Fast Money - 9/6/23

0:01Live from the Nasdaq market site in the heart of New York City's Times Square. This is Fast to pay up to get full control of Hulu. Our Julia Borson is here with the details. And later, airlines flying into fall filled with turbulence. Fighter jet delays ground shares of Lockheed Martin and AMC's less than memorable day. I'm Melissa Lee coming to you live from our brand new set and studio. Be here at the Nasdaq Market Site on the desk tonight. Tam Seymour, Karen Feynman, Steve Brasso, and Guy Adami. And we start off with Apple, today's worst outperformer, the stock dropping almost 4%. Part of the blame due to a troubling development in China, Beijing banning government workers from using iPhones at work.

0:55Then the headline that the EU is slapping Apple, along with a host of tech titans, with new regulations that will most certainly impact their business. All this is Apple is battling revenue declines ahead of next week's big iPhone event. We have talked about this so many times, about the notion that China can just flip a switch and hurt Apple. And here we have a taste of it, Guy. The existential risk. Now, we've said it, and it hasn't come to fruition. Stock's gone higher. I mean, we're in a whisper of an all-time high. That said, this is the huge risk for Apple, and now it's government workers.

1:29But again, China can do whatever they want here, and I've thought for a long time, if they want to escalate the rhetoric, if they want to continue to turn it up, Apple will be the biggest company with the biggest bullseye on their back, and you saw it today. I'll say this. I'm shocked the stock wasn't down more than it was today. If you had told me that, play the game. Tell me what's going to happen. I said the stock's down 10 % easy tomorrow, and it wasn't even close, which is a good sign. But this is the first, I think, of many. So if you look at an analyst report across the street and they list risk disclosures on Apple, they'll give their bull case, they'll give their multiple, they'll tell you why.

2:01And then they say risks to their outlook. Number one risk is always regulatory kind of escalation with China. Number two is typically some kind of loss of dominance at the app store. I mean, these are two things that popped up today. I mean, in Europe especially, because they're calling them a gatekeeper and they're basically talking about knocking down the App Store and whether they're going to do it or not. Apple has to hold tight here. They actually have to defend a lot of the privacy dynamics and the iOS, et cetera. So I don't think they're going to go quietly. I would also point out that I'm surprised that this didn't happen to Apple not far after we beat up on Huawei.

2:34I mean, and here's Huawei, by the way, in the last week has come out with their Mate 60 phone, which is outsold or kept at least the same sales pace that the Apple, that the iPhone 14 came out last year in the first five days. They've sold about 800 ,000 of these phones. It's a much better price phone for China. Obviously, the chips inside make the Chinese regulators a lot more comfortable. And I think it's a real threat. So in other words, I think there's competition in the form of another phone. I think Big Brother is really on top of them. And I think, again, analysts have to respond to this.

3:03Putting all of this aside, there are still questions about Apple's valuation relative to the market, relative to itself, Karen. Right. So, I mean, it is expensive, even without this news or where it was yesterday before this news. I mean, I agree with Tim. China has always been front and center, both as a market for consumers and obviously as a place where they're manufactured. So they're pretty vulnerable to China. And that's not a great place to be. I'm surprised actually in hindsight thinking about it. Why hasn't this been more of a penalty, a potential penalty on Apple for a while? I mean, it did not that long ago, traded up near all time highs.

3:43And it's not surprising to me that this level is still expensive. Right. I think this multiple north of 30, we talk about, you know, the software or the services multiple being much better than the hardware multiple. But still, that's pretty big multiple. So even though it's down a lot from the peak. I wouldn't I own a little left. I would not jump in and add to it here. I jumped in. That's what you did today. So I had sold it. I actually bought the stock today. So to Guy and Tim's to everyone's point, this has been sort of in the mix forever. We've known about this. So you start off the show.

4:18China can flip a switch. So can Apple. They could flip the switch, too. They could start manufacturing off. They have started to manufacturing, right? So this would have been a bigger shock years ago than it is now. But sorry, what's the switch that they're, what's that going to do? They can take manufacturing from China. They can take the reliance in China. Makes the phone more expensive. I mean, is it a good thing? I mean, it's good for the U.S. government. Everything's going to be made more expensive if we're onshoring everything. That's the whole Biden administration. Let's start manufacturing here.

