McDonald’s Jumps Despite Rough Results… And Rates Drop On Treasury Update 7/29/24

0:01Live from the Nasdaq market site in the heart of New York City's Times Square.

0:15This is Fast Cartmaster says are bumping up against some very precise support levels and where he thinks they are going from here. Plus, bond yields drop ahead of the Fed meeting. Tesla revs up on a big bullish call from Morgan Stanley and called a Deadpool bounce. Shares of Disney getting a boost after a big weekend at the box office. How much higher can go from here? I'm Melissa Lee coming to you live from Studio B at the Nasdaq. On the desk tonight, Carter Worth, Guy Adami, Mike Coe, and Julie Beal. We're going to get to all of those stories in just a moment. But first, we start off with some breaking news out of Delta.

0:49The airline announcing a lawsuit over this month's massive tech outage. Phil LeBeau's got all the details. Phil. Melissa, let me clarify. We do not think a lawsuit has been filed yet, but we do know that a law firm has been hired by Delta to pursue damages that happened because of the Microsoft and CrowdStrike software outage that began on Friday the 19th, extended for about six days. David Boyce, a well-known litigator, runs the firm Boyce, Schiller & Flexner. He has been hired by Delta. And again, they are going to be seeking compensation from Microsoft and CrowdStrike. No suit has been filed as of this point.

1:28We have reached out to Delta for a comment, have been unable to get a comment officially from Delta. That software outage, by the way, it's estimated to have cost Delta between$350 and$500 million. We say estimated because they're still figuring out exactly how much it's going to cost the company. They're handling tens of thousands of claims from passengers who were either stranded or had flights canceled. They have more than 176 ,000 refund or reimbursement requests. You add all that up, the estimate, again, is between$350 and$500 million. By the way, Delta canceled almost 7 ,000 flights due to the outage.

2:08Melissa, we have not yet reached out to Microsoft and CrowdStrike, but will be shortly to see if they have a comment regarding this. Not a surprise given the monetary damages that Delta says it is incurring and also the reputational hit that it has suffered over the last week and a half. Melissa, back to you. Phil, that estimated cost of$350 to$500 million, that's simply the cost to Delta's operations. It doesn't try to enumerate what the reputational damage is. Correct. That's the estimate that you get from analysts when they say, OK, this is what we think it probably costs between the 19th and the 25th or 26th, depending on when you want to say that their schedule was officially back to normal.

2:50So that's strictly looking at the refund request, the reimbursement requests, all of the costs that went into getting back up to speed. Okay. Phil, keep us posted. Phil LeBeau, again, still awaiting comment from Delta Airlines itself. But they've hired a law firm, Guy. And I guess we sort of knew we were thinking about this outage and the liabilities, that there would be an effort from companies who were affected by the outage to recoup some of their losses. Fair enough. Okay. I mean, I think there are reasons to be bearish Microsoft. I don't think this is one of them, number one. So you're talking about, let's call it a half a billion dollars.

3:27We'll round up. I mean, you're talking about Microsoft, the$3 trillion company. CrowdStrike is a$62 billion company. So rounding error for Microsoft, it's sort of a big deal potentially for CrowdStrike. With that said, I mean, CrowdStrike, the stock, has already been punished. So we'll see. But I don't think it's necessarily market moving. Maybe Gene thinks it will be. But for me, it's interesting, but I don't think it moves the needle here. This is just Delta, though, Mike Coe. And if you multiply Delta by X number of companies that have been affected, let's just say, I don't know, 10? What kind of number do you get?

4:02What kind of impact do you get at that point? Yeah, so X number of companies, large and small. Just sort of elaborating on what Guy was just saying. I mean, you're talking about a company when you're talking about CrowdStrike that was hopefully going to make maybe a billion dollars total in net income versus Microsoft, which is many, many tens of billions of free cash flow. So to his point, it is a rounding error. And ultimately, you know, this is sort of follow the thread all the way back to who was ultimately responsible. And you have to think that this is more of a liability in terms of the impact on the potential share price for CrowdStrike than it is for Microsoft, I think.

