KICKING OFF A CRITICAL WEEK FOR BIG TECH 4/24/23

0:01Right now on Fast Shares, a First Republic tumbling deposits at the regional bank plunging by over 40 % in Q1. and now they plan to lay off close to a quarter of their employees in Q2. We'll go inside the numbers straight ahead. Plus, a Beijing ban, new reports that China may stop U.S. chipmaker Micron from selling its chips on the mainland. The U.S., for its part, asking neighboring countries not to help China if it needs more chips. Is this just the start of a bigger trade fight to come? And later, why investors keep hanging up on AT &T. Burgers, fries and options ahead of Mickey D's results.

0:32and new cell phone data painting a dire picture for one of California's most important cities. I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq MarketSite. Full house here on the desk tonight. Tim Seymour, Steve Grasso, Bono and Eisen, and Dan Nathan. We start off with an earnings alert on First Republic. Shares dropping sharply despite a top and bottom line beat. Investors spooked by the massive drop in deposits in Q1. They fell over 40 percent. This even after the bank got a$30 billion lifeline from a number of the country's largest banks. First Republic also saying it is planning to lay off up to a quarter of its workforce in the second quarter.

1:08Remember during the day it was up 12 percent or so. So the markets giveth and taketh away. They're taking it away right now, Tim. Yeah. Then they, you know, going down seems to be more painful on percentage terms, even though going up actually is more rewarding on a relative basis. But this deposit number is really a bad number. Again, the street was calling for$137 billion. We see where they came in. So we need to hear from the call what they're going to do. Cost cutting is what I think people actually believe the CEO can do and certainly what they're going to have to do. But it's going to get back to, really, what's the level on deposit rates that can still be profitable for this bank?

1:45And what are they going to have to pay as a premium over some of their regional peers? And then ultimately, where are they with their business model? Because I don't think, at least right now and some of the guides we have, and I know we're going to have a great discussion about this with a banking analyst who doesn't think they're necessarily going out of business, that they have options. But their core model is something that I think right now is really in question, and that's really where we are. I mean, if it's a business in part built by deposits that are above FDIC insurance, I don't know if those days are ever going to come back.

2:12The good news, though, is they did say that outflows did stabilize from March 27th up until basically April 21st, I think, is the date. So stabilization in the most recent days, Dan, but still not good enough for us. Yeah, I mean, listen, that was one of the intents of kind of the feds coming in, doing what they did in the throes of that crisis. Really, they had to make sure this didn't become systemic. And if you look, we've been talking about FRC. Look at it. It's just been flatlined, you know what I mean, at that level for weeks and weeks. If we looked at the KRE, the Regional Bank Index, it was the same thing.

2:42You know, it struck me today as we were thinking about how we're going to cover this story, especially on a day that was already up into the print here. Look at the BKX. If we want to pull that up. So that's the banking index that is equal weight, right? We talk about the XLF a lot. We know that Berkshire is the largest holding there, over 12 percent. Not a great indication of the banks. Look at the BKX, how little rally it has had, especially given what we've seen by the participants of the large money center banks. So it just struck me a little bit, especially over the weekend. I don't know if you saw the Wall Street Journal article about the banking mess, if it's over or not or whatever.

3:13The BKX has not made a lot of progress. It really feels like there's other shoes to drop. Yeah, KRE too. Let's get to more details on the quarter. The conference call is about a half hour in. CNBC.com banking reporter Hugh Son has been listening into the call. Hugh, what are we learning so far? Hey, Melissa, it's great to be with you. You know, the CEO of First Republic made what was probably the most important conference call in the 40-year history of First Republic in about 12 minutes. And there was no Q &A. So it was, in a sense, it was very easy to take in. However, it was painfully brief.

3:46You know, the big news and the portrait that CEO Mike Roffler wanted to portray was one of stabilization. So you saw, obviously, the deposits fell by about 41 percent to$140 billion, more or less. That is, however, below the analyst estimate. And on top of that, you know, they basically say that since the end of the quarter in the past three weeks, they've only fell about 1.7 percent further. So if the image is stabilizing at First Republic, however, what are they left with is one of the questions. A couple more points of sort of action here. You know, they are cutting up to 25 percent of their employees.