4:46Let's bring everything home. So we've established that everything's going to be more expensive. Would you rather it be more expensive or more levered to China? Would you rather, Melissa? Did you see that? So the key is you want to get less China leverage, which is what Apple has the capability of doing, which is what they've been doing already. Other unknown question here, and that is, can the government further? Can they say not just government officials, but state owned enterprises? Why wouldn't you think we have states like an Alibaba, by the way, and say, sure, this should have been done about data flow out of this country.

5:18Right. And we're concerned about it as well. So this is very tit for tat type approach to it. This has been already in the mix as far as the iPhone is considered, as far as privacy concerns are considered. But didn't China do this with Tesla as well? Right. They said no one no one can own a Tesla. Government or military officials cannot use Tesla. And and the Tesla sales weren't really crimped. So is there is there a propensity for people to have two phones? I don't know. China is different than the U.S. where people have a burner walking around. Now everybody knows. I mean, why do you say it?

5:53A guy like you has to have one. At the NFL season, you say these things. So just to put a bow on it, the reason why I got back in, it seems a little contrived. It seems overdone. Everyone's talking about September being a terrible month. I think it's going to be a good month for the markets. If it's a good month for the markets, it's good for tech. If it's a good month for tech, it's good for Apple. I look at a couple things. The fact that this iPhone 15 release we're getting on the 12th is, you know, whatever cliche you want to throw at this. It's evolution, not revolution. I mean, there's nothing earth shattering going on here.

6:23I look at the declining iPhone sales. I look at the pull forward. I look at the discretionary headwinds for every company, especially. I don't think anybody had more of a tailwind from COVID than Apple, at least certainly in its side. Tim, only because, just real quick, only because on the innovation, when has Apple ever innovated? They always replicate. Well, I mean, you know, fair enough. We've certainly complained about innovation at Apple. It's only been a camera. It's been, you know, a case and whatnot. But I look at also those second quarter numbers where, look, they beat, but it was still declining sales.

6:56And the beat came from 8 percent in China and 5 percent in the EU, EU, which, by the way, includes India for some reason. But but the point is that the two growth markets, the two headlines for Apple, it's only about the multiple. So so really, it's about whatever you want to put as a multiple on this stock. And the street has gotten comfortable thrown a 30 times on this. And I just don't know that you do that in this environment. Rising interest rates, 28. Whatever. Let's call it 30. We'll round up. But as Tim just said, three quarters now of declining revenues, declining earnings. I mean, high single digits earnings growth, high single digits revenue growth.

7:32If you had said any other company other than Apple, you'd say this stock's too expensive in this environment. It is too expensive in this environment. Guess what? Apple does go down, too, over periods of time. Since I would say over the last seven years-ish, Apple's had probably six or seven, 25 to 40 percent peak to trough declines. Big opportunities. So it does happen. But let's play this out, that if the environment is so bad or potentially so bad, isn't this exactly what you want to be in? You want to be in a company that has a lot of cash, does not depend on the capital markets for cash in any way, has a customer base that loves the product, needs a product.

8:09It's almost like a utility, like toilet paper. Whoa, whoa, whoa, whoa, whoa, whoa. I don't know what you're doing with stocks at home in the Lee house. I'm just saying that people do not want to live without their iPhones. And I get instructions about what I have to go. In order to still buy that phone. Right. I believe all of that, that people absolutely think it's a necessity to have their iPhone. But I don't believe it's a necessity to have a 30 multiple. Right. And so we've seen rates move. just talk about math all the time. And so it wouldn't be surprising to see, if you talk about a drawdown of 25%, it gets us to 24 times.

8:49That's a market mold. Well, probably the market will be much lower if it got to that case. It'd still be above. So even though it is a necessity, the stock here, this is not a built-in floor. Inspired by our executive producer who's just in our ear. I mean, the question is, would you rather, if you find yourself in the toilet without your iPhone or toilet paper, But what would you be more upset about? Again, you know, that's just bad. Taking it one, it's just right over the line. Right over the line. Second day on the new set, folks. It didn't take long. Nope, did not. All right, our next guest is the street's biggest Apple, Bear.

