Justice Department Takes Aim At Alphabet… Plus A Sweet Tooth Deal Worth Billions 8/14/24

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. Break it up. Shares of Alphabet hit hard as the DOJ signals they may push to pull apart Google to address its search monopoly. Could this really happen? What would a breakup look like? How could that impact the tech giant's business? We've got a deep dive coming up. Plus, chocolate, meet Cheez-It. We'll go inside the nearly$30 billion deal Mars just inked for Kelanova. Will it spark a wave of other tie-ups in the food space? We'll debate that. And later, waiting on Walmart, the trade ahead of the results, Cisco beating expectations, climbing after hours, and psychedelic fears from high hopes about treatment uses to mounting concerns over major research studies, the potential roadblocks facing that industry.

0:45I'm Melissa Lee, coming to you live from Studio B at the NASDAQ. On the desk tonight, C. Grasso, Karen Feinerman, Bono and Eisen, and Guy Adami. We'll get to Alphabet's DOJ concerns in just a moment. But first, we've got a news alert on some big moves and a couple of consumer names, Ulta and Nike, both higher. on some smart money buys. Contessa Brewer's got all the details. Hey, Contessa. Hey there, Melissa. Yeah, we're seeing Ulta shares climbing in the extended session after Berkshire Hathaway revealed small new stakes in the cosmetics company Ulta. It added 690 ,000 shares and Pershing Square is making a play in the consumer space as well.

1:18It revealed a new stake in Nike. It bought 3 million shares in the quarter. So you see consumer discretionary getting a little love here, Melissa. All right, Contessa, thank you. Contessa Brewer, These are consumer discretionary stocks we talk about a lot. There can be similarities maybe drawn to a Starbucks situation where these were great brands declining a little bit under pressure. Although, well, yes, for Nike and having some of the same global issues as well. The Ulta one to me was more interesting. If you look at these, so this was the 13F, which is from June 30. And at June 30, the stock Ulta was trading at$385.

1:57It's$3.29 or closed at$3.29 today. Wouldn't be surprised if when they file their next 13F that they've added to that position. If they liked it there, they'd probably like it here. So Ulta stumbled a bit. The valuation on it's really low. They report shortly. I forget the date, but they've had, you know, same-store sales have been a little bit anemic. And we saw Elf that really missed, and that traded poorly, and Ulta was down with that. And this is at the same time that Sephora is doing pretty well. So, as a shareholder, very happy to have Warren there. August 29th, after the bell, is when they report.

2:35I mean, the stock is a$500, again, not that it matters, but it was a$520 stock or so in February. Fell on hard times. A lot of it on competition, slowdown on the consumer, all those things. But valuation is compelling, definitely here. And it's interesting. After they reported Dana Telsey's firm, Telsey Advisory, they have a$500 price target on the stock. And they were sort of the outlier. And I went back and read it on the back of this announcement. And it's interesting. Maybe they're seeing the same things that maybe Warren Buffett is seeing as well. Buying back a billion dollars worth of stock, which is not insignificant.

3:05So, you know what, this is one, as much as I don't like chasing things into these announcements, this is one actually in earnings that makes a little bit of sense. What do you think of Nike? You know, listen, I own it. I bought it much higher. I really thought that a lot of their issues were behind them or at least were pricey in the stock. And then you kind of take a look at short interest. I think it's around one and a half, two percent. I don't really think at this point shorts are really leaning in here. I just I really think that the worst case scenario has been priced in. And I wouldn't be surprised.

3:35In fact, I'm not surprised to see smart money buying it because essentially what you've seen is the market look to chase outperformance. And you've seen that rotation into some of the small caps. And I think this is more of a speculative situation where you're able to kind of get into a laggard and look to generate alpha. I bought Nike when it fell from grace from that 93 spot. I thought it was overdone. I bought it ahead of the Olympics, figuring that they would get free advertisement. It went from a bottom fish to a losing trade to now I have my head above water. My biggest thing is, when do I exit this trade?

