Stocks of the Week! 

In this email:

• You’ll Never Regret A Bargain!🤑

• Falling Fast—Time to Buy!💰

You’ll Never Regret A Bargain!🤑 

Have you seen the market this week? Red everywhere. It’s like a slasher movie.

The great news is now is the perfect time to pick up some absolute bargains. One stock I have in my sights has already “been there, done that” with the sell offs & ready for a come back to fair value.

Salesforce went through a rough patch in May & the stock dived hard. I’m talking over 20% down in a single day. Since then, Salesforce has made quite the comeback & showing signs of strength that are worth making a note of.

Let me tell you why I think this SaaS giant is one of the stronger picks for my portfolio right now. 👇

 The May Selloff: What Happened?📉 

First of all, let’s address the huge sell off in May. I can’t mention they tanked 20% in a day & casually brush it off & move on like it’s not a big deal. So what actually happened?

In short, Salesforce reduced guidance for the company’s sales growth.

For a company with a sky-high valuation & expectations to match, any sign of slowing growth can scare investors. And that’s exactly what happened. Salesforce’s stock price took a hit, nervous traders started panic selling, stock continues to slide, more panic selling… you get the idea. Sprinkle in a general concern over tech valuations & a slowing economy & you’ve got the perfect recipe for a short term sell off.

Key words - short term.

Headlines were fixated on the short-term guidance. Salesforce’s long-term fundamentals remained intact so become a perfect opportunity to buy the dip.

A Strong Recovery: Closing the Gap💡

Fast forward a few months & Salesforce has rebounded just shy of 30% at it’s peak, currently sitting around 15% up after getting caught up in the recent market wide sell off. But here’s the interesting thing.

The stock has closed the gap on it’s May sell off. From a technical perspective, closing the gap is a bullish indicator. That tells me the market has taken on the “bad news” & is over it. It usually means we’re ready for a stronger move upwards.

Even better than just technical analysis, company’s actual performance has been top notch too. I think they were pulling our leg with the guidance. Or people on the board wanted a chance to buy in a little cheaper…

Total revenue posted at $9.33 billion, up 8% year-over-year (YoY), with subscription and support revenue rising 9% YoY to $8.76 billion.

And here's the best bit. Operating income (the money a company makes from its main business activities, after paying for things like wages and supplies, but before paying taxes and interest. It shows how much profit the business is making just from its day-to-day operations). soared by 21% YoY to $1.78 billion.

Operating margins (how much money a company keeps as profit from its sales after paying for basic business costs, like rent and employee salaries, but before paying taxes or interest) was up too. From 17% last year to 19% this year.

For a SaaS company that relies heavily on scale, seeing margins expand is a major positive sign. It means they’re cutting expenses in all the right areas without sacrificing growth. Speaking of….

Undervalued with Plenty of Growth Ahead📊

Even with Salesforce’s impressive growth & profitability, the stock is still trading at only 22x forward earnings. For a company of their caliber & track record, that puts the need at undervalued, for me. Put that head to head with some of their peers in the software space & you’ll see what I mean.

- Oracle (ORCL) is trading at the same multiple of 22x forward earnings but has a slower projected profit growth of 15%.

- ServiceNow (NOW), another cloud giant, is trading at a massive 50x forward earnings, with profit growth estimated around 20%.

For context, Salesforce’s profit growth is expected to jump by 23% this fiscal year. That means if Salesforce’s stock price doubled they still wouldn’t be at the same valuation levels as service now but are penciled in for 3% more profit growth.

There’s clearly value to be had here.

 AI Acquisition: Boosting Future Growth🔮

Would it even be tech if I didn’t mention AI at least once?

Salesforce recently acquired Tenyx, an AI voice agent company.

Why would they do that, you ask?

It’s part of their broader strategy to weave artificial intelligence into its CRM platform to try & boost growth & cut costs. What a perfect combo!

Tenyx specializes in voice recognition & AI-driven customer service solutions. That means Salesforce customers will have access to tools that can automate tasks, streamline workflows, & improve efficiency.

This acquisition comes on the heels of Salesforce’s broader push into AI, which has already included features like Einstein AI & a partnership with Workday to create an AI-powered assistant for employees.

Why does this matter?

