Welcome back. Everyone today's episode. We have something, I think a little bit different. I've received. I think the most criticism as a YouTuber, by focusing too much, on the story of a company to Bunch on the narrative, basically the qualitative aspects of it and not the valuation. That's the biggest criticism that I've received. Now. What I want to do in this episode is talk about valuation. Talk all about valuation for
this entire video. And what I plan on doing is going over every single company in the story fund, which is this very much. Beaten up growth portfolio. And I'm going to go through every single company and give my personal valuation of it as well as the valuation of analysts and kind of correlate that and tie that in with your guys's valuation. Yes, even yours as well. So we'll look at all of them, kind of together. What I did was a poll recently on my channel, right?
At a question. I said out of all of these companies, which one is the most overvalued. So most of you said Salesforce is the most overvalued company. My portfolio. Then Adobe. Apple then Netflix, Microsoft Ali, Baba an Amazon and literally out of like, 300 people responding. No one voted for Google or Facebook. So you guys think that Google and Facebook are not overvalued, that was not the ones that you picked. But regardless we'll be talking about all of that.
Will be looking at every single one of these companies and the valuation of each of them. Now, before we jump into the valuation of these individual companies. I want to share some thoughts on valuation in general. One thing is a misconception that I see shared quite frequently. This is very common amongst investors. We See that most any growth portfolio is probably in the red over the past year. That's just a case. The market has sold down like
crazy. Most of us are taking losses in any growth companies, Great companies like Amazon, Google, Microsoft Netflix, Adobe, you know, all of these are basically trading down over the past seven months. And one thing that I see, often said, in cases, like this is because the company used to trade way up here. It was at this price. Now, it trades at this price. It had to be overvalued. At this price because currently, it's trading down here. That's what people think.
If a company goes down in price. It had to be overvalued at the price that used to trade at. And likewise. I see the same thing during a bull market because a company used to trade down here and now it trades a pair. It was undervalued down here because if you bought it down here you would have made money. Well, I don't actually agree
with that reasoning at all. Here is a true story about Peter Lynch that I think illustrates the problem with this logic in 1972 shares of Taco Bell, we're going through a major correction, but the legendary investor, Peter Lynch, saw an opportunity in just a short amount of time. The stock price had been cut in half from $14 to $7 despite. No obvious issues with the business Lynch, begin scooping
up shares. So here we have a case of Taco Bell back in 1972 trading from $14 to seven dollars and that catches the attention of Peter Lynch. So he sees a company go down by half. He starts to load up on Cher's at 7:00. There's a share. So he's loading up at seven dollars a share thinking. He's getting this at 50% off but the correction wasn't over shares kept sinking eventually hitting. $1 an 85% pull back from the $7 at that level.
The seven dollars were lynched started buying the stock. So imagine this he sees a stock fall 50%. He thinks that this is a company that doesn't really have any big issues. He starts loading up at seven dollars a share, then it falls an additional 85. Five percent. Now, in this situation, most investors would conclude that they have made a grave mistake that they were wrong in the market has proved them has
proved them wrong, right? Because at the point that they bought at seven dollars, it's now traded down to $1 down, 85 percent. It would seem kind of crazy to conclude that you're still right in that purchase and most people would assume that the stock was overpriced at seven dollars a share. Because it's now trading at $1, share, Peter Lynch didn't operate this way. He said, Rather than chalking it up to a loss, Lynch kept buying Taco Bell, even at one dollars a share.
You see, Lynch knew the real story. The company had no debt continue to see strong growth, which meant the pullback in the Stock's price was a great opportunity for patient investors. And as we now know, later Lynch was absolutely right. Once the dust settled, Taco Bell was acquired by PepsiCo for $42 per share. Making it a five bagger meaning that he earned five hundred percent has returned.
From his original by in price. Meanwhile, the stock going from $1 to $42 is a four thousand one hundred percent gain, that's the stuff of Legends. In fact, Peter Lynch consider that one of his best investments ever. See, Peter Lynch, clearly, understood that stock prices. Do not trade in line with the company's fair value. They don't just trade right there with the fair value. All the time investors are incredibly emotional when he bought Taco Bell at seven dollars per share.
He knew that that was an undervalued price. Given the company's fundamentals and growth prospects. Went down to $1, a share that didn't change his opinion. That was the market being irrational. He held onto it and eventually he made a lot of money and I think this story is incredibly applicable right now because there's many great companies, especially growth companies that are trading down like crazy and that doesn't always mean that they were overvalued at your initial purchase price.
I think many of these companies in the market right now that have been sold off over the past three months, will prove to be some of the best performing, stocks over the next 10 years. So that's just something to keep in mind. Mind on a bigger scale. I actually Drew this out because I think it's I think it's important. This is how I view the fair value and the price of a
company. Still have the fair value which is what the company's actually kind of worth the intrinsic value of the company, really where it should be trading. Then you have the price that it's trading at. The price is trading at is, dictated by all sorts of different things. Stick dated by emotions by Russia, by inflation, by guesses of interest rate hikes. It's lots of logistics with Doing retirement planning and pulling money out of different funds, all different things
affect the price. The fair value is what the companies actually worth, based on its future growth prospects. Now, what I tried to illustrate here, with this very crude drawing, is that the blue hair, the fair value and the red hair, the price. They don't really match all that often. They're not really perfectly in line. And I think this is really what it's like. The fair value of the company
does fluctuate up and down. To some degree is a company has its fundamentals change, but the price is wildly. Oil for a lot of growth stocks, especially the price moves up to way. Overvalued territory, then investors turn bearish. Like they are right now and many great stocks. Just keep selling down, more and more and too heavily undervalue territory. And it's difficult to know. What is the actual value of the
company. But the goal of us as investors is to wait until companies that are really great companies. Get into this undervalue territory and buy them while other people are pessimistic and hold on to them be able to hold on to him, even if Trade down into further and further undervalued territory. So this may not be the way that
you look at valuation. But this is the way that I look at it. Now having said that, let's go ahead and talk about my individual Holdings, and we'll look at a couple different things with these valuations, will start off with the top holding care, which is Amazon. Amazon is a company that when I do valuation on it, I'm always looking at the terminal value of the company and terminal risks to the company. What is terminal value mean?