4:26It's a very deep cut. Obviously, they've talked about suspending dividends, cutting executive compensation, closing some offices and reigning a real estate footprint. So really, these are the steps of a company that's under some considerable duress. Another thing they pointed out is they've retained nearly 90 percent of their financial advisors in the wealth management division. I guess that's another way of saying that they've lost about 10 percent of their advisors, you know, in the post-SVB. And so, yeah, look, that's that's sort of the high notes from this 12 minute call. 12 minutes, Hugh, and that's it?

5:05No Q &A. No Q &A. Wow. Unprecedented. Husan, thanks for keeping us posted on this. Tim had mentioned, you know, at what cost the deposits. We know that in the days following the initial blowups in the banking sector, we got ads for 5-plus percent CDs from First Republic. I mean, these things, it's not going to be able to be easy to keep up with these sorts of payments just to keep deposits stable. And stable meaning, as you mentioned, down 1 percent in the past three weeks. Well, it's not just about keeping the deposits up. It's also about the profitability of those said deposits. And I think that's the point that you're getting at.

5:39If you're having to pay 4.5%, 5 % just to retain and prevent outflows, I think it puts you in a bit of a challenging position. There is one positive takeaway that Hugh mentioned, which is the assets under custody and the advisor retention. I would have expected to see perhaps a lot. That was a real area of focus for them, bringing in talent. They cater to high net worth individuals. And I think going out and making all of those efforts to acquire talent only to have it run out of the door. So I do think that is an incremental positive takeaway, that they're at least able to retain those high net worth individuals.

6:13And I think the biggest takeaway for me, this feels like we're rehashing it. We went through this semi-crisis already. We were worried about the floor falling out, the sky falling down, whatever you want to use there. J.P. Morgan did just fine. Large money center banks did just fine. We had to hear from these regional banks. I think we knew this was not going to be good. This was going to be terrible. But we've already lived it. It's already over. So I don't know if it's going to have a huge effect on the overall market tomorrow. I think it's not good for the regionals, but it's very easy to transfer your deposit from a bank from one to another these days.

6:51So I think crisis, quote unquote, averted for now for the overall market. Do you feel better knowing First Republic's results in a 12 minute conference call where there were no questions answered? No, the bank's not down 90 percent or close to it because they're less profitable. OK, this isn't a story because this was a story of one of the great growth stories in the regional banking. They had a 20 percent CAGR in terms of what they were doing when most other banks were growing two to five percent. Wouldn't be down where it is here. There'd be plenty of people that would be willing to say, OK, it doesn't need to grow as fast.

7:29And I understand a derating multiple, I think. And this is what Dan's referring to in the KRE. I mean, we just we just don't know. And we still haven't gotten to an environment where some of the credit velocity has picked up. And so there are clearly trades in here. There are clearly just but I, you know, I'm just not ready to make that just before just before because I don't want to get away. I don't feel better about seeing the results. What I'm saying is the market needed to see them just to see how bad it really was. But I think the market has already digested all of this. All right. So a couple of things.

8:02Let's extrapolate it to the economy here, because I think this is really important. And so in this piece I referenced by The Wall Street Journal, why the banking mess isn't over, they were quoting a bunch of Goldman Sachs data. And I thought it was interesting because it said for every 10 percent of lesser profitability that these banks have, they're contracting 2 percent in loan growth. And that's like, so let's think about that. OK, so we're seeing this across regional banks. We're going to see it across. We know that some of the major banks have tightened up their standards, especially even as they brought in more deposits.

8:29I think that is probably and we've been talking about what's on the other side of this crisis. And I really do think that. So what does that mean for the contraction in the economy? The other thing is this headline, they're going to cut their headcount by 20 to 25 percent in the second quarter alone. And so might we see remember that episode we had a few weeks ago when I told you it's a certainty there's going to be less bankers in America at the end of this year than the start of this year. We're going to see further consolidation. We'll probably see further banks close. And that just doesn't mean that doesn't bode well for these people finding the similar sorts of jobs.