4:40Yeah, certainly. We're not seeing too much reaction in the after-hours session, CrowdStrike at least, after the pummeling it's gotten so far. Morgan Stanley, Julie, just out today saying that they expect a 20 percent reduction in new bookings in the second half of the year. And that's not even accounting for the potential liabilities it might be on the hook for. It's hard, right? This is a company that was known as the fix-it company that would, you know, come in for major data disruptions and be able to resolve them and suddenly to be at the epicenter. It doesn't just bring into question, you know, the level of consolidation that we've seen in the security market where we are so dependent on just a single company.

5:18I think it has an impact that ripples through in terms of the M &A market. I think an issue like CrowdStrike's only gives Lena Kahn more power to push back on these kinds of issues, because once we start to consolidate, we just become entirely dependent on them. Yeah. Carter, how does that chart look, either Microsoft or CrowdStrike? Yeah, CrowdStrike, I mean, it's the definition of a bad situation. Anything that's in an uptrend that then suffers an immediate and aggressive setback, not just a dip, but a heavy volume drop in gap, typically it's news related. And that, of course, was the case with CrowdStrike.

5:52But now down, what, from 400 to some 250? It's always tempting to think, hey, maybe I could catch this for a bounce. But this is more damage than I would say is normal. And I would resist the temptation to try to step in. I know we said this is a rounding error. And, of course, relative to the size of Microsoft, it is a rounding error. At the same time, Guy, if we are in a market environment which questions higher valuation stocks, which questions the return on investment of AI investments, which questions how much revenue is Microsoft actually going to generate from Copilot. And then you lump this on.

6:28That's the right. I think that now you look, you're always looking through. I know you do through the right lens. But with that said, now people will start asking questions like this. Just, I think, creates another round of dialogue around these stocks and evaluations that the market is awarded to them. And to your point, we say it all the time, the spend has been there in AI. Without question, you can't argue that. Is it the return on investment, though, that's going to excite people or it's going to be disappointing? I think that's sort of the other side of this trade. And Microsoft tomorrow, I think after the bell, I mean, you're going to learn a lot more in terms of is the growth going to continue?

7:03You're starting to see sort of a deceleration. And at 30 times next year's numbers, which is where Microsoft is trading, It's an expensive stock relative to its history and obviously relative to the broader market. All right. Let's get more on the impact to Microsoft and the broader tech sector with the aforementioned Gene Munster, managing partner at Deepwater Asset Management. Gene, great to have you with us. What is your initial take on this news? I'm right lockstep with Guy on this one. I think that this is a rounding error. And you think about the Microsoft quarter, what's orbiting around it is several topics.

7:35We've got the crowd strike, the outage piece. That is something that will be in litigation probably for a long time. There's also cyber insurance. They could claim act of God. We're a long way away from resolution and probably a long way away from Microsoft tomorrow talking about any specifics around this. My guess is that they will say something like this is going to have a minimal impact on the business and there is a low probability that they're going to venture an actual number around it. So that's one topic that's orbiting the quarter. The other topics, of course, is related to AI, Azure, and how they're starting to monetize CoPilot 360.

8:10And I think when you kind of put all this into together, I think the CrowdStrike piece, the outage piece, I think it's probably fourth on the list in terms of what's on investors' mind going into tomorrow. I do want to talk more about Microsoft in the quarter, Gene, but I'm just curious as a tech investor, how do you look at CrowdStrike? I mean, it's supposedly best in class in its sector, but the damage to it is not just in the damage to recurring bookings, but also potentially in liabilities. Is it tempting to you? Not yet. We had owned CrowdStrike up until about a month or two ago, and we didn't anticipate this happening.

