yesterday was one of the proudest

moments in my life next to

getting married next to graduating from

officer cadet school and next to being a

father for the first time because

yesterday as i announced on social media

my elder daughter she bought her very

first share of stock so it's a really

proud moment for me and i'm like you

know different from other parents other

parents are really proud when their

children get good grades in school or

graduate from university and of course

that's important but to me the most

important thing is really learning how

to be financially

uh free and learning the skills be

financially free and one of the most

important skills is learning how to

invest and i'm really really proud that

my daughter

she just turned 18 so she just qualified

to open an account of the broker which

she did just open an account and

yesterday she purchased her first share

of stock and i asked on social media can

you guess what was the first stock that

she bought and i got

a whole lot of responses so i really

like to thank you guys for

sharing your responses and i'm gonna

reveal what the stock is in a while and

i'm also gonna evaluate whether it was a

good buy from my perspective

all right so let's take a look at all

the replies we got let's start off with

um on youtube right so youtube let's see

what came in so we've got a lot of

people saying that all right google was

one tesla

all right um

a tnt roblox and disney and

gamestop and it seems that no one got

the answer initially a lot of tesla a

lot of facebook a lot of amazon a lot of

alibaba for some reason

a lot of apple as well uh twitter

trolling berkshire disney um

again tesla again by the way some people

think i hate tesla i don't hate tesla i

don't hate any stock because as an

investor i've got no feelings towards

any stock the stock has no feelings

towards me so i have any feelings

towards any stock right so to me i think

very objectively and

i would say tesla is a good business

right i wouldn't say it's a great

business because to me a great business

has no competition

like google has no competition right but

tesla's a good business right it's a

dominant company in electric vehicles

energy storage but there are competitors

coming out so i would say that's good

business not fantastic but good business

and getting stronger of course great

numbers coming up yesterday but i

wouldn't buy because it's overpriced

it's way overvalued and one of the

things that

i tell my students is that a great

business

can be a bad investment if you pay too

high a price

for the shares and a great business is

only a great investment if you can buy

at less than what it's worth

so no matter how great a company is like

tesla's a good business like i said but

if you overpay for the price of the

share sure short term it can still go up

but in the long run it's a bit dangerous

because you don't have a margin of

safety right so i mean that's my take uh

so i don't hate it right i don't hate

anything yeah um

okay so but what bitcoin right

netflix no netflix i just wrote

something on netflix i wouldn't touch

netflix never have never will touch

netflix no one seemed to get it but i

think i found that two people got the

answer let me see if i can find it over

here uh let me see if i can find someone

who got it now if you got it

i'll be sending you a free t-shirt

wherever you live in the world i'll be

sending it to you that's your gift and

i'll give more than one for more than

one person who gets it right let's take

a look again

oh yes okay so vicky

vicky said adobe or intel well supposed

to be one guess but i'll give it to you

okay because the answer is she bought

adobe so vicky i'll be sending you a

t-shirt so vicky you gotta send me an

email at support piranhaprofits.com

and you gotta verify your identity to

make sure it's vicky all right and i'll

send you that t-shirt so that's vicky

one person who got it another person got

it let me see if i can find that person

um

yes

adobe you get a free t-shirt as well

send me an email at support

piranhaprofits.com

you get a free t-shirt from our piranha

profits

store and

that's right piranhaprofits.store we've

got all kinds of merchandise for piranha

profits and i'll be sending you

our best selling t-shirt

this one keep winning in the markets all

right and by the way on facebook

one correct answer as well on my

facebook page uh it comes from let's see

it comes from brian tan all right brian

hans send me an email you get a free

t-shirt

so did my daughter make a good

investment decision with adobe it's time

for the father to evaluate now bear in

mind that before i got my daughter to

open an account and make her first buy

she had to watch my videos she had to

read my books to understand the process

of selecting a good investment and the

great thing about kids is that or

beginners is that they follow

instructions like okay does he meet all

the criteria check check check check

check okay they get in if it doesn't

they don't get in where some adults who

think they know better they don't follow

the rules they break the rules they just

buy because they think it's hot it's

exciting and that's how they get into

trouble so sometimes it's good

when you teach beginners because they

