Microsoft Sinks After Reporting… Plus Fed Decision On Deck 7/30/24

0:00Live from the Nasdaq market site in the heart of New York City's Times Square. This is Fast In focus, we are counting down to the central bank's next decision coming tomorrow and what it could mean for rates and the markets. And later, JetBlue shares take off after posting a surprise profit. Merck, with its worst day in nearly three years, and a Staples stalwart loses three months of gains in one day. The stories behind all those moves coming up. I'm Melissa Lee coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Feinerman, Dan Nathan, and Guy Adami. We start off with that huge slate of earnings, some big names on the move in the after-hours trade.

0:49We've got team coverage on all these names. Kate Rogers standing by in Starbucks. Kate Rooney digging into AMD's quarter. Julia Borson's watching Pinterest. But we start off with Steve Kovach, who's got all the details on Microsoft's results. Steve. Yeah, Mel. So Microsoft squeaked by with beats on the top and bottom lines for the quarter. But disappointing growth in cloud and a big jump in CapEx from last March quarter is weighing shares down. First, the results here. EPS was a beat at two dollars and ninety five cents. Street was looking for$2.93. And revenue, a very slight beat here,$64.7 billion.

1:23Street was looking for$64.39 billion. And on Azure cloud growth, this was a little bit of a deceleration here. And the first miss on expectations since October of 2022 put 29 % versus 30.2 % expected. Meantime, Azure AI Services, a percentage of that revenue, it was 8%. That is up 7 % last quarter and 6 % the quarter before that. So at least that part is growing. That final stat is really important one to watch with AI services making up a larger and larger chunk of Azure's growth. Microsoft's opaque on the details, though, but it appears to be working pretty well for them. As for capital expenditures, though, Microsoft spent$19 billion in the quarter, presumably most of that going towards building out AI infrastructure.

2:10And that's up a whopping 77 % from the year ago quarter. So what to listen for on the call, guys, at 530. Microsoft's explanation for that massive CapEx. We, of course, saw Alphabet shares punished for the lack of clarity around its massive AI CapEx, but not spending as much as Microsoft, Mel. Do you think we'll hear about revenue contribution from Copilot yet, Steve? I truly doubt it, Mel. They've been so opaque and not really talking about sales figures or anything related to Copilot. Seems like all the AI action is really happening in Azure. I've been speaking to IT professionals for the last several months about whether or not they're buying Copilot for their employees.

2:51And the thing I hear again and again and again about Copilot is we're going to test it with a few hundred employees. We use it and realize it's just not worth the cost. So we're going to put it aside for now. So it seems like that's the story around Copilot, at least for now, until we get some more data or real sales data from Microsoft. All right, Steve, thanks. Keep us posted. Again, conference call, half an hour's time. It gets underway. What was wrong with the quarter, Guy? Nothing. I mean, what's wrong with the quarter is the valuation is excessive. And now people are sort of focused on valuation.

3:19And we talked about it with Gene last night. Azure needed to come in basically in line with expectations. It came about a percent light. Doesn't sound like a big deal. But when you start to see deceleration, the market gets concerned. I'll say this as well. Margin's OK. But again, year over year, flat margin. So a stock that traded up to 470, seemingly a month and a half or two months ago, now down some 15%. The question is, it's not where you sell it, it's where you buy it. And if you look at the April low, I think it was April 30th, the stock basically traded down to, I want to say, 390-ish.

3:48I mean, that's a logical level to trade down and hold. And then it starts to make sense. And then at least I think you can sort of wrap your head around or make a decent argument on valuation. We did get an increase in terms of the percentage points as a contribution to Azure from AI, and that was positive from last quarter. Yeah, 6 % two quarters ago, 7 % last quarter, 8 % this quarter. They're at 44 % of their total revenues coming from Intelligent Cloud. So that was up 19 % year over year. If you think about the quarter that they just reported as far as revenues, they're up like 15%, 16 % year over year.

