Big Tech Earnings Kickoff and What UPS’s Results Say About the Strength of the Market 4/25/23

0:01Looks so good. Doesn't look real. Right now and fast down the S &P posts their worst day in over a month. While the Nasdaq has its steepest slide since the start of the banking crisis. Now investors turn to the action. After Hours and Alphabet and Microsoft, both stocks higher at this hour. We'll go inside the numbers. Plus, UPS not delivering. The stock posting its worst day in nearly 17 years after an earnings miss and some seriously downbeat comments from the CEO about consumers and the economy. And later, First Republic's brutal day after shares nearly cut in half today as the bank is reportedly trying to sell up to$100 billion worth of loans and securities to get its house in order.

0:36Will it be enough to fix their problems? I'm Melissa Lee. This is Fast Money Live from the NASDAQ Market Site. On the desk tonight, Tim Seymour, Karen Feinerman, Courtney Garcia, and Guy Adami. And we begin with a monster night of earnings after the bell with conference calls getting underway. Deidre Bosa, Steve Kovac, Manning, our tech desk following the action in Alphabet and Microsoft. Alphabet's calls just starting. Plus, Kate Rogers standing by with the very latest in Chipotle's earnings. And Christina Parts and Evelis digging through the results from Visa. We've got to start off with Alphabet here.

1:05Shares are jumping after the company's cloud business posted its first ever operating profit. The tech giant's conference call is just starting. CNBC's Deidre Bosa has got the details. Debo. Melissa, there's a lot of focus on that cloud profitability, but I want to make sure our audience understands something. Just a few days ago, Alphabet started reallocating some of those expenses from cloud to search. That, in effect, trimmed a billion dollars off of its 2022 operating loss, and it helped achieve this milestone faster than it otherwise would have. Yes, Google Cloud was heading in that direction, profitability, but it would not likely have gotten there this fast, most certainly, if it didn't have that sort of reallocation that it announced in a filing on Thursday.

1:46Moving on, on the growth front, cloud revenue is decelerating like it is at the other hyperscalers, Amazon's Azure, AWS at Amazon. In terms of the core business search and advertising, it was a second straight quarter of falling revenue. And investors, we know they were really looking for more progress on the cost cutting front. So I spoke to CFO Ruth Porat on the phone just after the results crossed. And I asked her if there was more wood to cut. She reiterated that the company is committed to growing revenue faster than costs. But instead of pointing to anything specific, she said they're looking for durable and sustainable ways to achieve that efficiency.

2:21She mentioned using AI and automation to achieve that. And certainly we're going to hear a lot more about AI on the call, which is just kicking off. Melissa. All right, Debo, thank you. Deidre Bosa. All right. So focus on the profitability of cloud, Karen. There's also, of course, the second straight quarterly decline in ad revenue, which is something that we should take away and apply to other companies as well. Yes, but I think it was better than feared. So that was good. I thought that was actually a mild positive. The buyback, a$70 billion buyback. But to Dieter's point about expenses, they've been the blaggard for sure.

2:56And I think there must be so much room to cut. We know they're going to shrink their footprint of real estate and employees somewhat. But I can't help but think there is more to do there. And I think it would be very, I mean, if you look at what's happened to Meta since they, you know, found religion in the year of efficiency, right? I mean, I think Google really has more to do. So all in all, I thought it was fine. I feared worse. And this was enough, I think. Yeah, it feels like a sigh of relief here. A sigh of relief for sure. And I will say that I think they get the benefit of valuation works for them.

3:31So they didn't have to knock the cover off the ball. I think people are looking for valuation. The question is, where does it go and where do you take profits? So if you go back to August, I think the second leg lower in Google took place from this sort of 118 level. And that lines up. Carter Worth, I think, might have been on last week talking about how Google looked good to him. I think he pointed out sort of 120. So this stock should have legs up to about that level, barring any foreseen things in this conference call if it happens. Yeah. Courtney, your take on the quarter? Yeah, I think there were definitely some positives here.

