Microsoft, Alphabet on the Move, and RTX’s Engine Troubles 7/25/23

0:00Right now on Fast and After the Bell, earnings palooza and a winning streak for the industrials. that now stands out an even dozen will break down the tech trade and where this market is going ahead of a Fed decision coming up. Plus, RTX's rough day. Shares of the aerospace giant dropping more than 13 percent on news of a manufacturing problem around some of its most popular jet engines. The fix and the fallout straight ahead. And later, luxury lag shares of LVMH faltering today and worries about a slowdown here in the States. But will a rebound in Asia, especially China, boost the bottom line in the months to come?

0:30We'll debate that. I'm Melissa Lee. This This is Fast Money. We're live at the Nasdaq MarketSite. Full house here on the desk tonight. Tim Seymour, Karen Feinerman, Dan Nathan, and Guy Adami. We start off with that big night of earnings. Alphabet, Snap, Visa, Microsoft all out with results in just the past hour. Shares are on the move. We've got an A-team of reporters ready to dive into the numbers for us. Kate Rogers, Kate Rooney, and Steve Kovac all on deck. But we start off with Deidre Bosa on Alphabet's quarter. Deebo. Melissa, investors, they are cheering a pickup in revenue growth, perhaps a sign that the advertising market has bottomed.

1:02But a lot of the focus is on Ruth Porat, Google's longtime CFO, taking on a new role as president and chief investment officer. She said it will include both external and internal responsibilities. She'll be engaged with policymakers to recognize the importance of technology, she says. On the investment side, she'll cover infrastructure, real estate, data centers, efforts as well to expand in the India region. As for why now, She said that she has been a CFO for 14 years, eight years at Google, six years at Morgan Stanley before that. So she said it was time for a new challenge. Margins were also a positive story this quarter.

1:36Better than expected operating leverage and less of a jump in terms of capex that the street was expecting. Porat attributed that to a few things, moderating office and headcount expansion and a delay in data center construction projects. I asked her, and this I feel like is the question the street is most curious about, monetizing generative AI. She said, I would have to wait until the analysts call. But, Melissa, I'm ready. I've got phone in my hand. I will not miss it. So I'll jump back on when I get it. All right. You tell us when, Debo. Thank you, Deidre Bosa. Wow, look at that stock reaction, Karen.

2:08It was good enough and then some. Yeah, it was. And on so many fronts, actually, just about every single front. So the advertising strength, that was obviously a positive and hopefully will be a read through for Meta as well. But YouTube, also a positive. So that's good. And cloud. Cloud was good. So there's a lot to like here. The valuation isn't too demanding. Guy was the one I was thinking of the other day. We couldn't think of it. The Ruth Porat thing, it's kind of, I don't know what quite to make of it. Remember when she got there, she was very much celebrated, and she turned out to be great.

2:41It really was, we need a grown-up in the room, and we need someone who's not just going to spend, spend, spend. They did continue to spend for quite a while, but I think they're going to spend on AI, but also they may be able to reel it in on AI if they could become more efficient, which they should be able to. So there's a lot to like here, but I always want to wait till the call. Sometimes they throw something out at you, but I'm pleasantly surprised. The comments so far really exhibit, you know, just a carefulness when it comes to spending, prioritizing growth, but durably reengineering the cost space.

3:17I mean, these are new words from big tech, But these are the kinds of words that investors want to hear right now. They are, although I think in Google's case, they want to hear that the core business is alive and well and the threats, the competitive threats from generative AI are not things that are hurting their core search business. And their core search business is crushing it. And if you look at then, clouds up 28 percent, YouTube up four after contracting the last couple of quarters. Those other parts of the business that have been important parts of the story, I think, are what bring you along.

3:45And Google, the stock, is the one of the mega cap tech stocks that really is it's hard to say it's underperformed. But if you look at Microsoft and Apple, which basically got back and went through those those highs of two years ago, Google's still, you know, around 145 is the target to to make a fresh new high. So relative underperformance. Part of the reason Karen talked about the valuation gives investors the ability to follow through on this, because the valuation is really of all of them makes the most sense. It's interesting. Debo just said that they pushed out the construction of a data center.

