welcome back everyone today on the Joseph Carlson show I bought a new stock a new stock that's going to be a major concentrated position in my main portfolio the passive income portfolio the new stock of course is a compounding machine it is a dominant global company a digital one with high margins and growing revenues and free cash flows in this episode I'll be going over this stock highlighting the bull case and the bease the thesis overall and the reason that I'm investing in it so we have a lot to get to in this episode I think it's going to be a fun one and we also have some news Costco just raised their membership fee for the first time in 7 years now as a a large Costco shareholder as someone that really loves this company and I've made it a big part of my portfolio for a long time it's one of my top positions I have some opinions on this so I'll be going over this Costco raise in this episode and then finally we also had some interesting news happen over the past couple of days a video surfaced with Sam Altman driving this super futuristic looking sports car looks like an expensive vehicle I want to take a look at this and actually find out what vehicle that is and how much that thing costs so we have a lot of fun stuff to get into let's go ahead and jump in we'll start off with the new buy let's just take a look at the position here we have it on the M1 Finance portfolio I I'll bring it up here so we can look at it together the portfolio overall is doing well it's performing well in fact it's doing really well so this isn't a buy out of desperation this is one that I think will just and enhance the portfolio make it a bit stronger and I'll also mention in combination of this buy I also did a small trim of a different position I'll first go over the position I trimmed I've recently trimmed a little bit of Chipotle the company's great it's a worldclass uh Food business I I've gone over the ques on Chipotle many times and the gains have come in it's really been a profitable company you can see the gains here $1,500 on a relative small position Chipotle is actually one of my smallest positions Chipotle has seen so many backtack quarters of outperformance in same location sales and earnings per share that it's raced up to a 55 Ford PE ratio so it now trades at a very high valuation and I think it's good in cases like this when I have a lot of good companies and a lot of good options to take some off the table when I see a company push up into the territory that I consider extremely high valuations that's where Chipotle is right now so I sold 25% of my position around $99,000 in the stock and I still have $11,500 in gains so this position is actually bigger than what I originally invested in it it has grown bigger but I'm just taking a bit off the table now with some of those proceeds and some dividends and some new capital I've been building a position in this new company and it's in the consumer category it is booking Holdings booking.com or as the advertisement say now just to summarize what booking.com is it is the largest online Travel Agency in the world an online travel agency means that you can go to booking.com you can type in like the different destination you want to go to and they're like your concierge helping you find plane tickets and car rentals and hotels to stay at a lot of people think that booking.com may just be for hotels but this company has actually done a series of Acquisitions to build out a very robust platform of different technology websites they work in cohesion together for example they own rentalcars.com they own kayak they own Open Table Open Table is actually more popular in the US as a place to make dinner reservations so overall I would not look at booking Holdings as just a place to book hotels that only resembles one part of what they do they own all these different digital properties and they've kind of Consolidated the online travel agency industry with their business so as you look at it it's a fully-fledged platform even what they're doing now is they're competing directly with Airbnb so not only can you book different hotels you can actually list your own house and do the exact same thing an Airbnb is doing so they are competing in every way possible with the online travel experience dinner you know all that type of stuff that's what the company does now if we look at the specifics of this company and a bigger breakdown of what they do booking is actually unique because it started in the US as priceline.com but then in 2005 they bought book .c from Europe and so part of the companies actually originates from Europe part of it originates from the US but the majority of the compan is actually popular in Europe booking.com is by far the biggest online travel agent in Europe now if you compare booking holding to something more similar like Expedia Expedia is more popular in the US so many people in the US will be more familiar with xedia booking holding is the dominant player in Europe and the travel industry is much more valuable in Europe because of the demographic of their businesses in the US we have a couple dominant businesses like Marriott and Hilton they dominate as hotel chains and because they have that dominant position they can barter far better terms for themselves and they have far more marketing power than the hotel chains in Europe the hotel segment in Europe is far smaller more segmented and there's no dominant chains that can barter together and have the marketing power that one like Hilton or marot has so in Europe the services that book Holdings offers is far more valuable because they can offload all of that marketing onto their platform so booking makes a fortune from Europe but they're trying to gain further market share in the US and overall if you factor in all of their platforms and all of their market share everything they compete in they are by far the largest online travel agent so this is an investment of the top of the food chain the number one player in the travel and experience agent and then there's other companies that are trying to compete with him so when we look at the company overall that's just a basic breakdown of what they do they help people go on vacation and have fun experiences they have aroundthe clock customer service and that's their specialty now to break this down further I want to take a look at a slide I created and this boils down my overall investment thesis into only a few simple bullet points the first one is that I believe