Well, AI has the potential to dramatically increase the value Salesforce delivers to its customers by letting businesses automate repetitive tasks, provide better customer insights, & ultimately save time & money.

It’s a win-win. It makes Salesforce more valuable to its existing customer base as well as opening up new revenue streams as more & more companies come around to the idea of AI solutions.

 💰 Share Buybacks: Supporting the Stock Price💰

I always love it when a company puts their money where their mouth is. If you needed more reasons to be optimistic about Salesforce, that’s exactly what they’re doing.

Earlier this year, Salesforce announced a $10 billion increase to its share repurchase program. They might as well put a banner up in the head office that reads “We believe our stock is undervalued & this is a good use of our capital”.

It’s a big show of confidence from management. And confidence aside, when a company buys back it’s shares it’s reduces the number of shares available.

That alone can support the stock price relying on good old fashioned supply & demand. It also boosts earnings per share (because there’s less shares) which can give the stock price a boost, too.

 📈 Raised Profit Guidance = Confidence📈

If all of that wasn’t enough, Salesforce also raised its profit guidance for the full fiscal year. The company now expects adjusted earnings per share (EPS) in the range of $10.03 to $10.11, up from the previous forecast of $9.86 to $9.94.

Raising guidance is a big deal. It shows that the company is not only confident it can deliver strong results but also sees even better performance ahead. This confidence, combined with the AI acquisition & share repurchases have me knocking at the door with cash in my hand.

⚠️ Risks to Consider⚠️

Now to play the Debbie Downer. How could it all go wrong & what are the risks? And are they risks worth taking?

Firstly, all this AI talk could be a double edged sword.

Right now, Salesforce is a leader in the CRM software space. But AI could be the great equalizer here. It makes everything more efficient. That means small competitors that would’ve never stood a chance before can use AI to scale & be more dynamic. If it’s a start up environment, they’ll be able to pivot & adapt a lot quicker than Salesforce can, too.

And then there’s the worry of the broader market right now.

If businesses start cutting back on their IT & CRM spending due to economic uncertainty, Salesforce’s growth could slow, which would put pressure on its stock price. We’ve seen that first hand in May where they only hinted they might be slowing down.

That said, with a diversified customer base & strong financials, Salesforce is in a position better than most to weather a potential storm.

 🎯 The Bottom Line🎯

The market has already shown it’s backing Salesforce by closing the gap from the May selloff. I don’t think that’s a trend that’s going to change.

With the stock trading at only 22x forward earnings, a share repurchase program providing support & a raised profit outlook for the year, I think this is one of the better opportunities in the market right now for value & growth.

A consensus estimate of $306 gives me over a 25% gain from current price & takes us back to recent highs which I can get behind as a price target.

Risk/reward is in my favour for this stock & it’s not often you can pick up a market leader at discount so it’s going straight in my basket.

What do you make of Salesforce?

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Falling Fast—Time to Buy!💰

Alphabet (Google’s parent company) is looking better & better by the day. I feel like the hyenas in Lion King watching Pumba dance every time they have a red day.

And there’s been a lot of them lately. They’re down over 21% from all time highs in July but now is a great time to add them to my portfolio.

Is Alphabet Undervalued? Spoiler Alert: Yes!📊

First things first - Alphabets fundamentals are still rock solid. That’s always a great place to start.

Current price-to-earnings (P/E) ratio sits around 21.65x, which is below its five-year average of 26.7x. Forward P/E for the next 12 months is around 19x, which is also below its historical average around 24.43x.

To put it simply: Alphabet is cheaper than it has been in the past relative to its earnings, even when you compare it to itself. And you can’t get a better comparison for value than that.

That tells me there’s room for the stock price to move up without any risk of the value being overstretched because it’s trading too low in the market right now.

And there’s plenty of room for upside.

Analysts expect Alphabet’s earnings per share (EPS) to hit $8.69 by December 2025. Even if its P/E ratio drops a little to 21x, that would give the stock a target price of $182.49. That’s a bout a 21% gain on current price.

What about if P/E ratio rallies to the five year average of 26.7x?

Then the stock price would be somewhere around $230 & we’d be sitting at a 50%+ gain. Not too bad, right?

The Antitrust Lawsuits: Should We Worry?🚨

Now that all sounds amazing but let’s quickly address the elephant in the room.