follow instructions they go by the book

so

let's run through um

adobe and let's see is it a good

investment now

what's a good stock investment remember

when you buy a stock

you're not buying a lottery ticket

you're not predicting that it's going to

go up tomorrow or next week

you are buying a piece of a business

behind a stock is a business now if the

business does well

the stock will do well over time in the

short term it can go up it can go down

no one knows but in the long run it

always goes up in a short term if it

goes down it's an opportunity to add

more shares and a bigger discount

so what makes a good business they're

all together

seven steps that we use to evaluate a

business

i'm not gonna go through all the steps

today but i'm gonna highlight the most

important steps and see if

kelly made the right decision all right

so what's criteria number one

number one criteria is we only want to

buy businesses

that have a history

of consistently increasing sales revenue

net income and cash flows from

operations for at least five years

so let's see if it passes that first

criteria so this is adobe over here

and i'm using guru focus i think they've

got really good visual uh

charts

so first let's take a look at the

revenue has revenue been growing

consistently over the years is it an

uptrend in revenue yep revenue is

growing and it grows even during the

pandemic even during the recession so i

love these kind of businesses because it

shows that they are pandemic proof they

are recession proof they are resilient

all right now more importantly hey

revenue is growing but is it making

money it's gonna be making money right

net profit should be going up so we've

got net income also increasing

for at least five years it doesn't have

to go up every year as long as you see

an uptrend in that

net income now even more important net

income we want to see cash from

operations and free cash flow increasing

for at least five years

so there we have operating cash flow in

yellow increasing consistently

in fact for for more than

10 years right and free cash flow in

blue that's operating cash flow minus

capital expenditures so we like

companies with low capital expenditures

low capex right so that produces huge

free cash flow

that the company can use to buy back

shares or paid dividends now for adobe

they don't pay dividends but they do buy

back shares they do reinvest in the

business growth so ideally we want to

see a business that

the number of shares is decreasing over

time as they buy back shares there's

less and less shares each share becomes

worth more ideally right so the shares

outstanding for adobe you can see that

it's it's been on a downtrend less

shares each share becomes more valuable

so seems to pass that first criteria

next

criteria number two i want to make sure

that the business has very strong

profitability metrics now what the heck

does that mean that means the company is

very efficient at generating

high profit levels and what do i look at

i look at uh four things

the first thing is i look at

gross profit margins and net profit

margins they should be rising or at

least consistent

so let's take a look at

their profit margins over here

so this is adobe again

so you can see over the years now this

is um

right 2018 2019 2020 2021 and the last

12 months and this is the five year

average so we want to see

profit margins

consistent or rising for at least five

years

so first let's look at the gross profit

margins um

from 2018 86

85

86 88 88 so is it pretty consistent yep

and the last 12 months they have gross

profit margin 88

is above the five-year average so it is

rising

next net profit margin net profit margin

again take a look at the last couple of

years 28 26

40 40

30

29

so it's kind of like up and down

but

the last 12 months 29.9 is above the

five year average as well so you can see

that net profit margins are very very

healthy

next one of the most important things

when you buy a business is to ensure

that it's got high

return on equity

return on equity tells you how much

profit the business makes out of the

shareholders stake in the business so

ideally we want to have

return on equity

more than 12

to 15 percent

more than 15 would be excellent of

course and you can see the uh return on

equity

consistently

29

29 44 34

way above 15

last 12 months we're above the five year

average so it's extremely

good at making money from the

shareholders stake in the business

but

what's even more important than return

on equity is return on invested capital

roic in fact

warren buffett has once said that one of

the most important things is to ensure

the business you buy has a high return

on capital

and he's referring to return on invested

capital where it calculates

how well the company makes money based

on both equity and debt

so again we want roic ideally to be

above 12

to 15 percent and it should be

consistent or rising and check out the

roic 17 21 19 30

32 26 26

and so the last 12 months 26 way over 15

and way above the five year average so

it's an extremely well-run business the

next criteria i look at in investing in

a business is to ensure the business has

conservative debt you see there are some

companies that can make a lot of money