It means the value of the entire lifetime of the company, not just the next year, right? Not how many e profits going to produce next year but the profits will produce over the next 30 years. That's the terminal value, the present value of all future, cash flows from the company.
So what I'm attracted to with Amazon, the reason why I've bought so much of this company, is it really so much of a concern about the present value that will talk about but it's a concern about the industries of Amazon's in it's in a couple huge industries that I think will continue to be huge Industries and bigger Industries for the long-term future online
retail. I think Amazon is dominant and will continue to separate from other competitors like Shopify and it's in AWS the online it Cloud hosting. They have the leadership position. They have incredible lock in. They have a high rate of growth and the competitors that are competing against them will take some market share, but I think the industry overall will continue to grow at double-digit rates for a very long period of
time. So those two industries of online retail and AWS Cloud, hosting are the things that are attracted me to Amazon to begin with. Now, if we go into the valuation, there's a couple things I want to look at first. We'll just take a glance at what you guys thought were the most overvalued companies out of my entire portfolio. Only two votes were for Amazon. So, some of you might think it's overvalued, but you don't think it's the most overvalued company in my portfolio.
Now, let's go ahead and look at the analyst first. This is something that will look at for every holding. This is Morningstar. Their analysis firm. They do analysis on all of big Tech. For Amazon right now. They have it as a five-star by which means that the company in their rating system is as good of a bias. You can get. It's the biggest by rating, they put the Fair Value Estimate at 3850. So they think that this company is heavily undervalued and they give it a moat rating of wide.
So they also think the company has a wide moat. Now, I can also look at Schwab's reading on this. They also have Equity analysis on these companies and they give it a market perform, which is basically a hold. So they I don't consider a strong by a strong cell. They just think that it's a hold right. Now. The last one that we can look at
is cfra. This is another analysis firm and they consider Amazon, a four-star rating, which is a by, but not a strong by now that we've looked at your votes on Amazon. We've looked at the analysts ratings on Amazon. Let's go ahead and look at my valuation on the company. This is going to be using qualtrics insights, which I get a lot of questions about this. This entire website, with all these graphs here, in this information is available as part of the patreon.
There's no bait and switch. It's not Anything extra is just part of the membership. So if you want to try this out, you can join the patreon. There's a free trial in the link in the description below. Now, let's go ahead and look at Amazon's valuation here. Companies came down from three thousand dollars per share to 2000 trades at 2100 right now. And a lot of the things people look at when valuing any company, but I think it's fine is a forward P/E ratio.
Based on this Amazon is expensive, you're valuing the company on the narrow term price to earnings ratio. Amazon is a company. That's very expensive. Pensive. So I don't blame you, if that's the way that you're looking at it, but there's other ways to value a company. When you look at the Evita ibadah, the Enterprise Value to ebit of the company, that is another proxy for the earnings of the company.
And if you look at it this way, which I think most analysts do, Amazon is much more in line with the rest of big Tech. It trades that an Enterprise Value to ibadah of 18.9. So it's right there in line with Microsoft, Apple, Google and Facebook, right? Little bit more expensive than some little bit cheaper than others on an Evita. That basis, I think the Amazons undervalued we can also look at the free cash flow of the company. This is the most controversial part of this company.
If you look at the free cash flow over time, I know that Amazon has the ability to generate growing free cash flows. I know that they're capable of doing that because you've seen them prove that to investors back. In 2015. They had seven billion, then nine billion, then back down to six billion, then they hiked it up a lot in 2018. They had 17 billion. This was pre covid-19. You know, big boost for Amazon, 2019 pre covid, 22 billion dollars in free, cash flow then in 2020.
They update the 26 billion dollars. So Amazon has the ability to grow their free cash flow. I think at a very steady rate and the company's grown its Revenue dramatically since 2019. It's added 200 billion dollars in Revenue so they can grow free cash flow. They have AWS growing like crazy. They have their revenue on their retail growing like crazy and the free cash flow just goes off a cliff. Right here in 2021. It goes down to 14 billion
dollars in the - the reason. Why is because Amazon is doing aggressive reinvestments. They're throwing all of their cash flows into capex. Meaning, they're buying so many warehouses hiring. So many workers, buying all the tools and equipment and they're just not making any free cash flow right now. Now as a long-term investor, I can't just look at one year, just their capex in one year and base my investment thesis off of that.
I'm looking at the long-term time Horizon of the company, and I think that If the company chooses to based on my analysis, I think the company could generate 30 to 40 billion dollars in free cash flow next year. That's I think a conservative estimate that is incremental free cash flow growth since 2020 as the company's expanded rapidly. So, based off those estimates Amazon. Right now with this one point zero, nine trillion dollar price tag. It's trading around 25 to 30 times.
Next year's free cash flow. And to me, that seems cheap for Amazon. It's more expensive than other companies. That's more expensive than Google, or You know, other companies in the market that you can buy but not many companies in the market are growing their e. But I like this, there's just not many doing this. There's not many companies in the market growing their revenues like this. There's really not many companies. Pulling in half a trillion dollars in Revenue.
