Has AI Reached Its Peak? And Can Crypto’s Run Continue? 12/4/23

0:01Live from the Nasdaq market site in the heart of New York City's Times Square. This is fast money. Here's what's on tap tonight. Too far, too fast. The promise of AI sending the stocks with the biggest chip and cloud names into orbit this year. But have these names outrun the hype? Should investors be ready for them to come back to Earth? We'll debate that. Plus, Bitcoin Bonanza, the cryptocurrency topping 42 ,000 today and at its highest level in 18 months. Our Bitcoin baller BK will be in the house to tell us if this year's revival will keep going. And later, an airline merger hitting turbulence with investors.

0:33a street upgrade revving up shares of Carvana, and the impact of job cuts at Spotify and the rest of the media landscape. I'm Melissa Lee. Come to you live from Studio B at the NASDAQ on the desk tonight. Bono and Eisen, Karen Feinerman, Dan Nathan, and Guy Adami. We start off with a cover that may have just signaled the top to this year's AI boom. Barron's this weekend leading with a story touting the AI gold rush, calling Nvidia the clear winner in the race and saying the stock is still undervalued. That, even as shares have more than tripled this year, But since hitting an all-time high just two weeks ago, shares have pulled back 10 percent.

1:07And just today, NVIDIA fell more than 2.5 percent. Alphabet and Microsoft, the other big players in the AI race, also seen bigger losses in the broader markets. So is this the latest hot trend to suffer the cover story curse? Or will spending in this space justify this year's rally? And even more to come, perhaps, as the bulls in AI will say, Guy. It's like being on a cover of Sports Illustrated or the Madden curse. And yeah, Barron's is right there with them. And it's interesting. Last quarter, NVIDIA had that huge run up in earnings. Stock closed, I think, on the day 485, went north of five hundred and fifteen dollars, only to subsequently trade below 400 in the next couple of months.

1:44Same setup this time, traded right up to 485, printed 500. Here we are now. So is this a sign of things? Yes. And let's be clear. NVIDIA is an extraordinarily important company. Collectively, we have said that the stock is being rewarded in almost an obscene way in terms of valuation, in my opinion. A cyclical company still trading at valuations that I don't think make a lot of sense here. So I disagree with a bunch of that, actually, except what actually happened to the stock before earnings last time, before earnings this time. We've talked about it a couple of times. That's how I went into it, that they would sell into earnings and it would probably trade off, which is exactly what happened.

2:21I'd like to buy it again, which I did after the last earnings. I don't agree with the valuation being so crazy. I think that part of what happened today was the whole Magnificent Seven traded down, which includes a lot of AI hype, right? Alphabet, Microsoft, but even, you know, Netflix, Meta, which has some AI as well. So I think it was sort of mixed up in that. I don't think the valuation is crazy. And I still think that we are early in this, I don't know what you want to call it, gigantic tectonic plate sort of change. and that I think NVIDIA will earn their way. Actually, I do think it won't even be expensive.

3:01It'll be relatively fair. That's starting to happen. Okay, so if you're looking at the out year, you're looking at next year's estimates, it's trading about 22 times these expected numbers. So over the course of this year, as these beat and raises have happened, it's kind of worked its way into consensus. So if you're looking on the backward looking, it still does look very expensive for a$1.1 trillion company that all of a sudden had this sort of growth come out of nowhere. I'll just say this. One of the concerns right now is this customer concentration, right? At a time where we just saw Gina Raimondo talking about a lot of this stuff, you know, this has been dominating, I think, a lot of the discourse in and around, not just here with obviously our CHIPS Act and how we're thinking about supply chains and how we're thinking about AI and who's going to control AI in our competition with China, but also obviously over there.

3:47So the customer concentration is important, right? Microsoft and Meta make up nearly 30 % of NVIDIA's sales. Throw in Amazon and Alphabet and you get to 40%. Then if you think about geographic exposure, and it's maybe two-thirds outside of the U.S., and then if you think about those customers, you think about Microsoft, every day I've been reading stories over the last couple of months how Microsoft is developing their own graphics chips to train their own models, to put in their own data center and the like here. So the story for NVIDIA was, you know, it's not going to have the sorts of returns.