8:47Our sell discipline was around more valuation. And so—but we know the company really well, and we have not stepped in. And I think in this case, you really need to see a flushing out. It typically takes a couple quarters. We'll see a step down. We'll probably see another step down again. And I think once you get two quarters of bad news in, once they report their December quarter, I think that's probably the point where you have a good sense about really what the impact of the issue has been on their business. Gene, let's go back to Microsoft for a second. You know, amongst the many things that people will look at, you know, what's going to stand out to you in terms of the one thing that will move the needle in terms of market reaction?

9:29It's all going to come down to Azure growth. I mean that truly is the pressure point. The number, the bogey number here is above 30%. That number is important because Google Cloud grew their June quarter by 29%. Last quarter, Azure grew at 31%. The street's looking for just over 30 % growth. As long as they can show that they're continuing to gain market share, I think Microsoft investors are going to generally view this as favorable. I think that the, you know, the flip side is if that dips below 29%, there's a a whole new narrative that starts to emerge. So I think that that's probably the biggest.

10:02And then, of course, there's the CapEx second potential question guy. It's all about Azure. Hey, Gene, this is Julie. I was curious what you thought. You know, there have been various reports of what is the AI software attach rate to, you know, what the cloud Azure spend is. I've heard, you know, for every$100, it would be$40 of AI spend. Do you have any sense of if we'll hear anything about that more concretely and what we should be thinking about in terms of battle testing that number? So the co-pilot piece is this kind of falls in the category of what's been generally disappointing around software and AI is we just haven't seen the uptake.

10:38We saw a little bit of good news from ServiceNow last week, but in general, to put some numbers around that, there are about 360 is kind of the magic number. There are about 365 million co-pilot users or Office 365 users, conveniently those numbers. And if you think about what that impact has been, they've said to slowly expect this over the next several quarters and several years. But some quick perspective, if they add 1%, if they convert 1 % of that base, it's about $360 a year. And that would add about half a percent to their revenue. So the bottom line is this, is AI is going to be throughout all Microsoft's products, but don't expect any sort of magical lift to happen tomorrow night.

11:22I think that they will continue to tamp down expectations relative to the impact of Copilot 360. Sounds like you think the stock's going to go lower, Gene, or am I just imputing that on what you're saying? Because they're going to tamp down expectations and it's only going to be 30 % growth rate on Azure. I mean, 31 % is the company's guidance. I don't see anything that's going to make the stock go up. Well, I could be wrong, and we could see a bigger, a better Azure number. I think probably that's something that could make the stock up because that's the most important piece is at Deepwater. We don't own Microsoft right now.

11:57I think that there are other companies to own. I just put one piece. So we don't own it. We think there are better places to invest. And I think it comes back to a topic that we continue to discuss, which is how much to what degree do you believe in AI? If you think that AI is going to be transformative in line or exceed the hype that's out there, then Microsoft's going to continue to do well. But I still think that there are other companies, Google, Meta, Apple, that are going to do better. Gene, thank you. Always good to get your analysis. Gene Munster of Deepwater. Myco, the stock hit its high July 5th.

12:31It's down about 9 % or so from that time. How are the options markets positioning? Yeah, the options markets are generally positive. We have seen calls outpacing puts by about 3 to 2 over the course of the last 20 trading days or so. Right now, the options market is implying a move of a little over 4%, which is in line with their historical average. I will say, though, and this probably is consistent with Gene's view, that vol, that is basically the price of options, is well over the 80th percentile right now looking out three months. So it does look like the options market thinks that it's going to be a little choppier than it has been for them going forward.

13:11All right. Now let's get to the other big story for us, and that is the big day for McDonald's. The stock gaining nearly 4 percent for its best day since 2022. Even after a largely disappointing earnings report this morning, the fast food giant seeing a drop in same-store sales for the first time in nearly four years as price-conscious consumers pull back. Our Kate Rogers joins us now with more. Kate. Melissa, you said it was a tough quarter for the fast food giant, missing estimates across the board. It's second straight quarter EPS miss. And as for those same store sales, they missed the mark in every operating segment.