but to make a lot of money they take a

lot of debt and that becomes very

dangerous because if interest rates rise

too much they have to pay more and more

interest on the debt and that reduces

their profitability or if they're not

able to refinance the debt they could go

bus so we want companies with little or

no debt ideally so what we look at we

look at a few ratios

of course the first thing to look at is

the current ratio that is the current

assets divided by the current

liabilities so we want this to be more

than one which means there's more

current assets than current liability so

that's 1.04 that's that's fine

the next thing to look at would be the

debt to ebitda ratio

so this is taking the total debt of the

company

and dividing it by the earnings before

interest taxes depreciation and

amortization so ideally we want the debt

to a bitter ratio to be 3 or less

so what does it mean so we've adapted a

bid of 3 it means theoretically

the company has 3 times more debt than

its annual profits and it can pay off

all its debt in 3 years

so we want it to be 3 or less but for

adobe you can see the debt to ebitda is

0.69 which is very low which is very

safe which means that within a year

adobe can pay off all the debt if it

wants to

the other thing i look at is

debt servicing ratio or you can look at

interest coverage ratio

so interest coverage ratio is basically

the

ebitda again which is the profits of the

company divided by the interest expenses

so this tells you

um how much more profits as a company

make

divided by the interest it pays on its

uh debt right so ideally we want this to

be

uh

more than three

so this is less than three this is more

than three and you can see their

interest coverage is 53 times so it's

way more than three it's really very

very safe so these are the companies

that i can buy i can sleep soundly at

night i know that

uh nothing will go wrong with the

business and look at it not only that

but the company has got more cash

on their balance sheet then their total

debt which means the company could

effectively effectively pay off all

their debt if they wanted to and be debt

free so

great choice that my daughter made

really safe company all right so the

next criteria which i i taught my

daughter is that a business you only

invest in a business that has

a sustainable

competitive advantage that protects the

business from potential competition so

this is also known as a wide economic

moat you know what's a mode right you

know all days kings live in castles

and they build a moat around the castle

the moat is kind of like this water

barrier where they put off crocodiles

where it prevents the enemy from

attacking the castle so same thing when

you invest in a business you want a

business to have

a white mode a lot of crocodiles

so what does this mean for business it

means that the company

is able to ward off competition

and competitors are not able to easily

take away their customers and market

share so when a company has a wide

economic mode it allows the company to

maintain its pricing power in other

words it can raise prices

without losing market share

it can pass on higher costs to the

customers it's able to protect its

market share and generate consistent

growth in sales

net income and free cash flow into the

future it prevents competitors from

taking away customers

so in other words to summarize

i only want to buy businesses that have

no competition

or the competition is insignificant the

competition can't touch the business

customers so that's an example of why i

have never invested in netflix and i

won't invent i won't invest in netflix

no matter how low the price goes because

netflix has a lot of competition right

they've got competition from disney plus

from amazon prime from hbo so it's a

very competitive business so they don't

have a wide economic mode with enough

crocodiles and piranhas okay whereas

uh adobe doesn't have this mode we're

gonna find out in a while right so what

gives a company this protection this

mode a few things number one

is

the business we wanted to have what is

what is a brand monopoly

so brand monopoly means that the brand

is so strong that it literally becomes a

monopoly in the market so a monopoly is

defined as more than 50

market share of the market it's a brand

monopoly like for example

google and youtube is a brand monopoly

there's no close competition right

uh what's next the next thing

that gives a companies mode is what is

known as high switching cost

this is one of the most important things

high switching cost means that the

moment a customer

uses the product it's very expensive and

difficult to switch to another brand or

to another competitor they're kind of

like stuck there for many many years

right so let's call high switching cost

another one is the network effect which

means that the more people that use it

the more people want to use it for

collaboration because everyone is using

it creates a network effect like for

example

instagram and facebook and tick tock

they have got a network effect okay

barriers to entry that stop competition

from coming in

huge economies of scale like costco or

amazon where they can price lower than

anyone else because of huge economies of

scale so basically we only want to buy a