4:21It's not going to have the beats and raises going forward next year. But it probably is trading at a reasonable multiple. But the only problem is, it's like it's going to be relative to its growth. In my opinion, it's not going to be that attractive, not nearly as attractive for those who jumped into this story, who recognize what it was mid-year this year. Yeah, I mean, I think it's safe to expect that you're not going to get the same returns that you got being in the stock last year. But that doesn't mean that it's necessarily overvalued. And I do understand the customer concentration, but the names of those companies that you just listed are amongst the top seven companies in the United States.

4:53So if I'm going to be concentrated, and most companies have to be concentrated somewhere, I'd rather be concentrated there than, say, in some SMB-type segment of the market. The other thing is, like, listen, there is some concern around the China story and whether or not you're going to continue to see numbers pull back in that region. With that said, I do think analysts are on to something that I think we just have yet to really wrap our minds around how large this thing really can be. The beats and raises notwithstanding, we have continued to ratchet up expectations and they have continued to outperform those raised expectations.

5:30And so until I see some pullback in terms of the growth prospects, I think you continue to look to buy pullbacks in the name. I think that you can be bullish the longer-term AI story but be bearish on the name at the same time. If you are a believer, for instance, that companies are going to start to really scrutinize their balance sheets next year because of economic troubles or whatnot, then how are they going to justify that level of AI spend? And so it's just the level of spend. It's not necessarily that they won't be spending, but maybe they won't be spending as much as forecasted to meet the economic times.

6:04Or maybe you've already seen the double ordering or potentially triple ordering. And I don't know if we have that graphic of the comments from Gina Raimondo, but I think this is important. I mean, she's basically saying if you try to circumvent the rules, be careful. We're going to go after you. I mean, you can't take – I don't think you can discount that. And it's pretty important. I'm not certain that's what took NVIDIA down today, but it clearly didn't help. And, again, can they grow into the valuation? Absolutely. It's going to take time. And that beat or that raise from$7 billion of revenue to$11 billion we saw a couple quarters ago.

6:34I don't think you're going to see that magnitude of percentage beat in terms of absolute numbers. Obviously, yes, we went from 18 to 20 now, but I think those beats are going to be smaller and smaller. Typically speaking, I mean, a space that everybody wants to be in will become commoditized and margins typically decrease on the back of that. I think this is similar to when AWS, right, early on in their career, it seemed like, all right, this is absolutely something that can be commoditized. Right. And here we are several years later. And still, this is a really good business. It is somewhat it is competitive space for sure.

7:09They owned it before. But now you obviously have many other you have Microsoft, Alphabet, Oracle and others. And I think we're still early in this evolution. So I think you're right. The stock can trade differently than what's happening in the underlying business. But I think this stock is going to give you another chance to own this. Remember, the valuation's getting cheaper. The stock's moving a little bit. The valuation's getting a lot cheaper. The only thing I'd say about that. And, and, and, and, and we just said one more thing. There's many other customers, right? There's Dell. There's Oracle.

7:38There's a lot of big customers here and a lot of new customers as well. Yeah, no, it is interesting, though, on that May quarter that they reported, and it was that, like, 80 % revenue, like, beat, okay? Like, it was astounding. I don't think anybody had any whispers, anything. You know, it gapped up to$400. Well, it's traded down to four. It's traded up to 500 a few times. It's traded down to 400. It's really gone sideways. So the investors are really trying to digest all of this. And if you look at next year's numbers, so we're saying it's trading about 22 times next year's consensus, about 12 times next year's sales.

8:09OK, that seems really reasonable for a company like this that has those customers that is in this secular shift and the like. OK, the only problem at some point in 2024, estimates are probably going to go down, in my opinion, for the out year, for the next year. OK, and once you do that, that's when the stock fills in that gap back to 350 to that May thing. Like trades where as a multiple? Well, it's going to start trading more expensive. Right. Because the stock I mean, like to me, because if estimates are going to come down. No, but but if the estimates are going down. Right. Like so to me right now, you're expected in 2025 for like low single like low double digits, like, you know, 12 percent, low teens or something like that growth rate.

8:46I'm just saying it has the potential to go negative. And here's the other thing. I just want to say this. The last time we were all so excited about technology was late 2021. There was all these different advancements going on in AR and VR and the metaverse and this and that, whatever. And you know what? NVIDIA sold off 70%. Meta sold off 70%. Netflix sold off 70%. Tesla sold off 70%. These stocks, I mean, like, it can happen, people. I mean, we all are so euphoric. Everything's amazing. And Barron's just told us it's an AI gold rush. That's what they told us this weekend. With the 1.6 beta, I think you kind of are signing up for that.