9:22His price target is$120 a share, and he has one of the only sell ratings on it on the street. Walter Pysak is with Light Shed Partners. Walter, great to have you with us. Thanks, Melissa. How are you doing? Good. Is it tough to have this rating, this price tag on an Apple seeming juggernaut in this market? I mean, some would argue that in spite of these headwinds today, the stock actually acted pretty well. I mean, it's definitely been tough. We've had a sell since March. The stock's up 20 percent, outperforming the S &P, but underperforming the triple cube. So, you know, the issue, though, is I think, as you guys were talking about, it's not growing.

10:00The company is not growing. and the multiple just went from over that period from 25 to 30 over the past four years from 15 to 30 for a no growth company. They're showing some minimal earnings growth because they're buying stock back. So then the question is, OK, that's already happened. That's the last three quarters. What about next year? Maybe maybe people are expecting them to return to growth next year. And look, the single primary driver of this company's revenue and profit growth is still the iPhone. It's 52 % of revenue, right? And what's happening? Today, earlier on CNBC, you had the CEO of AT &T tell David Faber that people are just holding onto their phones longer.

10:39I was listening to you guys before. You're 100 % right. No one's going to get rid of their iPhone. The question is, how long is it going to take them to upgrade to the next model? And we all know the battery dies, but the battery's been getting better. And what is it about this year that's going to get you to buy it? Is it a higher price? Is that going to inspire you to buy the phone faster because the telcos, which is where all the product goes through, these are the guys that are doing the promotions. Mike Sievert also on CNBC talking about promotions, costing more and them wanting to pull back on that.

11:08What's going to make you buy your iPhone or replace your iPhone faster than you did before? That's the question. What is the most likely trigger for this decline that you see to 120? You can argue that if the market overall goes down, Apple still remains higher relative to the markets. And if the markets go higher, it's because of Apple. It's sort of a lose-lose situation for you bears out there. Yeah. I mean, I certainly, again, didn't expect multiple expansion when they missed the quarter and generated a nickel off of a lower tax rate, right? You don't expect that to happen. But going forward, you know, I did this back in 2012, same issue with the operators and we were wrong early on and then it kicked in where the replacement cycle extended, the stock missed, and they had one of these drawdowns that you guys were referring to earlier.

11:59So why do stocks go down or why do multiples contract when companies miss earnings? And yeah, you could say it didn't happen last quarter, but if they miss earnings next quarter or if the street's expecting 3 % to 5 % growth next year and it's not 3 % to 5 % growth, then at some point investors look at other large cap names that are out there and say, maybe we should be in those names rather than Apple. And that's theoretically how the call can work. But you're right. Up to this point, it's been painful. And it has not worked, even though they've missed earnings or at least not delivered any type of growth in recent quarters.

12:31Walter, it's interesting. And you probably know the number exactly. But I think Apple's in about 350-ish ETFs, of which it's in the top 15 holdings. So in the world of passive investing, where nothing matters but money flow, Apple wins to that. And they're probably the biggest winner. So part of your thesis, I would imagine, at 120 is something happens in the broader market as well. Is that accurate? I mean, look, I'm cognizant. I'm not going to be the macro guy making that call. It's certainly been surprising what the market has done this year relative to all of the things that are going on. So I'm aware of that.

13:07But as a fundamental analyst, if I look and look, we've had a neutral on this before. I've had a buy on this more than I've had a sell on it by a large stretch. But if I look at a company and I look at their valuation, I look at the free cash flow yield, I look at peg ratios, and I look at my numbers being next year, 17 billion lower than consensus in revenue. If that happens and I'm right fundamentally, then theoretically, the market should reflect that. And I get that there's large companies that are driving the market. But when they reported last quarter, the stock was down and the market was up.

13:41So you do have leadership that obviously benefits from inflows, but sometimes leadership changes or the weighting within those large companies does change if there's other companies. By the way, there's analysts out there saying like, hey, this should get a services multiple. Services multiple, Netflix PE multiple is lower than Apple. So it's not like if it becomes a services company, that's going to re-rate to a higher number. That's a lower number right now. Walter, great to get your take. Thank you so much. You bet. Walter Pysik, Lightshed. And Karen, I mean, I guess your portfolio is one example of this where you have a Google or an Alphabet in favor instead of Apple.