13:43In the U.S., its key market down 0.7 percent, as CEO Chris Kempchinski said. Its value leadership gap in the category had shrunk, adding that the consumer slowdown was most pronounced with low-income consumers. Take a listen to what he had to say.

13:59you're seeing that the consumer is eating at home more often you're seeing more deal seeking from the consumer and you're just seeing i think a trade down even within either units per transaction or within mix all of those things for us are indicators that the consumer across a number of these markets is being very discriminating now the theme on the call was no surprise all about value, finding the right offering to resonate with consumers globally because this pullback isn't limited to the U.S. consumer. It is important to note that$5 value deal began on June 25th. It's not really reflected in this quarter, which ended June 30th.

14:38And while 93 percent of restaurants will extend the offer into August, management really seems keen on continuing even further. In fact, I obtained a memo to the U.S. owners today from U.S. President Joe Erlinger saying, quote, we have an affordability gap to close and we must continue to take actions that show our customers. We are listening because, of course, franchisees will have to make some decisions about how far into the future they want to extend this, if at all. Back over to you, Melissa. Kate, thank you. Kate Rogers. So the savior to the stock today was the fact that the value meal was selling.

15:08Right. And that that could be extended. And it could have been worse. Right. I mean, yeah. And, you know, Carter can speak to this, but put up a chart, you know, put back a chart to October and look where McDonald's is traded down to. I'm pretty much here to tell you, We traded right back down to those October lows, which is when, by the way, the broader market bottomed out as well. So you had something to trade against in terms of that low. Definitely a relief rally. And I think the market's going to say, you know what, wait a second here. We can wrap our head around what McDonald's is trying to do, their strategy.

15:37People will find us. They'll come back. And at 20 times earnings, it's worth a flyer against that level. So it actually somewhat, and not that I would have said this was going to happen, but in retrospect, it actually makes a lot of sense. Carter? Well, that's right. I mean, to some extent, this is a classic instance where price is wise, right? The restaurants have been under pressure for a while. We know Starbucks, McDonald's, Chipotle is now down 30 percent from its peak, things like Wendy's and Darden and so forth. So at this point, it's a classic instance of bad news. Stock goes up. Much is priced in already.

16:10In fact, the S &P 500 restaurant sub-industry group right now on a relative basis is back to where it was in 2009. My hunch is to be contrarian here and actually start buying some of these assets that are down on their knees. I get the idea that you offer a value meal. You get consumers back. But are they really going to come back? Or once that$5 deal ends, are they going to go back to their old habits, Julie? I mean, I guess it depends on how long the consumer feels inflationary pressures. But if you think that it's going to be beyond August, which is how long they're looking to extend this, then I don't know if that foot traffic decline is going to actually be reversed.

16:50Yeah, I agree. I think it's the one challenge of once you start doing discounts, it is so hard to pull back from them. And as has been demonstrated in the soft foot traffic across all of these food service retailers is that people will just stay home if they don't think the value is there. And everyone is value starved. It's not even just a low income concept. A lot of people that I know, even super wealthy people, are very aware of pricing and how little value there is anywhere in the market. So I think it's going to be a persistent problem. We're going to hear a cross-consumer discretionary.

17:22If you can bring value to the table, if you're a company like Elf who can just really surprise and delight their consumers, you're going to be fine. But if you can't, you're really going to struggle. Yeah. Mike? Yeah. I mean, well, first of all, we shouldn't be too surprised. As Carter pointed out, we saw this with Starbucks, consecutive quarterly disappointments. And then, of course, we saw the same thing with one of their suppliers in the form of Lamb Weston, which had an enormous miss, 74 percent income miss. And that basically speaks to this whole issue. The one thing I would say about McDonald's is that we're dealing with McDonald's corporate here.