9:19You understand that you bought that when you bought the stock. So you're not expecting necessarily some orderly march. So if the case is that, listen, we're expecting to see some increased volatility, yes. And I would say investors should be very well aware of that. Otherwise, you don't need to be in this pocket of the market. The other thing that I think is being underestimated is that, yes, you may see enterprise spin pull back. But that doesn't mean that NVIDIA specifically is the loser. I would argue that it's going to be the secondary and tertiary players that really suffer the blunt of that blow.

9:45And then the full stack aspect of NVIDIA, I think, is something that none of us are really mentioning here. The fact that we have all the developers on their platform and they're sticky there. They have a decade head start there. So there is some moat. So, yes, I'm not going to push against the fact that you could see a pullback in enterprise spin and you could see a growth rate pullback altogether. But I still think that there is a strong argument to be made that this is at least fairly priced. There are software revenues that have not been fully factored into the valuation at this point in terms of software revenues in the out years.

10:18It's interesting. We're probably all saying the same thing, just in different ways. Right. I mean, it's a stock you want to own. My question is, you want to own it here or to Dan's point, you can get a much better opportunity. I think you're going to get a better opportunity. I mean, quite frankly, I don't think anybody saw a move from 516 this summer down to below 400 in a few months later. And then we obviously we went back. So my point is the stock will give you an opportunity cheaper than where we are, I think. Right. And Barron's is not wrong. No, at all. There is probably an AI gold rush going on.

10:47But the question is, will it be immune? Will all these names be immune if there is a rotation out of Magnificent Seven, which is what we may be witnessing right now as we are seeing regional banks come to life or seeing health care show some signs of life, etc. in this phase of the market. Yeah, I agree with Guy completely there that, I mean, normally I'm a long-term holder. I don't trade around. This one, I really do. There's a lot to do in options. There's a lot of one by twos, interesting things to do. And I think I will have a chance to do it again. Our next guest believes AI returns will justify all the hype.

11:21Tech investor Gene Munster's managing partner at Deepwater Asset Management. Gene, great to have you with us. I know that you've been listening into our conversation. At what point do you get concerned, you know, if enterprise spend pulls back at all, that the AI spend will also pull back, especially as we are sort of in the early stages of this whole thing, and we may not see what the returns are on investment at this point. Melissa, I think any pullback would largely be noise. And I think this whole conversation needs to start with some context. We've used adjectives to describe what this transformation from AI is.

11:57The whole panel is optimistic. Most people are optimistic, but I think most people are still understanding what the significance of this is. And if I think about the scale of how transformative this is, if we put electricity at 100, I'd put AI at 90, I would put the internet at 50, and the smartphone at 30. I think it's that big of a deal. I think that we're going to see a blowout, a bubble in the next three to five years around AI that's going to impact the entire market, that's going to, I think, make this conversation look a little trivial when we look back at it relative to the opportunity.

12:29That said, there can be some bumps in the road and is noteworthy. You don't just want to be a visionary and you want to be an investor. So I'll just start there with the point that ultimately, I think that this is going to be much bigger. NVIDIA is going to be powering this. I think this is a good company to own. And I just want to give an example. We don't at Deepwater, we do not own NVIDIA. We do have the Deepwater Frontier Tech Innovator, it's ticker LOUP. We own TSMC in that. TSMC trades at eight times. They're the picks and shovels of this whole revolution. NVIDIA trades at 22 times. That's, as I like to say, you get your cake and ice cream too.

13:11You get the benefit of owning this transformative wave, but you get it at a better valuation. And so there's a lot of good things going on when it comes to AI. Just to put your bullishness in context, Gene, I'm just curious, where would you have put Metaverse back in the heyday of Metaverse on that scale of innovative trends? Would it have been bigger than the Internet? A 25. I would have said it would have been smaller than the smartphone. I would have put 3D TV at a 5. Autonomous cars at 25 or 30, something there. I mean, this is, I don't, I just, my personality, I don't want to get tripping over adjectives to hype things up.

