Is Apple the Teflon Tech Stock? And the Latest Moves in the Weight Loss Drug Space 6/26/23

0:01Right now in Fast, a Google glitch. Shares of Alphabet taking a tumble after one analyst raise a red flag over the costs of AI, what the move says about the investment opportunities in the space. Plus, the weight loss wars heat up as Pfizer exits the ring and Lilly ups its game, how the primary players are positioned now and how you should play this sector. And later, rough scenes for Carnival, some clarity on Lucid's latest deal, and one big developer is moving out of Park Avenue. The stories and the trades behind the stocks are coming up. I'm Melissa Lee. This is Fast Money. We're live with the Nasdaq Market Site on the desk tonight.

0:31Karen Feinerman, Dan Nathan, Guy Adami and Julie Beal. We start off with the seemingly unstoppable Apple, the stock hitting a fresh record high during the session today, the third day in a row that it's done that. While the stock closed off the levels, it has risen as much as 3 percent, even after Jerome Powell seemed to take the wind out of the sails of the big tech trade in his congressional testimony last week. The same cannot be said for some of the other growth stocks, though. Tesla, for example, down nearly 13 percent for its Wednesday highs, and NVIDIA has shed almost 8 % in the last week.

1:02So we have asked this question before at least once, if not twice, or three times, or 10 times, or 20 times. Is Apple truly the Teflon stock? We will ask it again. Guy Dami, answer once again, please. Today, clearly it is. But historic. Go back five years. In 2018, since that point, you've seen probably six, if not seven, 25 to 40 % peak to trough decline. So Apple actually goes down at times as well. Apple is currently in, and don't at me if if I'm off by one, 354 ETFs, of which Apple is one of its top 15 holdings. So in the world of passive investing where money flows in, Apple's going to win to that.

1:40So it sort of makes sense that Apple continues to grind higher. Apple wins when people flee other high-growth tech names. The money flows into Apple. At a certain point, though, the musical chairs end in the no more chairs, and that's when Apple goes down. So it doesn't mean it's not a great company, but at 28 times next year's earnings with single-digit EPS growth, single-digit revenue growth, margins that are probably flatlining, if not declining, the stock is expensive here. You have lightened up, Karen. I have. I lightened up last week. Currently the day that was the all-time high, but I can guarantee you, as I said then, it will not be the all-time high if I lightened up.

2:16I promise that 100%. But I just feel like the whole space, meaning, you know, FANG, Big Cap Tech, has had huge runs. And the Apple, I actually have a little bit higher P.E. than you do on that. Remembering the hardware part of the business also, which has a lower P.E., so that means the rest of it trading at an even higher P.E. I don't know. I just felt like I got too much exposure overall. Apple to me is the one that I guess is, well, it's the most expensive with the exception now of NVIDIA, which is super expensive. But compared to a Meta or a Google, so I had to lighten. It's painful. But it did.

2:57Yeah. Yeah. I just say that. So Guy mentioned, you know, high single digits earnings growth, you know, mid to high single digits expected sales growth. So, you know, trading 10 turns over the S &P is multiple. It makes up seven and a half percent of the S &P. It makes up nearly 13 percent of the NASDAQ 100. And I think what's interesting to me is that we mentioned a couple other names that you said have been selling off over the last week that are truly expensive. They've seen multiple expansion on things that they haven't realized yet. a lot of excitement about technology that hopefully they will be able to harness over the next few years, clearly over the next decade or so, but they pulled forward a lot of excitement around.

3:29Apple's not in that situation. You know, if this AI thing hadn't happened in the last six months or so, we might have been really excited about spatial computing, about this new Vision Pro that they just launched at their WD, but we're not excited about it, and it's not in the stock right here. But something's in the stock, and maybe it's a flight to the sort of quality, Maybe because these 43 % gross margins have flatlined right there. And we found this sort of equilibrium between their hardware business, which makes up, let's say, two thirds of their revenue and the mixed shift with the services and all that sort of stuff.

