Dow Hits 40,000… Plus The Luxury Real Estate Boom 5/16/24

0:02Live in 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. A market milestone. The Dow topping 40 ,000 for the first time ever as Walmart charges for records of its own. But a former executive retailer has a shocking take on what is next for the stop to lay out his case. Plus, China rising, the K-Web Internet ETF hitting its best level since last July. Names like Alibaba and Tencent soaring. What's driving the rebound in these stocks? And will tensions between the U.S. and China derail their run? We'll debate it. And later, Beverly Hills billions.

0:36Mortgage rates may be high and the consumer may be under pressure, but mega deals are still happening in the ultra-high-end real estate market. We'll be joined on set by luxury broker Mauricio Umansky for the latest read on what, where, and how much the Uber wealthy are buying. I'm Melissa Lee. Come to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Dan Nathan, and Guy Adami. Well, markets making a big milestone today, but pulling back off the highs, the Dow climbing over 40 ,000 for the first time ever. The feat coming less than four years after it first hit the 30 ,000 mark, but the index pulling back midday and ending up slightly in the red.

1:10One big winner in the Dow, Walmart, which notched its best day in four years after earnings this morning. The retailer citing significant e-commerce gains and growing business from higher income consumers. But a former company exec warning about the stock's valuation. In fact, former Walmart U.S. CEO Bill Simon is using the B word, bubble. He will join us in just a few to explain. We wanted first to get the thoughts here on the desk, given where we are trading here at all-time highs on Walmart. And do you think that what is driving the stock to all-time highs will be forces that continue in its business?

1:45Yes, and I can understand why. And I'd love to hear Mr. Simon's thoughts on why he thinks it's a bubble. I would agree on valuation alone. You look at it and say this is expensive relative to the market, relative to itself. Absolutely. Of course, the problem is they're crushing it in the world that we live in right now. And this does sound like a big deal. It's a big deal. Operating margins were 4.4 percent. The street was at 4.1 percent. You'd be like, that's not a big deal. For Walmart, that's a big deal. On top of that, inventories were$55 billion down, 2.7 percent year over year, as opposed to sales growth of up like 6 percent.

2:18So margins are going to continue to improve in an environment where they're winning. So, yes, valuation is a concern. We've said it for a while. But you know what? You stay with the stock, Melms. I mean, unlike past reports, we're seeing an increase in volume in transactions, not just an increase in revenues from price increases, which is sort of the trend that we've seen in retail in general. Yeah, and it's got guy mentioned inventories. Think about how far removed we feel like we are from the inventory snafus of about six or seven quarters ago when people thought this is these are the smartest guys in the room in retail.

2:47How did this happen? And but for Walmart, it's all about gross margin. And that's where the multiple in the stock at least has plenty of support around here. And I think the question is how much higher can the multiple go based upon how much higher can the margin go? But, again, gross margin was up about 42 bips to 24.1%. E-commerce added 340 basis points to the overall story here. And that's the part where you start to think, do you get a growthier Amazon-ish multiple on it, even though people say Amazon's multiple is all about AWS. us. But I like Walmart here. I've liked it for three years. I like it less than I used to, because I think some of the re-rating in the company are the things we're talking about that have led to margin.

3:30But I think there's been a massive investment in digital, in technology, even in their people. They've refurbished the stores. They're a lot more up to date, and they have a customer now that has a bigger wallet. We've proven that. And that's a function of a lot of things. Inflation teaches even people with money that I don't like to get ripped off. And at some point, I really do want to go to the place where I know I'm getting the best price. Walmart's been a price leader. Anybody who shops at Walmart knows they're getting the best price. They push around their wholesalers. They determine price.

3:57I still like it. So you think that there's been a re-rating, but yet still the stock is overvalued on the basis of even that? I think there's been a re-rating that the company that is warranted. I'm not sure how much farther we can go from here. Yeah, I agree with that. And listen, I was bearishly predisposed for this one. I got this wrong. And I was reading the tea leaves of some of these other consumer companies, we all identify this. You know, this has been going on now, this trend that they've been kind of capturing some wallet share from some higher end consumers. So that trade down thing that benefited them right there.