4:06Well, you're made whole now, so. Yeah, I know. Getting back to even is not great. I'm actually up 10 % in the position now. And I think I should probably trim, to be honest with you. The longer term outlook, though. I mean, if you believe that a Starbucks can be turned around, then maybe you're a believer that Nike can also be turned around. I mean, wouldn't it be crazy if Brian Nichol went to Nike? No, that's not going to happen. At the same time. Right. I think I own it, too. I own it from higher like you. I thought a lot of the, you know, the bad news was behind it. It's to me a very similar story to Lululemon, the once absolutely behemoth, did everything right for years and then lost their way and then found themselves in real competition here with On and Hoka.

4:47However, I still own it. I still like it. All right. Let's turn now to the straw that may have broken Google's back. Shares of parent company Alphabet sinking as much as 4 % today after news that the Justice Department is considering forcing a breakup of the tech giant. It's not the first time the company has found itself in the crosshairs of the U.S. government, but usually the stock seems to shrug off the threat. So why not this time around? Let's get more details from CNBC's Eamon Javers. Eamon. Hey there, Melissa. There have been a number of media reports suggesting that a breakup of the nearly$2 trillion market cap company could be on the table.

5:19And that is literally true because at this stage of the process, by definition, all options are in play. But the real question is whether the Department of Justice is willing to go that far in its request to the court and whether the judge in this case, Amit Mehta, thinks that's the best solution. Now, the Justice Department's Jonathan Cantor was asked about this issue of a remedy on Squawk Box yesterday. He was careful not to tip his hand, but maybe if you parse this really closely, you might hear him suggesting maybe that he prefers to go big or go home. Take a listen to what he said. That case, US v.

5:55Google, was the first monopolization case, not just major monopolization case, but the first litigated monopolization case since US v. Microsoft. These cases don't come very often, and when they do, they tend to be quite large and quite big. So you heard what he said there. Now, the Department of Justice has two active cases against Google right now. The other one focuses on ad sales domination in the marketplace and is expected to go to trial in September. If the DOJ does push for a big breakup, that would be something that we haven't seen since all the way back in 1982, when the government broke up the Bell telephone system nationwide, creating those seven baby Bell telecom companies.

6:34And, Melissa, we may be getting a little ahead of ourselves to speculate on this. But I do wonder how Wall Street would value the baby Googles in a breakup scenario. Would that unlock additional market value? Our dear Drubosa this morning flagged a report from Jeffries that suggested that the sum of its parts analysis of Google indicates a total market cap for all the various parts of the company might be well above the company's current market cap. So, you know, if you get all those baby Googles out there, are they worth more to investors than just Google on its own? Yep. Eamon, thank you. Eamon Javers.

7:08Meantime, there's this dig from former Google CEO Eric Schmidt speaking to students at Stanford University about the company's current work culture. Google decided that work-life balance and going home early and working from home was more important than winning. And the startups, the reason startups work is because the people work like hell.

7:35So possibly a huge DOJ issue hanging over it, possibly a culture issue, maybe putting it behind in the AI race here. What do you make of this? Well, I go back to what Eamon just said, was Brent Thill at Jeffries that said the breakup value. And that's 100 percent right. And you go back and look over history, if there are a few, you know, three or four situations where that happened, the best thing that happened to shareholders was something like this. So I don't know who they're trying to punish. Maybe if they want to try to punish Google, they fine them some ridiculous amount. Maybe that's more of a fine than breaking them up.

8:05I'm not really sure it's going to happen. I'm not sure why it should happen. With that said, and I think Karen would agree with this, I mean, Google, out of all the names we talk about, still has the biggest moat and still is probably the most interesting in terms of valuation. Yeah. How do you look at that? Because some of the parts, it's an interesting sort of exercise. A lot of analysts do that. But the reality is that it never gets tested because you're never breaking up the parts. Right. And here we are. And here we are doing it anyway. Right. But the stock went down. Yes. Well, yeah, I don't know exactly why the stock went down.

