Alphabet’s New AI Chip… And Rising Power Bills No Matter What Happens With Inflation 4/9/24

0:02Live from the Nasdaq market site in the heart of New York City's Times Square. This is fast money. Here's what's on tap tonight. Google gains. The tech giant closing back in on a$2 trillion market cap as shares hit another all-time high. How Alphabet got its AI ambitions back on track and how the cloud is powering those gains. Plus, charged up, utility companies push rushing to upgrade U.S. electricity grids, and that is driving power prices higher for you. What could that mean for inflation as the Fed ponders its rate cut path? And later, Boeing's backslide as the planemaker faces another whistleblower claim.

0:35Cisco surges on a bullish call from Morgan Stanley. And banks get ready to kick off Q1 earnings season. How the rate backdrop will impact their business. I'm Melissa Lee coming to you live from Studio B at the NASDAQ. On the desk tonight, Julie Beal in person. Karen Feinerman, Dan Nathan, and Guy Adami. Stocks trying to stage a late-day rally as investors wait for tomorrow's key inflation report. The NASDAQ and the S &P managing to climb into the green. While the Dow is slightly lower ahead of CPI, economists expect consumer prices rose three-tenths of a percent in March versus February. Compared to last year, they're expecting a slight acceleration to 3.7%.

1:10We'll get to all of that in just a minute. But we start with a fresh all-time high for Google. The tech giant unveiling a new chip to compete with Microsoft and Amazon at its cloud event next conference in Las Vegas today. So what does this mean for Google and the race for cloud supremacy? At least for today, that meant another 1 % gain and a new high. Well, maybe they're not losing as badly as we thought a couple of months ago when the stock was cascading lower. But, you know, I think it's partially that. I think mostly this is just my opinion. NVIDIA's weakness is Google's gain. I believe that 100 percent.

1:45And if rates continue to go higher, which I also believe, I think those high flying, high valuation names will continue to sell off. And I think people will rotate into Google like they're doing right now. They report, I believe, on the 23rd of this month. We've said it for a while. I think you stay with this name in the earnings. I mean, this is the one out of many of them that you can make a rational case for in terms of valuation. A very rational case in terms of valuation. I think it's actually 25th this month. But it's not like they were all of a sudden in the AI game. They just did such a terrible launch.

2:16I mean, you know, we talked about that ad nauseum, which was ad nauseum the moment it came out. But it's it should be much higher, actually, I think. It's been at this this P.E. 23. If you back out the cash, it's 22, 21. It should be a much higher premium to the market when you consider what an extraordinary company this is. And I think also not only was the launch not handled well, but I also think the fears of what would happen to the search business, which obviously is the engine of earnings here, have not come to pass as yet. They could. But so this is sort of the sweet spot of the beginning of their launch.

2:52I think we could see a lot more upside. If Gemini really takes off and gets anything like a co-piloty kind of excitement around it, I think there's good upside here. Yeah, I agree. I think the company is so well positioned because not only do they have the ability to create these chips, and we know that there's just this race to be able to replace NVIDIA with FPGA and ASIC chips, but they have the data to train on, right? It's not just what's on search. It's in our emails. It's in our calendars. And they need that data in order for the large language models to be any good. So I think they're really well positioned.

3:23And with the stock where it's at, it really looks pretty compelling to me. Yeah, it's interesting. I mean, this is not the reason why I would say that Google should be up because of, you know, the generative AI story changing. What they need to do is really on this Gemini product, they need to actually have some successful launches. They need to demonstrate that their product is as good as what OpenAI is offering and some of these other upstarts, right? And so I don't think this chip does that. So I just think it's kind of interesting as like an extension of the conversation we were having last night in a way.

3:49is like when you have NVIDIA coming off, you have some of these other stories kind of, you know, just kind of grinding a little bit, going sideways a little bit. I mean, people are looking for opportunities and things that are unloved. We talked about low expectations and really poor sentiment last night. I think that's what's going on here. But I don't think you're buying Alphabet right now because of their ability to better compete with NVIDIA, you know, in generative AI, like, you know, high-end GPUs or anything like that. As soon as they come out with a product that people want to use and they can charge, you know, 20 bucks a month for, you know, additional or something like that, then put it out across their productivity suites and the like, that's when people are going to start recognizing the relative cheapness, in my opinion.