4:27Tim just talked a little bit about the investment in e-commerce. You know, that brings me to Amazon. OK, so if I was doing a little would you rather, I'm not saying I am doing that. But you talk. OK, well, you talk about operating margins. You know, Amazon's got double the operating margin. They have double the gross margin. They're growing more than twice as fast on a revenue basis. They're going to overtake Walmart next year in revenues, and that's probably predominantly retail. So if I'm thinking about the investments that Amazon has been making in generative AI, well, that's certainly going to benefit this infrastructure that they already have, right, from a logistics standpoint, from serving better products and ads.

5:02Ads becoming a huge business for them, too. So I just think Amazon is probably a lot more interesting right here on a valuation basis, especially if you're concerned about Walmart's, you know, Walmart's valuation. And again, I just think that they have more levers to pull on the margin front. So they should be a lot more profitable and they're growing faster, which I think supports that multiple. So Amazon, I mean, we're showing the PEs. So your thesis is that relative to itself, Amazon is cheap. Right. Relative to itself, Walmart. A year and a half ago, we were making the argument that North American retail was basically not in the valuation of Amazon.

5:36Right. And so when you think about the benefit that they're getting from generative AI on AWS, the resurgence of growth there. And then you think about that retail business, it still seems kind of cheap to me. So if you're going to if you're interested in buying Walmart for all the reasons that these guys just said, you should be interested in Amazon's retail business. All right. So let's play the valuation games. And I'll say I still like Walmart here. I understand everybody's saying it is expensive. Costco has been on this huge move since earnings. I mean, it's sold off in a major way after earnings.

6:06It's basically gotten the entire thing back, probably justifiable. That trades at almost twice the multiple of Walmart. Very similar. Obviously, there's a difference with Costco with recurring revenue, with the memberships. I get all those things. But ask yourself, in this environment, should Costco effectively be trading twice the multiple of Walmart? Now, maybe Costco is justified, which means, in my opinion, Walmart should be more expensive. Well, my question here with the gains in higher income consumers is where are those higher income consumers coming from? Where are they not spending those dollars?

6:35And is it a Costco? I don't know. I don't know. I'm positing. I mean, I have no idea, but it's got to be from someplace. I think a lot of it's probably going to be at the expense of grocery. And if you think about where Walmart, you know, really has been in a great position in an inflationary environment, they, you know, Walmart doesn't say that they love inflation, but they love inflation. I mean, this is great for the top line. I guess I feel as if there's sustainability to that to that customer and to that new demo. And I think it actually goes back to Target because of all the stories here, if we are in a world where we've overcome some of the inventory dynamics, we believe the consumer is there's obviously very different strata within the consumer base.

7:17But but but Target certainly has also had access to that same more affluent consumer. Target trades. Actually, that's one even more of a discount relative to Walmart than it's ever been. And that's something that is very interesting to me, I think. And you can see that Target, which reports next week, had somewhat of a halo effect from Walmart, just reaffirming their full year. And that's important for Target, who needs to reaffirm themselves. But maybe it's not. Maybe it shouldn't have gone that halo effect. Maybe the fact is that, you know, the Walmart, the higher income consumer goes to Walmart for the groceries, stays for the general merchandise, which would be negative for Target.

7:51And that's why the valuations traded the discrepancy that they traded without question. And that's why if you overlay the two charts, although, listen, Target obviously dropped and has come back. Walmart's still outperforming. I think Tim's point about supermarkets are spot on. Let's take a look at Kroger, though, for example. I mean, this is the stock that was in whisper of its all time high. Again, you talk about valuation. I mean, this trades at half the valuation of Walmart. So maybe the market's not rewarding Kroger in the form of valuation. If it were to reward them, that stock should be a lot higher.