13:59That's not what I do. But I just, I think it's important for me to be on the record here is I think we're going into a huge bull market when it comes to AI. I think it's going to impact a lot of companies. NVIDIA is going to benefit. There are some smaller companies that I think will benefit more. Gene, it's Karen. Thanks for coming on. So I got to ask, though, why don't you own NVIDIA as a means of diversification? TSMC, although it may be cheaper, does have some other sort of idiosyncratic risks. Why not own both? I think that there is, it comes down to 2025 and what the expectations are for growth.

14:35The street's at 15%. I think it's going to be better than that. I think it's going to be 15 % to 20%, but it just doesn't have that. I think that's where investors' heads are at right now. It's going to be great for the next few quarters. I just think it comes down to 2025. And I think when we look at TSMC, all the things that are going on with some of the hyperscalers and them building their own chips, what Apple's doing, TSMC is going a benefit. And I think that they've got a bigger potential in 2025 to have upside. So that's why we don't own NVIDIA and why we own TSMC. Gene Bonham here. Thanks for being with us.

15:09Can you help us think about or tell us how we should be thinking about the China risk to this story? It seems to be the glaring bear case if there is one to be made. Can you help us kind of quantify what that may be and the duration in terms of how long that may last? It's the piece that keeps me up having TSMC in our portfolio, it is to quantify the risk. I think that eventually something does happen there in terms of China and Taiwan. I don't necessarily know it's going to be military related, but I think that there needs to be some resolution. When I think about that risk, I put it in the category that if something did happen there, TSMC would be crushed.

15:52let's say it's down 50%, that half of their production is still outside of Taiwan. I think that's in China. I think that's an important piece around how this story is evolving. So there still is that piece to it. I think the rest of the market's probably down 25 % on something like that. I think it would be a huge event. So I think it would be bad. I think it would be bad for the whole market, but that is the piece. And that's the reason why TSMC is not in the conversation. If there's a MAG-8, TSMC would be the eighth. I think it would be hard to get most people on board with that because of the risk that you're outlining.

16:28But ultimately, I think it's a manageable risk. Gene, thanks. Great to see you. Gene Munster, the Water Asset Management. TSMC, that's interesting. Totally. You know, listen, I think everything Gene says makes a lot of sense. And, you know, I think some of these big platform companies are going to be the big beneficiaries. Not too different, Karen, the way you just described, like AWS and what that meant. So, like, for instance, you know, a company like Apple or Amazon or even Google and Amazon right now that just seem to be mired in. We know that they've been spending billions of dollars on investment in machine learning for, you know, 10 plus years or whatever.

16:59But they can't get their products out. They can't get good reviews of their products. They can't, you know, right now that's going on. They'll figure that out. You know what I mean? Like they will. And then a company like Apple, which has no headlines in and around generative AI and that sort of thing. Like there will be productivity. There will be all these sorts of new whiz bang things that work into their products and make them more interesting and the like here and everything like that. And I think, again, what I would say is and I've said this consistently over the last couple of years, and I don't think we're out of the woods as far as a bear market is concerned, believe it or not.

17:27I think the QQQ is a great way to play big secular trends, especially if the largest components are going to be ones beneficiary because we know the top 10 names make up half the weight of it. Turning to airlines now. Alaska Air announcing over the weekend plans to acquire rival carrier Hawaiian Airlines in a deal valued at$1.9 billion. The offer of$18 a share nearly four times where Hawaiian close on Friday. Alaska, meantime, down 14 percent today, its biggest drop since the start of the pandemic. Let's get more on this deal now with Phil LeBeau. Hey, Phil. Hey, Melissa, this is an interesting deal if it goes through with, not surprisingly, both Alaska and the Hawaiian CEOs believe it will.

18:05As you mentioned, it's a$1.9 billion deal. $900 million, by the way, of Hawaiian debt would be acquired by Alaska. Both brands remain. They continue flying Alaska and Hawaiian Airlines, but they're going to be under one corporate umbrella, which is going to be run by Alaska. The approval is expected within 12 to 18 months. And yes, the CEOs realize that many believe the DOJ will likely fight this and not approve of it. Here's what the Hawaiian CEO had to say this morning when we put that question to him. This transaction needs to be looked on on its own merits, not compared to any other. That it is pro-consumer, that we're giving more options to travelers to Hawaii.

