Apple’s Weakness Finally Hits The Market… And The Obesity Battle Budget Impact 3/5/24

0:01Live 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. Bruised and battered. Shares of Apple slumping now down nearly 12 percent for the year and a major drag on the markets today. iPhone troubles in China falling behind in AI. Those are just a couple of the bear case talking points. We'll get the bullish take coming up, plus a coming obesity bomb. Why a former Obama economic aide is warning the boom in weight loss drugs could become a government budget buster if something isn't done and soon to fix this pricing problem. The traders are set to weigh in on this one, pun unfortunately intended.

0:37Yes. And later, Bitcoin's record-breaking rise and big-time retreat targets retail recovery and major stock pop and bringing generative AI to the insurance business. I'm Melissa Lee. Coming to you live from Studio B at the NASDAQ, on the desk tonight, Tim Seymour, Dan Nathan, Guy Adami, and Julie Beal. We start off with Apple shares in reverse, the one-time biggest company in the world, seeing its stock drop another 2.8 % today. They are now down more than 14 percent from the record high, hit less than three months ago. The company has lost more than$450 billion in market cap in that period. That's more than the entire value of UnitedHealth.

1:10The latest catalyst weighing in on the stock, a report that found iPhone sales in China plunged 24 percent in the first six weeks of the year. Market share in the company's third biggest market also falling. And Apple's weakness today did seem to filter into the broader market. The Nasdaq falling as much as 2%, closing just above the 16 ,000 mark. The S &P and Dow also down more than a percent. So was this the break in the market euphoria that some of the desks have been waiting for? Before you answer that, I want to point out that both NVIDIA and Supermicro actually finished higher today. Actually finished higher today.

1:45So what's the deal here, Tim? Well, if we're answering the big, like today, are you a Brady Bunch fan guy? I mean, come on. Who is this? Right. So remember the Marsha, Marsha, Marsha? Yeah. So today was China, China, China. Everywhere you looked, it was China. It was China on Apple sales. It was China in AMD. It was China back home in China, not delivering. It was China beefing up their defense. I mean, it was Tesla seeing shipments dive in China. It was all about China. Back to Apple. If you think about where Apple's been getting their growth, we know services have been where they've been getting their multiple, but they over indexed to U.S.

2:18and China. So 33 percent of global iPhone sales are U.S. and China, they're around 54 percent and they're losing ground fast to Huawei. So some of this are the dynamics that we've been talking about for a long time on this desk, which is that if you make things really ugly for China, I think some of our most important companies are going to find it kind of tough out there, too. Then there's Huawei, what they've been doing on their just on their own. They picked up 750 basis points of market share in the last year and Apple's fallen 200. So the dynamic here around things that I think have been plaguing Apple for some time.

2:50And more importantly, at this point, it's the market that's planning. I mean, you know, the fundamentals are what's bringing this story forward. But it's very clear. Apple has been underperforming and a relative underperformer for a long time. That's dead money for over two years now, if you look at where they got to 179 in March of 22. Yeah. And the data from Hanhai on 18 percent sales slump, that really underscores this notion that China is weak. It's a problem market. But Apple had been given the benefit of the doubt for a long time in terms of its revenue has been slowing. And now it's not.

3:22And that's part of the story, right, of the differentiation amongst the biggest cap tax. It's not being given the benefit of the doubt. 100 % right. And finally, at least today, the market caught up in staying with the Brady Bunch. Why wouldn't you? Why wouldn't you? Yes. So, Ann B. Davis, as you know. Alice. Nice job. Tremendous. Nice job, Matt. But she was the center square. I mean, she was the linchpin to that entire family. if you think about it. And there was an episode where she left because she didn't think she was needed anymore. The whole place went to bleep. Dan used the word. That was Alice on K.

3:53Remember that whole thing. That was Alice on K. With that said, that sort of, Apple is the linchpin to the entire thing, I believe. And now it's finally starting to show the signs of why it is. Now, the thing you have to figure out is where am I buying Apple here, not where am I selling it. Those days, I think, are over. The first level comes in the form of the October low, 165-ish. We'll see what happens if and when we get there. And then you're probably talking, if in fact it overshot, you know, 152 is the next level. But I do think finally the market's starting to catch on to the Apple weakness.