business if it has got at least one

or two

of these characteristics so does adobe

have these characteristics let's take a

look now but before that you have to

understand for some of you have to

understand what adobe does by the way

some of you are wondering

why did my daughter pick adobe out of so

many stocks and the reason is because

she uses adobe every day

one of the things that i taught my

daughter is that you should invest in

companies

where you are the customer yourself you

use the products and services then you

understand the business very well you're

in touch with the business

and my daughter one of her passions is

in

editing and designing she's a great um

video editor she's a great photographer

she loves designing stuff and in fact on

her birthday she asked me to buy the

adobe software for her to do video

editing right so she uses it every day

and she said why don't i buy the company

which i'm a customer of that's why she

chose adobe so in case you don't know

what does adobe do now adobe

has got two main

business segments

the first one

makes up 70 of their revenue which is

called their digital media segment

and they have got their main software is

called creative cloud which is a

cloud-based software

and who uses it well it's used by

designers like my daughter social media

users students photographers

videographers creative professionals and

publishers

where they can download and access the

latest creation tools and

fun fact

ninety percent

of global creative professionals use at

least one of adobe's products 90

market share

so what are some of these famous

products you've heard of um

photography editing products like adobe

photoshop right it's an iconic software

adobe photoshop they've got video

editing software where like adobe

illustrator adobe

dreamweaver adobe after effects for

graphic design web illustration and

stuff like that right so

uh that's the first part of their

business but a lot of people don't know

they've got a second part of their

business that makes up 30 of their

revenue and this is growing like crazy

okay so the second part of their

business is known as the digital

experience segment

and the software is called the adobe

experience cloud

which offers ai driven solutions for

marketing

analytics

advertising and commerce for enterprises

for businesses

and

their target group who uses this is used

by marketers advertisers data scientists

publishes web analysts marketing

executives

and sales executives and product

developers right

now what's their market share it's

amazing

90

of the top 100 companies in each

industry use at least three of adobe's

products

that's amazing right for example do you

know that

10 out of 10

of the largest global auto manufacturers

use adobe

9 out of 10 of the largest u.s internet

retailers use adobe 9 out of 10 of the

largest u.s media companies use adobe

10 out of 10 of the largest u.s

financial institutions use adobe 8 out

of 10 of the largest global airlines use

adobe and 9 out of 10

of the largest global hotel chains use

adobe

right so question does adobe

have a brand monopoly oh you bad it does

yeah okay so adobe is a white mode

because number one it's got a brand

monopoly 90

of global creative professionals use

adobe including my daughter herself

and she's a student as well as

a hobbyist designer

and next adobe has also high switching

cost why

now

if you go to design school for three

years you learn designing right you

learn editing using adobe software

once you graduate and you go and work

would you change software

no you spent three years learning the

software

so chances are for the rest of your

career you would use adobe software

because you've taken so long to learn it

you don't want to relearn something else

and you pay subscription fees for the

rest of your life right

so that creates a high switching cost

it's not like netflix where i can cancel

and watch disney the next month right

this one you kind of get stuck there for

for many many years makes the network

effect

so the ability to allow collaboration

among adobe's products

allows them to consolidate and share

templates easily within the adobe cloud

system where

creative people all around the world

they are sharing the adobe cloud system

and they can share and collaborate

all these ideas and files so everyone

wants to be a part of this global

collaboration that creates the network

effect so

their customers can take advantage of

the large amount of data available to

them due to adobe's market dominance now

finally economies of scale

yes

there are other companies that have

photo editing software yes there are

companies that have video editing

software right but there's no company

that offers the entire suite of all the

different softwares integrated

all right so

it creates this economies of scale where

there's no direct competitor that offers

everything

so that gives a door right so so far we

can see that adobe seems to be a great

business to invest in but

is it at a good price so again remember

a great business

can be a lousy investment if you pay too

high a price

for the shares but a business is a good

investment if you can buy it and less

than what it is worth

so what are the shares really worth what