4:16And you would think that, you know, again, I think if you look at think about the last seven months, you think about the introduction of chat to BT4. And really, for all intents and purposes, it felt like Google was left flat footed. Right. And so it's come around a little bit. So maybe some of that underperformance relative to Microsoft has kind of come out right now with where the stock is. I'm with Karen. I want to hear more on the call. I want to hear what they think their ability to kind of commercialize some of the products that they are. working on this. Gemini is going to be really important to them.

4:46And again, I said it last night, I don't think we're going to see really earnings growth from this sort of stuff. I don't think we're going to see it until the back half of next year. So now, make no mistake about it, there is still pressure on that search business. I mean, that's what all of these business models are kind of going for, too. So, you know, the better it looks is the more incentive a lot of their competitors have, in my opinion. So, you know, I'm not chasing this here. You know, I know you're probably long and you came in and that sort of thing. I would be surprised if you would be adding to it at this point.

5:16I'm just saying that to the crowd right here before we have a better sense of just kind of what the outlook looks like for the back half of the year. And I'm not sure they're going to give us specific guidance. They don't do that anymore. And I'm glad you mentioned the competition. Obviously, we're going to get to Microsoft in just a moment. But, you know, for some time, we've been talking about AI, Microsoft versus Alphabet, how flat footed Alphabet has been, how behind it may be. We still have to hear about when they're going to actually launch the search generative experience, which is, I guess, maybe the equivalent sort of of the co-pilot that Microsoft talked about,$30 a month guy.

5:46So there's still a lot of details that we want to hear about in terms of their growth in the future. But for right now, their business is just firing on all cylinders. Yeah. And I don't think there's behind as people think. And at 20 times next year's numbers with probably close to 22 percent EPS growth, I think you're getting, I think you want to be in the stock on the virtue just on valuation alone and the fact that they're probably not that significantly behind Microsoft. And oh, by the way, you know, margins, operating margins are now approaching 30 percent. Good for them. This is a really good quarter.

6:13I know what Dan's saying, up nine bucks, do you want to chase, especially potentially with a call? Valuation is compelling still. This is something that Karen's talked about for a while. And that 148-ish prior all-time high from November of 2021, I think on a benign tape, I mean, that's definitely in the crosshairs. All right, let's get to Microsoft now. The company beating on the top of the bottom line. And shares are down but well off the lows of the after-hours session. Steve Kovac is here to take us inside the numbers. Steve. Yeah, there's shares falling, Melissa. Despite those beats in the top and bottom lines, let me go over the numbers real quick.

6:42Revenue,$56.19 billion versus the$55.47 billion expected. That's up 8 % year-on-year. EPS, a beat,$2.69 versus the$2.55 expected. But Azure cloud growth, that continues its drastic slowdown, reporting 26 % growth there. The year-ago quarter, that number was 40%. The over-intelligent cloud segment booked$24 billion in revenue, up 15 % from a year ago. And some other key numbers to look at here. Search and news advertising revenue up 8 % year-on-year. We'll see if the new updates to the Bing AI chatbot has anything to do with that. And, by the way, the collapse in PC demand is improving somewhat.

7:22But Windows licensing revenue was down 12 percent, an improvement from the 28 percent drop we saw in the previous quarter. And I'm going to echo Deirdre here. The call kicks off at 530. We're expecting guidance during that call. So pay attention, Melissa. Yeah, Steve, thank you. Steve Kovac, keep us posted on the conference call as well. The context, obviously, is we just saw a 15 month high in Microsoft ahead of these earnings, Tim. Yeah, and I think that's that's it. It's almost like they dropped some of the spice from the earnings last week when you heard about the pricing on, you know, essentially the AI based office platform at 30 bucks.

7:57And the presumption that the street has already been able to do that what the market did and it took it to fresh highs or at least back to those old highs is what it's done. You know, the Azure dynamics, I think, are things we're going to continue to hear about. And so you have a lot of saturation in cloud. This is a place that I'm not saying that this is necessarily where Microsoft is pulling its multiple. It's clearly pulling its multiple right now on the software side. But to the extent that there's a lot of great news priced in here, and this is before we've really seen follow through on some of these presumptions about a 30 buck a month in Office 365.