4:26So I don't mean to throw cold water on it. Last night we all sound really optimistic about it, especially as the trade or the idea is broadening out. But for their chips, I don't think that's the reason why it should be going up right now. I don't know. But to the point that the chip business will help the cloud business. Do you think this software company is going to do better at designing high-end GPUs than they will doing software? you know what I mean, that is going to better enable search and defend their moat? That's my only point. So I'm just trying to push back at a narrative here. I think a lot of people want to be bullish on this name right now, but I don't think this is probably the best reason to do it.

5:01Well, let's get to Deidre Bosa. She just sat down with Google Cloud CEO Thomas Kurian in the last hour. She joins us now. Deidre, some big announcements. What did Mr. Kurian say? Yeah. So let me just hit on Dan's point right there is that the chips are supposed to be part of this full ecosystem that is supposed to serve customers in the cloud. And that's really the proposition here. I also heard Karen say that Google is trying to create some co-piloty excitement. And I think that's right, because the problem with Google's generative AI has been mixed messaging. There was BARD, there was Duet AI, and now it's all under the Gemini umbrella.

5:35So they're streamlining it in the way that Microsoft has sort of streamlined its proposition into Copilot. Now, even though Google has developed the technology to make even chat GPT and any of the other models possible, it has been seen as playing catch up in that race. So at its annual cloud event that's happening right now in Vegas, it's really a chance for Google and its executives to tell its cloud computing customers what sets it apart. So when I just sat down with Thomas Kurian, he is the Google cloud chief. I asked him that very question. What sets him apart from the hyperscale rivals. Have a listen.

6:11One of them is offering a closed system. They have one model, one provider of that model. They don't even own that model. The other one does not have any AI expertise, so they only offer third-party models. We blend both. We have our own models, and we have the expertise to build systems and integrate these models into our products so that people can use it. At the same time, we're not taking a closed proprietary point of view. Now, he did not name Microsoft and Amazon, but that is clearly who he is talking about. Microsoft, he's referring to with the closed system and Amazon, he's referring to as the one without AI experience.

6:52And I got to say, guys, this is the most sort of aggressive or on the offense that I've seen Google executives in a long time. He wasn't mincing words here. And he's saying, look, we've got all aspects of this. We've got the model that we're developing ourselves, both an open and closed one in Gemini and Gemma. Plus, we have access to all the other ones that people want to use. And it's about that openness and choice, at least for the enterprise customers. I covered a lot more ground with Thomas Corian, and we'll be showing that in TechCheck and the exchange tomorrow. It sounds also, Deidre, like they're aware of other companies scraping data from their websites, and they're being a little bit more tough about it in terms of what those companies can get from their data.

7:33Yeah, and that was part of the product announcements today, something called grounding. Google has such unique access to a database of information because it has been the gatekeeper to the internet. It has the most up-to-date. So that's one of the strengths that they're telling their cloud customers as well. And as we know, to build these models, you need a ton of data to do so. And everyone's competing right now on speed and accuracy. And one last question, Debo, what has pricing been for cloud? We just heard that Alibaba cut its pricing 23 % for international customers who use data centers that are housed outside of mainland China.

8:09Does that put pressure on these other hyperscalers? So I did ask Thomas Corian what monetization looks like. And he said that there's customers coming over from other cloud platforms to take advantage of their generative AI tools. He says this is new money being spent. He didn't talk about the exact pricing of it. But the idea that it's new income coming in, they're not just changing it and they're going to Google because they offer a unique set of these tools. All right. Debo, thank you. Deidre Bosa, back at Anglewood Cliffs. So does anything change? I mean, you mentioned the chips. They're using NVIDIA H100 architecture, right?

8:50They're using ARM architecture. So it's not necessarily, you know, we're pulling the chip making business entirely. No, I don't think I think that's sort of the point Dan was making. I don't think that's what's happening. I think what is happening, though, was it October of last year when they had that 11th hour meeting, that emergency meeting to talk about things and the stock fell off a cliff? I mean, that was obviously a weak point. Now, at least they're flexing a little bit. I think I heard that term. And Dan Ives talked about it today, I think, on Closing Bell. I mean, they're going to compete with people now.

