rely heavily on their sales and marketing. Team that they take up roughly half of what they earn and revenue. So, very expensive to run the company. It's not lean right now. It's not optimized, and they pay for those expenses by diluting the shareholder.
They've been doing seven percent plus dilution year-over-year, and that's the other part that we don't like, but overall, there's some parts that we do, like about the company, some parts that I don't like about the company. Now, let's go ahead and talk about valuation. What I've done is I've ran through a lot of different models on how to model out the future cash flows of Salesforce. And ultimately what I'm deciding to pay for those cash flows.
So this isn't a perfect science. This is just based on some assumptions, but I think it puts on paper. Some of the the future I see in Salesforce. This is a cash flow analysis on the company. Let me zoom in here so you can see it. Now. We have Salesforce. We have a tenure cash flow analysis here. So this projects out until 2031 and then I make some assumptions based on historical information as well as characteristics about the company, the mode of ignorance.
B, the secular Trends. One of those assumptions is, I think the revenue will grow on an annualized basis around 16%. So some years like next year it will grow faster 20%, Then it will kind of slowed down. But overall, if you were to annualize it over the next 10 years. I think they can grow at 16%. The company has a long Runway of growth if GDP and the US and every place they do business continues to grow. They can sustain this level of growth for a long period of time.
So, I don't think this Revenue expectation is Realistic. Hopefully, I think it will be quite accurate. That's the goal here. Now, the E bottom margin hair. Is you take the revenue and you see the percentage of ibadah they gain from that Revenue. So historically last year it was 25% and I'm assuming 35%. Why am I assuming a higher ibadah margin? Because like I said, I think over the next five to ten years sales force will gradually
become a higher margin business. Their margins will improve as their revenue grows and outpaces, the gross of their sales and marketing. And outpaces the growth of their dilution. And as that happened there even a margins should improve over time give different comparable companies. Microsoft has an even a margin of, like, 49% way higher than what this assumption even is. Google's is way higher as well. Facebook is way higher, even apples is at 40% and their hardware company.
So I don't see it as unrealistic to assume that a software company that has a scaling product can grow, their ibadah margins to a large extent over the next 10 years. And I think, They'll do that on a very consistent basis. So, last year, it was 25% at the end of 10 years. I think it will be above 40 percent annualized.
I think I'll be around 35%. Now when I plug these numbers in what this does is it projects out based on my assumptions the growth rate of these things over the next ten years so I can see what my revenue is going to be for Salesforce. At the end of twenty Thirty one right there. It's 93 billion dollars and then I can see what the ibadah will be at the end of twenty Thirty One based on that, ibadah margin, so that will be thirty two billion.
Ian 800 million now, because ibadah stands for the earnings before interest taxes depreciation and amortization. We have to add that stuff back. Otherwise, our model wouldn't be correct. So we have the capex margin here. This is the percentage of Revenue spent on capex, which includes that depreciation amortization and capital expenditures, but then we also have to add back in the taxes which I'm using a flat effective tax rate of 14%. So I calculate that in as well.
That's not right here as a variable. And then, at the end of this, what we should have is, we have the ibadah projections here. We have our Capital expenditures here and how much we're spending on that. We have our effective tax rate, that's right here. And then at the end we have a number that is the accumulative calculation of this. So we have our ibadah subtracting out our Capital expenditures subtracting out our tax rate and then we have the number left over which is our
free cash flow line. So right here, we have the cash flow. That is the Cash flow of the company and in 2031, 10 years from now, I'm projecting 27 billion, 279 million dollars in free cash flow. That's what this project sit. The company will produce some free cash flows at the end of a 10 year basis. And then what you have to decide is if we've modeled out, that the company is going to create that much cash flow. Now, we gotta decide how much were willing to pay for those
cash flows. What do we think? The market will be willing to pay for the cash flows? Assuming these assumptions are correct? And what I did was I looked at the current price differences. Cash flow of Salesforce and it's very high. It's around 40 and they're not going to keep it that high. So as they grow and mature in the company stops growing, quite as quick at the end of 10 years, the price to free cash flow will contract over time. I really believe that.
I think it will be something that you want to price in. So what I did was I looked again at the end of story of matured companies and I tried to understand it. This meaning that I try to be very conservative with these assumptions and if I attach a Price to free cash flow of 15. This is what this model spits out. What I did was I built a stock purchase distribution. Chart here. This shows you the current price of the company. Right now.
It's selling for 175, a share. And based on these conservative assumptions. I should be earning an 8 point. 8, 7% return, if I bought it today. Now, if the price goes down 5%, and I can buy at 167, then my return goes up as the price goes down. And the Assumption, stay, the same, the future. Did return goes up. It goes down. 10%, 2158. You could buy it for this price based on these assumptions. It should be a 10%, annualized return.
Then if you could get it for 150, the return should be ten point six, five percent and likewise. If the price goes up 5%, if we see it at 180 for your returns go down and ten percent returns, go down to seven point eight. If it goes up to 200 and $2 a share based on these assumptions. The return would be seven point three six percent annualized but as of right now based on the current Rice. And these assumptions, I should
be getting an eight point eight. Seven percent return on what I believe again are intentionally somewhat conservative assumptions, but I'm trying to tilt this model more conservative. For example, if I want to be less conservative with my assumptions, I could plug in something like a 20 price to free cash flow exit. So if we assume investors are going to pay a 20 price to free cash flow, that changes the assumptions quite a bit.
They go from eight percent return based on today's price to 12 percent annualized and that's a Very good return for a company like this. And if you think that these are even aggressive assumptions that 20 price to free cash flow, Microsoft right now, trades a day. 34. So Microsoft is out of 34 currently even being as big and slow growing as it currently is Salesforce is growing much faster. So when I say that 15 is a conservative assumption, I'm basing that on a lot of other
companies. Now just a disclaimer regarding this discounted cash flow analysis. I think it is important to model out your future assumptions for the company, but a lot of people View discounted cash flow analysis as the law and it determines whether or not you should buy a company and exactly what price you should buy it. And I don't really view it. That way. I think it is important to do it as somewhat of a sanity.
Check the plug in your assumptions and make sure that they make sense in regards to what you're paying for a company. But having said that, there are other major considerations that need to be made. When buying a company, the mode of the company, the leadership, the secular growth, the products and services that it sells the switching costs, right? The qualitative aspects of a business that you're buying our Paramount, they're incredibly
important. So while I use modeling and discounted cash flow analysis as one tool and a tool belt, that's the way that I view it. One tool to help aid in your overall research process and I'm doing it for every company. I'm trying to Value every company to reasonable expectations, but I also want to own the absolute best companies. I want to own the best companies at a fair or reasonable priced, or better yet undervalued. That's what I'm trying to do
with this portfolio. So Salesforce is one of the companies. I outline, it's one of the best stocks one of the best companies in the market and my valuation of it shows right now that it's reasonably valued. It's not heavily undervalued. It's not an absolute still but it is reasonably valued. So that's my thoughts on it. I hope you enjoyed this video. If you want to check out more exclusive content, get access to a Discord Community or you want
access to Quality trim. We are about to push another major update. That has a lot of changes. You can join the patreon. It comes with a free. Aisle. There's no bait and switch. There's no up selling. There's no ads your price never changes. It's easy to join and cancel. I think you'll really enjoy it. So, check that out. There's a link in the description for the patreon. Other than that. I'll see you in the next one.