8:31So the street was really expecting a pretty good number, and they really hit it. And I'm actually surprised it's not down more. I would have thought that this bar was really – the number we'd expect, it's got to be better than that for us to keep the rally going here. So it hangs in there pretty well. another one. We've got to see what they say on the call. Yeah. And by the way, oftentimes they don't give us their outlook until after the show is off the air. So that's one reason to stay on CNBC.com, but we won't have that to trade right here. Yeah. And just to take another look, you know, Texas Instruments, which their largest customer is Apple.

9:02OK, they reported after the close. They're talking about inventory levels. They're talking about cancellations at elevated levels, too. I think that's kind of interesting. I know, Tim, you really focused on the semis on a relative basis. I think there's things that are being said. AAC Technologies the other day, TSM last week that don't bode that well. I mean, take out a lot of the excitement in and around, let's say, some of this cloud growth and the related AI stuff. I mean, you know, the numbers had come down for a lot of these companies, and they're kind of beating those sorts of lowered bars here.

9:28But for some of those people, and we know who they are, you know, and some of them are good friends of ours and us who thought S &P earnings, you know, they don't have a chance of being anywhere near 220 flat or whatever. I mean, here we are mid-year, and it seems like That's not that difficult of a stretch here, especially with the dollar weakness and everything like that. So I don't know. 31 times earnings. You know, as I said, Google's 20. Microsoft's 31 now. Again, slowing cloud growth, although still robust at 26%. I think revenue growth of 8 % year over year is not great for a company with this valuation.

10:03I'm not a hater here. You're just trying to sort of read the tea leaves. I understand the excitement around the company. We've said it's probably one of the five most important companies in the world. I just think it's rich in this environment. Let's see what they have to say on the call. Yeah. You would think that they wouldn't release all the spiciness, in your words, Tim, ahead of the earnings call, unless they knew that there was more spiciness to be released on the earnings call. I don't think they're – look, Microsoft, of all the mega-cap tech companies, has been the most confident company of all of them.

10:30I don't think they're worried about anything, and they should be. I mean, you know, they – I don't know if – I wouldn't characterize them. I'm not sure we're characterizing Google as having lagged badly. I don't think they have. I think we actually have no idea where Google really sits. But there's no question Microsoft has been out there on the offensive. The presumption is that they're going to take search, that they're going to take a lot of places that Google has dominated. So, yes, I feel like they could have dropped that news somewhere in here. It probably doesn't matter. The stock's arguably been the best performing stock in the world for a long time.

11:04And this shouldn't surprise anybody, this performance. All right. For more on the reports from Alphabet and Microsoft, let's bring in Fast Money friend Gene Munster. He's a managing partner at Deepwater Asset Management. There's a lot to go through, Gene, but I'm going to kick it off with a would you rather at this point, given the results. Microsoft or Alphabet? Melissa, it's a pretty straightforward answer for me. It's Google, advantage Google here, not just because the valuation difference, but I think that there is a light year gap between what Microsoft has talked about versus what they've delivered and what they will deliver.

11:37Again, they're going to be a critical part to the AI future. But just to put some context about what's going on, they're growing revenue about 7 % a year. During the pandemic, it was about 18 % a year. And before the pandemic, in fiscal year 19, it was 14%. Growth rate has decelerated. And so this is all about what's going to happen relative to AI. The price increase related to co-pilot and office is significant. That could have a 40 % lever over a decade on their business. But I think you just have to keep things in mind. There is a lot priced in when it comes to Microsoft. If you turn the page and think about Google, this with what I rather, Google, on the other hand, there is a wall of worry with investors because of that 90 % global market share and the potential impact as we move to an AI first single result.

12:30And if we look back a decade ago, the paradigm is related to what happened with desktop to mobile. That also was a concern. If we went back and looked at some B-roll of our conversations then, that's what investors were concerned about. And ultimately, Google made that jump. I'm in the belief that Google, their 20-year lead in search, is going to inform better AI decisions. We don't see it in the products today. I think that they will deliver on that. Ultimately, I think that's going to be good for ad revenue. And I think they're going to have persistent growth for the next five to 10 years as they start to turn that corner.