4:01I think you bring up ad revenue, which everybody was expecting was going to decline. And I think that's something when you look at the general economy, people do look at that as a bellwether to what that means for the consumer going forward. If ad spending is pulling back. And it was better than feared, which actually I think was a good thing. I do think you want to own these companies. We do have exposure to them, but I'm not actively adding to them after such a big run up this year. It's already up after hours right now. I don't think you want to chase this on the upside either. What do you want to know in the conference call?

4:26I want to know about YouTube. I want to hear a little bit more about the environment. YouTube, I'm going to give as much credit as even the ad business and the operating margin improvement in the cloud business and that going net positive. Just because YouTube has been, I think, one of those stories where I think there's the most upside for this company on some level. This is a place where I think they're in a pole position right now in the world of wide open streaming, the competitive landscape around Netflix. What does that now mean that Netflix is in there on video ads? So I think that that's very important.

4:55Back to where I think Guy was with this. I mean, you have to think about the stock in the context of where it was going into these numbers. This was up 20 percent from a chat GBT low. I mean, this was this was a stock that was really beleaguered at one point. I think we sold off on the concept of Bing versus Google search, which isn't even a conversation to me. But it's interesting that, of course, we're going to have the same conversation with Microsoft in a second. What's really going on in AI? I think for Google, the core business are alive and well. I think the comps in the second half of the year get a lot better for Google, by the way.

5:26They were very difficult over the last couple of quarters. Remember, 4Q21 comp is 33 percent. The comp on this one was about 22 percent. So it was tough. And I think expectations were low. Just a couple of things to add. But Tim talks about AI. We want to hear about how do they monetize it, right? We don't know. Microsoft, we don't know. We don't know what the model is, but we do know that there's fears of cannibalization of their search business. The other thing, just to get to the advertising sort of sigh of relief, you have Meta up$4 or$5. Snap is up. So the read-through is that the advertising business overall is better.

5:58Yeah. I mean, the commentary about the ad business, particularly when it comes to the YouTube ads, will be interesting because they have more of the brand advertising, And that can sort of be pulled back as the economy gets a little bit more uncertain. So we might be able to get some color on where they see the economy is based on what brand advertisers are doing with their money. Yeah, that's that's a healthy sign for sure. YouTube's a good question. My question would be, you know, employee growth. I think up from one hundred and sixty thousand employees this time last year to close to two hundred thousand.

6:26They're ramping up for something that margins were actually good this quarter. You wonder how long that can last again. Again, valuation is the reason I think you want to continue to own it. That's why Karen, I'm sure, continues to own it. Question is, what level do you pull the ripcord? I think 118 is probably right. All right, Google's up more than 4%. Let's get to Microsoft now also surging after hours. The software giant beating on the top and the bottom lines. Results in the cloud better than feared. CBC's Steve Kovacs got the latest. Yeah, the other AI company, right? Look, Microsoft delivering a beat and showing growth in the segments that matter.

6:56Revenue overall up 7 % year-on-year. Net income up 9%. Intelligent Cloud beating expectations, too, with over$22 billion in sales. That's up 16 % year on year. Now, this is the division that includes Azure Cloud, but Azure Cloud growth keeps decelerating. It's up 27%, but keep in mind, Azure was growing nearly 50 % this time last year. Could be a sign companies are trimming their IT budgets. And in more personal computing, that includes Bing Search, by the way, beat expectations with over$13 billion in revenue, but was still down 9 % year on year. And take a look at Windows licensing revenue. That's down a whopping 28%.

7:36That follows all those reports we got from research firms like IDC that PC sales fell off a cliff last quarter. And we got to talk about AI. CEO Satya Nadella bragging in the company's earnings release that AI Innovations calling Microsoft the platform of choice for AI development. Now, the call is starting at 530, and I'll be back with more as soon as I get it, Melissa. All right. Thanks, Steve. Steve Kovach, 5 % gain here in the After Hours. Guy, what do you make of this one? This one, you did sort of have to deliver on the results. Yeah, and I didn't think they would. They did. But again, things are decelerating, but not as fast as people feared, not unlike what you're seeing with Google.