8:19So it all sort of does make a little bit of sense. All right. Let's now bring in that ex-Walmart exec who sees trouble lurking in the retailers' strong numbers. Bill Simons is a former Walmart U.S. CEO. He's now on the board of Darden Restaurants and other companies out there. Bill, in the pre-interview you did with our producer, Stephanie, you used the word bubble when it came to Walmart stock. Why did you choose that word? Well, sure. First of all, it's good to be with you. And the conversation you're having, I think, is the right one. The trade down that Walmart's seeing from the affluent consumer into the business is not anything new.

8:57It happens every time there's an economic challenge. And we've seen it historically. Some of them stay and some of them go. And it'll be really interesting to see this time how many stay and how many leave. And it's a different company now with the digital capabilities that they have than it was the last time this happened. But the real issue is, and the challenge is that the tailwinds that have come from food inflation that have pushed Walmart along will reverse eventually. And we're starting to see some of that happen now. Those same tailwinds that drove the food business will become headwinds.

9:37And you'll sort of see a reversal between Walmart and Target. Target's breakdown of each of their categories is very similar to Walmart, but their overall business is impacted by the food general merchandise mix. And so as tailwinds shift to headwinds and vice versa, I think you're going to see some changes in the dynamic. So at the crux of this use of the word bubble is the notion that what has been helping to drive its sales, which is the gain of the higher income consumer, some of those consumers will not stay. Why do you think they didn't stay in the past? It seems like it would be easier to stay easier than ever to stay at this point because it's more of a digital commerce commerce platform and you can buy groceries and everything all at once.

10:19You can pick up in store. You can get it delivered. It's just a lot more convenient and easier to stay with that that platform. Well, you know, I think that's really the difference between now and the last time that it's happened. And typically what happens is, you know, when money's tight, people react, even high-end consumers react. The Walmart experience is better than it used to be, but it's still not, you know, a premium experience. Walmart's built on convenience, cost, and assortment, not on service. And so as, you know, the economic challenges abate, and we all believe that they will eventually, service will become more important than than convenience and price.

11:02And we'll see a shift back of some of the consumers. That's a Bill. It's Tim. I'm sorry to interrupt. And it's great having you here, because how about we drill in a little bit deeper into the stuff that you spent tons of years getting buried in both formats and segments. So formats in the form of competition in different segments in terms of, say, private label, which is really picking up a lot of momentum. and the lower income consumer is actually spending more on private label, more inclined to spend on private label, especially at Walmart, where I think there's a pretty strong private label brand.

11:31Also, at the expense of in terms of formats, you know, C-stores seem to be ones we talked about grocery that are really hurting here, especially with higher gas prices, higher prices there. Isn't this a reason why some of this is more sustainable for Walmart? It is. It is to a certain extent. And kind of what you see is this shift in shoppers and formats. And I think you're exactly correct. That volume's got to be coming out of traditional grocers where pricing has gotten expensive and Walmart really shines in that environment. The convenience channel historically had higher prices and higher margins.

12:13has the advantage for the most part of having gas as a traffic draw. And so you see some of that business can tend to stick. The real challenge, and I think where Walmart has to really perform and continue to deliver, is to become that sort of digital bridge to try to keep those customers in. If those customers have to go to the physical box to get the savings, I think they're going to move. If Walmart can deliver a seamless experience digitally to them, many of them will likely stay. And that's really the challenge. That's what's different now. Bill, you got a great view as to this. So I'm going to ask the question.

12:52View on inflation and what are you doing if you're the Fed chair? I'm still worried about inflation because I think that we're in a cycle of inflation. We saw cost components rise, which drove up wholesale and then retail prices. Then we had a little bit of a lull. Then we saw these wage increases, wage rate increases, where the UPS guys got a raise and the Delta Pilots got a raise. Walmart, Target, all the retailers started talking about$15,$16,$18,$20 an hour. So we saw a rebound in wage rate increases. And when inflation sort of abated a bit, now with the wage rate increases, we're seeing more commodity pricing increases to compensate for the wage increases.

13:36And until that cycle stops, I'm still nervous. And I think the Fed will be cautious. Do you think that cycle lasts for 12 months? Because you say that Walmart should be a great investment for 12 months, but then there would be trouble 24 months out. So is it the thesis that as long as there's inflation, Walmart, despite its valuation, will do well? Yeah, I couldn't agree more. That's exactly right. As As long as there's inflation and those tailwinds that come from particularly from food inflation, more traffic will come to the Walmart store. And as you all said earlier, they'll not only buy groceries, but they'll buy the general merchandise assortment that for the most part they typically don't.