3:59So, yes, it's Teflon because it seems to be very defensive, but it's trading in a multiple that it has not in a very long time. And that should make you a bit nervous, because if you see how money can come out very quickly of the most loved, exciting stories, ultimately, if we do have a sustained sell off, They will come for Apple because it will be an easy source of funds. Where do you stand on this, Julie? Because when they did come, you know, when Jerome Powell was very hawkish last week, when they came for the other tech stocks, they did not come for Apple. And so maybe Apple is, you know, the premium is justified and you want to pay up for it because it is safety, you know, in a time of uncertainty.

4:34It has been. It was during the bank crisis and it has been in the past week. A lot of it, I think, is a function, their ability to execute. They just have an uncanny ability to release products that people want. And I think we continue to see that going forward. The real challenge for them is where to find that next incremental$100 million of revenue that they can still generate at a high margin. And I think that's a real challenge for them. Here's a question, though. I mean, do they need to do that at this juncture in time? You know, because they will have new product launches. They've got this whole headset kind of thing going on.

5:15Do they need to do that right now, or can they just sort of wait because they are given the benefit of the doubt in this market environment right now? In terms of the stock price, I think they can wait. I mean, to me, there are a couple existential risks. The biggest one, obviously, is if things continue to heat up in China, China, Taiwan, obviously, specifically. And if that whole situation starts to rear itself in a worse way than it currently is, That could be a problem for Apple. But it's also a problem that the globe is slowing down. And at a certain point, consumers are going to stop spending on these products.

5:48We're not there yet, clearly, but we're going to get there. And Apple will not be impervious to that. You know, it's interesting. Some of the data we're seeing on consumers in China, in particular, of late is not great for Apple, especially when they've actually put up some decent quarters in China, you know, even as they were coming out of zero COVID or kind of into that sort of period. So those are things that, like, I think should be on your radar if you're invested in the name here, especially if you're thinking about adding to the position or it's a new position right here. And then the other issue, I mean, like Guy mentioned here, I mean, when you think about this company and their reliance on the supply chain in and around China, you know, reshoring, even if it's to other places that have cheaper labor than here in the U.S., it's going to be, you know, it's going to be a hit to their margins that have been, again, very stable.

6:33But those are the sorts of things that you want to start thinking about near a three trillion dollar market cap at a valuation that we have not seen in a very long time. How do you think about that? Because in the long run, that's that's the move to make reshoring. And yes, it's expensive in the near term, but it gives them more. I mean, if China is a political headwind or a potential tape bomb for China, it removes that. Right. At what cost, though? Right. I mean, who knows what cost? And so it's it's obviously a cost to them and it's a cost they have to pass on to the customers. And then it's, I would imagine, somewhat of an enormous endeavor from a supply chain cost just to how to get that up and running smoothly.

7:10And I would think you'd have to have duplicate manufacturing for a while. Although, if anyone can do it, they can. But just one other thing I want to point about Apple, a lot of people feel, well, it's got a great balance sheet. It does have a great balance sheet for sure. Yet, they do have some debt. You know, the amount of cash in their overall balance sheet is only 2 % of market cap now. 2%. Oh. It seems like an enormous amount. And it is a great balance sheet. They do generate tons of cash. What should it be? What percentage should that be in order for you to say it is a great balance sheet?

7:42Well, I look at something like Google with a great balance sheet, and their net cash is 6%. So I don't know. That's kind of a big difference. But is that a problem? Because they can go to the market. It's not a problem at all. They don't need money. You know, just that buying back stock has been a really great thing for them. They've made so much money for shareholders by doing that. It's just the perception of how much cash they have relative to the rest of their business seems a little. Yeah, but one point here is like if that debt to equity ever turned, okay, like debt to cash, that would be like a seminal event for a company that's actually bought back over a half a trillion dollars in stock since they instituted a buyback in 2012.

8:26And you think about this, we've been talking about a company for years that basically at best has had high single digits earnings growth per year. They have managed that massively through those buybacks. So, I mean, at some point, if they get on the wrong side of one of these big technological shifts or so, CapEx and R &D is going to have to ramp up. And let's just say they've made a mistake with spatial computing. Let's just say whatever they're spending, the billions and billions on this, is the wrong platform. And let's say they missed out on the auto or something in and around that. And that is the next 100, 200 billion dollars in revenue over the next decade or something like that.