4:24So we as a show are not afraid to admit that we are wrong. Every day. Every day. We say it gladly. We do. Just yesterday, we led the show with this notion that, oh, the market is broadening. Apple's down and we're OK, Julie. And yet here we are today. Maybe we're not so OK. Where do you stand on that in terms of whether or not you need Apple in order to advance here? I don't think you need Apple, but I think what you do need is we do need more breadth in this market in order for people to feel confident that there is some staying power and there is some strength in the economy. The biggest problem we have is that the economic data is going all different kinds of directions.

5:03And so people are flocking to the growth stories that they feel good about, that they feel are durable. And so you see that, that anytime there's any kind of whiff, we're going to talk about a big whiff of mine later in the show. Anytime you see any kind of whiff, people sell the stocks aggressively. And so that's kind of what we're seeing here. I do think that the long term fundamentals in Apple are good and interesting. I think they're going to do the same thing in AI that they've done in all of their other businesses, which they are a fast follower. And then they design and make it better. And they leverage the fact that everyone believes they're a safe and secure place.

5:35But in the meantime, I agree. I think it's really challenging for the stock to work from here. Yeah, I agree with all that. And I think they are a very good fast follower. And when you think about that, this is really important fast follow, though, because where they get this margin right on services, this is what this is going to be tied to. Right. And so the hardware business is declining. And right. And they have like what, 15 percent market share in China, 20 percent of their sales come from China. And so China, you know, again, that's a separate conversation here. So how are they going to actually go from a 45 % gross margin and justify a 30, you know, it was trading at 30 times.

6:09I mean, that's really important just to remember just two months ago. So now it's about 26 times and you don't get there on a hardware sort of multiple, right? So you need to have something in the Gen.AI space. And the fact that it's only down 13 % on the fact that some of these other mega cap tech leaders like Microsoft and, you know, Amazon and Meta have caught up. And obviously, NVIDIA is a different sort of story here. This actually does present an opportunity. I think the way Guy kind of mentioned it a little bit is not, you know, figuring out where to sell it, is actually figuring out to where to buy it.

6:37I know you were talking about 160 a lot all summer long. It almost got there, got to about 165 or so. I think at that point, it discounts a whole heck of a lot of the skepticism around their lack of gen AI. And the other thing I'll just say is about Vision Pro. When you think about spatial computing, it really is about services going forward. Right. And that will all of this AI sort of stuff will work into that at some point. And I go back to our conversation last night with the CEO of Perplexity. I think there are certain opportunities that will exist for some of these big platform companies.

7:07Most of them will not be able to make acquisitions. Apple probably can when you think about what Amazon's been able to do in this space, what Meta's been able to do in this space, what Google's been able to do in this space, and obviously Microsoft. So that one, to me, kind of plugs a hole. One last thing here before I go away. The China, China, China thing. I don't think the market's here. I don't think investors are paying attention to this. China is exporting deflation right now. China has a huge youth unemployment problem. China has a huge demographic problem. These are things that are not fixed very quickly.

7:38Our government is getting a little focused on the idea of dumping EVs and all this sort of stuff. If they start dumping all sorts of things because they don't have the internal consumption dynamics, this is going to spread from Apple and Tesla to other parts of our markets, other parts of our multinationals that are relying on China. So I think this is a precursor. I know we've been saying this for a long time, but it's here, people. I mean, that's what Tesla and Apple are telling you right now. Well, I don't know that it's priced into a lot of U.S. companies that are so dependent on China. I hear you.

8:06And again, this was like China's Super Tuesday. I mean, there was a lot going on out there. And I think they disappointed in terms of a policy response. I think we priced in a lot of China pain in the Chinese stocks. I'm not sure we priced enough of it into the U.S. stocks. And so we could go around to Nike. We could go to Starbucks. I mean, we played this game. And meanwhile, the rhetoric only ratchets up that much more. So I do think it's a really important point. I do think we're kind of Goldilocks on a lot of different stuff. The fact that NVIDIA closed higher on the day when semis were down one and a half percent.