4:18So, you know, it's good that Intelligent Cloud is making up a greater percentage of the overall revenue, right? And that's where your margin is going to come from. But if you're losing some share in that and you're seeing some deceleration, some of the things that we've been talking about as far as multiples are concerned is something that in this sort of environment you want to pay attention to. And also, if we're starting to see, as Steve just mentioned, and we've been talking about this a little bit, there's not too many great examples of Fortune 100 companies who are saying Copilot is a game changer right now for us.

4:47We're deploying it across our suites and stuff like that. So to me, this is probably a back half story. You asked Steve, are we going to get some numbers around Copilot? I think the numbers in the quarter are going to start to show you that it's not a big uptake right now. Yeah, it was a perfectly fine quarter. In fact, the numbers, according to a lot of the street, actually beat the numbers. It's interesting also after the March print, we got some sense from management that Azure was somewhat capacity constrained. So a little bit of weakness there, not a total surprise. As Dan's referencing also, and as you did, Melissa, the intertwined nature of the AI workload and what's going on in cloud usage.

5:20And if you think that there's more competition in cloud, and we know there is, and we know at some point this becomes a dogfight that I think someone's going to have to start cutting margins by cutting prices. That's not happening yet. It's still growth period rewarded for the 13 billion in CapEx, I think. But again, this is a case where have we overbuilt? The market wants to see some results. The build out is clearly ahead of the results. But I think based upon the secular trend here, this is what they're supposed to be doing. So I agree with everything I've been saying. It's not that the quarter was particularly bad in a vacuum.

5:54I think it would have been fine. We're not in a vacuum. This drawdown from 400 and I don't know, 67 or wherever it was. This is this is pretty big. Well, so we'll see the multiple probably be sub 30. Right. I don't know, Dan, if they're necessarily losing share. I do think the pie is growing. But I mean, it's funny that even with the even with how far it's come in from the 467, this one percent miss was just not good enough. So the bar is very, very high. We'll see, you know, what does this mean for Meta? What does this mean for Amazon? AWS will get that on Thursday. It is interesting, though, that Alphabet, albeit a much smaller cloud business, was accelerating faster.

6:39Right. So far, what it means, at least in the after hours action, is decline to 3 percent for Amazon and for Meta. Guy, is that fair? Do we impute what was going on with Microsoft in terms of the lack of amazing growth in AI to the others? Well, fair is an interesting word. I mean, when things get dragged up on the back of good quarters over the last couple of years, I mean, whether it's fair or not doesn't matter. That's what's happened. So it works the other way as well. So, yeah, I think in the context of what we're talking about, it actually makes sense because for the last couple of weeks ish, it feels as though the markets like sell first, ask questions later, which, again, sort of makes sense.

7:13You know, we'll see how this plays out. But again, in terms of Microsoft, it's not I think the time to sell it was probably again in retrospect a couple of weeks ago. So now you're saying, OK, where's the right entry point? And as I mentioned earlier, that April low sort of sticks out to me. Just one more thing on Meta with pins, which we'll get to later, that is weighing heavily on Meta as well. Oh, that's true. That's a good point there. Yeah, we're going to have our markets conversation. But ultimately, this is a markets conversation because we continue to see the broadening of the market. But when you get back to where every mega cap tech stock, certainly Microsoft, Amazon, Google and Meta kind of was already there.

7:47They were teetering at the 100 day before this. And then you had today's activity and you have a dynamic here where all those people that said, I'm looking for that place to buy this dip. It takes it takes a more strong stomach, I should say, even though these are the most defensive companies in the world on some level and the valuations aren't terrible. Let's say we don't have great traction when it comes to A.I. Revenue, A.I. Contribution for Microsoft until the back half of the year or maybe even the first half of next year. How do you does that matter for NVIDIA? Sure. They're still going to spend.

