Cracks In The Consumer… And The State Of The Semi Trade 5/8/24

0:01Live from the Nasdaq market side in the heart of New York City's Times Square. This is Fast Money. Here's what's on tap tonight. Tapping the brakes, a host of consumer names taking hits as companies warn shoppers are struggling to buy now and pay later. From lighter bookings at Uber to a revenue slowdown at Shopify to the trade down stories we are hearing at McDonald's and Starbucks. A deep dive into how crunch the consumer really is right now. Plus, first roasted and now toasted. And no, we're not talking about the Tom Brady special. Netflix with a major about face following its post-earning slide will go inside the rebound straight ahead.

0:35And later, it's so bad it's good. The chart master will make his case for why these two health care losers are ready to make the move from doghouse to the penthouse. I'm Melissa Lee. Coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Feinemann, Carter Worth, and Guy Adami. We start off with the latest signs of cracks in the consumer. Uber posting its biggest stock drop since October 2022 after reporting a surprise loss in its latest quarter and saying that ride bookings came in below expectations. Shopify also plunged in nearly 19 percent, making today its worst day on record.

1:08The e-commerce company forecasting sales growth for the current quarter that would be its slowest in the last two years. And they weren't the only earnings reports that raised red flags. Just yesterday, Disney's CFO saying they are seeing evidence of moderating demand for travel. McDonald's last week warning consumers are more discriminating in a world of higher prices. Grocery brands, Kraft Heinz and Mondelez, also seeing a pullback in spending. And then there's this, the looming threat of so-called phantom debt created by the rise of buy now, pay later. Juniper Research estimating that by 2028, customers will owe nearly$700 billion globally in these installment payment programs.

1:47So with the pressure of still sticky high prices and a mountain of debt eventually coming due, do investors need to brace for a rude awakening when it comes to the stocks tied to the consumer. Are we seeing the start of that right now, Guy? People will say we cherry pick the negative stuff. And there was an old saying, the best time to have a coaching moment is when things are going really well. So the stock market, things are going really well. So it's a good time to bring up things that can go wrong. And this is clearly one of them. And you mentioned McDonald's. We've been doing this show over 17 years.

2:17You've never heard McDonald's say the things they've said over the last couple of months in terms of their consumer. But this started a year and a half ago with the dollar stores, Dollar Gen, Dollar Tree, talking about their consumer trading down. And now we're starting to see it on the higher end as well. Now you'll say, well, wait a second, MasterCard and Visa, they're not going to cover. Of course they are. I mean, they're just looking at transactions. That actually makes a lot of sense. But transactions, in my opinion, do not speak to the health of the consumer. It does seem like we're seeing it migrate, the troubles at the pressure to a higher end consumer.

2:45And we're starting to see that right now. I mean, when Disney says that its customers are starting to rethink, then you think, oh, well, who can afford to go to Disney? And we saw it in LVMH. We've seen it in a lot of the beauty and cosmetics world. We've seen it in some of the aspirational spirits world. We even heard it from Taiwan Semi, whose stock dropped 6 % at the end of April because they talked about end consumer demand for PCs and places where at least some of them were, I would say, just generic chips have an appetite. I actually sat on a CFO roundtable. Steve Leisman does one of these once a month with a bunch of CFOs with CNBC.

3:18and this was probably two weeks after Visa gave earnings. And ultimately, their bottom line is our consumer is stable. And so but when you heard from the food service companies, Guy referenced, you know, what McDonald's has had to say, a lot more cautious and different places where I think you are seeing that consumer breakdown. So whether it's consumer credit that we talk about all the time, that's at record highs, whether it's the savings rate that's burned through COVID, But you have to be concerned even when there is a dynamic with jobs that really is very much favoring the consumer. I think it's a mix, though.

3:49I think it's if you really are an interesting value proposition or you're doing something better, that the customers will still come. Right. So if we look at Nike, they haven't been. Right. So that's been that goes to the point of maybe the consumers tapped out. But and the same for Starbucks, same for McDonald's. on the other side. Now, maybe this is a little bit higher demographic in terms of income, but look at Chipotle, right? And so they're doing something right every single time. And I look at On versus Nike as well. I think I mentioned that, but Hoka, Gap Stores even turning it around. You could imagine Gap Stores not able to do it, and yet they are.