8:14The difference here is here's a stock that's trading probably 28 times next year's numbers. I think they're being rewarded already for it in terms of the stock price. Now, we've seen before at the 530 conference call weird things happen, but this is a good quarter and margins hung in. So you've got to respect what they're doing. And I think in some ways it shows that Microsoft is just beating their competitors a bit. But it is still in this environment, I think, an expensive stock. As they have. And this honeymoon for Microsoft has gone on so much longer than I think a lot of people gave them credit for, both in terms of cloud and now this whole AI thing.

8:46And they they are the only ones with any real products in the in the in the till, you know, in terms of churning something out where I can actually office 365 products, you know, Bing search, whatever. But at least they will be monetizing AI before other people. Having said that, at two 90, you're right up at your AI high. I don't I don't know why you should not be chasing this, especially when as much as those Azure numbers. And I think they're the reason why the stock's also spiking. I think that's a relief. and I think at 27 percent. Remember, as your revenues have gone from about 30 billion to they'll be close to 60 billion by the end of 23.

9:19And they're not going to ever do that again. And I just think you've priced in a lot of peak stuff here. And I, you know, this is what we have to say about Microsoft, because there's not a lot bad you can say. It's just that it's been such a great run. And I look at the outperformance of the S &P, spoke about this yesterday or two days ago about Apple and Microsoft, up both 23 percent to the S &P from that run in the last four months. I think it's I think this is a relief back up to that level that you're fading. But, you know, I mean, a lot can happen on conference calls, particularly guidance when it comes to Microsoft, which will come, you know, in maybe half an hour's time or so.

9:51But the big picture so far is that things aren't as bad as everybody thought. That corporate slowdown we haven't seen. The pullback in advertising we haven't seen. Bank earnings have been as bad as. So at what point do we say, you know what, maybe things are fine? Why are we sitting around here wringing your hands about a recession to come? and S &P too high when things are coming out all right. Yeah, and I think you're seeing more and more of that. We'll get to you later. I mean, UPS is telling a different story when it comes to the consumers. I think you're getting some mixed signals. But I think what's interesting, too, when you look at Microsoft, is PC demand was expected to be down significantly.

10:22We did see that. But, again, it wasn't as bad as feared. And some of that, too, could get resolved here soon because there tends to be a three-year cycle of you getting a new PC. We're about three years out from COVID, right? So it's about that time where you could start to see some of the end of the cycle here. And again, AI they have not yet benefited from. But that probably, you know, a year, two years out, you're going to start to see them generating some profits there. So I think longer term, you're going to start to see that. But I think to Tim's point, a lot is probably already priced in at this point, which is the problem.

10:50Yeah, just to that point. I mean, I have a little higher, 30 times earnings almost. And I mean, that's, you know, a pretty significant premium to where the market is. It's a premium company. It deserves a premium valuation, but I don't know how much more room there is to go at this level of 30 times. Also, Amazon up a few 3 percent or so in the after hours on the cloud. But your point about hold on. We were expecting this to be this. You know, the last four quarters I've been expecting. This is the quarter when mega cap tech lets us down. And today was the day during the trading day where it's set up for everything we wanted.

11:23We wanted to hear. I don't want to hear this. But on some level, I have been saying I want to hear that warning on enterprise. I want to hear that warning from mega cap tech. It's another earnings period. And I'd say this is probably the fourth in a row where it's kind of not giving you what you want. And I think it's extending out this whole cycle for this market. And it's about the greatest trading market we've had in a long time because you've you've you're you're going to get these opportunities. There's pessimism. There's people on both sides of the boat. There's passive investors that continue to get rewarded for staying in some of these names that are, you know, these five names are 45 percent of the Nasdaq 100.

11:56So you're totally right. Today was it. We'll talk about the market later in the show. But this was that kind of day that set you up for two of the biggest companies in the world to disappoint. And they've done the opposite. All right. Let's get more on the big tech movers from Gene Munster, managing partner at Deepwater Asset Management. Gene, great to have you with us. What do you make of the results so far? What are the things you want to know? Melissa, I think you and the panel summed it up well. It just wasn't as bad as people were expecting. I've heard that several times, and I would agree with that at the base level.

12:25What jumped out to me most is there wasn't much that jumped out from these two reports. But that essentially buries the headline here, because the hour and a half here that we're in, this is like power hour for AI tech geeks and investors. These two conference calls are really going to set up, I think, the tone for AI for the next one, two months. and we're going to hear more, especially from Google. And I think that this is really going to be the substance of what came out tonight is going to be how Google is going to talk about their nine products that are one billion and more monthly active users.