8:21Yeah, NVIDIA is trading up right now, you know, because basically that CapEx number is causing some investors like, OK, we're OK, especially after how much the stock has come off a little bit. I'll just say this about the spend and recognizing, you know, some return on this investment. I mean, we're also digesting an economy that seems to be slowing right now. Right. And so if you think about just enterprise spending, it usually comes down in a slower environment. And there's pretty easy things to pull back on a little bit, especially if you spent tens of billions of dollars. You know what I mean?

8:50Like beefing up your sort of A.I. when you don't really see something in the near term. That's how you could really kind of, you know, rail or, you know, bring things in a little bit. So, again, you know, none of us can tell you whether the economy is slowing. But right now it seems to be signs of it. All right. Let's bring in Gene Munster, Deepwater. He is the managing partner there. And of course, he's a fast money friend. Gene, what's your take here? MR. Melissa, I think they missed on the pressure point, of course, but I think the stock reaction is an overreaction. And ultimately, I think that this speaks to how sensitive investors are just for any little blink.

9:26I think, Karen, you were talking about this, just any fracturing. There's 12 metrics, kind of key metrics that come out in this quarter. They beat on 11 of the 12, and they missed on the Intelligent Club by 1 percent. And I think that this reaction, it is, again, deja vu relative to what we saw with Google. That's what it's all about, though, Gene. That's the only thing the market, the only thing they missed on is the only thing the market cares about. All that makes sense. But at the end of the day, I think this is the reaction tonight. We're going to get guidance in a little bit. That's going to have a huge impact.

9:59The street's looking for a slight deceleration from, call it, 15.5 % to 14.5 % next year. And so that's going to be an important piece to this. But at the end of the day, I think the piece that really jumps out to me is this CapEx number. I mean, this is a really good sign for the AI trade. And these big companies, they cannot afford to take their foot off the accelerator when it comes to this investment. And ultimately, I think Dan mentioned that NVIDIA is now up in the after hours. That makes sense. I see this as most encouraging. So understand the near-term reaction. People focused on that Azure number.

10:35But I think the AI trade is still in lockstep and in a good position. And Gene, so it's Tim. Thanks for joining. Certainly, Microsoft has somewhat unique embedded AI solutions. But what I think we're talking about here is a margin hit, at least in the short run. Can you talk about that? Because, again, we can say it's the cost of doing business. But at some point, it really is something that could indicate that there's competition and there's dynamics around the valuation. So near term, the stock's going to move long term in margins, too. I would say this is that I'm confident that as they continue to increase their spend in the near term, that margins are going to be under pressure.

11:15I think that that is that is a safe bet. And you're seeing some of that in the stock. I am also confident that this investment will pay off. And ultimately, I think that this is going to lead to higher, if not highest margins that Microsoft has seen. And so I don't know what that period is, if it's a one-year investment period, if it's a year and a half. I think by 2026, we're going to start to really reap the benefits. Last night, we talked about the timing of this contribution from Co-Pilot. It's going to take time. And ultimately, I think that this is the right, even if it's at the cost of near-term margins, it's absolutely the right thing.

11:50If they don't make this investment, they are going to be, they won't be Microsoft. It won't be a$3 trillion company. It will be$1 trillion. And they got to do it. And I think it's going to be good for margins long term. Gene, it's Karen. Thanks for being on today. Do you think we will get more granularity on the call about Copilot or, you know, one of the giant questions out there is monetization of the AI spend? It's definitely going to come up. And I think that they will probably give a metric. I think this is something they'll probably give some indication on it and probably conclude with that we're starting to build and that next year is probably the year where they're going to start to see it.

12:25So that's going to be another factor here, along with guidance as far as how this contribution is. But so I do expect them to say something on that topic. Gene, great to get your take. We'll check in with you after this call starts in about 16 minutes time. Sounds good. Guy, if they don't give the copilot number, which is widely expected at this point, they give OK. I mean, like, I don't know. What do you think happens to the stock? Well, I think I think it could get down that level that we talked about. And I think that's, you know, Tim made a great point, as he typically does. everybody says, I have a level that I want to buy a stock until that stock gets there.