there's going to be growing middle class incomes middle class is getting wealthier and wealthier every generation every decade we can see it in all of the numbers the purchasing power per household is increasing even when you adjust for inflation it's still increasing that's why more people are eating at restaurants more people are going on vacation more people are buying Apple products people are becoming wealthier across developed countries just consider this for a minute once you already own an apartment or own a home and you have a car your goal is not to buy another apartment or another home or another car most people get the Necessities that they're looking for they want food on the table they want to have a house once they have shelter and they have they have a vehicle they have food then they're off to do other things they want to spend the excess money the margin after that on additional experiences usually that's eating at restaurants going to movies and especially traveling people love traveling and Beyond the Necessities to live most people have a very high priority to have experiences which include traveling and I believe that as middle class incomes grow we're going to see this trend of more and more travel it's going to eat up a bigger and bigger percentage of overall GDP so I have an overall view that this is a long-term secular Trend it is not a postco recovery bounce this isn't a temporary thing travel is going to exist in the future Forever This stock is called a consumer cyclical which means it's sensitive to the economy to an extent if we have a big recession if the economy goes south if people lose their jobs there's going to be less travel so it's susceptible to recessions but on that point that is a major bear point for any type of travel industry or any type of experience stocks and what I've seen through the data is that this company is far less cyclical than you would believe in fact I believe the company is discounted dramatically because of the so-called cyclicality of it when it's really not that cyclical travel's not quite as cyclical as people think in fact if we bring up the numbers here let's to take a look at the raw data to show you the lack of cality and we can look at that in the revenue the revenue is basically a gradual straight line except for covid which obviously has a one-time material impact on their revenue but if you actually normalized it and took out these covid years it looks like it's on an incredibly steady growth path every single year so yes there's always a constant fair with booking Holdings that the company is cyclical and it's susceptible to recessions of course the stock will go down down in recession but in a recession a lot of stocks go down not just experience Holdings the stock will go down temporarily but it will eventually recover as the economy does and in general I don't use recessions as an excuse to not invest in businesses unless I don't believe they can make it through recession overall what I'm looking for are secular long-term growth Trends and I see that in experiences I see that in developed countries middleclass incomes more and more people are spending on travel so overall in my view that's a very positive thing the next thing is this company is super profitable it has a very profitable business model High margins uh High free cash flow and low amounts of stock-based comp so we're looking at a company here that's already extremely profitable and they've worked out to be a bit of a gatekeeper they're a bit of a monopolistic company they sit between millions and millions of people and their destination traveling and because they broker and they kind of work as the in between person there they can charge fees along the way that doesn't require any capex doesn't require you know investments in facilities investments in in trucks and shipping things they just work as a gatekeeper between these two industries I love companies that have this type of business model I view the business model as similar to Visa Mastercard Visa Mastercard work as a bit of a gatekeeper they are in the middle of your digital transaction between the retailer and the bank they tie everyone together as a large Network and they have lots of challenges growing in a different economies and different places but because of their massive Network effects they continue to grow in a very profitable business model and I view that as very similar to booking Holdings it is a gatekeeper company now gatekeeper doesn't mean that it doesn't offer value it offers immense value to customers and the businesses that they give inventory to they're very very good at marketing so they find lots of customers and they provide that inventory to different hotels that is a value service but they charge a fee along the way and that's a very very profitable business model and they don't do a lot of dilution with stock-based comp which is a nice thing now they're also the largest online travel agent with the widest range of platforms and services for travel and experiences I went over this a bit but they're basically just the most fully-fledged company that offers these Services other companies and especially startups can offer different bits and pieces but they have everything and this gives them a unique advantage over different you know different competitors you know you have Google that can kind of match you with flights or hotels they can do part of it but booking does everything they have 247 customer service that makes it more difficult for other startup competitors or little digital apps to compete with them now being the largest also gives them that dominant market share which they've used to organically grow year-over-year and even though they're the largest they're still taking market share they're not losing market share so they're the biggest and they're expanding market share over time not losing it now of course there are some be cases for this stock the most important ones are competition and regulation with regulation I think it's unlikely to meaningfully slow the growth of this company but it is going to face constant scrutiny and constant regulation this is something that I've seen with every great company that I invest in whether it's Visa Mastercard Microsoft Apple Google you name it great companies grow to Great size they are and because of that they start to get looked at from Regulators booking Holdings is just the same it's a very dominant large profitable company that has huge