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5 February 2022
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DISCLAIMER
This report by Adam Khoo, Adam Khoo Learning Technologies Group Pte Ltd and Piranha
Ltd. is in no way a solicitation or offer to sell securities or investment advisory services.
Adam Khoo, Adam Khoo Learning Technologies Group Pte Ltd and Piranha Ltd. is not
intended to be a source for professional advice. Participants should always seek the advice
of an appropriately qualified professional before making any investment decisions.

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imply that past results are an indication of future performance. Neither we nor our
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statements other than statements of historical fact are forward-looking statements (including
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5 February 2022

Dear Investors and Traders,

US Stocks Start the Year with A Correction

After a strong rally to end 2021, US markets started off 2022 with a correction. The S&P 500
(SPX) declined up to 13% but found its support at the 4,296 level. The SPX has since
rebounded back above its 200MA (red line), which is a sign that the correction has ended for
now. SPX found rejection at the 4528 resistance (no thanks to Mark Z) but remains above its
200MA.

If the SPX can stay above the 200MA, then the short-term bullish bias is intact. The 50MA
remains above the 150MA which also indicates that the bull market is very much intact.

S&P 500 (SPX) Daily Candles

While this first correction seems over for now, we can definitely expect many more
corrections for the rest of the year. Already, the market has been unusually volatile with huge
intraday swings seen even among the mega and large cap stocks. The market is now going
through one of the most volatile periods in the last 10 years.

Remember that as an investor, volatility can be your best friend. When Mr. Market goes
through huge mood swings, you can stake advantage of him by quickly buying shares of
fundamentally great businesses when they are irrationally mispriced. I have been doing this
by adding shares of MSFT, CRM, VEEV, ASML, ADBE, DIS, AMZN, GOOGL and FB.

If you are fully allocated in your positions or do not have spare cash to invest, then simply
ignore Mr. Market’s crazy price quotations and always focus on the performance (sales,
earnings, cash flows) of the underlying business. When you have invested in great
businesses (that passes the VMI 7 Steps), you can be quite confident that the stock’s intrinsic
value will rise over the long run and so will its share price. What you should never do is to
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be influenced by Mr. Market’s manic depressive mood swings and become fearful at low
prices and greedy at high prices yourself. This is when investors do dumb things that will
jeopardize the performance of their own portfolios.

Recession and Bear Market Unlikely but Expect High Volatility

I see the chance of a bear market or a recession unlikely this year. As I have previously
mentioned in my January newsletter and Market Outlook 202 Webinar, the US and global
economies are on solid footing and are expected to keep growing this year.

S&P 500 corporate earnings are expected to grow 8% to 10% and the S&P 500 no longer
looks expensive at a P/E (TTM) of 25x (versus 10-year average of 22.94x).

The Fed Chair recently confirmed that it will start its rate hike cycle by increasing the fed
funds rate in March. How has the stock market performed historically during interest rate
hike cycles? You can see in the table below that since 1954, the Fed has gone through 12 of
these rate-hike cycles. 11 out of 12 periods were bullish for the market and the S&P 500
delivered an average annualized return of 9%.

So, if history repeats itself, we can expect the same single digit returns for the US market in
the next few years.
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Historical Patterns Also Suggest Higher Volatility Ahead

This year (2022) happens to be US mid-tern elections year. In the table below, you can see
how the S&P 500 has performed during this particular election period. Since 1950, US mid-
term election years have seen high intra-year drawdowns of 17.1% on average. This is
because the market tends to get nervous when there is uncertainty over the coming election
outcome.

However, once the election outcome is over (despite which party takes control), the market
tends to rally very strongly. The last 3 months & first 2 quarters of the following year has
averaged a gain of +32.3%.

So, don’t panic if you see the market correcting back down 17% for the year. Take advantage
of it by adding shares of good businesses on your watchlist! When the market rebounds
towards the end of the year and the following year, it should give the portfolio a nice boost.

If you are thinking of whether I am going to sell shares now and buy them back at a lower
price during the next correction before the year-end rally, the answer is no. The reason is
because the market is not a machine that can be predicted with certainty.

As an investor, I will just hold onto the shares of great businesses and add more if and when
the bigger correction unfolds. I will also use options strategies like covered calls to generate
additional income when the market is consolidating or pulling back as well as cash secured
puts during periods of high volatility pullbacks.
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Another interesting pattern to consider is that last year (2021) was a year of shallow
pullbacks. The S&P 500 had 10 pullbacks that were relatively shallow (5% correction or
less). What tends to happen the year after a shallow correction year?

From the table below, you can see the top 10 years with the Shallowest Pullbacks (Since
1955). Stocks tend to rise the following year with high volatility. The S&P 500 average intra-
year volatility was -13% and average annual return was a gain +7%. So, this may be another
clue that we could get a single digit gain this year with a 13% intra year pullback (which we
have already experienced in January).

Meta Platform’s (Facebook) (FB) Sell-Off

After Meta (Facebook) announced their financial results on Feb 3, its stock price declined by
over 26%, wiping off $388 billion in market value, the largest in history. Were the results
really that bad? Did the market over-react to the ‘bad news’ and is this yet another
opportunity to buy a great company and a big discount? Let’s look at the facts.