8:37I think there's what I'm not quite sure how to figure out in some of the parts is what's coming next. The ad that that lawsuit, which I actually think is problematic as well. And this makes me think, why fashion a breakup when you might have some other really relevant information, which is what happens in that suit? So I kind of think that we will get bored with this story shortly and that we'll go back to the thing that will drive Google in the short term is how is Google doing as a business? And how is, you know, is the cloud still on track? And AI, though. I mean, for the fumbling AI part? Well, no, I mean, in terms of the AI race, we're talking about traditional search at this point in terms of the monopoly status that Google has.

9:25Yes, the threat to Google's underlying business. Right. But they're moving on. I mean, we're focused on AI search in terms of the valuation of the company going forward, right? I mean, that's where the hopes and dreams are of all the investors. And that's an open playing field. I mean, that's the perception of the market that there is no lock that anybody has on AI search. It's a free-for-all. I don't really agree with that. No. Well, I think that's what the phone is over, right? You know, this company is behind. This company, you know, has another product. And they have bumbled it, to Karen's point, and this was supposed to be the year where they actually got credit for the AI component to it.

10:03But I think the stock's down because I don't believe that the market believes it will get broken up. You're more, if we went around the table, I'm more bullish if it gets broken up. You would be too, I would assume, right? Wait, so status quo means it's down 3 %? Status quo means that it's down 3 % because you're not going to get the quote-unquote sum of the parts. And when you look at the DOJ has had at Apple already, it's probably having at Amazon already. They don't believe they're going to break up all of them ultimately. So you don't see those getting affected or else they would have all been down.

10:38What do you think? I just think it's I just think it's overhang from the unknown. This is probably going to be three to five years in the making in terms of like what the resolution is ultimately going to be. They're clearly going to appeal. They've they've come out and said as much. We just don't know. And I think in uncertainty, we've seen volatility spike in the market and retrace quite a bit. But ultimately, I just think they're being punished because you don't know. You've seen a similar situation, although it's not to the same extent at all with CrowdStrike. There's there's this overhang and you just don't know.

11:06So speculating, sure. But I mean, three percent, we're talking about a three percent move in Google. I think the stock's up 18 percent or so, 15 percent this year. I mean, I really don't think that if the market thought that they were going to be broken up, the stock would be up 10 percent. You think so? Yeah. All right. For more on whether a Google breakup could actually happen and what it could mean for the stock, let's bring in deepwater assets, Gene Munster. Gene, so what do you think? If there were an announcement tomorrow that Google would be broken up, what would the shares do? I think I'm leaning with Steve on this.

11:37I think it's up probably 5 percent plus. I think ultimately this could unlock 20 percent of value, put the probability at low, call it 15 percent, that this ultimately some variation of this happens. but to answer your question is that I think the sum of the parts do unlock value here. This exercise is a well-traveled road, as you mentioned, and typically we, with a company like this, I think that it's important to recognize that when things do get broken up, there's going to be a lot of agreements that will be quickly put in place that would be probably infuriate regulators, but ultimately I think the substance of how Google functions would remain relatively unchanged.

12:17But But again, I think that this would unlock value. What do you think is the most likely scenario in terms of how the broken up Google would look? And if you can sort of overlap that with what is the format in which Google will be optimized as a broken up company? So the most likely scenario is that they break out their ad network. It's their ugly piece of business. It's about 11 percent of revenue. It's actually been declining. This is kind of falls below the fold. but this has been long rumored by regulators to get broken out. For those of you who've been following Google a long time, this is the old DoubleClick business.

12:54And so ultimately, I think that that was not as part of the reports today. It was related to Chrome and Android getting broken out. I don't know how they would do that, but I think that 15 % probability that I put on some form of a breakup would be related to that ad network business. And it gives regulators some sort of a victory. And ultimately, I think investors' central question, Melissa, I mean, you hit it on related to AI, but is specifically, where does Gemini fall in a potential breakup? And of course, most likely that goes with the search business, which is where, call it, more than half the value is today.

13:33Gene, while you were waiting in the wings, you probably heard that clip we played. What do you make of that comment that, I don't know what it was, I'm paraphrasing, but they're tired of winning or they're not winning anymore. or that whole point about people not being in the workplace, thoughts on that and the culture around Google? You know, first it's true. I think that not only is Schmidt saying it, but also you have other people, Sundar has said that a couple quarters ago on their earnings call, said they've just kind of lost some of their fire. And that was part of some of these layoffs that we saw a lot of tech companies going through.