9:19And I think they're taking this head on. Valuation has always been compelling. There's clearly still a moat there without question. And I definitely think if other names are going to show the weakness that we've seen now for the last four weeks, Google wins to that. Yeah, and there's other ways they can win, right? So we're just talking about, OK, their generative AI models, that's one thing, right? But their cloud is really important, right? So when you think about, like, enterprise customers who want to use these services, they want to use them on these public clouds. You know, Google Cloud is number three behind AWS and then behind Microsoft.

9:47So all of this stuff is important. So I don't mean to like poo-poo that sort of thing, but I mean, ultimately, there needs to be some sort of product that comes out that looks as exciting as GPT-4 or some of the other things that we've seen. And they have not been able to do that yet. I think when all those things start to come together, then you'll see an acceleration in their cloud numbers and the like. And you're going to see acceleration in cloud usage overall because of all this stuff. And we had just gotten to a period at one point last year where I think AWS's growth like year over year got down to like 11 or 12 percent or something.

10:16This is a business that was growing 40, 50 % plus for years and years. I think people were getting a little downbeat on all of these business models until generative AI came around. Yeah, I think if you look at Google's business model, so much of it is really driven on being able to be a nice party to play with and not be completely dependent on AWS or be completely dependent on Microsoft. And if you think of their installed base of businesses that actually use their products, right, their Google Sheets and all of that, being able to insert just a little bit of AI is going to be really meaningful to their business, right?

10:46And it doesn't even have to be that great. Google Sheets are pretty terrible as a product, right? But a lot of businesses use them because they're functional and they work good enough. And I think having even good enough is going to be good enough for them to really be able to move the needle. Yeah. And we made that case though for Apple too, right? They have such a big installed base of people who use it. Siri is terrible. Siri, yes, we did. But still people use it because it's on their phone already. It is the most frustrating thing. I just asked Siri like five times that I just looking it up myself because I just cannot believe how bad Siri is.

11:21I think they just scrapped Siri entire. It's amazing to me how such a product that cares so much about interface. And yet you do use it. I hear you using it in the green room. I know. But the point is that you use it because you are an installed based user. I am. And I hate it. And I think it's terrible. And I still will do it as well. Yes, yes, yes. You know, it's interesting. me about the Google multiple, which is so low. Microsoft and Amazon get a much higher cloud multiple, right? I think that Meta gets a much higher advertising. Well, maybe not. And then YouTube, I think, gets a lower multiple.

11:59And then there's all the money that they spend on losing money. So somewhere in there, there should be a high multiple. We haven't seen it yet. All right. Let's turn out to the countdown to tomorrow's CPI report. The Dow climbed back from a 320-point deficit. Ahead of that release, ending the day virtually flat, the Nasdaq grabbing 52 points. Meantime, the 10-year Treasury yield retreating from four-month highs hit yesterday. So what are markets telling us about what they want to hear from tomorrow's report? Now, oftentimes, we like to play this game, Guy. Yes. If I told you what the report said today, what do you think the markets would do?

12:33Because it seems like the markets have a propensity to go higher when things show a hot economy and when things show that things are in line or in check, like inflation? So my answer should typically be, it's going to go higher, Mel. But I don't, so a hot number to me, and I think what we saw at the end of the day, this is just me, what we saw at the end of the day, people squaring up ahead of tomorrow. What was the most interesting thing to me today was the fact that at one point, the VIX was north of 16.5, closed below 15. I mean, we haven't seen a move like that in the VIX in quite some time.

13:06Yields are interesting. I still think yields are going higher. But to answer your question, a hot number when I say hot, I guess, course, three point eight is what the street's looking for. Three eight or higher. And I think the market's not going to like it a lot. And I think you're going to see bonds continue to sell off. Gold continue to rally despite yields going higher. And the S &P sell off on the back of it. Bank of America says a strong inflation print will send yields to four point seven five percent, which would be wow and probably not very good for equities. Yeah, you would normally think that for equities, that's going to be problematic.