The market sell-off was sparked by a few concerns

a) FB reported Earnings per share (EPS) of $3.67 per share, a 5% decline from the same
quarter a year ago. This was below analyst’s projections of $3.84 per share
b) FB’s daily active users (DAU) declined from 1,930m in Q3 to 1,929m in Q4. This was
the first decline in DAU in the company’s history. The media spun this into a narrative
that ‘users were abandoning Facebook’.
c) FB projected Revenue of $27 to $29 billion in 2022, lower than the $30 billion expected.

Does this concern me as an investor? Not at all. While there were some disappointments in
the report, I think that the concerns (many of them short-term issues) have been blown out of
proportion by the media. If you dig deeper into the numbers and look at the bigger picture,
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FB remains an extremely profitable company with no close competitors and a rock-solid

balance sheet. After the price decline, it is now very undervalued.

a) Revenue, Net Income and Free Cash Flow is Up +37%, +35% and +65.5% Respectively!

Although diluted EPS declined 5% for Q4, Revenue increased 20% for the same quarter. The
reason for the quarterly earnings decline was because of increased expenses in FB’s Reality
Lab’s division which is building its new Metaverse business (which will take time to become
profitable).

On an annual basis, the company is still highly profitable. For the last 12 months, Revenue
grew +37%, Net income grew +35%, EPS grew +36% and Free Cash Flow is up +65.5%
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b) Short-Term Earnings Decline is Due to the New Reality Lab’s Business. Family of Apps
Revenue and Earnings Growth is Still Strong.

Meta’s family of apps segment (includes facebook, Instagram, whatsapp, messenger) net
income increased by +21.7% for Q4 and increased +44.9% for the last 12 months. So, its
legacy business is actually doing very well.

The company’s new reality lab business (which is building the new metaverse) is the segment
that is losing money. It takes 4-5 years for a new business segment to become profitable.
Amazon’s AWS cloud business took years to become profitable and is now its leading
income generator. Disney’s Disney Plus streaming service is not yet profitable as well but
will be a big income contributor in the next 3-4 years.

Similarly, I expect FB’s reality labs business to continue losing money for the next 4-5 years.
However, reality lab’s revenue has been doubling for the last 3 years (now at $2.27 billion)
and once this new segment becomes profitable, it will solidify FB position as a leader in the
social media space.

c) FB’s Leadership Position Is Still Strong Despite Fall in Quarterly DAU

The other fact that is freaking investors out is FB’s first historic quarterly decline in Daily
Active Users (DAU) from 1.93 billion to 1.92 billion people.
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While this is the first time the Facebook platform itself has seen a decline on a quarterly
basis, DAU is still up +4.5% from the same quarter a year ago. At the same time, on a
company-wide basis, meaning across all of its networks (Facebook, Instagram, WhatsApp,
Messenger), DAU is still growing on a quarterly and up +8.5% on an annual basis.

This growth rate is not as high as it used to be a couple of years ago, but that has to be
expected. The law of large numbers states that no company can maintain a high growth rate
forever. A user decline of less than one-tenth of one percent in one quarter is not especially
meaningful. It should be noted that growth during the previous quarter was quite strong, at
more than 20 million. It is thus possible that there were some pull-forward effects and that
growth rebounds in the upcoming quarter (Q1 2022).

Despite the slowdown in user growth, Meta’s market share leadership is still way ahead of
other social media companies. Meta owns 5 of the top 10 most used social media platforms.
Meta’s wide economic moat is still very much intact..
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d) Average Revenue per User (ARPU) Can Continue to Drive Growth

At the same time, it is also important to note that FB’s revenue per user has risen in all
geographic markets: On a year-over-year basis, US ARPU grew 13% and the ‘Rest of the
World’ segment ARPU grew by 24% year over year.

Even if DAUs were to decline or stagnate in the short term, revenue would still rise rapidly as
ARPU increases. Hence, FB’s small user count decline is thus far from disastrous as growing
revenue per user more than offsets this for now.

e) How FB will Re-Accelerate Growth

Another major concern for investors is a projected short-term growth slowdown. FB

forecasted Q1 022 revenues of $27 billion (3% y/y growth) to $29 billion (11% y/y growth),
which falls short of analyst’s expectations.

This slowdown is being caused by rising competition for user’s time (especially among
younger users) who are turning to short-form videos offered by Tik Tok. FB has countered
this challenge by launching ‘FB Reels’ (Tik Tok equivalent) which has been gaining a lot of
traction. Reels has now the highest user engagement among Meta’s family of apps. Meta has
yet to monetise reels. Once they do, it will further boost its top and bottom line growth.

Another headwind for Meta is Apple's changed iOS privacy policy that has led to less
effective ad targeting. This will impact profitability in the short-term as well, but it is a
challenge that will impact all social media platforms that rely on advertising revenue.