Growing their ibadah at incredible speeds and trading at 25 to 30 times free cash flow. So overall, I don't have a specific dollar number of what Amazon is worth. And in my opinion, I don't think that's the way to look at valuation. I've never once heard Warren Buffett or Charlie. Munger, say apple is worth exactly. This dollar amount or Coca-Cola is worth exactly this dollar amount. What they do is they look at ranges. There's a ranger Amazon becomes kind of overvalued, and then it
becomes very overvalued. There's a range where it's mostly fair value. And then there's a range where it's undervalued and a range where it's grossly undervalued. So based on my estimation of the company, my valuation. I think that fair value right now is somewhere in the range of 3402. Dollars per share. I think that's fairly valued based on the mode of the company, the growth prospects the industries, that it competes in the ibadah, growth of the company and the free cash flow
opportunity. I think that's a fair value. I think that if the company got up into the range of forty eight hundred dollars a share, that would probably be up into the overvalued range right now and I'd be looking at taking some gains at that point and I think the at a range of 2,000 dollars per share. I think that the company is undervalued. Now, there's no guarantees with this and just as a disclaimer. This isn't a buyer sell
recommendation. I'm just showing you my thoughts and what I'm doing with my portfolio, I'm not telling any of you what to do with yours. Now, the next company on the list, the next biggest holding in my portfolio is Google and I switched over to the Holdings page here. So you can see the real return with Amazon. I'm down 30% right now and with Google, I'm down 11% over. Also, even Google has sold off over the past couple of months. And it's a great company. Largely considered to be
undervalued. By most of you. In fact, in the vote of what's the most overvalued company, literally. Nobody voted for Google. None of you. Thought it was the most overvalued company in my portfolio and across the web right now. Most people agree, that Google's undervalued. It's basically a consensus right now. Now, let's go ahead and see if the analyst agree. Morningstar has Google at a four-star by. So they actually believe that Google is not as good or not as undervalued as Amazon.
They think the Amazons a more undervalued company. Now, they give Google a Fair Value Estimate of 3600 dollars and an economic moat that's wide. So why don't company undervalued right now? Things are looking good. According to Morningstar Schwab Equity analysis, right now, gives us a strong outperform, the consider a by, and then we have the cfra giving Google a four-star by. So all the analysis agree that
Google is undervalued currently. So if you looked at the analyst opinions, all of them across the board agree that Google is undervalued, and I think that most people online do, let's go ahead and take a deeper. Look at this, with quatrain sites. The first thing is that Google has a nineteen point two. And forward P/E ratio, so this big of a company growing, this fast has a 19-4 PE but keep in mind, Ford Pease are based on analyst estimates.
There are just estimates that it's not set in stone and they can be revised downwards. If a lot of companies, pull their funding, they pull their marketing budget because they think we're going into a recession or if we do enter into a recession. I think that Google will get hit. The company will have lower earnings than its. It's analysts forecast right now, so that It is something to keep in mind.
Google will get more expensive. If we enter into a recession with lots of companies pull their ad budget. But right now, it still looks very cheap. When you look at the growth rate of the company. It's just absurd. The company's growth is incredible. In fact, it was unnatural growth from 2020 to 2021, the free cash flow. Growth of the company is absurd in 2021. Google earned sixty seven billion dollars in free cash flow. So that's not hypothetical.
That is how much they earned based on the free cash flow. Well, it's trading at a 22 free cash flow multiple. So the company is trading above some other companies but it's still relatively cheap for a company like Google and the Enterprise Value to e but have Google is even better.
It's at a 13. So the Enterprise Value to ibadah was brought down a lot as Google, grew their ibadah again, unnaturally from 2020 to 2021, going from 61 billion dollars in ibadah to 103 billion dollars in ibadah. That is just incredible. So when I look at all of these metrics and I try to form a fair value of Sumption on it. I think the fair value of Google is around 2,800 dollars per share. That's where I'd be looking at
it as mostly Fair valued. I think at 3,000 or thirty five hundred dollars a share the company's overvalued and I'd be looking at taking gains and I know that this is different than what most people believe, right. Now. A lot of people believe that Google is the most undervalued company in the market and the most obvious by. But when I compare Google to other companies, I just think that the terminal value risk. The long-term risk to the
company are greater than other. He's one of them is advertising. Advertising is a great business during good times. But when we enter into a big recession, if we eventually do, I think that Google's ibadah their earnings and profitability will be hit quite a bit. It's not as resilient as something like Microsoft. Another thing that I think is a risk for Google is the same risk for Facebook. You saw what Apple did to Facebook by doing privacy changes. Now, just entertain me here for
a minute. Just imagine this hypothetical. Let's say that in a couple years. I will no longer wants to do the agreement with Google where Google pays Apple 12 plus billion dollars to be the default search engine to be the default homepage on Safari browser, when billions of people by their phones, they open it up. They have the Safari app and they see Google as the default search engine. Google is paying for that, right? If they had an incredible moat and they, they just had no
competition. Why would Google pay Apple? 12, plus billion dollars to be defaulted. Clearly. They think it's worth that much. Money now, imagine for a minute, if Apple decided they no longer wanted to do that and then stead they defaulted their own browser apples search. Right? I searched they could call it Spotlight, right? They could do whatever they want and it could have a huge privacy emphasis, just like what they did with Facebook. This poses. I think a very great risk to
Google's business. It's something that I just factored in in the back of my mind. Apple could essentially do that sometime in the future and who knows what would happen? Would people just revert right back to Google search. Does it have that big of a switching cost in a moat? Or would people kind of start to
use the Apple search. So overall, I do like the business of Google and I think it's clearly undervalued based off its near-term future earnings, but there's some long tail risks with this company that do concern me. Now. My third biggest holding is Microsoft. I currently have around 10 thousand dollars of value. And this holding is down, four
point five percent. So it's down just a hair, Microsoft is one that about seven of you in this poll, so not the most but some of I thought it was the most overvalued company in my portfolio and the comments on this one. We're basically that Microsoft trades at a high P/E ratio. And the growth isn't too fast. So you think it's the most overvalued? Now, let's go ahead and take a look at the analyst here.