14:21Instead of Apple. Much, much bigger. Just when they add one mathematical point to Apple, they've been doing buybacks for years. Because rates have moved so much and their multiple is so high, those are no longer accretive. They might be a floor to the stock, but they're not accretive to earnings. Yeah. You rethinking your – No, because I think the risk is, so if you look where the stock stopped on the downslide, it was around 170-ish. That's where it stopped back in May. So the August low was around that level. So I think your risk right now, 20 up, 10 down. Okay. Apple's breakdown, by the way, creating a bit of a domino effect in the market today.

14:57Major averages falling with the Nasdaq, the biggest loser. Are we in a so-goes-Apple, so-goes-the-market kind of moment? Kind of feels that way. Look, at different times we've seen that. So far, it's actually, you know, triple Qs have outperformed the market over the last few weeks. And it's funny because that point we were saying the market breadth was growing since that point of mid-July. A lot of this is rates related. You've seen transports underperformed by about 7 percent. You've seen industrials underperformed by three and a half percent. So it's almost as if Apple, despite whatever is going on and today is a bounce downward after a bounce back in Apple, frankly.

15:34If Apple really gives ground, the numbers just don't lie. The market has to pull back. The reflexive dynamic here is I think you're going to see more rotation. I think over the last week or so, as some of the growth that has become a little more troublesome, megacap tech's caught a bit. So that's the flip side of this. It's interesting. You know, Tim talked about this on a 1230 call. The Chinese currency, the yuan, continues to sort of get whacked. Nobody seems to talk about it. Nobody cares. They should. Dollar yen continues to go higher seemingly every day. We're going to come in for show one night and say the Bank of Japan intervene in the yen, and it'll last for about a day and a half.

16:07That's not going to work. Dollar's going to continue to go higher against the yen, which is not a good thing for equities, in my opinion. And to the Apple point, yeah, Apple's clearly important. Rates are more important. And very quietly, 10-year yields are back to 4.3%. It's a big deal. They're not going up for the right reasons. That's my view. And by the way, the BOJ has been trying to jawbone the yen, and it worked for a small window of time. Exactly. one minute and then reverse. BOJ's been so off-size on monetary policy, and you brought up toilet paper, by the way, not me. No, but you took it to the next level.

16:40Come on, this is what happens around here. Mine was a metaphor. That went over my head. Coming up, rough skies ahead for airline stocks and major players, warning of a spike in fuel costs this summer. So will the pain of the airport pump continue to be a headwind for the space? We'll debate that next. Plus, all eyes unarmed. The IPO market picking up steam ahead of one of the biggest listings of the year. So will the high-profile debut pave the way for more tech and AI companies to follow suit? The details when Fast Money returns.

17:16Welcome back to Fast Money. Two major airlines today signaling there could be turbulence ahead. Southwest warning on revenue on some of its leisure bookings stalled last month. and United telling the street that spiking jet fuel costs could weigh on its quarterly results. Phil LeBeau is here in studio. Be with us. Welcome, Phil. Wow, I love this place. This is fantastic. This is like the living room of Dr. Evil. It is. It was meant to be. Yes. That's what we were going for. That's good. That's good. Ooh. Let's talk about the airlines. It was also Alaska had some negative comments today. And the bottom line is this.

17:50Jet fuel, if you've looked at it since the beginning of July, has been on a tear. relatively speaking. And as a result, what did we hear from United today? It said that their jet fuel costs up about 20 percent in the third quarter. They didn't bring down their guidance in terms of earnings, but they clearly issued the warning there. And then you heard the same thing from Southwest Airlines saying, look, we see these higher costs here. Not the greatest commentary regarding leisure demand, but they didn't warn. They did say unit revenues will be lower than expected from their previous guidance. And take a look at jet fuel.

18:24As we mentioned, up about, what, 30, 35 percent since the middle of July. This is the largest cost for the airlines. So this should not come as a surprise that we're seeing this from the airlines. And as you take a look at the airline index, all of this raises the question, what can we expect beyond the third quarter? It's starting to feel, to me, similar to what it felt like before the pandemic when, remember, Warren Buffett and others said, look, there's a long-term play with airlines. I'm starting to get the feeling that there may not be a long-term play for the airlines, that they're back in this trading dilemma, that you just kind of trade them up and down, trade them up and down.