9:03That's how companies like this see their dominance kind of go the way of the dodo. And as long as we've all been in the business, let's call it the last 30 years or so, there has not been a single tech company in that time period that has not been knocked off the pedestal in which they sat for a very long time. It just happened every single time. You know, you could say that some of us have been calling for that with Apple at every new product, you know, iteration or shift or something like that. At some point, it's going to happen. And those are the sorts of things that you want to keep an eye out for, in my opinion.

9:32When I just add one thing to that, the ecosystem that they do have, that embedded ecosystem with that cost of switching is really an extraordinary asset that it's not reflected in the balance sheet. Right. But I mean, you're an Apple guy. Yeah, you're an everything guy. You got all kinds of gadgets. But wouldn't it be hard to switch? Not really. I mean, to be honest with you, you know why? Because this is the story of China. So they have the everything apps. Right. So the hardware is less interesting to me. So like to me, I think at some point we probably do go that way. And when you think about India's population just crossing that of China's, they are not going to be spending on, you know, on the sort of hardware that like like the rest of the West or Europe spend on.

10:09So to me, I actually think there will be some sort of big shift in the next five to 10 years. But trying to trade that in Apple right now is probably hard. But Guy, what does this tell you about the market environment we are in, where Apple is continuing to make new highs almost every day, seemingly, at the expense of a lot of other tech companies? This is the part of the flight to quality, perceived quality. There's safety in Apple. We can be there. We can hide out there. We've seen this before, and it does end. And when it ends, it ends typically abruptly. Obviously, the broader market, I don't want to get too crazy here, but for the last week or so, it's starting to show at least some cracks out there.

10:42Apple probably wins to that. But a certain point in that timeline, they stopped winning to that. Now, we're not even close to that yet, but we've seen that before over the last couple of years. Well, today's NASDAQ weakness could be an opportunity for investors, according to our next guest. Citi listing big tech and growth stocks as top plays for at least the next six months. Let's bring in Stuart Kaiser, the firm's head of equity trading strategy. Stuart, great to have you here on set. Welcome. Great. Thanks for having me. So why at least the next six months? I mean, what about the environment?

11:10High interest rates, higher for longer spells big tech growth stocks to you? You know, I think the way we've been approaching the year is you've got very high cash yields. You've got recession risk kind of in the background. And that's the main driver of people wanting to be in large cap tech and growth stocks. Essentially, there's a scarcity of growth and people are willing to pay a premium to be in them. So from our perspective, the key to unlocking that trade is you need growth to broaden out, which effectively means recession risk come down. We still have a recession in our forecast. So in our view, that sort of overarching operating environment stays in place.

11:39And that should be relatively favorable to tech. I think the other thing is, yeah, there's a valuation aspect to this. But these are stocks that have stronger EPS momentum, have stronger revisions. There's a fundamental reason for this beyond just valuation. And you put that all together and we're still comfortable being in the space, though the risk reward isn't what it was a few months ago, clearly. You're a sector guy, so I'm not going to ask you specifically about an NVIDIA, let's say. But you do like that sort of AI momentum trade. How much of it are you worried about the valuations there in particular?

12:08I mean, AI, you can believe it's a real thing. You can believe that there's an investment cycle, but you may not believe that NVIDIA should be trading where it is. Look, stock by stock, yeah, there might be some stocks that look a little rich. We have about 35 AI winners in our quote unquote basket. The average or the median P on those stocks is actually down year to date because of the massive revisions to both EBITDA and sales. So, yeah, you could probably pick out a stock or two here where the valuation's got inexpensive. And that's why you diversify. You own kind of a basket of these stocks.

12:35And our view on AI is the revenue revisions been better to the market, been better than peers. The EBITDA revision has been better than the market, been better than peers. Valuation hasn't gone crazy. Frankly, what worries us the most is a little bit of fatigue in the sector. We are starting to see long-only flows kind of calm down into that space. So while we do like it medium term, we're kind of taking a pause here just to see how that flows dynamic pillies out a bit. Stuart, give us a sense. You just said you're starting to see some fatigue, and I think that was evident in some of these big names today.