Morningstar has Microsoft as a four-star by the fair value estimate of 352, and a wide economic mode. So I agree with everything basically here. I think that Morningstar has this one, right Schwab also has this one as a strongly outperformed, their strongest by rating and cfra. A also has Microsoft as a five-star by so across the board. The analysts think that Microsoft is undervalued. Now, let's go ahead and take a look at the fundamentals here.
Microsoft trades at a 23 forward, P/E ratio. So that's where most people think that it's overvalued because right now, any company above a 20 PE ratio is being looked at with very skeptical eyes, right? People are looking at these higher PE companies and seeing if they really deserve it, Microsoft is one that I think really deserves it. This company deserves. Trading at a 25 plus forward P/E ratio if we look at the other valuation metrics, Microsoft trades at a 10 price to sales.
I think that's reasonable. That's where it often trades right there in that same range on an EV to ibadah at trades, that an eighteen point seven. So, right there, with Amazon, now, the thing that I really like about Microsoft is, I think this company has an incredible mode. I think that unlike Google or unlike Facebook. If we go into a battery session, it will hurt, Microsoft's
earnings to some extent. But I have to believe that all of its corporate business, licenses all the office tools, all the things that they sell cloud computing. I think that that will hold up a bit better than the advertising business. So, I think that Microsoft is less susceptible to the impact of a recession, then companies like Google or Facebook. That's why I think it deserves a
higher PE ratio. Now, on a free cash flow basis, Microsoft generates consistent and Incredibly fast growing free cash flow. It has incredibly high gross margins. So as this company grows, its Her mental Revenue, it keeps a lot of that as free cash flow. And right now it's trading on a price to free cash flow of around 33. So 56 billion dollars of free cash flow last year, this continues to grow on Pace. You can see the trend over time. They're always posting positive
free cash flow. They have. I think an unassailable moat. I don't think they're ever going to get disrupted and I think 33 price to free cash flow is reasonable for a company like this. I think a PE ratio of 24 is undervalued side. Look at Microsoft and I think the fair value of this company is right there with Morning Star. I think it's 350 right now, at 260. I think that the company is just undervalued and the arguments that Microsoft should trade back into a teens PE ratio, right?
17 or 18. I just think are incorrect. This company deserves a large premium over other companies because of the consistency of their cash flow that consistency of their growth. And I think they're incredible mode. When we look at the shares outstanding, you can see that they just continually do these share BuyBacks. And I think that there Do that right now. So Microsoft is actually a company that right. Now. I think is set up very good for the next three years.
I can see it continually growing and being impacted in a recession to a lesser extent than most companies. So if Microsoft trades up to the 350 range, that 360s, I'll be looking at taking gains at that point. But right now, it's not even close to that. And I think in this market with the hatred towards any tech company, I don't think I'm going to get there. Anytime soon. Next, we have Netflix. This is the fourth largest holding and boy, is this one, a
tough one. It's a Tough one to look at. I am down seventeen thousand six hundred dollars on Netflix. That is. 64% some down over half my initial capital in this company. This one is not a company like Taco Bell, right? This wasn't Peter Lynch buying Taco Bell and the company fell down half in price because of no fundamental reason. Netflix fell down half and price or 64 percent in price because of fundamental related reasons. The growth Outlook has deteriorated for the company.
Their total addressable Market seems to be much. Smaller than investors were anticipating and the competition seems to be having a greater impact. So I don't think that Netflix sold off for no reason. I think the company deserved a trade down, but the question I have to ask myself now is with it at its current price. Is it still overvalued or undervalued? And that's what we're going to look at.
Now, in terms of the poles. You can see Netflix right here, eight of you thought that this is the most overvalued company in my portfolio. When I read your reasoning, many of you said, Netflix, just has to Take the bowl and difficult of a path, which I think is a fair argument. You're basically saying you can't predict the future. The company might not, you know, have any free cash on the future. It might get to disrupted. So it's to overvalue too risky. And that's a take that I
understand. Now, let's go ahead and look at the animals here. Morningstar has Netflix. Now, as a four-star by, and I have to give credit where credit is due. Morningstar was spot-on with their assessment on Netflix. They've held that this company has been overvalued all the way since 2017, this Orange. Hair is overvalued. So they firmly said, this company has been overvalued for a very long time, year after year, after year. And after this massive Plunge in
stock price. Finally, for the first time in like ten years. They're saying, now, the stock is undervalued, right? The price has changed dramatically for Netflix and now they're actually saying that it's a four-star by. They have the Fair Value Estimate as to 80 Schwab has a rating of hold on. Netflix. It's a market perform and cfra has a three star rating. On Netflix, which again, is just like a hold. Now. Let's go ahead and take a look at Netflix and my personal
valuation on the company. When I look in terms of valuation on Netflix. The first thing that I'm looking at is the PE ratio of the company, it used to trade at that growth premium. The growth premium was a 40-plus. So, while Netflix had a bright future, it didn't seem to have such a small total addressable market and before it had a huge indication is that competition and internet-connected devices was a big problem for it.
It traded at that growth, premium valuation of Got 40 to 60 for PE. Now. Look at it, the premiums gone. It's trading at a 17. This is cheaper than basically, all of big Tech right there with Facebook. It trades at the same PE ratio as many restaurants and slow growing companies. So Netflix, no longer is being priced by investors as a premium company. It's traded down to a very moderate slow growing company that has lots of risks.