9:01So I just think that what that means for consumer spending. Also, we saw some of the data in and around the SVB failure and what that meant for consumer data. So these are the palpitations that I think are going to continue until we have some sort of clarity about when this ends. Let's dig deeper into the results with Christopher Marinak, director of research at Jannie Montgomery. Scott, Chris, great to have you with us. Thank you, Michelle. Good to be here. Melissa, that's OK, though. I get that all the time. Sorry about that. No problem. How do you – you don't cover First Republic yourself. Your firm does.

9:31And so I'm wondering how you see First Republic's results as sort of any sort of sign for some of the banks that you do cover. So clearly it was a disappointment on the deposits. We thought that there would be$40 or$45 billion decline, not$72. I think that the cost-cutting has to happen immediately, which they talked about. The question is, can they really pivot from being a growth company to now being a one focused on expenses and profitability? We're not sure it's in their DNA, but they're going to have to. I mean, for survivability, they have to make this change. I thought it was disappointing that there wasn't Q &A.

10:05I think we needed to get that therapy on the call, but it didn't happen. So now we have to ask the company to give us, if not weekly, perhaps biweekly updates about what's happening with the balance sheet. And really, the shrinking of the balance sheet is now the next critical step. What do you think is the next chapter for First Republic? I mean, what options do you think it has on the table? Dozens of banks have had a look at this thing. Nothing has happened so far. I don't know if a deal could possibly be in the works here. Does it need to raise capital somehow? Would that be, I mean, what are some of the next things that you're looking for here?

10:37I think shrinking the balance sheet. They have to shrink the assets. They have to constitute themselves as a much smaller company. You know, the ratio that I hang my hat on is that 51 percent of the funding is debt. And so that really is not a good number. The average for large cap banks is 14 today. So that's way out of whack. They have to shrink and they have to reduce profitability. Clearly, stock is telling you that. But I think they have to actually execute on that so they can be a much smaller company and then revisit kind of where they go strategically. It's a hard pill to swallow. It's really friendly fire from what happened with SVB.

11:11But for them, it is what it is. It's the one company that really has been singled out. I think the rest of the industry has sidestepped this issue. And I think this is the one that we needed to get clarity on. So now we know how bad it is to the point made earlier. And now they have to do the heavy lifting of shrinking the balance sheet and revisiting their size and structure with much lower profits. Kurt, I mean, Chris, sorry. So the question I have, though, is where do Fed funds need to settle in? Where do they need to settle in? And can we read this through other regional banks? Because we are talking about an element of really where can they actually be profitable and what was a significant part of their business.

11:49I'm just curious. Say we have Fed funds at 5 percent for 12 months. Where does the deposit rate have to top out at? Oh, for them, I think, you know, their total funding was a little bit less than 3 percent. I think they need to get, you know, probably to three and a quarter, three and a half and stop there. I'm sure incrementally they're paying five today. So they're below water. For the whole industry, we generally see about 220 to 240 points spread between where Fed funds finishes and where banks cost the funds are. That's a way to think about it for the industry. First Republic is clearly going to be higher.

12:23They already are higher by a country mile. So they have to change gears and kind of stop paying as high rates. But again, that goes back to shrinking the balance sheet. If they shrink the balance sheet, they can pay down their funding on borrowings and really reconstitute themselves as a much smaller company. They most likely have to shrink by at least half, but most likely two thirds. Chris, if we have you back on in nine months or so, 12 months, are we still going to be talking about First Republic as a publicly traded entity? I think we will. You know, Jim Herbert is very strong as a CEO. I think he has built this company from the ground up for many years.

12:57He took it out from from Maryland, B of A, a long time ago. I think he's got the will to do it. It's just going to be hard. It's not going to be a growth company. It's going to have to focus on profitability. But I would not count Jim out. What multiple would you put on this new First Republic? I mean, compared to all the other banking options that there are out there at this point. So I start with the price, the tangible book. I think it's going to be at a deep discount for a while. So 50 to 60 percent, a tangible book is a place to start. And I think as you reconstitute the earnings, most likely a five or six multiple is where I think we sit.