13:04How do you read the move of Ruth Porat into the role of CIO? Feels like they made a role for her. She was tired of being CFO, so they just wanted her to stay around, wanted that continuity. And she's a class act and has some ties within Washington. And I think that that can be helpful to the company. I think the bigger piece in terms of the personnel is just Sergey Brin starting to spend more time. It's my understanding he's been hanging out in New Zealand for a long time and now is reported on campus for three or four days a week. And to me, that I think emphasizes their importance. And just to finally kind of put an underscore in terms of where Google is related to AI, this is not a new topic.

13:49Microsoft, this is a topic in the last three quarters. Google has been talking about this since 2017 as an AI-first company. Again, we haven't seen it, but I suspect that all that data, we know data and models and AI is advantageous. I think it's going to benefit their search revenue in the years to come. And I think Sergey is back involved with the company to see that forward. Genius, Tim. So I agree with that. And I think Google is often seen as the one that doesn't get credit for a lot of the places that maybe they've dominated and maybe that's the fear. and back to Ruth Porat, I think she unlocked a lot of value for the shares.

14:23And I ask you as an analyst, because I think from a governance perspective and a transparency perspective and the ability for investors to get comfortable with the sum of the parts and the pieces, is Google cheap here? I mean, they seem like they're still not given credit for where they are in not just the core search business, which is the dominant one, but some of these other businesses which are starting to really pick up momentum. The central question related to valuation is next year's numbers and are they going to be able to achieve those. And so they just grew at four, almost 5 percent this quarter.

14:57Next year, the street's looking for 11 percent. They've grown for two consecutive quarters. If they can hit that 11 percent growth, this is cheap. This is about it's not as good. It was lower before, but you typically don't get a company that has a pole position in a massive market that trades at a subpar multiple relative to the other leaders. And so I think we're going to fast forward six, nine, 12 months from now and just continue to see this story move higher. Gene, one last question. What's the read through to Amazon here? Well, I was thinking a lot about AWS and what we saw was just incredible growth with Google Cloud and Azure.

15:37they basically didn't change from the March quarter. They're in the high 20 percent. And what we saw with AWS last quarter at 16 percent, they gave kind of informal guidance to expect that to be more like 13 percent for the June quarter. So we're going to see this big gap. So I think what it shows is I think AWS is going to disappoint. But what's probably more important relative to the Amazon stock is the commentary about AWS. I think at this point, the June quarter is a throwaway for investors when it comes to AWS. It's more about, are they going to say that the bottom's in in the growth rate, we're going to start to move it higher.

16:11If AWS does not show improving revenue growth with the backdrop of cloud and AI, that's a major problem. I suspect that they will talk about better growth in AWS in the back half of this year. Gene, great to see you. And of course, let us know if you hear anything from these conference calls. You have We'll do a phone on each year. Gene Munster, Deepwater Asset Management. We should note not much movement in Amazon in the after our session. We are seeing moving shares of meta, which are up almost two percent at this point. Yeah. Great question by Karen on the AWS. If you think about the decelerating growth has been obviously something with this story.

16:46And if you think about where they're exposed, this would be Amazon with their cloud. It's really small, medium sized business. And if you think about Google and Microsoft, where their exposure is larger enterprises. So maybe that's just a bit of a read to on, you know, like the different segments of different businesses. So Amazon is going to be definitely really interesting next week. All right. And by the way, on that Google move in the after our session, that's$22 billion in market cap. No, more. Yes. Missing a zero makes a big difference. $220 billion in market cap in the after our session.

17:17That's roughly the size of a Cisco. It added a Cisco on the back of its earnings report. All right. Coming up, RTX having a rough day to stop with its worst drop since the start of the pandemic. The details on what rattled shares straight ahead. But first, the earnings parade rolls on, the brutal after hours action in Snap and the muted reaction to earnings per Visa. The breakdown of both of these names and their calls when Fast Money rolls on.

17:51Welcome back to Fast Money. The earnings excitement continues. Snap also reporting after the bell, the social stock beating the street, but shares are tanking on weak forecasts. Kate Rogers is here with the very latest. Kate. Hi, Melissa. Well, Snap reporting a narrower than expected adjusted loss in revenues were a slight beat for the quarter. The first revenue beat in the past five quarters. Daily active users also a beat at 397 million in the quarter. That's above the 394.9 million projected. On the advertiser front, Snap says it has record active advertisers in the quarter, up more than 20 % year-on-year, and through improved retention compared to this time last year.