So that's the first thing that I would point out the Enterprise Value to ibadah is for .7, And now I know that Netflix has some different accounting with their amortization. So that eBay doesn't perfectly reflect the profitability and free cash flow. I'm aware of that but that's still a pretty incredible even at ibadah. Even when you discount the amortization, which most expenses for Netflix, about 80% of them are amortized in the
first two years. So on a rolling basis, this is still a lot of ibadah for a very cheap price. We look at the price to sales of Netflix. We just saw that Microsoft trades at a 10 Used to sales, Netflix is creating out of 2.7. So 2.7 times its Revenue. That's the price of the market cap. Overall, the picture and painting here is that Netflix is not priced for greatness. It's not price to be this all-encompassing biggest streaming service super
profitable. Now, it's just being priced as a very moderate kind of slow growing company and I still believe that Netflix does have a lot of potential aside from what the widespread - press has led everyone to believe they for I casted Mega subscriber gains, right? They're going to lose two million next quarter. That's what they're forecasting. But based off their last forecast. It could be plus 1 million or - 5 million, right? It's a little bit unpredictable.
But overall, they forecasted that they're having a churn and subscribers because they're at this massive size and many people in 2022. Are like finally, I can go out and go on vacations. Finally. The covid restrictions are gone. So this hasn't been a good year for Netflix, and I think that the rest of this year, will be really tough, but I'm still looking. The terminal value of this company. The long-term Prospect right? Netflix still is the biggest
streaming service. The free cash flow has widely been for the past 10 years - just money burning all around every quarter, burned more and more money. But now look, they're having more and more positive quarters. And these are meaningful quarters. Last quarter. They beat their free cash flow estimate by 100 million. So they were expecting to have somewhere a little bit over 700 million.
They came in with 800 million free cash flow that quarter and they're projecting their forecasting to be free, cash flow positive from here on out. So looking at the current valuation and the situation Netflix is in, I still think there is a network effect to this company. Meaning right now. They're shedding some subscribers because of I think temporary issues over the full year term in 2022. I think that Netflix will come out with a net subscriber gain going forward.
If they're continuing to do that. They will have earnings growth. I estimate that their earnings. Will be 20 to 30 percent over the next five years. And I think that in 2025 Netflix could have free cash flows of around 8 to 10 billion dollars. That's the case, the company I think will be valued above 550. So even right now, is discouraging, as this company has been to hold. I think I can make a profit on this over the next five years.
The downside of this company is if they just cannot regain growth, if the company's just fizzling out, they have no bigger total addressable Market. They can't figure out the India market, the Asia Market, they Can't continue to grow in South America. If that's the case, then the share price will either stagnate or just Trail off. So that's the upside and downside right now. For me. Netflix is a whole.
Now after Netflix. We have my next largest holding, which is a Dobby. I'm down 8% on this. Holding. So out of five thousand, three hundred dollars invested. I'm down. Roughly four hundred and sixty. Now adobe's one of the companies that you voted as one of the most overvalued in my portfolio. So right there behind Salesforce, we have 20 votes that Dobby is the most overvalued. Let's go ahead and take a look at what the analysts. Think, morning start believes that adobe's.
Actually, a by the consider, a five-star by. So a better buy than Google. I think that that's probably shocking to a lot of people. They have the Fair Value Estimate at 6:15. They have the economic moat of the company rating as wide. And I agree with the moat rating, but we'll talk about the valuation in a minute. We have Schwab giving Adobe a hold. So they don't consider a strong by. They're just saying, hold on to it. And we have the cfra giving this one a four.
Star by. So let's go ahead and look at adobe's valuation. This company has come down like crazy and price. We can see from the beginning of this year. Year-to-date adobe's down $165 and over the past year. You can see the huge spike in price is up to nearly $700 per share. Now. It's down to four hundred
dollars per share. But again because a company came down in price doesn't mean that it's now undervalued necessarily because a company moved up in price doesn't mean that it was undervalued previously, fair value. Estimates can vary widely from Actual price. If we look at Adobe, we have a company that trades at a premium. The premium is 29 forward P/E. That's what most of you are saying.
Means this company is overvalued it, trades at a premium valuation, in terms of forward, P/E ratio and the Enterprise Value to ibadah. Even on a price to sales basis, Adobe seems expensive. It trades at a 12 price to sales where Microsoft trades at a 10. Right? Those are both software companies. Microsoft has incredible gross margins, but Adobe Demands, even a higher price to sales than Microsoft. So so far at a quick glance at these valuation metrics overall.
I'm starting to agree with you. That adobe might be the most overvalued company in my portfolio. Let's go ahead and take a look at why investors might be valuing this company, to this extent. First of all, let's look at the annual free cash, flow growth because I think this will be revealing, this company is growing, its free cash flow to an insane amount. Let's go ahead and blow this up because I want to look at the free cash flow of this company. Over time.
This is what I Investors are really looking at and really paying for with this company. Try to find another company, with this explosive level of consistent, growing free, cash flow. See if you can find another software company that has it to this extent. We have a company that for 2002 to 2014. It did grow its free cash flow substantially, you know, but then in 2013, it was like a switch flipped, right? Something happened. What happened was they switch to
SAS? They switch to the cloud model no longer. Could you go on and just pirate the whole Adobe suite? They switch to that nice Cloud Model that stopped all the piracy. They have incremental updates. They build people monthly lots of professionals, use it for photography, for video editing, for all different applications. They have very tough switching costs. So if you learn everything on an adobe piece of software, you don't really want to switch over
to something else. Even if it's cheaper. You just have so much energy. Tie it into Adobe. So since 2013, they started to see this explosive growth in there. Out Create a seat subscriptions and their free cash flow and you saw it go from. Let's see, less than 1 billion dollars in free cash flow per year to 6.8 billion. So they 6 x 7 x their free cash flow from 2013 to 2020 one. That is dramatic and simply put not many companies are doing this.