19:01Because if you look at their business, demand is strong. The demand remains strong, a little soft on the pricing in the third quarter, but not terrible. So why is there no love for these stocks at all? I'm curious, Phil, for United, how do they stick to the revenue and cost guidance that they gave in July, even with fuel costs going up so much? A lot of that has to do with the demand that you saw. I mean, they had a great summer. International, United is killing it. They are absolutely killing it on the international business. They've got the pricing there. They have the demand there. They added the capacity at the right time.

19:36But the cost guidance remained the same. I mean, revenue per hedge. The math doesn't add up, is your point. And they also didn't increase capacity. So it would be one thing if they said we're increasing capacity, which as an investor, by the way, I don't want to hear, right? Because airlines, whenever they get sloppy on capacities, when the multiple dives. And that is the concern that's out there right now for between Labor Day and Thanksgiving. There's more capacity this Labor Day to Thanksgiving than there was in 2019. And more than a few people in the industry have said, I think we might be a little over our skis.

20:05Yeah. Well, you said this, and I'll just say this because I've said it before. I think airlines are the greatest trading stocks in the market. And I think if you look at the underperformance, and I think Delta underperformed its multiple and its earnings power for a long time, And then it shot up, I don't know how many, 14 straight days. I mean, it set a record. Right. And I think they can go lower here. Yeah. Karen, what do you think of airlines here? Well, I don't know. And I'm wondering about how much do they hedge that oil? So for some amount of time, maybe they're OK with the cost because they make it up on the other side.

20:37But they need them to come down. They do need it. Although sometimes we've seen that oil has actually not been such a headwind in that they're able to charge more. You've seen oil. Can they still do oil surplus or gas surplus charges, gas? No. They can't. No, not right now. The market won't bear it? The market won't bear it. That's my opinion. Now, the market has bared higher costs on these international routes than have been out there. So, I mean, there is a little bit of firmness there. But I think there's not as much as you might imagine if oil continues to move higher. May I ask Phil a question?

21:10We have not goodby the gas. The rules still apply. I'm trying to play by the rules. You have to understand, Phil, if we goodby the gas, Is the question about toilet paper? No. Well, close, but no. Existential risks. And United can say whatever they want. There was a ground halt the other day. Yesterday. Stopped me from coming into New York on United. I had to rebook on a different airline. There seems to be an existential risk here with the airlines on the back of all these. Am I being too dramatic here, or is there something going on? No, I don't. I think you're being too dramatic. Look, what happened with United yesterday was a very short ground stop.

21:44Now, it's not good if you're somebody like me and you're there and you're like, I got to get to New York. I'm not going to sit around and wait and see whether or not the ground stop is lifted. Ultimately, the flight I was supposed to be on did take off. But I didn't know that. And like a lot of people, I was like, I got to get to New York one way or the other. So I rebooked. I do not think that there is an existential issue here for United or Southwest or any of the other airlines. I do think that we will occasionally come across this. And I know that's not the answer people want to hear, but I don't think there is an existential issue.

22:14Yeah, I mean, I think the bigger question is, do oil, does oil come down? Katie Stockton just tweeted today. She saw it up to 94 because we're definitely seeing the spike. You know, today we saw a continuation of yesterday's spike on the back of the production. I think we're at the higher end of it. So Katie sees it to 94. I had said, I think 100. That big, fat, round number is probably going to be the limit to the upside or thereabouts. So we're closer to that than you could sort of see the light at the end of the tunnel. When you look at the charts, Southwest chart is the most hideous chart in the airlines.

22:47Delta, United, still look okay to me. So if you're going to look, if you want to bottom fish and you want to look at Southwest, then you could probably take a stab at that. But I don't see any reason to go out on a ledge and buy any of the airlines right now. I don't see any reason to trade airlines on oil prices. I mean, we don't reward them on the way down. We don't talk about it being a windfall and a surplus to them. So I just think, like, I'm a big fan of Delta. I'm a million miler. I've flown a lot of miles on Delta. But I think this is the best airline by far in terms of what their execution is, in terms of their balance sheet.