13:02That is by far the most of any company. And they've been sitting on this AI train since 2017. Microsoft got going back in November. They made the open AI investments before that. But I really think that the kind of the key takeaways from this earnings period is going to happen in the next hour here when we hear more from Google on products and hear more from guidance from Microsoft. Do you feel like you have an understanding as to how AI powered search will impact the profitability of that business at Alphabet? Or do you think that that is something that the company has to elaborate on? they have to elaborate on.

13:39And I suspect that it's going to be a near-term downdraft in terms of some of the monetization with search. Anytime you see a new platform take off, this happened when Facebook went from desktop to mobile. It happened when Instagram took over Facebook. Google has talked about it with their shorts being impacted, some of their YouTube business being impacted by shorts. Whenever there is a shift, there is typically a step down in terms of monetization. That's the curve that investors want to get their heads around with Google. If not for that, I think Google stock would be up 40 percent this year.

14:13This would probably just lag NVIDIA. But there is that piece. And I think the best thing for Google management to do is just to let investors know what that drawback looks like. Our best guess is that the search business is negatively impacted by 5 percent over the next couple of years in this. But ultimately, we think that it will power higher, much, much, much higher clicks per search, less clicks, but much more ARPU per search. And we think that that's going to be a net positive. We think Google is probably one of the best ways to invest in AI over the next five years. Gene, it's Karen. So it's hard for investors to get our arms around, as you said, what it's going to be, how you value all of their AI and also DeepMind and Google Brain merging.

14:58But in terms of the cost cuts, which I've been looking for, which is a lot more tangible and sort of easy to put a multiple on it. Are you frustrated with that? Do you expect anything more from them on that? I hope that they're going to say more about that. Of course, they talked last quarter about this being they're going to shift the word that they use as a durable, more durable business model. We haven't seen the substance in it, and that has been a slight disappointment. They've made a cut headcount by, I call it 8 percent. And of course, Meta leads that at 25 percent, 8 percent is more or less in line.

15:30But I think that there is unfortunately more room for Google to do on the headcount reduction piece. And I think that they probably will do that. And that's part of the reason why they talked about this 70 billion buyback. That's 5 percent of their float. They're going to be buying back shares, I think, as they talk about some of these headcount reductions in the quarters ahead. I think there's more to come for Google. And I think at that point it really sets the table for improving margins. But I think in Google's case, there's more to go. We own Google. We we like this company. We want to buy more.

16:01But I think there's this this trough that we're kind of navigating through right now ahead of what's going to be a great outcome for A.I. and Google. All right, Gene, thanks for your thoughts initially. And let us know what you hear on those conference calls. We'll do. Gene Munster. All right. So what are the outstanding issues for these calls, Guy, in your view? Well, for Microsoft, to me, it seems like, you know, there's just deceleration. Will that reaccelerate any point? Tim's point is exactly right. I mean, I think the growth part is behind them. Doesn't mean they can't continue to grow. It's just decelerates.

16:33And what's their end user looking like? I mean, everybody else seems to see a slowdown. You know, where are they seeing the pickup that's going to basically, in my opinion, allow them to continue to have a valuation that is maybe justifiable for them, but expensive in this environment? Yeah. Courtney, how about you? Yeah, I would agree with that. I think really we want to see moving forward for them. What is going to be the catalyst to bring them further, right? Because I think everybody isn't so excited about AI, but it's just not profitable yet. So I don't think that's something we can really hang our hats on at this point in time.

17:01And I think we do need something we can hang our hats on. Like you're saying, it's a lot easier when we look at cost cutting. We're just not seeing that right now. So I think we need something a little more tangible. All right. Coming up, we've got more earnings action after the break. Shares of Chipotle and Visa higher after reporting results. Details from the quarter's next. And we are biting into McDonald's after strong results this morning. What the CEO had to say about the quarter as shares hovered near all-time highs. Don't go anywhere. Fast Money is back in two.