is the business really worth so this is

where we'll jump into the intrinsic

value calculator and this is where she

needed a bit of help from me to do

evaluation and this is something that we

teach of course in our value momentum

investing course where you get these

calculators you learn to calculate it

yourself and of course in my ultimate

investors playbook uip subscription i do

all the valuation for you i do all the

work for you so let's take a quick look

so first understand that

a business is a money making machine

so what is the machine worth it is worth

all the cash

it can generate over the business

lifetime

now most analysts when they calculate

the value of a business

they will

project the future cash flow and

discount it to present value and they

will assume that the business lasts

forever and hence they use a terminal

value but for me i'm pretty conservative

i assume that the company

will only last for 20 years

so that's why i use a 20-year calculator

to

kind of like guess how much cash the

company would generate for 20 years

and that's how i value the business so

anything beyond 20 years is a bonus

right so i'm just being really

conservative in my valuation all right

so for adobe you can see i put in some

numbers over here the operating cash

flow is about 7 billion in the last 12

months the capital expenditure is very

insignificant because of the kind of

business it is in

uh total debt 3.6 billion 4.7 billion in

cash

projected growth rate for the next five

years would be 16.89 we can get this

from a variety of websites that have

growth projections

and we assume that lasts for five years

and then it would go down to 15

in year 6 and year 10 and there after

the last 10 years only growing at four

percent which is roughly the gdp growth

rate of the u.s

plus one percent company has

472 million shares outstanding so we

have to divide

the business by the number of shares to

find out what one share is worth we use

a discount rate of 5.9

based on the risk-free rate plus beta

multiplied by the market risk premium

and this gives me an intrinsic value of

six hundred and thirteen dollars per

share

so at the current share price of uh

what's the share price right now share

price right now is four to eight point

eleven

uh there we are this gives me a 30

discount to valuation so it's it's

undervalued now again in valuation you

may say but but adam uh these are just

projections you know what if it falls

short of the projection

fair enough that's why in valuation you

must always have a base case

and a pessimistic scenario

so

what if adobe for some reason it can't

grow as much anymore and let's assume

that there are growth

halves from 16

it halves to eight percent right or

eight point four percent what happens

then

you can see the valuation now drops to

four nine eight

but even at four nine it's still a good

deal because it's now selling 428 it's

still a 40 40 discount so this gives us

a margin of safety all right so a quick

look at the charts

and you can see i've put in the

valuation range

base case six

one three valuation and pessimistic if

it slows down

498 currently selling at 428 so we've

got a margin of safety

now i always want to ensure that when i

buy a company i want to take a look at

the long term performance and i want to

see that in the long run over 10 years

we have got a very very nice uptrend and

that's usually the case with companies

with a wide economic mode with little or

no competition so you can see adobe has

a very very strong

long-term trend

and you can see that previously when it

retraced right remember prices don't go

up in a straight line

they move in wave patterns right wave up

wave down wave up wave down wave up wave

down and we always want to bite on a

wave down

so that we can catch the next wave up

right and you can see previously every

time it it waved down it found support

at

these moving averages and the 20 ema

or the 40 ema

over here right but this time because of

this

tech crash it has come all the way down

right to the 40 ema

uh the blue dotted line which is very

red it is very rare that it gets down to

the blue line so based on the technicals

it looks pretty oversold as well

and you can see that

now these are on monthly candles if we

zoom into the weekly candles

you can see there is a level of support

over here

at which the price is consolidating at

right so it's not a bad level to buy we

always want to buy on a wave down at a

level of support so well done kelly

great job and again this is just a first

stop in the next couple of days she'll

be adding more and more stocks to her

portfolio now again this is not a

prediction that the price will go up

next day next week or even next month

this is an investment with a time

horizon you know of at least like two to

three years where it's going to be a lot

higher by the meantime it could still go

low in the short term if it does you

know she knows that she's gonna add more

shares right buy a good company and a

bigger discount in the long run you make

even more money so i hope that you learn

something in this process as well

and i'll see you guys in the next video

may the markets be with you

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markets be with you