14:05Google, of course, went through some of that. They cut about 12 % of their workforce. And so I think that that is true. I think that ultimately that's one of the ironic benefits of a breakup is it just creates some urgency around the different businesses. And when you're a part of such a big company, it's kind of easy to get complacent, super hard thing to do. Meta's done a great job of invigorating their culture. And I think Google still has a long way to go. We own Google. We think it's the best positioned company related to AI, but we wish that there was more urgency around that kind of spirit to win.

14:39Hey, Gene, it's Karen. and you sort of half answered it with Meta. It sounds like Meta sort of felt a fire under them. Do you think that the dynamic that Eric Schmidt was talking about is more broad than just Alphabet? I mean, more broad in the sense of just kind of across tech in general. I think that Google set a culture. I mean, they were the original company that you'd go in in the afternoon and there would be literally like these tents set up and people would be eating sushi in the tents. I mean, it was kind of a cultural revolution that happened that I think captured a lot of tech. And so I think that we've seen that.

15:19I think this round of layoffs that we saw over the past couple of years I think has changed some of that. But in general, I think that there is, I think, amongst some of the big tech companies, there just isn't that same fire. And of course, related to venture and the startup culture, it's very different. They live in the office. This is something different. And that's the magic, I think, of what these companies need to do is, you know, break off different groups that still have that startup mentality that really want to win. Well, it sounds like it would be a win-win. You would unlock value. You would reignite that sort of entrepreneur culture that it once had if Google did break up.

15:57So wouldn't it be the ultimate Jedi mind trick if Alphabet just announced ahead of any sort of DOJ proposal that it's going to break up? I mean, I would be doing somersaults. I would love that if they did that. I think that it would accomplish what you just described. I think the probability that that happens is exceptionally low, and I'll give you a quick reason why. They shouldn't be paying$50 billion a year in tax. They're going to maintain that search share. They do that because they can increase that 6 % a year to grow their search business by 14 % a year. They want to pay that big tax number because they want an insurance policy.

16:33It's part of their culture. I love the idea, Melissa. Of course, it was a low probability. I would put that I probably would take a trip to the moon before. If that does ultimately happen, you can hold me accountable to that. You've got the tape. Gene, good to see you. Thank you. Thank you. Gene Munster. Well, as a shareholder, Karen, would you want it to break up? Are you worried about the culture there? I am worried about the culture. I do feel they did fumble the AI launch, right? And so that was somewhat disappointing. It's been sort of undervalued for a while, I think. And it got a little bit of momentum and then sort of lost it.

17:15And I do think that a lot of what Gene's saying, getting that fire. And you're really focused. You feel like when you work for part of a 100 ,000 plus organization, you can't really make a difference. When you start to work for something smaller, you can. Right. Well, Alphabet's dealing with another headache in San Francisco, speaking of Alphabet.

17:40That is a parking lot filled with Waymo driverless vehicles. A couple weeks ago before dawn, residents in the area were greeted with a chorus of honks and beeps as the cars moved around this lot. Waymo says their vehicles have recently been programmed to honk if another car or driverless vehicle gets close. The honking they added has worked well on the road, but Waymo didn't anticipate this would create a problem in parking lots because cars are so far apart in parking lots. The company updated the software so that their EVs wouldn't be such a nuisance. It's what people want, right? I mean, they want this world, this dystopian society.

18:17And I saw the video. The woman, she's apoplectic. It's 4.30 in the morning. You're like, why are all these cars honking with their lights on? Nobody inside. Mm-hmm. That's why you've got to be more like, you know, thanks, there you go. You know how I would handle this. Get off my lawn. Exactly. That's the night. There are other ways. Coming up, earnings season rolls on. Cisco shares on the move after reporting results and numbers and details from that quarter next. Plus, investors digesting this morning's CPI data as inflation slows to a three-year low. What it means for the Fed's next rate move and how you can position ahead of the Jackson Hole meeting.