17:33Welcome back to Fast Money. We've got a double dose of restaurant movers starting with an earnings alert on Chipotle. Shares surging almost 8 percent right now after the company beat on the top and the bottom lines for its first quarter. of the stock, hitting a fresh 52-week high in the after hours. Our Kate Rogers joins us with the very latest. Kate. Melissa, a big quarter here for Chipotle. Comps up 10.9 percent. Margins also better than anticipated. We all know pricing has been the name of the game for Chipotle, but CEO Brian Nickel telling us just earlier before the call that price hikes have paused at least for now.

18:02Take a listen. Our plan is to pause on pricing. You know, we have always said we're going to keep an eye on what happens with inflation, both labor inflation and food cost inflation. And, you know, we like to trail that a little bit rather than get in front of it. So we feel pretty good about where we are right now. We don't have any plans to take pricing. But, you know, if we see that move, fortunately, we've got a really strong brand with a lot of pricing power. Nickel also telling us the labor picture is improving. The company plans to open about 285 locations this year, many of them with those Chipotle lanes.

18:36And we're always talking about restaurants that are well positioned in a recession. We'll get to McDonald's later, But, Melissa, this is also certainly one of them. Back over to you. All right. Thank you very much, Kate Rogers. Stay right there. We'll get back to you from McDonald's. This is what we would call here on the show a burrito blowout. Yeah. It's fun to say. What did you make of this quarter? The fact that, yeah, you know, we're hearing this from other consumer companies in terms of the pricing. The pricing increase train may be coming to a halt at this point. Yeah. Good for them, by the way.

19:07I mean, at a certain point, you've got to slow things down. And they've navigated extraordinarily well. You look at restaurant margins where 25.6 percent. A year ago, it was 20.7 percent. They've navigated last year in an inflationary environment and still able to maintain their margins. It's really extraordinary what they're doing. And they just didn't beat$10.50. I mean, the street was below$9. That is a blowout as well. And it probably is deservative of this move. Now, people will say, wait a second. You know, the valuation, it's been expensive. If it's ridiculous, you can have a big volume day tomorrow.

19:39If you've enjoyed the run up, there's nothing wrong with taking taking some of the burrito off your plate, maybe. If you might. Yeah, if you. But it's an extraordinary company. It's an extraordinary quarter. There's some headlines coming off that conference call. The CEO saying that you did see some recovery in the lower income consumer, which is also good news for other quick serves as well as retailers. Well, we talked about it with Coke prices and all these major brands who have pricing power passing on. Starbucks, what they've done over the last two years, it's north of 25 percent. What CMG continues to also do is they do a great job of beating reasonable guidance.

20:16I mean, they had a mid, they had a, I think they had a mid single, a high single digit guide, excuse me, on their comps. They came in at 10.9 percent. And we talk about this multiple, and I've talked about this multiple almost as much as we've talked about the burrito blowout over and over again on this show. For a long time, I mean, not only have I been wrong on CMG for a long time, but this multiple has been expensive for a long time. So why should we think that this multiple is going to catch up with this company now? I don't I mean, I mean, anyway, there's been so much that's been done here.

20:46And I think this is a company that I don't think is fighting from a multiple dynamic. I think let's watch the consumer. There's just one point with I don't know if it was Morgan who interviewed the CEO in the last hour where he talked about having enough workers. Yeah. Yeah. Which I thought was interesting because they had struggled for a little bit less than others, but had still struggled. And so, I don't know, maybe we're seeing a little bit of a supply dynamic change in the labor market. All right. Let's get to McDonald's here. Ending the day, half a percent lower after hitting another all-time high this morning.

21:16The fast food chain reporting a top and bottom line beat before the bell and said same-store sales surged even with higher menu prices. Still, executives warning that they expect economic headwinds to persist this year. CEO Brian Kempchinski joined Squawk on the street this morning to break down the quarter. Kate Rogers has the details. Back to you, Kate. Hey, again, Melissa. So, well, huge quarter, as you said, for McDonald's beating on every metric, notably that same store sales number increasing 12.6 percent in every segment across the globe. Far above projections, CEO Chris Kempchinski acknowledging some macro challenges in this environment, including stubborn inflation, of course, but also expressing optimism about what the future holds at McDonald's.