18:28It did offer some formal guidance, which it has not in recent quarters, and that's why the stock's down. The company sees Q3 daily active users between 405 and 406 million versus the streets' expectation of 406 million. The company says forward visibility of advertising demand also remains limited. Q3 revenues anticipated between 1.07 billion and 1.13 billion in Q3 adjusted EBITDA of between negative 50 million and negative 100 million. Both numbers disappointing the street. And as you can see, the stock is lower by 17 percent in the after hours. Back over to you. All right, Kate, thanks. Kate Rogers, Dan, Nathan, you've traded this.

19:05So you know how I trade it when it gaps down 17 percent after each of the last five quarters. That is what the average has been. If you just bought it in the one or two, you like a three day rule or whatever, it always fills in. It's what they do. It's totally bizarre. So wait until the thing goes, like if it has a nine handle on it. I remember sitting in Miami when we were there in January, it was down 20 % or 25 % and it had a nine handle. I just think you buy it in a couple days. In a couple days. A couple day rule for Dan. Yeah, I mean, whatever. Just buy a little bit. Ten bucks. I'm surprised.

19:38I mean, am I only one that surprised us down this much? I mean, I get the I get the guide was not great, but it's a pretty significant move. Now, I'll say this. Facebook's probably going to be up significantly on the back of this, I would imagine, and it should be. But I think this is sort of self-first asked questions later right now. And 18 percent on this quarter doesn't make, I don't know, it doesn't make a lot of sense to me. I'm just reading some headlines coming about Twitter and Elon Musk. The Wall Street Journal is reporting that Twitter or X now is cutting ad prices. So getting competitive here on the social front, which could mean more pain for the likes of a snap potentially and some of the others.

20:17Could mean more pain for them in the short term. Yeah. I mean, they're not really in a position to be that aggressive. I mean, you know, unlike what maybe you could dispute, but what he's doing at Tesla, he's cutting prices, too. But, you know, and are we calling it X, by the way? No, I have to. What do I do? Is it unclear whether you're going to use that name? Are you X-ing? Am I X-ing? That's a different thing altogether. Um, I don't know. I, I, I think it's interesting to be, have a strategy to be more aggressive. Clearly they are remaking all kinds of things here, but I don't think they have the, the foundation to be that aggressive.

20:52All right. We'll keep track of this and not bring you any developments. Meantime, let's get to Visa because that also reported also on the move after its results, the key consumer name beating on the top of the bottom lines. Kate Rooney joins us with that report. Kate. Hey, Melissa, that beat for Visa was all about strong consumer spending as CEO, Ryan McInerney just put it, consumer spending remained resilient and drove growth in the payments volume and processed transactions as well. Cross-border volume also continued to be a tailwind fueled by travel growth from the ongoing recovery and summer tourism.

21:23Those cross-border payments are key for Visa. It's a higher margin part of the business that had been crushed during the pandemic. Cross-border, meanwhile, was up 17 percent in the quarter. And cooling inflation, guys, was actually weighing on U.S. payments volume. That was up about 6%, which was roughly half of the growth of the international side of the payments volume. Total payments volume, meanwhile, was up 9%. Revenues grew 12 % year over year. Payments volume did slow slightly from prior quarters, and it was the smallest jump in profit Visa has seen in two years. Visa's rosy consumer comments come after pretty similar sentiment we heard from American Express on Friday.

22:01They saw record spending. MasterCard, meanwhile, reports Thursday morning. Melissa, back to you. All right, Kate, thanks, Kate Rooney. By the way, the CFO saying on the conference call just now, travel into the U.S. still hovering at 2019 levels, so pre-pandemic here, Karen. So, I mean, it's a perfectly good earnings cross-border. That's a nice margin business. It's just, you know, this is a high 20s, multiple stock, low 30s. It's a great brand. It's really a valuable company, but it's priced like a great premium baron. So it's not for me here. Our crack staff in EC will now put up a chart that shows where we were this time last year, which was an all-time high, about 248.