17:58So if they can do things to encourage people to come back, they're getting paid on a royalty model. I think that a lot of the pressure is actually going to be felt by the franchises, arguably more so than McDonald's the parent. And so at its current multiple, it might actually be worth playing this one from the long side, even though the entire sector is really under significant pressure. And I expect that to continue. All right. Coming up, Apple's AI ambitions. Will the newly announced features drive iPhone upgrades or will the staggered rollout put a wrench in the tech titans plans? Plus, a major call on Tesla.

18:30Just how much higher one analyst sees this stock going and what's going to get it there? Don't go anywhere. Fast Money is back in two. This is Fast Money with Melissa Lee right here on CNBC.

18:55Welcome back to Fast Money. Tesla shares surging more than 5.5 % today after Morgan Stanley named the EV maker its top pick in U.S. autos replacing Ford. Analyst Adam Jonas reiterating his overweight rating and$310 price target, which is about 33 % upside from today's close. He says cost-cutting has minimized downside risk for the company, points to increasing revenues from Tesla services, specifically the energy business, which he thinks could be a big one, and also selling emissions credits. Mike, what do you think of this call? Yeah, I mean, I think it's important. You know, it's interesting because it replaced Ford, but I really don't think these are close comps when you look at Tesla versus any of the sort of legacy automakers.

19:37First of all, they're way ahead on the software side. But they obviously have a business model that feeds naturally to services. In fact, if you own a Tesla, many people are already subscribing to services. Obviously, that creates some kind of an ecosystem, basically. I think that's a real strength. And the truth is that these cars do actually represent exceptional value for money, I think. And that plus full self-driving, statistics show that the cars that are operating on full self-driving, although there's been a lot of negative press about those situations where you've had accidents is actually lower than cars where people are just driving themselves.

20:11And so I think that ultimately one of the knocks on Tesla, one of the costs for consumers is insurance. They've tried to resolve that by offering it themselves. But I think that ultimately is going to end up being a benefit as well. So there's a lot of potential things that can turn around and be real positives, I think, for Tesla. Yeah. I mean, I thought what was really interesting about this call is that the reasons why it's a topic in the auto industry is because it's not an auto company. I mean, those are the areas of strength for Tesla, the non-auto parts of the company guy. That's well, you hit the nail on the head.

20:39I mean, it's everything X auto is and you're replacing Ford. So I don't even know if it's fair comps, I think, to your point and Mike's point as well. Let's look at the stock, though. I mean, again, if you go back three and a half, four years, it's clearly been in a pretty significant downtrend on a broader market that's done extraordinarily well. Number one, number two, you have seen bounces of this magnitude over the last six to nine months. So it's not unprecedented. The question one has to ask themselves, a lot of people think it's the next$3 trillion company. If that's the fact, if you believe that in a$5, $10 move doesn't matter in the stock.

21:12However, if you think it's a margin story, you think there's competition coming, the next administration might not be as friendly, then you have to take this into consideration. I still think the stock can trade significantly lower from here. When I say significantly lower, back down to the mid-180s or so. Carter, do you see that in the charts? Well, I mean, to Guy's point, just look at the chart, look at the price action. I mean, right now, the stock is the same price it was in the last week of July 2021. So you've gone from$2.30 a share to$2.32 a share. But you've had a drawdown, max run at 56%.

21:46The max run on the S &P in the period is 27, and the Qs is 37. So you have no results, and those two indices are up substantially with much worse risk program. Now, that has nothing to do with their future. But what it does say is you embrace a lot of risk here. We know the stock just dropped and gapped on its earnings. Now it's popped up because someone upgrades it. It's a trading vehicle. But my hunch is you bet against it here. All right. There is a lot more fast money to come. Here's what's coming up next. Apple's Intelligent Update. The tech giants detailing just what we can expect from the next iPhone's AI powers.

22:24Will it be enough to drive the new wave of upgrades? Plus, to the penny picks. Some big names hitting key levels, and the chart master thinks that that might mean they're ready for a bounce. The stock's on his radar. Next, you're watching Fast Money, live from the NASDAQ market site in Times Square. We're back right after this.