market share and it's growing uncontrollably so Regulators are looking at this and they're a little bit concerned about it rightfully so but in many cases the regulations really just don't slow down companies like this they might be like little speeding tickets along the way they might impact some areas for some time but overall really good dominant companies that offer a lot of value to customers continue to grow and that's mostly due to large Network effects so what I've seen so far is despite the different regulations they've faced different banss different restrictions they've still grown and they've grown organically very fast now the other competitor that people point out a lot is Google Google has a lot of different travel stuff like you can find different flights you can book hotels through Google but Google lacks incentive to supplant booking.com they lack incentive to completely destroy this company because booking.com and Expedia are two of their largest advertisers on Google they're two of the biggest advertisers in the world they pay roughly a combined $9 billion per year in advertising Revenue booking Holdings is a tough company to replace even for the likes of Google booking has 23,000 employees that's a lot of employees even when you factor in that Google has like 60,000 imagine them having to hire another 20 plus thousand to replace the services of just booking.com so the undertaking of replacing booking would mean that Google would have to sacrifice billions and billions of dollars of high margin revenue from their advertising and hire tens of thousands of employees all of a sudden it just doesn't make sense for them to go head-to-head that way Google of course is going to offer little tools to help plan your itinerary and different fun things like that but overall they're not not going to replace the fully-fledged online travel agents like Expedia or booking so that's a brief overview of some of the thesis but I also think it's important to look at the fundamentals and the numbers if we look at the valuation first I'll just say that the valuation is undemanding it's a stock that doesn't really have a high valuation in fact I consider it a very low valuation it's trading at a 24 PE ratio the S&P 500 trades at a 22 so the stock trades at a discount to the overall S&P 500 on a price to sales it's it's very low for a digital high margin company the free cashal yield is nearly 5% 5% free Casal yield is not that bad even when you factor in stock-based compensation they don't do a lot of dilution it brings it down to 4.5% this is pretty close to a treasury so the stock is trading again at an undemanding valuation it doesn't have to do much to justify its current valuation when we look at their gross bookings this is a kpi that we have mapped out in qualum we look at the merchant and the agency these are the two different types of billing methods one of them is a little bit better than the other the merchant is a little bit more profitable because it gives them float but they compete on both fronts they're competing with Expedia they're competing in Europe and different markets have different types of billing both of these are growing strong in 2024 this only represents q1 so you can see it's off to a good start but overall we can see that even the gross bookings are going up year over year we look at the free cash flow probably the most important metric I look at because it shows the true profitability of a company when I look at this I see a incredibly consistently profitable company since around 2006 it's been very free cash flow positive and a wonderful thing about this is that when we look at the stock-based compensation it's really just not a problem it's such a small amount 8% of their overall free cash flow so you don't have to worry about them playing games and overpaying developers and giving all of their money to Executives through stock-based compensation PL uh programs they're really returning the majority of this back to investors now we have a high free cash flow positive company that generated $7 billion in free cash flow last year in terms of their free cash flow per share this is also growing much faster than their total free cash flow for example last year it grew by 25% very fast free cash flow per share growth when I'm trying to add companies to my portfolios with compound machines I'm seeking companies that will grow at a rate above 15% per year that's what I want free cash flow per share above 15% per year because the S&P 500's average is around 8% so I want companies that are growing at roughly twice the economic rate of the S&P 500 and that's how I believe that I'll outperform the S&P 500 so this is a very important graph all of it basically comes down to how fast they can grow this singular chart and they're growing it fast if we look at the mechanics and the capital allocation of how they grow their free cash flow per share so fast basically what they do is they take their strong undiluted cash flow and they buy back a ton of stock the shares outstanding are going down dramatically fast look at this chart and there's no you know visual tricks going on here the y- AIS starts at zero so this shows you in relative terms how much they've actually they've cut out of their stock but most recently in 2020 they had 41 million shares now they have 34 million shares so they've reduced it by around 5 to 6 million in only a couple years and these Shares are expensive they're $4,000 a piece so they're reducing millions of shares that are really big shares that reduction is massive 88.6% reduction year-over-year they're not buying back shares by taking on debt in fact if we look at their balance sheet here they have more cash than debt they didn't take out a bunch of debt and and put it into share BuyBacks the way that they are able to buyback so many shares is because the company's so profitable it's continually discounted at a low price it trades at a low PE because it's in the scary travel industry investors are concerned about large language models they're concerned about Gemini they're concerned about travel they're concerned about regulation all these fairs keep the stock price down they keep the free casual yield incredibly high and bookings management uses that low valuation to do super accretive share BuyBacks so it's experiencing this virtuous cycle of the stock trading at a low multiple allowing management to do very attractive Buybacks in similar fashion as AutoZone AutoZone has benefited