13:01If enough big sellers head for the door at the same time, you get the sort of moves like we had in NVIDIA or Tesla. It doesn't really matter what the reason. What about complacency? I mean, I'm sure you have a lot of clients who spend time looking at things like the VIX or the VIX and that sort of thing. I mean, they're at levels that we have not seen since basically February 2020. Give us a sense for sentiment out there, at least in the flows that you guys are seeing. I think sentiment, you know, I wouldn't call it necessarily complacent. But, you know, I think, you know, people are becoming converts effectively.

13:27Right. I mean, you enter this year with very deep recession risk. Those have come out. So, you know, I don't know if I call complacency. I just think, you know, people have kind of risk adjusted how they're looking at things. I would say, even though the VIX is low, if you look at the shape of the VIX term structure, you go out three or five months, and the VIX is still at quite high level. So I really think what the market has done is said near term, maybe the risks have come in. We still think there's a considerable amount of medium term risks out there. And that's kind of where the risk is priced.

13:52Obviously, as you get closer to that, people get a little more concerned, and you see people lightening up. So, look, I think people are still hedging. People are still being very careful. And I do think there is risk premium price. It's just not priced in the next kind of two to four weeks at this point. At least the next six months seems like a very specific sort of time frame. So why the next six months and what happens beyond that that makes it a little less clear? Well, part of this, we just have to put a number on it, of course. But I would say, look, you know, our economists have a recessionary quarter in the fourth quarter.

14:21So I think up until you get to that recession data kind of being in front of you, we think people are going to be pretty conservative. A lot of people operate under this rule of thumb that you buy cyclicals when you're in the recession. Right. So six months would take us, in our view, kind of to the edge of that recession. And then you have to reevaluate, right? You need to see what the growth data looks like. How deep does this recession look like? It might be. How long might it last? And I think at that point, you have a lot of big decisions to make in terms of allocation. But until we see that, you know, that dot on the horizon become a line or something like that, you know, we're going to be pretty careful with the with the allocations.

14:52So let me ask you, if that dot on the horizon is a recession, it would seem to be likely then that we see a cut in interest rates, which has been a great ballast for these. How do you weigh those two things? Yeah, and if you look at 2024, there's about 150 basis points of cuts priced into 24. The markets kind of priced out the cuts that were in 2023. And I think that, frankly, just because the data has been stronger than it otherwise would have been. I think this is a big debate. You know, are rate cuts good or bad for markets? In our view right now, they'd actually be bad for markets because I think if the Fed is forced to cut, it's not for good reasons.

15:25It's because growth data is deteriorating at a pace you're not comfortable with. So I don't think you need rate cuts for the market to work. And frankly, I think if you started to price deeper rate cuts, you would be concerned about what the Fed's seeing from a growth perspective. What is a sector you absolutely do not want to be in for at least the next year? Look, I mean, people have voted with their feet on two sectors this year, and that's financials and energy. So those are probably, you know, two that we'd avoid a little bit. Energy in particular, I'm not an energy expert, but when the Saudis cut production and oil prices don't go up, I get a little bit suspicious.

15:56So I think those are the two areas that have been unloved by institutional investors on a year to date basis. And, you know, being that we think the investment environment is going to be pretty stable going forward, I think those are areas where we're not particularly excited by at this point. Stuart, great to have you. Thank you. Thank you. Stuart Kaiser of Citi. Julie Beal, what do you think? Well, I mean, it's such a fascinating time period right now. If you think about it, all of us came into this year assuming there would be a recession in the coming weeks. I mean, the Fed was practically hanging out bingo cards for what's going on in the next recession.

16:26And it hasn't shown up. It hasn't materialized. And I keep wondering what is going to be the thing that tips us into it. Initially, I think everyone thought it could be, you know, what happened with SVB. And I think we continue to have concerns about what's going on in the shadow banking crisis looming ahead of us. But other than that, it's really hard to see what's going to kind of trip it into recession. So that's the part that I'm the most curious about right now. It's an impressive array of ribbons behind Julie, that third place ribbon. Very decorated, that Julie B. It's critical. Sorry, Julie.