13:33So it definitely is a low valuation for a while until they can show. That's why I think this biweekly or weekly announcements of where they are with the balance sheet, with profitability, et cetera, is a critical step. They're going to have to be an exception and sort of make up some new disclosure rules about how often they communicate. But I think it's going to be worth their while to do so. So you said a multiple about five. We have a screen up here, the forward PE being about 13, including the decline that we're seeing in the after hours. So it needs to be more than cut in half from here. Unfortunately, and that's where book value, I think, can help and perhaps be a little bit of a safety valve.

14:11But again, I don't think we know what the real numbers are. I think the real earnings is a lot less than what has been in the screens here in recent days. All right. Chris, thanks so much for your time. Appreciate it. Christopher Maradock, Jannie Montgomery. All right. So the forward multiple needs to be cut by more than half, and there's still a lot that we do not know when it comes to the earnings power. Is this a story you want to be part of? It's not, unfortunately. Not yet. Let me not rule it out. I still think there's some real existential risk here. Dan raised two points earlier, and I'm going to add two more.

14:46What still has not fallen out is credit. And one thing, Chris had a nice chart here. We talked about net interest margin, cost of deposits, hold to maturity and available for sale. And if you kind of time series that data out, it brings to the front, are we really going to have a situation where there's going to be more stringent controls over available for sale versus hold to maturity? And I think that leads to the credit tightening and shrinking of loan growth and all of those things. That's a dance point, I think, kind of push us over that proverbial edge. All right. Let's get to the markets now in broader technology.

15:21Tomorrow starts a very big week for the sector. Alphabet and Microsoft report after the bell. Then later in the week, it's Meta and Amazon. Alphabet up less than a percent today, while Microsoft fell almost 2%. There are so many things they'll be looking for. The health of the ad industry, the health of enterprise spending, cloud, Grasso. Yeah, I mean, all that stuff is out there. The question, though, is doesn't it feel like this year that Microsoft really ate Google's lunch? To me, at least, it does. They ate everybody's lunch. But Google is outperforming on a year-to-day basis Microsoft. I was shocked to look at those numbers because you think, oh, my gosh, they're under the weight of Microsoft right now.

16:02Microsoft looks like it has to roll over to me. Google looks like they have to prove themselves. And I don't know how much Google is going to lose in ad revenue and have to build up in funding their AI. So for me, I think that both of them probably need to take a little bit step back. And if they do, the overall market rolls, too. To me, it's so much about cloud, how penetrated we are. And then, you know, really, what's the spend going in enterprise, at least in the near term? If you look at the charts, I just want to point out some of the stuff that I think we've talked about a lot. But that Microsoft and Apple since in the last four months have outperformed the S &P.

16:43So relative basis outperformance of 23 percent, both of them right back up to resistance. And I think we may or may not have a chart on this. So, yeah, there's there's Apple essentially net worth relative or just the performance relative to the S &P over the last couple of years. You can see we're right up at that level where it's been running into resistance. And again, it's a 23 percent move in the last four months. I don't think we're ever going to see Apple's value relative to the S &P this high ever again. And that's, you know, you can you can I can never be wrong in this because we will never know when never again is.

17:14But I think we have a backdrop of the setup here that doesn't make me feel great about what big cap can do. And the charts are telling me that as well. Yeah. So the setup for Microsoft is particularly bad. If you think about what we know and just in the last couple of weeks, that CDW pre-announcement is not good for Microsoft. If you think about just all the hype that is built into this story right now because of A.I., There's not too many other large cap companies. We've seen that. I know we talked a little bit about NVIDIA. That PC data that we saw from IDC a couple weeks is not particularly great.

17:47So to me, you know, I say to myself, stocks at the top end of the range here. It's trading about 30 times. It's had, you know, a really good run based on some things that it really becomes a bit of a show me story here. And I just think that you're going to have a better opportunity to buy this thing probably down 10 percent in the next couple weeks or possibly, you know, possibly lower. But to me, I think the valuation reset probably needs to happen a couple turns here. All those points aside, I still think there is an aspect of these names where they're still perceived as being safety. And if we're going to, we just shot back to that FRC situation where there's so much uncertainty, so many things that are unknown, and it kind of gives you a sense of jitteriness, particularly when you have an analyst essentially calling for the price target to be essentially 50 percent of where it is right now.