So, I think, the biggest reason that investors are paying a premium for Adobe, is this consistent growth of free cash flow consistent growth of ibadah, explosive growth of Revenue. New, the company has every metric moving in the right direction. It has high gross margins. It's highly profitable. The net income looks fantastic. The earnings per share. Growth is very consistent, and growing. And unlike a lot of software companies.
They're not diluting you. In fact, they're doing the opposite, you can see the shares outstanding going down over time. So adobe's now in the situation where they generate so much free cash flow. They can use that to buy back their shares of manufacture their earnings. So when I look at all these metrics of adobe, I'm looking at a company that I consider to have a pretty. I'd mode there is competition. There are people moving away to other products.
But Adobe still has a pretty big Moe and it has lots of markets. It can actually grow into lots of international markets. Now, having said that, we have a company that trades at a price to free cash flow of around 30 based on last year's earnings 2021. I think that the free cash flow will continue to grow, you know, the pasted. It has been ten to twenty percent per year and based on that. I don't think it's too expensive. I think that adobe's right there
around fair value. So, this is actually a company that II do think is sitting around fair value. My estimates are around 450 for it right now. So if Adobe does trade up to like, 600 dollars a share, 650, I'll be taking gains if it trades down to 32, 250. I'll be buying more of the company because I look at this one is almost a certainty. It's a bond like company that it will generate free cash flows. That's for certain the amount.
That's a variable is how fast those free cash flows will grow. So this company I think is a safer bet. It's more of a bond like company. You have to pay up for the premium of adobe. But right now I think it's just under Fair Value. Now, next up after Adobe. We have Ali Baba. The Chinese e-commerce giant. This company has been one of my biggest losses in the portfolio. Overall retail in general has just been hit any company connected with retail and
especially online. Retail has been hit hard over the past couple of months, but Ali Baba has its own specific unique concerns. I have five thousand one hundred dollars worth of value in this company, and I'm down currently 5700. So 53% I bought this one thinking, it was a value play, the numbers look good on. It looked like a fast growing company and people were fearful of China, but not to the extent that they are currently right.
Now. People are very skeptical of the Chinese government, and most investors, want nothing to do with it. So when we look at your guy's opinion on the most overvalue companies, two of you voted for Ali, Baba, and your comments were that Ali. Baba basically can't be valid because it presents too many risks, right? The Chinese. Is the biggest one. Now, we look at this and we look at the analysis here. Morningstar has a five star by.
They have the Fair Value Estimate at 179 and they have it as an economic wide mode. And while Morningstar is correct on many of these companies. They've been very incorrect on Ali. Baba. They had this company at a fair value of 300. Now they have the fair value at 180. So they keep adjusting down the fair value. Cfra has this one as a cell as well.
So they have it as a 2 Star which is a cell they say that they're Risks of assessment, reflects, our view of considerable oversight and interference by the Chinese Communist Party notable competitors. And dynamic market for e-commerce and other digital offerings. We also have some concerns related to corporate governance. So that's their thoughts on it. They think that this one is a cell. There's this too many extrinsic risks to the company.
Now, with every company that I look at, I'm always trying to separate the company, the fundamentals and the fair value of the company from the stock price. The stock price can trade, very volatile can go any direction. In. But we want to look at the actual company in the fundamental and future outlook. Right now. The valuation of Ali Baba is it's creating out of ten price to earnings. So it's cheaper than any other big Tech in the u.s.
It's cheaper than Facebook cheaper than Amazon cheaper than basically everything cheaper than Netflix, you know cheaper than a lot of restaurants here on paper Ali. Baba's like the cheapest company if it was a US based company, but looking at the actual fundamentals of the company, we have growth actually to celebrating Revenue. Growth is decelerating a lot and it's kind of unknown.
If it's going to re-accelerate. We have all the margins, gross margins profit, margins operating margins decelerate, in a moving down over time as well. We have a company that is facing increasing competition and it has a lot of factors at play that I don't think are directly fundamentally related, but I think they're close enough. The Chinese government can affect the profitability of the company and their interference over the past year has been pretty aggressive way more than
I actually anticipated. So I'm looking at this company looking at the concerns going forward and I'm going to be tracking this company over the next two quarters. Because as of right now, Ali Baba. And my opinion is a hold on paper. It's undervalued. It should be trading at 150 $200 a share right now. But if the fundamentals, if the actual growth rate margins competition, continue to actually deteriorate over time, I'm going to be moving out of
this company. Now after Ali Baba, we have Salesforce. This company is enterprise software. It's grown massively. Over the past decade and I have currently 47 hundred dollars of value in it. I'm down 21% and that's twelve hundred dollars. So first of all, just take a look at the graph here. Salesforce is very volatile, it traded up like crazy and 2020. Then in November with the rest of all the other Cloud companies it traded on a lot. It's down 48 percent from its recent all-time highs.
Now, out of all the companies that you voted on, as the most overvalued, the majority of you picked Salesforce right here. 28. People said that this is the most overvalued, so at one by an overwhelming extent. Now, funny enough. Most of you think that Salesforce is overvalued, when we look at the analyst hair, they disagree. They think that this company is actually like a still right now. It's a really strong by Salesforce by morningstar's estimate is worth three hundred
and twenty dollars. That's their Fair Value Estimate Schwab doesn't like it quite as much. They consider it a hold and the cfra analysts agree with Morningstar. They consider this one a strong by so we have the Audience. Here. Most of you think that this company is overvalued and a lot of analysts think that the company's undervalued. So having said that, here's how I look at the valuation. We have sales force at a 34 Ford PE ratio, 34 Ford PE is
expensive. If you're just looking at that in today's market, it probably looks over valued, even looking at the Enterprise Value to ibadah that looks even worse. It's out of 41. So both of those metrics don't paint a good picture, you look at it on a price to sales because it's a software company. It has high gross margins. That's at a six. So that's very reasonable.