14:15Because they get the traffic from the food, they buy general merchandise. Walmart continues to do well. When inflation abates and service becomes more important than price, some of those tailwinds will become headwinds. Bill, always great to get your take. Thanks for your time. You bet. Bill Simon. All right. So that's an interesting framework for an investment thesis, inflation for 12 months. And then you can build a portfolio. I mean, if that is your belief, then why not get into a Walmart, right, if you think that's going to benefit in that environment? I think Walmart has de-risked the story.

14:50I think there's less cyclicality in Walmart. I know it's kind of harder to believe at a higher multiple, but I think that's right. I like Target here. I like Target into the fact that I think they actually have a more affluent consumer. They have about 7 % share of essentially their business or people over 100 ,000 versus 3 % from Walmart. I think the trend is clearly still towards grocery over general merch, but Target's priced ascent. I'll just say that it seems like a very narrow theme. If you're focused on inflation going higher and you're focused on this high-end consumer, which Walmart has benefited from, I can go look at Disney, Starbucks, Lululemon.

15:23You know, Lulu and Starbucks are down 30 percent from their 52-week highs. They're talking about a consumer that's weakening. Look at McDonald's on the lower end. You know, so we've seen some of these other stories. Home Depot is down about 15 percent from its recent 52-week high. So to me, it's great that we're spending so much time on this one story. It's a huge retailer, and I think they're benefiting from some very unique trends. But there's a lot of other things, at least through the lens of the stock market, in retail and consumer that don't look particularly. But doesn't all of that underscore the notion that Walmart should do well?

15:51The fact that the Starbucks is not going there, that are not going to Disney. But it's going to get a really crowded trade. Right. And so, like, when I think about this, if you're telling me there's an inflation story that for another 12 months, Jamie Dimon was just in an interview talking about this. We keep hearing this. And so sooner or later, that is going to put a massive tax on the consumer. And it could all, in my opinion, come, I don't mean crashing down, but they could hit a wall very quickly. Right. And so to me, that's the fear that we get this stagflationary environment. Jamie talks a lot to me.

16:19He talks more than Jerome Powell these days. He talks a lot. Fantastic. I know Karen's happy about that. Higher income households, led share gains. Convenience is becoming increasingly important to customers, irrespective of their income level. And we've been talking about this for the last year or so. And that's in the transcript today from Walmart. So, listen, expensive, yes, stay with the stock. Really quickly, Dan's right to bring up Starbucks and Lulu. I think those two companies have bigger issues with prices that are too high and competition. Very different than even Target versus Walmart.

16:51But I think it's less about the consumer than those companies. Well, Reddit shares are soaring in the after-hours trade after the company announced that it is partnering with OpenAI. The partnership will bring Reddit content to chat GPT and will enable Reddit to bring new AI-powered features to its users and moderators. OpenAI will also become a Reddit advertising partner as part of the deal. OpenAI co-founder and CEO Sam Altman is a big Reddit shareholder. One of his holding companies has a stake of about 7%. OpenAI saying in a disclosure the partnership was led by OpenAI's COO and approved by the company's board.

17:26Ad partnership immediately is huge. All the rest possibly could be gravy, I guess. Yeah, and so this is a company that benefited right before their IPO. They did a couple deals using their data for training these large language models. So they really are focused on generative AI, how to kind of leverage their data and their users and the content that's being created there. And so this is a great deal. Listen, this is not a company that I thought was going to do particularly well after its IPO, but they keep putting stuff out. They keep cutting costs where it needs, I guess, where it seems to be.

17:54And they actually did something that a lot of Internet companies over the last seven years since they've gone public have not do. They've beaten raised on their first quarter out of the gate. So, again, I think they're getting the benefit of the doubt right now. Coming up, the newest entrant in the obesity drug space getting a big boost today. The results from Roach's latest trials and the next steps for this medication after the break. Plus, we're diving into the lap of luxury with celebrity real estate agent Mariso Umansky. Well, while office space and the run of the mill homes are still struggling, luxury is living it up.