18:31So I still do think there is a psychological safety net that these companies still offer. And that might lead them to be a slightly. That might be the biggest point out of all the stuff that we brought up, because if you look at what SVB collapsed, all of them took off. And then the first week of April, all the charts sort of flattened out on large cap tech. That might be the biggest takeaway is was that the reason why they got padded for a sense of safety? The only thing I'll say is safety is very crowded right here. It's crowded in a very small. If you look at the NASDAQ, I don't know if they can pull up the NDX.

19:03I mean, it's flatlined this whole month at 13 ,000. You know what I mean? So if there is one of these companies that are perceived safety that basically do like have some sort of warning about enterprise spending or something like that. And then it's not the cloud stuff is also really interesting because it's not just big enterprises. It's also we'll get a look into small, medium businesses, too. So to me, I just think there's probably one of these lurking out there that are going to basically say in this rate environment. Also, we're going to hear higher for longer, even if the Fed pauses at their May 3rd meeting.

19:30That's something that should weigh on valuations, too. And all of these companies are expensive right now. Coming up, a pricing pop. Coca-Cola reporting strong results as the soda maker passes costs on to the consumer. What the pricing power will mean for the stock straight ahead. But first, a semi-struggle for Micron. Shares under pressure as reports of a ban in China come into focus. How U.S.-China relations tensions are impacting the chip space. Don't go anywhere. Fast Money is back in tune.

19:59Welcome back to Fast Money. Micron shares dropping today and reports that China could ban the U.S. chipmaker from selling its semiconductors into the country. This move would be a major retaliation by Beijing. And it comes after the Chips Act barred American companies from investing more in China while getting new U.S. funding. Last year, revenue from China made up 25 percent of Micron's revenue. How scared should we be of this? I think, look, Micron is such a cyclical trade on some level within the chip space. We kind of know what they do. We know it's about inventory and DRAM pricing. And if you look at the chart, it kind of tells you about that.

20:37And on some level, maybe we price through a lot of bad stuff. We have no idea. And then when the White House is reaching out to Samsung, or at least there's a reference, yeah, that they have actually reached out to Samsung, or at least South Korea, to urge their chip makers not to make up the market gap in China if, in fact, Micron is banned. And I mean, it's just it's just interesting because we've been talking about things. I mean, how about going all the back to Huawei? Thinking about the things that the U.S. has done to hardware companies or semiconductor companies in that part of the world.

21:05And should they be surprised? No. So we've we've we've cautioned about the broader impact, not just even in the tech sector, but consumer products. Yeah. Yeah. I mean, this is getting dialed up. I mean, if you talk to folks who pre-pandemic used to go to China a lot for business, they're not going anymore. And you bring up the situation with Huawei. That was like the Huawei CFO who was detained in North America. You know what I mean? For whatever reasons that we deemed at the time. I don't even remember. I mean, it was something. That's to Tim Cook or someone senior from Apple. I mean, just it would be significant.

21:36Yeah. I mean, listen, Tim Cook, Elon. I mean, those guys are fine. They're made guys, as some of you guys might say. So is Jack Ma. Well, right. But I think what they do to their own people and have done, you know, like is reason enough to say, you know what? I'm not bringing my smartphone when I'm going over there. I'm not doing that sort of thing. So to me, yeah, I think it's going to be I think we are in the midst of a very bipolar world. It's a very hot economic war that doesn't really appear to get any cooler anytime soon. I mean, if Beijing did this, I think this would probably reaccelerate reshoring, the reshoring movement.

22:08Right. Because if you're if you're a Dell or an Apple computer and you manufacture over there, you no longer can get those chips from Micron in China. So what do you do? And if South Korea is not going to step in and fill the gap, all of a sudden you can't make your product. So what do you do? You have to find other places to make your product because you can't live with that risk anymore. But it's good for Samsung, let's be clear. Oh, that's why the shares were rallying. Yeah, and yet they even reported some numbers that weren't great. So it's very inflationary, too. I mean, you know, we talk about all the things that are going on and you can't get away from it.