from that same type of dynamic for a long period of time but what you have right now is a company that has a lot of BuyBacks they're going to do they've already signaled they're doing BuyBacks like crazy buying up the stock on every dip buying it all the time the shares outstanding are going to race downwards and they're not sacrificing the stability of the company or the balance sheet to accomplish these BuyBacks and they have so much cash right now that on top of doing BuyBacks they've also just started a dividend so this company's now returning even more cash to investors through a quarterly dividend they've already paid two of them this year so they're going to be paying a quarterly dividend and it's going to be a dividend Growth Company so overall That's The quick summary on booking.com I also have an hourlong exclusive on this company that I released yesterday so if you're interested in seeing more you can check out the patreon and and watch that video but this basically summarizes all the major points I think it's a compounding machine a great company that's going to do super acreative BuyBacks high amounts of free cash flow it does have some risks if we go into recession it'll go down uh there's some regulatory risk that I'm not too concerned about personally and I don't think that Google's going to destroy them or LMS are going to destroy them either I think they're going to overcome those challenges ultimately I see it as a company that's a very good risk and reward from the amount of free cash generates its market dominance and the growth potential in the future so I'm happy to have it in the portfolio I think it makes a welcome addition it's a company that's trading at a much lower valuation than the majority of companies in my portfolio so we'll see how it does there's no guarantees you know any stock can go down I've had it happen before but overall I think my batting average is quite good so this one I'm I'm very hopeful for I started off with a roughly $10,000 position I plan on growing this over the next few months I'll be buying it during any dip now moving on we get to some news headlines we have the major news breaking news that Costco finally did a price hike and this comes after seven years of not changing prices so they held price study for seven years and then they did what I would call a measly price hike $5 for their annual membership on their gold plan so it went from $60 per year to 65 if you're keeping track this price increase over a 7-year period doesn't even keep up with inflation inflation is way more than 8% in 7 years so Costco is being very kind to the consumer here they raise prices by 8% over a time period where inflation's like 30 or 40% they note that the fee increase will impact 52 million members a little over half of which are executive and the executive membership is going up $10 from 120 to 130 it's going up a little bit but they also raised the cap of the total payout and rewards you can get for the executive membership now overall when I look at this news there's a couple takeaways one of them is no one's going to cancel their membership because of this price hike not a single person in fact I believe out of the 52 million people I don't believe there's one person canceling their membership out of this price increase I just don't believe it I I really don't no one's going to look at this and say you know what this is where I draw the line Costco cannot charge me $5 per year an increase that they've done once in 7even years that's slower than the rate of inflation I I just don't think there's anyone that's going to do that it's 40 cents per month and Costco has expanded their value proposition to Consumers over the past seven years far past the 8% increase in what they're charging so I think if people cancel their membership I don't think it's going to be related to this and there's going to be evidence of that if you think I'm wrong if you say Joseph there's going to be at least a few people that cancel let's look at the retention rate let's see if the retention rate goes up or down after this move the next thing that I look at with this is that I think Costco is going to earn somewhere in the ballpark of around an additional $300 million in earnings because of this now there are some factors that could impact that how much more they're paying out in rewards could be one of them but when I do some rough math and I try to calculate the amount of members they have the amount of people that will get impacted by this and the fact that I don't think they're going to have a higher turn rate because of this I think an additional 300 million is about accurate when we look at Costco right now they earned $4.75 billion last year in membership Revenue this is their high margin Revenue so increasing this by a couple hundred million is actually a really big deal it's not just like increasing their total revenue that wouldn't be meaningful because this is very low margin Revenue but they're increasing their membership which is super high margin Revenue so this is ultimately a win-win for Costco they're earning more money and they're doing so without sacrificing their customer now finally we get to this bit of news we we have this video surface that made the rounds on twittter over the past couple of days because it's this super nice foreign looking car I'm not quite sure what it is but the video shows who's driving it and it's it's Sam Alman you see Sam Altman driving what looks like a new vehicle there um and I want to take a look at what that vehicle actually is apparently it's a kisic rera which is a $3.8 million car somewhere around that much multiple millions of dollars for this vehicle that's an impressive price point for a car paying $3 million for one when I watch this I I just have to jog my memory though didn't I hear just like a few months ago Sam in from front of Congress saying something about not caring about money not making money you know running a nonprofit let me go back to that you make a lot of money do you I make no I I paid enough for health insurance I have no equity and open AI really yeah that's interesting you need a lawyer I need a what you need a lawyer or an agent I I'm doing this cuz I love it he's just doing it cuz he loves it he's paid a no equity he just has enough to cover Healthcare and apparently enough to buy a $3 million car what I take from this video is I need to start a nonprofit that's all for this episode hope you enjoyed see you in the next one