8:35And by the way, at one point, semis were down, excuse me, significantly more than that. It just tells you where I think there is a lot of fear. And that is the FOMO kind. I mean, NVIDIA and Supermicro, the latest entrant to the S &P 500, finishing higher today of all stock. It's in a word impressive. I'm glad Tim flagged that because on a day where they had every reason to take those names out to the woodshed and leave them there, they crawl their way back. So good for them, I guess. I'm not quite sure what that's on the back of. I mean, if that is a flight to safety, then I think we're all having a much different conversation because that's a little bit scary.

9:12But you can't deny the fact that there is still a thirst for these names without question on valuations that I think are stretched, but clearly the rest of the market doesn't seem to at this point. Our next guest says that despite current weakness, Apple could be set for a Munster turnaround when it unveils its first foundational AI model this summer. Fast Money friend Gene Munster, Deepwater Asset Management, joins us now. Gene, great to have you with us. And you tweeted this yesterday, and I thought that was really interesting because we've all been trying to think about, you know, what is that upside?

9:40What is that unknown? If Apple manages to come out with something, we've all got these phones. And the likelihood of us saying, you know what, I'll pay X dollars a month and to sort of capture that revenue right away. seems to be sort of low-hanging fruit. But you walked through your assumptions yesterday. Can you go through 1.4 billion active users and then what? So they've got 2.2 billion active devices. That's the number that they give. They don't give out the monthly active users, but you can back into that. And as you said, it's about 1.4 billion. And they have a history of having services, obviously everything from music to iCloud storage to Apple TV.

10:19be. And if they can, on average, those are about$9 a month. And so if you just take a product that's personalized AI, and I'm going to talk about the product in two seconds here, but you take a personalized AI product, you sell it to 20 % of that base for$10 a month, that's going to add over 15 % to operating earnings. And I don't think, I think that's a very achievable piece. 15 % to operating or operating income is important when you look in the context that Apple, after they report the March quarter, their business will be down on average 2 % per quarter. And so anything in the growth direction is going to be viewed as positive.

10:59I buried the lead, Melissa, the question about what is personalized AI. This is a chat bot essentially that is personalized to you and will do tasks for you. So it could remediate a utility bill that you don't like. It could set up some social event. there's infinite number of things that you can do with a personalized AI. Apple, of course, is in a unique position related to their privacy and security, a unique position in the sense that consumers have to give their data to have this personalized AI be acted. And I think that people will take that. So that's the lever to the model. If I may, Melissa, I want to quickly go back to the conversation more broadly related to everything that's wrong with Apple.

11:42And I think that the panel did an excellent job of just framing in what the near-term concerns are. And when I think about those, those are things that are potent in the near term. And the key question that I have when I think even beyond AI is a very simple question, is are we going to use devices in the future? And if the answer is yes to that, Apple is the only company that brings together hardware, software services, soon to add AI to that. Think about that. Name another company that seamlessly It obviously brings hardware together across devices. Nobody does that. And so I understand this is a dark chapter for Apple, but I believe that once they inject AI into that ecosystem of hardware, software services, bring that together, I think that this tide will turn.

12:28So we had the co-founder and CEO Perplexity on yesterday, and we were discussing his thoughts on Google's AI problem. And I thought he framed it really nicely and succinctly in that, you know, when you use the word Google as a verb. It's almost synonymous with finding the answer. It is the equivalent of finding the truth. And it's almost the opposite case with Apple and Siri. It's almost a universal joke that Siri is terrible. Everybody hates Siri. And, you know, Siri can't understand anything that you're saying. So where does that put the bar in terms of Apple having to deliver on this personalized AI if there's already this notion that the AI that Apple has in your device currently, which is Siri, is horrendous.