13:39And, you know, if I think about it with my small cap hat, that's problematic for them, too, because they have more exposure to variable rate debt. But overall, I think a hot CPI print just puts cold water on the thesis that, you know, we're going to these market rate cuts are going to completely make it easy to be investing. Right. We've been benefiting from low rates for such a long time. It's like being on a moving walkway at the airport. Right. You think you're going so fast, but you have a lot of help. And so I think we could be losing that help soon. Karen? I think anything sort of right up the fairway or a little cooler is good.

14:12Anything else, I think the market will sell off. Yeah, it's interesting, though, that you mentioned small caps. I mean, small caps look a lot more constructive to me than the S &P 500. The S &P 500 really feels like it's losing some momentum. And at one point today, I looked up at my screens and I saw all the banks down like over 1%. I saw like American Express down more than 2%. And I was like, oh, I have not seen that sort of price action. in a really long time, and video is down more than 4%. I was like, oh, this has the makings to be finally like a proper sell-off. So I say to myself, last week we had this run-up in yields into the all-important March jobs report.

14:45Isn't that what you call it? The all-important? All-important. Every release is all-important. And then the number comes out. It's hotter than expected. It gets explained away, and the yields go down. You know what I mean? And then stocks went up. So I think about this one. I really do think, though, that if it is hot, I think yields are going to go up. I don't think they're going to go straight to 4.75. But I think the S &P is going to be testing that 50-day moving average at 5 ,100 or so. Well, ahead of this all-important CPI report, Wells Fargo Securities hiked its year-end price target for the S &P by 20 percent to a street high of 55.35.

15:16Chris Harvey is behind the call. He is the firm's head of equity strategy. Chris, always good to see you. Good to see you, too. You really sounded like you reluctantly did this. Like you really didn't want to do this, but you had to do this. You know, it's weird. This won't sound great. But even though we're high in the street, I don't feel bullish. It's not that, wow, multiples are so cheap. Things are going to be fantastic. The economy's on fire. The Fed's cutting rates and they're going to start slashing tomorrow. No, what it is is people are looking further and further out. They're getting more and more aggressive with their discounting.

15:48We're going into that period of greed. The Fed's going to add too much accommodation. We're starting not, we can argue about two cuts or three cuts and when, but they're going to start a multi-year easing cycle, right? AI, AI is still that secular story. And at the end of the day, I also think that M &A is going to start to kick up, right? And if we have a change in either the Senate or the White House, regulation is going to change. So when I put it all together, I think prices are going higher, but I don't feel real bullish about it. It sounded like, though, that if the three priced-in rate cuts go away, that you become less bullish?

16:27No, actually, no. So I'm going to, Guy said something that I don't quite agree with. What we've been seeing is as rates go higher, that's actually good for the market because the status quo stays, right? If the status quo stays, growth is good. That's good for growth. That's good for momentum. And it's good for large cap. We start to see rates go lower. Well, what works? Things that are out of favor, utilities, small caps, more levered companies. So in actuality, why did the equity market rally when we went from seven cuts to three cuts? Because the status quo stayed. If we start to lower rates, the Fed gets more aggressive, then you can start to see the rotation and large caps.

17:06To Dan's point, large caps start to go sideways, not up. Totally get that. Here's the pushback. What is then gold telling you in an environment where it should be getting whacked with yields going higher and the dollar going higher? Gold's making all-time highs seemingly every day. Right. Now, that's a great point. This is something that we struggle with because I see two trades in the market. I see that momentum trade and I'm seeing a reinflation trade. But both of those trades are helped by higher rates or rates not going lower. Right. And so I don't quite know what's what's happening with gold, but we are seeing it's gold, it's silver, it's copper, it's it's energy all going higher.

17:41There's a bit of a reinflation trade as rates have been going higher. So I think the Achilles heel for the market is actually lower rates or much, much lower rates. So, Chris, I'm assuming that that new target all the way up there at some level that I can't even contemplate. I'll be out of business if we're there anytime soon. No, it's predicated on like some earnings expectations for the underlying stocks in that index. OK, so all those things that we just talked about, higher commodity prices, higher yields, higher dollar, you know, a consumer that seems to be kind of stretched a little bit here.