12:57And it's never for reasons that you thought. And you're scared blankless, as you know. But if you try to just take a motion out of it and look at the levels, it actually starts to make sense. And for the first time in a long time, to Karen's point, at least you can make a case on valuation for sure. And if you're in Gene's camp, I mean, this is an entry point for a longer term position. So again, it's not where you sell Microsoft here. It's where you step in and buy it. And I think it's a 390. All right, we've got a news alert we want to get to on Biogen and Esai's Alzheimer's drug, Likambi. Pippa Stevens has got the details.

13:27Pippa. Hey, Melissa. Well, according to new data just released, the Alzheimer's drug, Likambi, did slow disease progression in patients over three years, meaning that there is a need for them to stay on the treatment long term. That's according to new data released today by Esai, which shares Likambi with Biogen. The study also found that the health of Alzheimer's patients who took the therapy did worsen after they stopped treatment and that the rates of adverse side effects associated with the drug, including brain bleeding and swelling, dropped after six months of treatment. You see there the stock up about one percent here on that news.

14:04Melissa. All right. Thank you very much, Pippa Stevens. And, of course, the other competitor in the market right now, Eli Lilly, with its recently approved drug here, Tim. a lot of developments in this area, which is very promising. No, it's, look, it's fantastic for mankind. And it certainly is a case where we think there's progress. But Biogen and Lilly, really, it has been kind of a two-horse race. And at times we were, you know, it was a year ago we were pushing back on the Biogen news. And, in fact, there's been some follow-through that's very good. Lilly, you know, as we get into that trade, but we talk about it all the time, the correlation that Lilly does seem to have to some of these other high-flying multiple, or I should say mega-cap tech stocks.

14:41And that's something that clearly continued again today. So we'll see where it trades tomorrow, along with these other names that are not in its share class. Yeah, let's get back to tech earnings here. Want to check in on shares of AMD up by about 7 percent. This after the chipmaker being on the top and the bottom lines, data center revenue is more than doubled from a year ago. Kate Rooney joins us now to break it down. Hey, Kate. Hey, Melissa. So AMD's quarter was driven by that record revenue for data centers and AI. CEO Lisa Su on the call just minutes ago saying that she expects AMD's GPU revenue to exceed $4.5 billion this year.

15:11That's up from the$4 billion they guided to in April. You saw the stock move slightly higher on that news. Data center revenue for the quarter, though, was up 115 % from a year ago. Lisa Su did say our AI business, as she put it, it's continued accelerating. We are well positioned to deliver strong revenue growth in the second half of the year, led by demand for those processors. She also says the rapid advances in generative AR are driving that demand for more compute in every market. She mentioned Microsoft. You guys were talking about the CapEx creating significant growth opportunities. Overall, revenue for the quarter beat expectations, 5.84 billion.

15:45And then gross margins were pretty much in line at 53 percent. Same with the outlook there. The investor community analysts out there are really waiting for the full year revenue forecast for the AI chip in particular, the MI300. The number to beat has been 4 billion. That's the guidance they issued in the first quarter. So that AI chip is key. Wall Street really wants to see higher revenue forecast as proof of some of that AI demand that they've been talking about. Speaking of Lisa Su, do not miss a big interview on Squawk on the Street tomorrow. She is going to be joining that team in the morning.

16:13Tune in, guys. Kate, thank you. Kate Rooney. We were just talking about the AMD on the call as being sort of the laggard in the AI trade, really. Do it, done nothing, languishing since February. Right. And so you're waiting for that chip. And Lisa Su just said$4.5 billion. That's about 18 % of their total for the year. Again, this is expected to grow revenues somewhere about 30-some percent next year. Earnings are expected to grow 56%. It's trading at about 25 times. So if you think that these guys are that far behind the eight ball, but they're about to catch up, I mean, Lisa Su seems pretty confident about that.