13:14The one advantage that Apple has is that even though the product is horrible, Siri's horrible today, it does three things for you. It can do a call, it can set a timer and tell you the weather. Even though the product is not up to par, people still use it, and they use it multiple times a day. And that's the opportunity for Apple. They don't have to have the best. They don't have to compete with the best foundation models. They got to do it good enough where people say this made my day better. And I think that that is a low bar for them to clear. And I think that they will, they're not going to do it in June, but they're going to show the framework of how they start to improve that.

13:51Gene, I know you've been bullish. I know you've been right. The stock since July of last year, it's been sort of a weird trading environment for the name. Topped out, traded back off. I think it basically tried to make a new all-time high, traded off again. Here we are at these current levels. understanding that the difference between 170 and 165 doesn't matter if you think it's going to 250. However, I know there's a little bit of a stock trader in you. So where do you think this thing gets down to when you get out there and say, you know what, that's it, that's the bottom? I think we're close.

14:21And I think that today's injection from CounterPoint about China being down 24 percent, you're on the math on that. If that ends up holding up for the quarter, they'll miss their numbers by 3 percent. The stock was down 2.5 percent today. I think that it's never fully priced in, but I think we're getting close to that. It has been, by my measurement, this has been the worst month and a half for Apple from an investor standpoint. There's always a fire out there, but we've got four fires going on right now. This has been the worst, and I think that sets up for a good rebound in the next six to 12 months.

14:51So, Gene, I guess that's the point. By the way, if Apple can ever actually get involved in a dispute I have with the cable company, I will put a 15 multiple on it. I mean, that'd be amazing. Fantastic. But it gets back to what you're saying. I mean, this period of six weeks, I think it's been a lot longer. And I get back to you, the analyst. What's the multiple? Because we've been having no problem putting a much higher multiple on Apple for the last three years, four years around services. You make great points on the comparison to Meta and where at what point that, you know, that, you know, essentially those DAUs, those MAUs, whatever they're counting these days.

15:24But talk about the multiple, because, you know, around 30 times is where most of the street is willing to stay, despite the fact that it's been such a period of lack of anything. So that meta example, just to kind of fill in the broader audience here, is the basic idea is that when meta was wiped out, people forgot the general, how big their install base was, the DAUs, their kind of that fabric, that framework. That's the same thing about Apple and their devices. I think that the reason why I mention that and make that comparison is I think that that is a justification for a multiple that is outpaced relative to the company's growth rate.

16:02I think the multiple is ultimately in the high 20s until they start to show some excitement around AI. Then I think it can go higher. Let's put it in the high 20s. A 28 multiple put an$8 earnings number on that in a couple of years. I think you get 225, around 225. So the loose math there is you get 30 % upside. So if AI, to answer your question, Tim, is the multiple is not going to go up much if they don't crack the code around showing that the business is going to reaccelerate. If they do show reacceleration from the business, I think the multiple goes up. Jean, always great to hear from you.

16:42Appreciate it. Thank you. Gene Munster, Deepwater Asset Management. What's your take? Yeah, I agree on most of what Gene said. The one issue I have is that, you know, for them to get material revenue that will cause the sort of bump in margins and justify a higher multiple, it's just years away. Like from a product offering in and around AI, because they're going to probably introduce a phone that has AI on the phone. The margins are very high on AI. Well, right. But think about this. OK, I just want to be really clear. So Microsoft, you know, 69 percent gross margin company versus, let's say, Apple at 45.

17:14Microsoft has mid-teens expected growth for the next year. Apple has mid-single digits, right? And they don't have Gen AI. So if you're going to make a bet here, you're probably going to bet that Microsoft's going to be able to inflect at some point, right, and get a lot of leverage from the investments that they made in this Open AI thing. And Apple has not articulated a single thing that they're doing on the thing that the market is actually paying up for right now. And that's why the stock is being sold. So you just did a self-would-you-rather. But I like what you did. I like what you did in terms of the inflection and the investment now and when it's going to pay off.