The lawsuits.

They’ve had some pretty hefty accusation thrown their way with a judge ruling that they’ve been monopolizing the search market for over a decade.

There’s even talk of potentially breaking up the company, or banning Alphabet from paying phone manufacturers to pre-install Google Search.

That would be less than ideal & pops any fantasies of 50% gains. Or does it?

Alphabet has been here before.

Remember when they were slapped with a €4.34 billion fine back in 2018 for abusing their dominance through Android? Or that €2.42 billion fine in 2017 for promoting their own shopping service in search results? Alphabet survived both of these & kept growing.

And if that wasn’t enough of a plot twist for you breaking up Alphabet could actually unlock value for shareholders. If they were forced to spin off YouTube, Google Cloud, or other divisions, the total value of the separate businesses could end up being higher than Alphabet’s current combined value.

That’s because spinoffs often make it easier for companies to focus on their core strengths. It makes them better at what they do because it’s the only thing they have to do.

Now I’m not saying don’t worry about the lawsuits at all. I’m just saying don’t lose any sleep over it. I know I won’t be.

Alphabet’s been through this before, & even in a worse case scenario there’s a chance I could be left with even more upside in the long run?

You’ll find me sleeping just fine.

ChatGPT Didn’t Kill Google: Alphabet Is Still Growing 🤖

Here’s another problem that was giving Alphabet investors sleepless nights.

Remember when everyone was screaming “the sky is falling!”, thinking that ChatGPT & large language models (LLMs) would wipe out Google Search?

Guess what?

That hasn’t happened. In fact, the numbers tell the opposite story.

Q2 2024, Alphabet’s search revenue grew by 13.8% year-over-year to hit $48.5 billion. And Google’s total services revenue climbed by 11.5% to reach $73.9 billion.

LLMs haven’t eaten into Google’s ad revenue like a lot of people though they would. And in any case, Google’s already adapting by rolling out new AI features of their own.

For example, they’ve started AI Overviews. You might’ve seen them if you’ve been searching the web. It generates responses to user queries using information from across the web & like the name suggests, gives you an overview.

That keeps users in the Google ecosystem so they can still deliver ads to keep their core business model intact. Sundar Pichai, Alphabet’s CEO, has said it’s a big hit with younger users (aged 18-24) which is a great spot to position yourself to benefit long term.

It turns out Alphabet isn’t just trying to survive the AI onslaught but find their own ways to thrive in it too.

The Cloud Is Alphabet’s Secret Weapon ☁️

Speaking of thriving, one of the most exciting (& overlooked) parts of Alphabet’s business is Google Cloud. Ads have always been Alphabet’s bread & butter but Google Cloud is growing at a crazy pace. Cloud revenue jumped 28.8% year-over-year in the most recent quarter, hitting $10.3 billion. That’s impressive enough on its own, but what’s really exciting is that the profitability is skyrocketing too.

In Q2 2024, Google Cloud’s operating margin hit 11.33%, up from 4.9% the previous quarter. 📈 And the market for cloud services is expected to grow at a 17.3% compound annual growth rate (CAGR) over the next decade, so there’s plenty of runway ahead.

Alphabet is already increasing its market share in cloud infrastructure services, & as it scales up, there’s a ton of room for even more margin expansion. If Google Cloud can even approach the profitability of Amazon’s AWS (which has margins that sit around 35%), Alphabet’s overall profits will boom.

So, Is Alphabet a Buy Right Now?🔍

All things considered, Alphabet is a buy for me at its current price. A solid one, too. Yes, there are risks from the lawsuits, but Alphabet’s track record tells me they can handle that kind of pressure. And don’t forget what I said about the potential value unlock in the worst case scenario….

And while that’s all going on Alphabet’s core businesses are still growing strong. Google Search is holding strong despite the AI hype. Google Cloud is growing quickly & becoming more profitable.

Add that to fact that Alphabet is undervalued based on its historical valuation multiples & there’s a lot of reasons to be excited.

Recent highs at a 26% gain would be the bare minimum I’d expect out of this over the next 12-18 months unless something goes terribly wrong.

That’s all! See you same time next week 👋 

P.S Hit reply & let me know what you thought of this weeks newsletter. All feedback is welcomed ❤️