18:11You know, we can get into consumer credit and defaults and all that sort of stuff. at some point, doesn't this all have to be a bit of a headwind to corporate earnings when they have an inability to maybe pass through some of these costs? And this is one of the things that I think kind of spelled the markets a little bit back in 2022. It's great. So what happened in 22, I think, is the market ran into a buzzsaw with the Fed. One of the reasons we struggled, we struggled with this 250 number on 2025. One of the reasons why we stayed too low for too long is We couldn't figure out the earnings power.

18:44And what we realized is what you're seeing in the market is what you're going to see on the earnings side. The winners will keep winning. You don't need a strong economy for large cap because you're going to get a market share shift. The winners, the higher profit, the higher growth companies are going to gain more than market share. AI is not discretionary anymore. Right. And so those companies will continue to gain. So you don't need the market to be you don't need GDP to be four or five percent. You can do it with GDP at 2%, 2.5%, because you're going to get these companies that are highly, highly profitable, a much bigger percentage.

19:19And we've already seen it, percent of the S &P 500. So if the winners keep winning, you don't need that growth. And that's what we're banking on. Chris, what about just productivity and other companies that aren't supplying the productivity but are using those productivity tools? How much do you factor that into your earnings? Yeah, so we're not seeing the productivity from AI just yet. We expect to see it. But every single company is saying, we debated this. Is AI discretionary? Is it not discretionary? It's not discretionary anymore. And it doesn't matter if you're seeing the productivity gains today.

19:53You will see them tomorrow and tomorrow. You had Jamie Dimon talk about it as a steam engine and so on and so forth. It's not a question of if. It's just when and how we're going to do it. Chris, always great to see you. Thank you. Chris Harvey. Julie, in small cap land, are we starting to see AI productivity gains? How are you thinking about how AI changes how companies operate, how productive they are, etc.? I think it's still it's pretty mixed right now. Part of it, too, is thinking about how AI gets impacted by regulation and all of the reports of hallucinations and things like that. So I don't think companies are really willing to adopt broadly.

20:28But if you own a small cap software business, those coders, those engineers, and those product managers, they're using a lot of AI to generate their code. And they're sometimes 10, sometimes 20, sometimes 40 % more productive. And that enables them to be more profitable, come to market IPO at better earnings multiples than they had been able to before. 55, 35, you just, you can't, you can't accept it. It's not, that doesn't sit well with you. So the last time the 10-year yield, and again, maybe Chris is totally right in that the pushback, you know, with the rates thing is that the last time that we had yields, you know, at, I don't know, man, when we broke out at 4 ,600, the S &P 500, when the market was pricing in six cuts for this year, okay, the 10-year yield was at 4 ,15.

21:15You know what I mean? Right now, we're at 4 ,35. If we have hot data and we go to 4 ,55 or something like that, I just think that there's a lot of multiple expansion that's going on there. And I just want to push back on one other thing is like to say that AI spending is not discretionary, I get that. But you cannot discount the fact that enterprise spending is going to be a thing that is cyclical, right? And so if you do have issues as far as earnings are concerned and margin compression and that sort of thing, and you've cut a lot of jobs already, then ultimately, if your sales go down, you will cut enterprise spending.

21:46You know what I mean? And so there will be some cyclicality to this. And we're not experiencing it right now because everybody has to be there. If Jamie Diamond is putting out a 61-page opus comparing, you know, generative AI to the advent of fire and the wheel and everything else you want to throw in there at once, you look like a real you-know-what if you're not, like, spending and focused on this no matter what business that you're in. So, like, my point is, is at some point that recession that had been alchemyed away over the last few years or so is going to hit or the fear of it, and then you will see an enterprise, like, a softening enterprise cycle.

22:19What was that Tom Hanks movie that when he was a castaway? I'm the captain. Castaway? That's what they call that movie. It's hot. I could be one of those people on some island. I'm just talking to a volleyball. My rescue was dependent upon Siri. I'd be looking for coconuts and hanging out because there's no shot of me ever using that. Just saying. Zero. Was that like a non sequitur? No. Karen was talking about her use of Siri earlier. How do we save Guy? And she would say, today's Thursday. But I stayed with me. Next block, I would have forgotten. Next block, you'll react to Chris Harvey. Coming up, more bruises for Boeing.