16:59No, listen, I'll be serious for a second. I agree with him in terms of banks. I think banks have, there's some problems here. The bank stocks do not trade particularly well. I'll push back a little bit on energy. I understand the underlying commodity not being all that buoyant. I think the stocks are actually relatively cheap in this environment. All right, coming up, Alphabet's AI implications, what analysts are saying the trend could mean for long-term results. The details on that call next, plus some fast movers catching our traders' eyes today. Carnival and Las Vegas Sands heading in opposite directions.

17:28a dive into cruises and casinos ahead. Don't go anywhere. Fast Money is back in tune.

17:42Welcome back to Fast Money. A downgrade on Alphabet nabbing our call of the day. Trophy. Shares slipping more than 3 % after UBS says it sees limited upside ahead in the search engine shift toward AI and the potential impact it could have on the valuable ad real estate in the near term. This is really interesting. Downgrading to a neutral, upping its price target, though, to 132. That's about 11 percent higher than today's close. What do you make of that? We all knew that it's a push pull in terms of AI. Short term, it could be pressure on margins, but longer term, it could be amazing. What do you think?

18:15Well, it's an odd sort of I couldn't quite tell what what was going on there. It's higher price target, downgrade to neutral, a little bit higher than where we are. Okay. I think that, you know, clearly the rebound in Alphabet since that disastrous foray into the public, you know, introduction of their AI, which was so much further along and has been so important to them for so long. So they handled that better. I still think just on evaluation basis that Google is so much more attractive than the other FAANGs, some of the other AI plays, it's so much cheaper than Microsoft. So could it trade down?

18:54Absolutely. I mean, you don't want to see Bing taking market share. That won't be a great thing. But it's not all bad for Google, right? And the amount of computing that people will need, what their cloud business can do, how it can grow. I understand there's costs with that as well. But I see it as it's opportunity and cost both at not a crazy price. And Microsoft's price for the same kind of thing is much higher. The other point that the analyst is making, Julie, was that, you know, even if there are gains because of AI in terms of revenue, there's also an investment cycle, a spending cycle that is happening.

19:29And so they'll be spending a lot more money just to keep up with AI. What's your take here on this? Because from the beginning, you've been sort of questioning what the impact would be on its business model. Well, you know, a lot of people first were concerned that this was an existential threat, right? Because if search suddenly gets very good, it's going to be harder for them to generate a lot of revenue from that. And I think people have kind of come to terms with that challenge. The thing is, is Google has done a really great job in terms of getting its cost structure back in line with where it probably needs to be.

20:00And the level of profitability that it has, its ability to take on the investment required for AI is substantial. It's just much better position than everyone else. And if you think of all the hype that Microsoft has gotten for Bing and its moved market share, not one iota, really, it really tells you the strength of the franchise that Google has. Its biggest problem really is regulatory more than anything else. Yeah, no, and I think that is 100 % correct. And when you think about a downgrade like this, it's really kind of quizzical on a valuation basis when you look at how much multiple expansion has been assigned to, let's say, a Microsoft, when I don't think that anyone thinks that there's going to be some renaissance for Bing.

20:41And think about what Microsoft had to do. They had to invest like$12 billion in open AI just to get access to this sort of technology right now. And that doesn't even cost, like the cost to compute, all this stuff is going up. So to me, I think Google, while yes, they are going to have some competition from meta, from really from everybody, if you think about it. Ultimately, I think they'll probably have the best product. Their product will evolve and really open up a lot of other avenues and other businesses, especially as it relates to Google Cloud. So to me, this one back at 110 or lower, it seems like that's how you want to play AI over a decade because it's not just making a bet on this.

21:19This is the company's evolution. They've mapped this out over the last seven years anyway. It's interesting. I mean, there are a number of reasons to downgrade evaluation. I mean, trades in a market multiple, probably mid-teen CPS growth. So there are a lot of things to like about the stock. Technically, you could say, you know what, maybe it's run its course in the short term. This stock made an all-time high, I think, November of 2021. That recent low of 83 bucks or so. This moved to, what, 115, 118 or so. It's a 50 % retracement, almost to the penny, as Carter would say, of that range. So it makes sense that we take a pause here.