4:26So I think if you're doing something right, the consumer is still there. They're just a little bit pickier. I mean, to that point, look at Williams-Sonoma, it's now$20 billion market cap. It is almost as big a performer as Chipotle. But the restaurant is interesting because while the space, if you look at the S &P 500 restaurant sub-industry group, obviously dominated by Chipotle, McDonald's, and Starbucks, on a five-year base, so just before COVID to present, that sub-industry is up 40 % versus the S &P up 80%. It's a major laggard. So it's making five-year relative lows to the market. And there doesn't look like there's anything right now that's going to fix that.

4:57Right. So it's so hard to figure out, Guy. Very difficult to figure out. But with this buy now, pay later, what we do know is that this debt does not get reported to credit agencies. So throw another trillion dollars. So this is sort of, that's why the term phantom debt comes into play, because it doesn't really get tallied anywhere. So when we hear about auto delinquencies, when we hear about credit card delinquencies, when we hear about all these other delinquencies, this is not coming up. No, it's one more. You know, I think U.S. consumer debt in aggregates over now$17.5 trillion. So throw that in the mix and, you know, you can do the math, over$18 trillion now.

5:35And the problem with that, of course, is, well, there are a number of problems, not least of which below the credit card debt is at an average rate of about 22 percent or so, which is a staggering number. And we've talked about the number of people, you know, how many people have, you know,$400 or$500 in emergency savings out there. God forbid something will happen. It's not that much. One in six people, I think, are food insecure. It goes on and on and on. But then you'll hear, you know, politicians talk about the great economy in through the lens of the stock market, one, which is not the economy and the lens of unemployment rate, which is below four percent.

6:05But, you know, I'll say again, the revisions that we can continue to see with these job numbers, it's going to catch up at some point. And we're starting to see it around the surface. So it is concerning. But we're saying this against a backdrop of an S &P that's been a couple percent of its all time high. So nobody seems to really care about it. And I think the rate environment reflects this. I mean, ultimately, this whole nonsense about higher for longer. In October of 2022, 10-year yields were 4.3, and here they are at 4.45. We're up like 18 base points in a year and a half. Yes, we move it aggressively this year, but these are not high rates, period.

6:39And so people say, well, commodity inflation. Commodities are a small, small part of the economy, oil notwithstanding. And so we'll see. But my hunch is, again, lower rates, and ultimately that reflects the slowdown that's probably coming. We did hear some bullishness about the consumer when it came to a lot of the bank CEOs. They're pretty confident about the ability of the consumer to continue spending at this point. Yeah, they were. And they're seeing credit quality that's a tiny bit worse, but a tiny bit from pristine highs that we haven't seen maybe ever. So they don't seem overly concerned about that.

7:11The banks also have rallied. I know JP Morgan is now a little higher than where it was when they announced that earnings that was so disappointing. So they don't seem overly concerned yet. It's with a bit of irony that the banks actually have rallied off of a base in October where I think people thought credit was a very big deal. And it was a consumer real estate dynamic. It was a regional bank dynamic. But I do think people were just expecting, as they often do, and they should do, I guess, historically with the banks, it's let's price in those loan losses. Let's put in the reserves on our own.

7:43And I just think that is part of the success story of the banks is that people realize credit-wise. I mean, and they heard and the money center banks have such a diversified banking model that higher rates really seemingly are better for them. But we would have had a chance to hear about some cracks more broadly from money center banks in their consumer. We have not. It certainly was not the issue around the earnings season for these guys. We'll potentially hear about cracks or nonexistent cracks from a lot of the earnings that are coming up. Retail earnings. We're getting to get Walmart, Home Depot next week.

8:11Which ones are you going to key into in terms of the read on the consumer? I mean, Walmart has always been an interesting one in terms of the read on the lower end, but also the read on the higher end, which are migrating to Walmart. That's what's most interesting to me, the amount of the percentage of people whose income, I guess, you know,$100 ,000 is not the same as it was 10 years ago, obviously. However, I think it's over 65 percent of now Walmart's customers have an income of$100 ,000 or more. And that number is, to me, it's fascinating and it's been growing over time. So Walmart, to me, is interesting to tell us, you know, people are migrating to Walmart.