I think that's actually kind of historically cheap for a company like Salesforce. So we have some different metrics are on a price to earnings on an Enterprise Value to ibadah Salesforce looks expensive on a price to sales. It doesn't look that expensive. Now the big thing that I've been focusing on and I've been stressing over the past three or four months is the free cash flow of the company and this is the big thing that Salesforce has going for it.
I think this is like Adobe and The investors are paying for this rapid increase in the free cash flow per share. We look at this company. Here's the free cash flow growth over the past while since 2004, right? It had essentially, no free cash flow. Then you see since 2015, the rapid increase in free cash flow every single quarter and every single year if we flip this over to annually, this is what it looks like.
See these type of charts when you see a company that's able to leverage its scale and grow its free cash flow at these rates. This is what investors are paying. For now, the 2022 hair. This is based off of an estimate of the most recent quarter, plus the past three quarters beyond that. So this isn't exactly like perfect. This is the trailing 12 months of free cash flow. Either way.
You see the rapid increase in this is what you're paying for with Salesforce. Remember, when you're buying a company, you're not buying the future earnings, you're not buying the future ibadah. You're buying the future, cash flows of the company. A company is worth the present value of all of its future cash flows. Those. So this is really what you're buying and this is really what they can return to investors. Now, Salesforce is still in growth mode.
So, if we look at the shares outstanding, you can see this trend of them, issuing more and more shares. And this is something that I hate to see with any company that I own in both of my portfolios, the passive income account in the story. Fun. I have exactly two companies that do dilution just to Salesforce didn't Amazon. Those are the only two exceptions I've made because I hate to see dilution Salesforce did some dilution right here when they bought slack.
And then they To do it for stock-based compensation. Now, the big takeaway here though, is that the free cash flow growth is heavily outpacing, the share, dilution, meaning, over the past couple of years. They've grown, their, their share count by about 40% and they grown their free cash flow by a hundred and sixty percent. So, as an investor, even though they're deluding me, they're growing the free cash flow at a much quicker pace.
And I think that this company has huge Network effects. I think that it has a huge lead in its industry. I think it does have a wide amount. And you can see this Illustrated in the growth of the company. You don't see many Revenue growth charts like this, with this type of consistency. This type of speed with these
type of margins. So other companies like twilio can grow their revenue at PACE but they don't have the margins of Salesforce. They don't produce a consistent growing free cash flow per share like Salesforce. So when I look at Salesforce on a price to free cash flow basis, it's trading at a 30 right now and that is only expensive if you think that this free cash flow, growth is going to come to
a complete stop. If you don't think it's going to grow its free cash flow, all any more that 30 price to free cash, flow is kind of expensive but I don't think that's going to happen. I think they're going to continue to grow their free cash flow 1020 percent per year.
So right now I do think that Salesforce is undervalued on a price do free cash flow basis based on the assumptions I have for this company because I consider to be a very wide mode and I think it will have considerable growth in the future. I think that the fair value is around $200 right now, I'd be looking at selling this company, if it trades back up to 250 to 270. That's where I think it enters overvalued range and I think it will eventually get there. We'll see how long it takes.
But that's what I'd be looking to sell now. Next up. We have apple. This is a company that I own in both portfolios. I'm incredibly bullish on it, but it's a smaller holding in this portfolio. So we have apple has a four thousand dollar position right now. And I'm in the green. This is one of the rare ones are. I'm actually in the green with my current Holdings. I mean, the green by 8.3%, $300. So this is actually one of the ones that many of you voted as
overvalued. It was Behind Adobe with 15 votes. A lot of people are convinced at Apple's. Overvalued you all disagree with the Warren Buffett. He's been recently buying this company. Now, let's go ahead and take a look at the analyst here. This is one where the analyst actually kind of agree with you. All they have apple as a three-star, which is just kind of a hold. They actually think that it's overvalued to some extent. They think the fair value is 130 and it currently trades at 142.
We also have Schwab's saying the opposite. They say that this one is a strong buy-in. We have cfra saying that this one is a buy with a four star rating. So we have some disagreement amongst the analyst, two of them saying it's a by one of them saying it's overvalued. So when I look at this company, I look at the valuation of it and I try to buy it on a good deal. But I consider Apple to have a very high terminal value very unlikely to be disrupted and to
have an incredibly wide mode. And I think there's lots of opportunities that are just long shot beds like the augmented reality or virtual reality headset. So having said that That's the frame that I look at this company from a qualitative standpoint. Then I look at the PE ratio of it.
It trades at a 22 forward P/E. So it's slightly more expensive than the S&P 500. So what I'm looking at from my perspective is a company that's substantially better than the average company in the S&P 500. But it trades at a slight premium, a 22 compared to an 18. So you're paying a little bit more to have apple over the other companies in the S&P 500, the Enterprise Value to ibadah is a 17. So we look at just the The basic valuation metrics.
I think that Apple's pretty cheap, just by its PE ratio, and it's Enterprise Value to ibadah. And I see no reason that Apple should trade down back to the 14 or 15 forward. P/E ratio that it was creating it when it didn't have nearly the moat that it now has, Apple has changed over the past five years. They have Apple TV. Plus they have apple music. They have way more devices that entangle you in their ecosystem. Like the watch, like the are
pods, right? All these different devices people use I think the company has a bigger moat. It has more Network effect. It has higher switching costs and I think it should trade at a bigger premium. When I look at the Enterprise Value to ibadah. I see that the Ebola is growing steadily over time. I see that the free cash flow is absolutely incredible growing steadily over time. Look at this over the past couple of years. We don't see any other company
in the world. Posting, these type of free cash flow numbers in 1/4. Forty four point, six billion dollars of free cash flow in a single quarter. Now after looking at the free cash flow, I think another thing. Attention should be drawn to is the shares outstanding because you want to adjust the free cash flow growth of the company on a per share basis. And I'm going to be adding that specific graph into qualtrics in the next week. So we'll have a free cash flow
per share graph here. But right now, the best we can do is compare the free cash flow against the shares outstanding. This is what the shares outstanding of apple look. Since the beginning of the company, isn't this incredible? There's not many companies like this.