17:46So, Julie, I'll put the same question to you. Microsoft or Apple here right now for AI and for stock games, obviously. I would say probably Microsoft, not just because they've already made the investments. It's like they have the right people. Think of how stressed out everyone was when there was all the drama with the OpenAI board. The keys to OpenAI are really with a handful of people. The fact that Google has spent so much money so many years and can't really come that close to it tells you everything you need to know. So I think the IP is really with Microsoft right now. All right. Meantime, the 10-year yield dropping to its lowest level in a month today, crossing below its 200-day moving average.

18:26This comes ahead of Fed Chair Jerome Powell's semiannual testimony before Congress, which starts tomorrow. Let's get straight to senior economics reporter Steve Leisman with what to expect. What kind of Powell are we going to hear from tomorrow, Steve? I think, Melissa, the thing it looks for is that it's going to break it down into three different categories here or three different areas. You've got the political side, the regulatory side and the economic side. Politically, expect Republicans to coax Powell into being more cautious or concerned with inflation. Democrats might argue more so the case for cuts.

18:58Futures markets going into this testimony price for a little chance of a rate cut in March or May. Better chance of cuts beginning in June. Financial regulation might be a hot button issue there. Melissa, with plenty of criticism from the Republican side and even some Democrats about plans to require banks to hold more capital. I expect a bit of that back and forth tomorrow. Economically, that's where it gets interesting. Powell is sure to note that inflation progress you've had, but insists there's no victory yet. Hillock stole the good economic growth and employment numbers, but say risks are nearly balanced, but with a wary eye for inflation to rekindle.

19:31It's here that there could be some downside risk to the testimony. With some concern, Powell leans towards fewer cuts. If you take a look here for year end, the futures market now prices in 3.75, 25 basis point cuts down from 7. But not far right now off the Fed's 3, although some officials are looking for only 2. That's where there'd be downside risk. A minority opinion out there that the funds rate ain't broke relative to the performance of this economy. So why fix it? Listen tomorrow for how Powell characterizes how much current rates are restraining the economy for clues about how much relief he thinks the economy might need.

20:06And Melissa, one more thing. The upside risk could come from how much he characterizes those January inflation numbers as just one off. Guys, I've got a question. Real quick, Steve. The New York Community Bank, does it come up in any context? And how does he address it if it does? Sure. I think that it comes up because, first of all, We're approaching that anniversary of the Silicon Valley bank failure. So you might have some discussion around that relative to the financial regulatory stuff I was talking about. I think, again, the Fed sees this thing sort of the way it saw SVB as a kind of one off.

20:39What's going on at New York Community Bank does not appear to be the what do you want to call it? The canary in the coal mine for the commercial real estate problems on the books of the banking system. That's not it. There may be one yet, Guy, but I don't think this is it. All right, Steve, thank you. Steve Leisman. Pleasure. Tim, what'd you make of the move in the 10-year? Great song by the police, by the way, Canary in a Coal Mine. And the move in the 10-year, I think, was somewhat a function of the ISM number. We had a 52.6. We were expecting 53. There was some deflationary dynamics in that number.

21:11And I think if you look at, again, three rate cuts by the end of the year, I think, if anything, I think Powell needs to talk about liquidity conditions out there. I think there is so much liquidity sloshing around, and I think that has something to do with even, you know, Bitcoin's move today. So that's interesting for me. But I think that the macro data right now on the labor market is all that matters. And we haven't seen a whole lot of weakness. Coming up, we're watching Nordstrom after our shares on the move after reporting results and details from the quarter next. And speaking of retail, an absolute bullseye for Target.

21:42Shares surging after a big boost in profits, but are investors ignoring the company's sales forecast? We're diving into that one when Fast Money returns.

21:57Welcome back to Fast Money. We've got an earnings alert on Nordstrom. Shares dropping after its latest earnings. CNBC's Courtney Reagan's got the details. Court. Hi, Melissa. Good to see you. So Nordstrom shares, as you point out, are dropping sharply here, about 10 percent in immediate reaction to those results. The forecast for margins is likely the biggest drag on the shares. Earnings beat expectations. Revenue is also stronger than expected, but led by the off-price Nordstrom rack. business. Revenues there grew 15 percent. The full line department store saw revenues fall 3 percent. Digital sales all in.