8:43Home Depot is its own animal without question. And, you know, if we pull up a quick Home Depot chart, I mean, it has not traded particularly well over the last year or so. So maybe that whole that foray into whatever you want to call it, home improvement, you know, people buckle down, go into Home Depot. Maybe that blooms a little bit off the rose. Yeah, I mean, Walmart is obviously because of its size, because it's a consumer staple. And it does speak to low end, high end. And it speaks to obviously one of the most astute management teams, period. in corporate America and the world, how it behaves here in Durnings is very important.

9:17My hunch is it's full, and if I were long, I'd hedge it in some way, but we shall see. All right. Let's delve into the risks of buy now, pay later. Loans made through issuers like Affirm, Klarna, and Afterpay help consumers afford bigger purchases, but those companies don't report their lending activity to major credit bureaus, making them harder to track and harder for economists to account for in their projections. For more, let's bring in Ted Rossman. He's a senior industry analyst at Bankrate. Ted, great to have you with us. Are the fears about this sort of phantom debt, are they overblown or is this something to be worried about?

9:49I think it's a legitimate issue. It's interesting, though, how the delinquency rate for buy now, pay later has been so much lower than people have projected. You know, for years now, there's been talk about, oh, my gosh, there's going to be all these delinquencies and they're not that selective about credit quality. A firm just reported their earnings and their delinquency rate of 2.4 percent is considerably lower than the credit card delinquency rate of about 3%. So I actually think that that's been a silver lining. I mean, there's no doubt that sometimes people can get into trouble with buy now, pay later and overspend.

10:21And they could with credit cards as well. But late payments have not been as big of a deal as a lot of people feared for buy now, pay later. Is there any research? I'm just wondering if consumers feel like it's doable to pay off that buy now, pay later slice, but not pay off their credit card. People like the built-in light at the end of the tunnel of buy now, pay later. So they know exactly how many payments for exactly how long. The classic use case has been for interest-free payments over six weeks. Although some of these providers are going much longer than that, maybe six months, a year, two years, sometimes even longer than that.

10:55And sometimes now with interest. I mean, some of these providers like a firm, it could be interest free or it could be all the way up to 36%. So I think there's a lot of variability there In general, though, I get the sense that consumer demand is very much there. And people like this as an alternative to credit cards. They like knowing exactly how much they owe for exactly how long. The average credit card rate, we should mention, is close to a record high. It's 20.66%. So that's something that people are using Buy Now, Pay Later as an alternative. Ted, it's Karen. Thanks for being on. Has there been a sort of migration of who the original Buy Now, Pay Later customers were?

11:34And maybe they were maybe in a little bit better financial position and now has morphed into somewhat of a different credit cohort. Conventional wisdom is that Buy Now, Pay Later is for young people without much credit and without much money, because, you know, in some ways it's almost like a debit card with financing privileges. It's short term. It's not this big open ended credit line like a credit card. It's easier to get. It's often very short term. We've seen some movement upmarket, like Affirm has had a famous partnership with Peloton for a while, which that's more of kind of the Henry set, the high earners not rich yet.

12:09But although in general, I would say Buy Now Pay Later does still skew younger, lower income, lower credit quality. I think it's interesting that companies like Affirm and Klarna have physical payment cards now that you can use in person, like at the grocery store or the gas station, and turn that into a Buy Now Pay Later plan. It's not just online commerce anymore. Since these loans aren't reported to credit agencies, do we have a sense of how many consumers actually have multiple buy now, pay later loans across various platforms and what that might look like in a scenario in which the economy may not be as good and employment may not be as high?

12:48There are a lot of repeat customers and loyal fans, which I think could be a good thing or a bad thing. I do think more credit reporting is needed. I mean, I do think it would be useful for buy now, pay later lenders to know if you've fallen behind on a plan with one of their rivals. And also, I think that would be useful for a credit card lender or a car lender or a mortgage lender. They're not there yet for a few reasons. But I think a surprising incentive for people to pay on time is the ability to continue to use these plans. I think that carrot has proven to be more useful than the stick approach, which is punishment, you know, dinging your credit, which is rare unless you go to collections in the buy now, pay later world.