That have devoured this much. Shares outstanding since 2013, they've just continue to do share BuyBacks with their massive growing pile of cash, every single quarter, and they buy back more and more of the stock as an equity owner and apple, you own a greater and greater portion of this company, every single quarter. And with the stock price falling
right now into the 140s. You better believe that Apple's doing share BuyBacks the allocated ninety billion dollars for share BuyBacks. So, you know, that this company is going to manufacture their earnings by Buying back their shares making that PE ratio go down. So on a price to free cash flow basis, you're paying around a 34 Apple based off their 20 21 years. So in the future, it's probably a bit cheaper. But as of last year, you're paying a 30 multiple on that
overall. I look at the metrics of Apple, the 22 for PE ratio. I think is undervalued. I think this company should be trading at a 26 plus. So right now I do think the Apple slightly undervalued. I think that fair value is around 150 for it at 120. I think the company's undervalued all be, buying more of it at that point. As I don't think, I really don't think the Apple should be trading in line with the rest of the market. Just doesn't make sense.
This is a dramatically better company bigger. Moat generates more free cash, flow can engineer its earnings. It has I think the least at least low risk of Regulation compared to other big tech companies because they're so privacy focused. And I don't think it has as much terminal value risk to its long-term story than other companies. So right now, I do think the apples undervalued, but not to a huge extent, if it gets to 120. I'll be looking. At scooping up more shares.
Now. The last holding in my portfolio is Facebook. This is one that I bought back into, I used to hold it and I sold it at 350 per share. So that was very fortunate timing. Then it fell like 40 to 50 percent and it got to a valuation. I just thought was to oversold. So I bought back into the company.
I currently have 2400 dollars into it and I'm down 10.6% now, out of the companies that we voted on as the most overvalued Google and Facebook were the only two that Nobody voted for so. None of you think that this is the most overvalued company in my portfolio and the analysts here. Mostly agree with you meta has a five star rating by Morningstar analysis. They think the fair value is 384 and it trades at 193. I think that it has a wide moat that looks good.
We have Facebook from Schwab and they give a by reading so that's good news from that. And then we have the cfra here, giving it a hold writing. So they're a little bit more cautious with Facebook. Now, in terms of my thoughts in the valuation. I I really didn't think too hard about Facebook. This was a pretty simple decision. The company sold down to the point where it was a 17 PE ratio right now.
It trades at a 16. So it's treating their right at a 16 forward, P/E ratio, which is heavily discounted that's cheaper than the rest of the market. So investors are discounting Facebook more than the average of the S&P 500. The price to sales is 4.4. The Enterprise Value to ibadah is below 10. Those all look really cheap. The free cash flow looks incredible. Growing free cash flow like
crazy. It has 40 billion dollars of free cash flow in 2021 and that makes the free cash flow multiple of 13. So this company is creating at a very low multiple in every way that you slice and dice it a low price to sales, a low P/E ratio, a low price to free cash flow, a low ev2. Ibadah. Everything looks cheap just all around the board, Facebook looks cheap. So the only bearish take that you could have on Facebook is if you think the company is just
going to have fundamental. Duration, like the fundamentals are going to fall out underneath. It Tik. Toks going to run away with everything, right? Everything will go wrong for the company. If you don't have that type of thesis on paper. And every way that you look at this company, my opinion, it looks cheap. So I bought back into the company. I think it's well, below its fair value and my opinion, it should be trading at a low 20s multiple. So, Facebook gets up to a 22-4 PE ratio.
I'll look at taking gains. But as of right now, anytime below that, I'm going to continue to hold it. So there you have it. There's a look at every holding. A portfolio, the valuation of it. How I view the valuation. Right now. I think every company in my portfolio. And this is the reason that I hold them. If I thought that they were overvalued, I would no longer hold the companies, and I've sold out of ones that I think
are overvalued. So, the more speculative ones ones that I think traded up to Big multiples, like, atlassian or crowdstrike. I sold out of those companies. I think that they were probably in the overvalued range, the ones that I currently hold. I think, are at a minimum close to fair value or undervalued. And in most cases, I think that many of Mr. Heavily undervalued, they start trading up into that overvalue territory that I outlined. I'll be looking at taking gains more aggressively.
So if Apple goes up to 200 dollars a share I'll be looking at taking gains. If Microsoft goes up to 350. I'll be looking at taking gains and so on and so forth. I don't predict. I don't expect that in this market, that wants nothing to do with these companies that they're going to race up the high valuations. And in the meantime, I just have to be patient. I realized this could take a very long time, until these companies move back. In the favor by investors.
Because right now, everybody wants to Consumer Staples. They want nothing to do with Cloud. Nothing to do with online retail. Nothing to do with tech in general. So I'm going to be patient, keep dollar cost averaging in look at the valuations of all these companies, but overall. I hope this gave a little bit more insight into how I look at these companies. So that's all for this episode. I hope you enjoyed. If you want to have more content and exclusive content. I have amas and lots of
different videos on the patreon. So if you join that, you get access to a Discord community You get access to the qual, trim Insight software suite, and a bunch of other fun stuff. So, other than that, I'll see you in the next one.