18:52There's really not a lot of overlap, and the route networks are very complementary here. We're relatively small players in the industry. Hey, on paper, almost everybody in the industry agrees, yeah, this makes sense, but that doesn't really matter if the DOJ is going to fight it. By the way, Alaska has offered$18 a share to all of the investors for Hawaiian Airlines. We reached out to the DOJ, as you would expect early on, just a day or two after a proposed merger is announced. They had no comment on the specifics. I'm sure, Melissa, we will hear from them at some point. Remember, the DOJ, as you take a look at shares of JetBlue and Spirit, they are watching the end of that hearing, that court case.

19:36Final arguments, maybe tomorrow, maybe on Wednesday, but it will be this week. And then we could get a ruling on that by the judge by the end of this year, though many believe it will be shortly after the new year. Finally, take a look at the airline stocks today. For the most part, they were, you know, moving higher. And there's the ARCA airline index moving higher. Interesting to see what happens not only with JetBlue and Spirit, Melissa, but once that's done, what does the DOJ say about this deal? Yeah, and regarding this deal, if it doesn't go through, is it thought that Hawaiian could be purchased by another airline or that no deal will happen?

20:10Because, I mean, the stock reaction indicates that people really believe it's in play. I think people think it could be in play, but I'm not sure if somebody else wants to get into making this offer. Melissa, I've spent a number of days with airline CEOs over the last couple of months at various events. We're going to their headquarters. Almost all of them say the same thing, which is you really have to buckle up if you want to take on the DOJ in this environment. They're watching what happens with JetBlue and Spirit. And while you can make an argument that Hawaiian might be in play, if this doesn't go through with Alaska and if the Biden administration is extended for another four years, do you really want to get into a fight trying to acquire an airline?

20:53All right. Phil, thanks. Phil LeBeau. You bet. Karen, what did you make of the stock reaction? Well, just as an ARB, there's sort of a rule. No airline deals. No airline deals, right? They're just too messy. They take too long. You know, it's no thank you. Spirit and JetBlue, the regulatory, I think, is supposed to get cleaned up by the first half of next year. Going to be interesting to watch. But Delta, if you look now, I didn't think it was getting down to 32. It did. But this has been a great trading stock. They also speak at a conference tomorrow. I want to say it's a Morgan Stanley conference.

21:22So keep an eye on this. They're trading vehicles. Tim says it all the time. And I think 38, it's better to be long Delta than shorted. Coming up, a trade worth writing home about. Builders holding up as the broader market takes a dip. why buyers aren't letting rising rates stop them from getting in the door. More on that next. Plus, Carvana cranking out the gain. Shares bouncing back from an autumn slump as analysts kick the tires on this stock. Where do they see this name heading next? Don't go anywhere. Fast Money is back in two.

21:52Welcome back to Fast Money. The ITB U.S. home construction ETF hitting a new intraday record today, dating back to its creation in 2006. The XHB also climbing to multi-year highs, a move coming ahead of Toll Brothers earnings report tomorrow. Meantime, a new B of A study finding high mortgage rates may be having a smaller impact on home buyers. The study finding 62 percent of purchasers would wait for rates to drop before buying. That is down from 85 percent back in February. So people may be getting inured to these higher rates guy. That's exactly right. It's the speed with which it happened.

22:28It scared people, but people realize, wait a second, it's bad, but I can deal with this, right? So that's one of the and listen, the move from 5 % to 4.25 % in the 10-year obviously bolstered these names. Here's my concern if you want to continue to be long homebuilders. If you think the unemployment rate is going to where I think it is, somewhere between 4.6 and 4.5 early next year, I think it's a very tough ask to be long homebuilders right here. It's not about evaluation. These stocks have had meteoric rises since the sell off we saw earlier this year. The bounce has been amazing. I just think if you think the employment picture changes, there's no reason to be long in the homebuilders.

23:03I agree. I think the bounce has been way beyond what should have. Still, rates are really high. That's definitely obviously, you know, put a huge crimp in real estate. Also, we haven't solved that people getting out of their low mortgages yet. Right. So we don't have that existing home supply on the market. So I'm kind of surprised at the magnitude of the bounce. I mean, I own some Lowe's. That's been nice. I own some Home Depot. And I own some Zillow, which is nice, too. But I got to think it's not ideal yet for them. They've got two years to wait, maybe. People, though, are still having children.