13:31Late fees are not as much of a thing. Even in the credit card world, those are about to go down dramatically because of a CFPB action. So I actually think the incentive of continuing to use this has been remarkably efficient for these providers. Ted, thanks for joining us. Always a pleasure. Thank you. It's amazing that two point three percent is delinquency rate at a firm for this sort of loan. Right. Well, for now. And I think Karen's question is a great one. Think about when we started hearing about buy now, pay later in a firm. And I mean, it was all during COVID. Right. It was people sitting at home with money coming in, getting paid by the government.

14:07We gave away 25 percent of GDP. We were betting on meme stocks. We were buying anything we could. I think cyclically, you have to watch out for that. Yeah. At the same time, these firms use very, very good data to pick the customer who they're lending to. That is interesting. And Square, right? Cash App, we saw that with them. Even Lemonade the other day we had on the right. I believe it is possible to have a better handle on who your customer is. But maybe psychologically, I do actually believe there is something to it, this for payments or however you choose to structure it. Yes, and you pay this off and you get that done and you'll leave that 20.6 percent average rate that you're paying on your credit card balance there.

14:51It's like let that hang out. Forget about it. American Express last week or earlier this week made an all time high. I mean, the stock's been unbelievable. And even with that valuation wise, I think it's still less than 16 times next year. Great. Karen talks about all time. It's an unbelievable franchise, without question. And their quarter was good. Loan loss provisions were actually better than the street was looking for. That's the one you've got to watch, because we've heard from Discover Financial and all those. We know what's going on there. But if you start to see loan loss provisions like American Express tick up in a meaningful way, that's going to be a huge tell.

15:22Well, just one thing. I mean, whenever I think of buy, don't pay now, there's that comic strip from the 1930s. I gladly pay you Tuesday for a hamburger today. Popeye. Popeye, exactly. Whoa, whoa. Did you know that or somebody telling you in your ear? No, nobody in my ear. No one in my ear. You like Popeye. He was a great, but it's a joke because it's kind of a risky game you're playing. Who wouldn't want to? Why wouldn't Mel know about Wimpy? Come on, stop it. Why would I know about Popeye? Popeye was a classic. I know you're kidding. You can't take ownership of Wimpy yourself. You're trying to curry favor, but you thought the same thing I thought.

15:58How did she know that? I just said it. And he became Secretary of the Treasury. Wimpy did? Yes. No. Buy now, pay later. No, never mind. All right. Meantime, check out the comeback in shares of Netflix, closing just a hair off where it was before earnings last month. The stock dropping 9 % immediately after the report where it said it would no longer report subscriber numbers. Shares have quietly gained more than 12 % from their post-earnings low. Guy, you've been watching this one. Yeah, no. And I will tell you, Tim's talked about it as well. The sell-off sort of made sense given where it got to.

16:30You know, I thought we'd run into earnings. I thought we'd make a new all-time high, then soft. That didn't happen. What scared people wasn't the quarter. It was obviously the commentary. We're not no longer, once you hear that, it's like, uh-oh, something's wrong. And the stock sold off pretty dramatically. We're right back to where we were effectively. Now you ask yourself, I mean, is it going to go blowing through that prior all-time high? Or once again, at 33 times, have we overextended? Netflix is fascinating. Well, you have the drop in gap, news related, and now you fill that gap. So it's what would be characterized simply as a rally to a difficult level where overhead supply comes into play.

17:03So it'll be stuck. I would think so. OK. So I think the way they sort of set that up, we will no longer give subscriber data in the future. Right. I think it's the way you have to do. We've seen companies do this a couple of times. I think it's ultimately to their benefit. We do care about how much money they make. Right. And so they're doing OK. Right. And they're doing OK. And then I think just the sort of the end of the streaming wars in that they're the obvious winner. There's got to be consolidation, which means that content costs will go down for some for some some things, not sports. We see that.