18:22We'll go inside the numbers when Fast Money returns. This is Fast Money with Melissa Lee, right here on CNBC.

18:36Welcome back to Fast Money. Shares of Roche popping on results from its latest obesity drug trial. The Swiss drugmaker's weekly injection helped patients lose 18.8 % of their weight over 24 weeks in a phase one trial. Roche acquired rights to the treatment as part of its$3 billion purchase of Karma Therapeutics in December. but it could still be years before the drug enters the market to compete with offerings from Eli Lilly and Novo Nordisk. And if you rewind back to December when the purchase was initially made, it was thought they were overpaying, especially when there was no there weren't any results from any drug trials at that point.

19:10They're paying three billion dollars, but they gain more than that in market cap today. So maybe it paid off in the end. Well, it's it's proven that everyone's going hard in the space. And in fact, you know, Vikings sold off on the back of this with some expectation that it could be their loss of Roche is moving ahead of them. It's just, you know, again, it's about addressable market. It's about the ability that the different kind of nuances of this format are things that are going to continue to get more detailed. Yeah. It's interesting. I mean, I know biotech's a subsect, but biotech, IBB, let's just pull it up real quick.

19:41We're really close to breaking through levels we haven't seen in a couple years now. And that's obviously a lot of it has to do with like Vertex and Regeneron and some of these names. But if Gilead can ever get off the mat, which, by the way, I think it will, I mean, IBB is one you want to take a look at. The whole space, to me, is still in play. I mean, Eli Lilly, to me, has gotten itself a little extended. Merck's basically trading at an all-time high. You get some help from Bristol-Myers at some point, which has been awful. And you've got to love the space in general, I think, Mel. You know, it's interesting that you think Eli Lilly, maybe from a valuation standpoint, Guy, but really has been consolidating over the last three months or so.

20:13And when you think about the guidance that they just gave and when you think about their GLP-1 contribution to their revenue growth, it's like$18 billion on a$42 billion annual number or so. And it's still expected their total revenue base is growing 20 plus percent a year for the next couple of years. So, again, if companies like upstarts like Roche are not going to have a real competitor for a while, it seems like this is a very narrow trade again. And sooner or later, another beat and raise and the stock's blown out. It's going to basically have another gap higher. But the thing about this is, so Eli Lilly and Novo can protect that moat because they have those years where these companies still need to bring these drugs to market.

20:49But at the same time, with these positive drug trial results, you know, you get a reset. You get the markets thinking this, they can be a contender. They are in the game. If you take a look at Amgen, when they released the results of their, the stock is still higher based on that. It reset the expectations and the valuation for Amgen. And you have to wonder, is that going to do the same for Roche? I think you're spot on in bringing it up. We say it's a discounting mechanism, right? And the market will look forward in terms of what you just said. And if it's a couple of years, the market will say, you know what?

21:20Two, three years from now, we're always going to have that competition. We want to be rewarding them now at this valuation. We want to start reaping some of the rewards of the stock. And I sort of favor the latter, not the former. Yeah, and I would just say with Amgen, it's a great point you make, Mel. I mean, I saw this great doc a couple months ago. What was that? Big shot. What? It was just covering the whole GLP-1 space. What network was that on? It was on CNBC. Mel did. It was excellent. But when you think about an Amgen and you think about expectations, I think low single digits earnings and sales growth next year.

21:46Right. So if this drug does come to market, it has to get re-rated. It's trading at 15 and a half times. Well, in terms of back to Roche, I mean, it hasn't really re-rated. I mean, you had the kind of a move today and you've seen a little bit of momentum in the stock, but the stock is still 16, 17 times. And that puts it very much in value territory. All right. Well, the weight loss drug craze taking over pop culture now. Paramount Plus announcing its latest South Park special. We'll tackle the subject head on. There's these new crazy drugs people are doing. Have you heard of semaglutides? Semaglutides?