However, FB may well emerge even stronger among its competitors as it has found a way to
circumvent the need for user-data-driven targeting.
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FB has recently introduced its proprietary “aggregated events measurement” tool, which
allows the measurement of web activities from iOS users to better pinpoint the delivery of
ads to the appropriate audience. FB is continuing to invest in the ongoing development of
“privacy-enhancing technology," including the use of AI, to reduce reliance on personal
information, and instead utilize more “anonymized data” to deliver effective personalized ads

FB may suffer from some near-term headwinds in rising costs and slowing growth during this
transition period. However, the company is expected to emerge with sustainable growth over
the longer-term as its monetisation in Reels and its investments in the metaverse pays off.

f) FB Shares Look Attractively Priced

So, what are FB’s shares worth? I have decided to use a Discounted ‘Free Cash Flow (FCF)’
valuation method as Cash flow from operations are increasing higher than Net Income. FB’s
last 12 month FCF growth was 65.5%. So, using a 17.81% FCF growth for the next 5 years is
not unreasonable. This 17.81% is the average consensus growth estimate from Zacks,
Simplywallstreet, Finviz and CapitalIQ.

Assuming a 17.81% growth for the next 5 years, an 8.9% growth (half) for the following 5
years and a 4.18% growth for the last 10 years, I get an intrinsic value per share of $403.04.
At the last closing price of $235, this represents a 41.69% discount.
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FB Weekly Candles

On the weekly chart timeframe, FB has also retraced to its 200MA at $231 on Friday (4 Feb).
Historically, the weekly 200MA has been a strong level of support during previous
corrections in 2018 and 2020. I took the opportunity on Friday to add more shares at $232.
This does not mean the price cannot go lower in the short-term. Prices can definitely go lower
and if they do, I will continue to buy and average down until I have a full allocation in my
portfolio (not more than 5% allocation).

Note: This is NOT a recommendation to buy FB or any mentioned securities in this

newsletter. This research is shared only for educational purposes only.

Alphabet’s Blows Away Expectations… Announces a 20-for-1 Stock Split

In the long-run, the stock market is a weighing machine. In the short-run, the stock market is
a beauty contest. Out of my 4 heavenly queens (Alphabet (GOOGL), Microsoft (MSFT),
Amazon (AMZN) and Meta (FB), 3 of my queens delivered results that blew away
expectations and their stock prices have soared. Only 1 of my queens has suffered an acne
breakout that caused her to lose the recent beauty pageant.

One of my queens, GOOGL/GOOG, has announced that it will be doing a 20-for-1 share
split, effective 15 July 2022. This means that every 1 share owned will be split into 20
smaller shares.

For example, you own 1 share of GOOG/GOOL on 14 July and the market price is $3,000 at
the time. On 15 July, you will wake up with 20 shares, with each share being priced at $150.
As investors, a share split does not change the value of the business at all. The intrinsic value
of the whole business remains the same. As investors, we are no better or worse off because
of this split. While the split may make the shares look cheaper psychologically, it does not
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actually become cheaper. This is because the intrinsic valuer per share will be divided by 20
as well.

The reason a company decides to split its shares into small pieces is so the absolute price
becomes smaller (from $3,000 to $150 per share for example). This is to make it more
“affordable” to retail investors which could in turn lead to greater demand for the shares.

Having a smaller share price could also qualify GOOG/GOOGL to be included into the Dow
Jones index (which is a price weighted index). GOOG/GOOGL has not been admitted into
the index because its share price is too large and it would skew the Index price. Entry into the
index could help increase the stock’s price as it would require all the funds & ETFs that own
the Dow Jones to buy Alphabet shares. The other advantage I see is that it allows us investors
to more easily buy 100 shares and hence sell covered call or cash secured put options. This is
because 1 contract of options equals 100 shares.

Is GOOGL still undervalued after its recent price jump post earnings? After the initial gap
up, GOOGL’s price has retraced back to the 50MA on daily candles. This prompted me to
add more shares as well on Friday. While I already have a relatively large position in
GOOGL (bought few years ago), I still find the current price reasonably valued. So, I did not
mind adding a bit more.

GOOGL Daily Candles

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From my conservative Discounted cash flow analysis, I calculate GOOGL’s intrinsic value to
be $3,486.95 per share. At the last closing price of $2,865, GOOGL is still 17.84%
undervalued. Post share split, the number of shares will increase 20x to 13,220 million and
the intrinsic value per share will become $174.35.

Historically, once a company announces a split, the share price tends to rally up to the day of
the share split. Right after the split, the share price tends to retrace back to where it started.
For example, AAPL announced its share split in late July 2020. The share price rallied all the
way up on the news. After the shares split on 31 Aug, the price retraced back down to the
level of the split announcement. Will this same pattern play out in GOOGL? That remains to
be seen.
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Note: This is NOT a recommendation to buy FB or any mentioned securities in this

newsletter. This research is shared only for educational purposes only.

AAPL Daily Candles

Wishing everyone a happy and prosperous Lunar New Year and may you grow your
portfolios in the year of the Tiger (my birth year incidentally!).

Stay safe and may the markets be with you

Adam Khoo
Get latest updates at facebook.com/adamkhoosuccess
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