17:39But and they're just in such a great spot. What we didn't hear from them was some real focus on cost cutting and margins, which I think is the next phase of this story. It's a company, as you say, Karen, the economies of scale and the operational leverage in their model is extraordinary. And we haven't heard about what else they're going to do, whether it's gaming, et cetera. I think it goes higher. Coming up, a wave of after hours action after the break. Arm Holdings, Airbnb, Robinhood, and Instacart all reporting within the last hour. We'll bring you the details from the quarters next. Plus, Tesla's roll downhill continues.

18:15And new reports could be pointing to even more trouble for the EV maker. how its self-driving issues could be more than just technical. The details from Fast Money returns. This is Fast Money with Melissa Lee, right here on CNBC.

18:35Welcome back to Fast Money. A check on how the markets close out the day. The Dow jumping 172 points, notching its sixth positive day in a row and its longest winning streak this year. The S &P virtually unchanged for the day. The Nasdaq losing nearly two-tenths of a percent. Some more after hours action. Shares of Instacart lower despite a beat in the top and the bottom line. Cheesecake Factory higher after its own earnings beat. And Klaviyo jumping after topping expectations, upping EPS and revenue guidance. Shares of Alonco Animal Health surging nearly 25 percent today and notching its best day ever.

19:05After reporting a top and bottom line beat, the company also hiking its profit guidance for the year. And shares of Tesla lower again today. Reuters reporting that U.S. prosecutors are examining whether the EV maker committed securities or wire fraud by misleading investors and consumers about its self-driving capabilities. Funding secured. That's all. Two words. Tesla funding secured. I mean, this is a company. This is what we're going after them for. I mean, come on. This is not some headline risk on the stock. It makes some explanation why, you know, one and a half percent possibly, you know, after hours, this and that.

19:42But, you know, the issues for Tesla are related to deliveries. They're related to profitability and they're related to China and demand. The fact that this is a company that's walked a very fine line and I'll leave it there in terms of what they've actually communicated to the markets, what their CEO has communicated to the markets, what's actually been going on. My guess is I wouldn't be able to get away with the same stuff. Robotaxis earlier than expected. That's against an oversold condition in the stock when they reported that bounce the stock. But put that chart back up and you will see. And I am not playing the role of Dan Nathan tonight.

20:13Carter Braxton Worth might be. But it's again, every rally in the last three and a half years and some of them have been significant, have been sold off in a meaningful way. So you have a series that continues of lower lows and lower highs. And my instinct suggests that will continue to happen. Next stop. Quick. What do you think? Next stop. This is a pair of twos for me. I mean, after you rally 40 percent and give back half of it, that's a lot of volatility. and then typically you'll go quiet after that. Coming up, shares of Arm Holding. Maybe down after hours, but there's at least one big-name semi-exec who's still a fan of the company, what NVIDIA CEO Jensen Huang had to say about the stock.

20:48And Seth Mahatis' Chris Rollins joins us to lay out what he is seeing in the semi-space in Fast Money Returns. Missed a moment of fast? Catch us anytime on the go. Follow the Fast Money Podcast. We're back right after this.

21:09Welcome back to Fast Money. Let's get to an earnings alert on Arm Holdings, a stock plunging 7.5 % after the company's full-year forecast came in below street expectations. It comes after top-line and bottom-line beats for its fiscal fourth quarter. What do we make of this here? Listen, Arm is a very mature company, right? It was probably around 18 years or whatever it was prior to going public. It trades prior to this move was$100 billion market cap and a company that's done effectively three and a half to four billion dollars of revenue every year for the last four. There's no my point is there's no revenue growth and it trades at a huge multiple price to revenue.

21:46Now, we had this conversation with Rick Heitzman when they went public. I asked him the question. He was not concerned about it. He was correct. The stock did well. But this move, to me, at least, makes sense on that metric alone. Let's get more in arms results. Bring in Chris Roland. He covers the stock for Susquehanna. Chris, great to have you with us. One issue also was that estimates going into this quarter really ratcheted higher throughout the quarter. Were you one of these analysts who raised estimates going in? I actually thought numbers were going to be higher than the ones they reported, so probably.