18:51Do not go anywhere. Fast Money is back in two.

18:59Welcome back to Fast Money. We've got an earnings alert on Cisco, the tech stock jumping following a top and bottom line beat. Seema Modi's got all the details. Seema. Melissa, green shoots are starting to emerge. Supply chain constraints are easing. CEO Chuck Robbins said it saw steady demand with product growth of 14 percent and that enterprise customers are now upgrading their infrastructure in preparation for AI. That's prompting Cisco to do the same. Robbins says Cisco crossed a billion dollars in AI orders with web-scale customers to date. Three of the four top hyperscalers deployed Cisco's Ethernet AI fabric, leveraging the company's designs for AI infrastructure.

19:34He expects an additional$1 billion of AI product orders in 2025. Even though it was a good quarter, Cisco did announce an approximately 7 % reduction to its global workforce, over 6 ,000 jobs. Cisco cut 4 ,000 jobs in February. Analysts pushed Robbins on why cut jobs now. Robbins said the company really needs to shift resources to the most important areas that are growing, like AI and cloud. And it does follow news of Intel cutting more than 15 ,000 jobs. Cisco shares have underperformed big tech so far this year. CEO Chick Robbins joins CNBC's Squawk on the Street tomorrow morning. Mel? Seema, thanks.

20:12Seema Modi, Cisco has underperformed. It's also relatively undervalued compared to peers, compared to the S &P 500, Bonoan. I think it's a bit defensive from a valuation standpoint, but I do think that that network revenue number is a bit concerning. And so, you know, I feel like there's a bit of a push and pull here because essentially they have done a good job and they deserve credit for shifting into, you know, cloud defense and things of that nature. But I think a 7 % workforce reduction surely does tell you that perhaps you're not as bullish on growth possibilities. And then add on top of that the concerns that the market is now having about AI CapEx spin, right?

20:49So I just feel like it was a bit of a mixed bag in terms of the way that I interpreted the results. Do you remember when Cisco used to be the bellwether and we would all wait to see how Cisco reported and everyone would go? Right, what John Chambers would say about the outlook in enterprise spending. Right. And they've lost sort of – well, not sort of. They've definitely lost. They've been – they put baby in the corner. She's not dancing anymore. You get that reference, right? No. Guy does. Dirty dancing. Oh, yeah, yeah, yeah. So now when you look at it on a chart, it doesn't look great. revenues to Bono's point don't look great.

21:21And when you're laying off people to pay for an idea, that's not a great look either. So I think they'll still remain in the corner. It's a show me state now. They haven't shown it. Maybe it's a value stock waiting to emerge. Yes, we were talking about this in the green room. 14, I think, was the P.E. And I was thinking about what you said. It was absolute bellwether, not just how they did, but really for the economy writ large. Right. What is this going to do? And then it was the Internet darling of 2000, 99, 2000, trading at multiple hundreds of times earnings. I wonder when would it be that NVIDIA will remember when we used to talk about NVIDIA?

22:00Yeah. Yeah. I think one day that will happen. But there's a lot to happen between then and now. I don't own Cisco. It's not crazy expensive. But like many others, I'm just sort of not that interested. Restructuring to drive efficiencies. We've this is now the code these companies are using, basically saying we're getting rid of five, eight, 10 percent of our workforce. And it's listen. Now we've seen this across a wide range of industries. Right. This is happening before our very eyes. The unemployment rate is going higher, whether you like it or not. And the market is not pricing any of this in the quarter was fine.

22:33I think the stock's higher on the back of that, not necessarily on the guide. There is a lot more fast money to come. Here's what's coming up next. Inflation cooling off as CPI slows to its lowest level in three years. How investors digested the data and what it could mean as the Fed heads to Jackson Hole next week. Plus, a sweet tooth deal. A candy conglomerate scooping up snack food maker, Kelanova, in a cash deal worth nearly$36 billion. More on the M &M, M &A, and who else might join forces. You're watching Fast Money, live from the Nasdaq market side in Times Square. We're back right after this.