16:46I mean, this seems like a better do. The sentiment is really bad right now relative to NVIDIA. So again, competition is going to come sooner or later. It should be from these guys. It's been awful. And in fact, this stock going into this print was down more than 40 percent from its highs back in March. And so as NVIDIA was starting to separate and start to show a new product line, we were suddenly waiting for the MI300. And we're really we're waiting for that data set. But that stock was down 10 percent year to date going into this print in a year when we know what we've been talking about 24 seven.

17:15So do you think it's a very interesting story? It's acknowledged as a as a distant second. But this is a stock for people that have been looking for underperformers. There's no question AMD is on that list. But the valuation is almost the same. It's virtually the same. So in that context, is this the underperformer that you bet on because it's been underperforming? Or is there a notion that it is too expensive considering what it's doing? Who has a greater growth trajectory, right? I mean, that's so it's the same valuation, but one's better than the other. You want to go with the one that has more growth opportunities.

17:43But however, I mean, given the magnitude of the sell off, I mean, this quarter was fine. The guide was fine. Is it this good? Probably not. But it's been so oversold, to Tim's earlier point, that you're getting this relief rally. I mean, I think you've got to sort of wait and see on this one still. I don't think they're out of the woods yet. I think both NVIDIA and AMD are about 30 % off their highs, give or take. So, you know, I really wonder, does it matter that AMD is$220-some-odd billion,$230 billion? Is that more attractive than something 10 times the size? I know it sounds crazy, but I think that's possible.

18:20But, you know, also the momentum may be shifting here. So that's good. Also part of the reason why NVIDIA is up, not just the spend for Microsoft, but the MD numbers. Coming up, we are keeping an eye on Microsoft as we await that conference call starting in just a few minutes. We'll bring you the headlines as they come. But first, Pinterest plunging after its results, the details from the quarter and results from Starbucks next. And a number of names catching our eyes from today's session. the reasons behind the moves and why these stocks should be on your radar ahead. Don't go anywhere. Fast Money is back in two.

18:51This is Fast Money with Melissa Lee right here on CNBC.

19:07Welcome back to Fast Money. We've got an earnings alert on Pinterest. shares are plummeting after hours despite a top and bottom line beat, though off their worst levels of the afternoon. The problem, weak guidance. Julia Borson's got the details. Hey, Julia. Hey, Melissa. That's right. Pinterest shares plummeting now down about 11.5 % on that disappointing third quarter guidance. The stock did beat expectations in the top and bottom lines, and it added 2 million more monthly active users than expected. But its third quarter guidance of between$885 and$900 million. That's in a range lower than the analyst consensus of$907 million.

19:44Pinterest CEO Bill Reddy is saying on the earnings call that they see momentum around Pinterest and that they're using AI to drive increased use for both users and results for advertisers. On the call just now, the company's CFO explaining the weaker than expected third quarter outlook, citing tougher comps, foreign exchange headwinds, and the fact that their guidance does not assume material improvement in the trends for the food and beverage category. But they did note that the ad market is relatively stable versus last quarter. They also said they're seeing real strength in the retail vertical.

20:21Meta Snap and Reddit are also trading down along with Pinterest. Meta reports tomorrow. Snap on Thursday. And then we hear from Reddit next week. Melissa? All right, Julia, thank you. Julia Boorstin, tougher comps, but you're giving a lower range anyway. It shouldn't make a difference what the comps are if the range itself is lower than even the analysts' expectations. But putting that aside, it is a disappointing third quarter outlook. The outlook. The quarter, I think, was OK. ARPU, Tim, quickly. Average revenue per user. I appreciate that. $1.64 in line. So maybe that was disappointing. Monthly average users, I think, are pretty good.

20:58Valuation is OK. The stock is traded down from about 45 bucks. And we talked about April lows. We'll throw up a chart because this 33 level is right back down to the April low. So this is one I actually think you close your eyes and buy, Milms. So meta, the read off of it, obviously not good. At best, it's neutral and likely it's something worse than neutral. But the valuation of meta here is actually, to me, far more attractive than Pinterest or Reddit or any of the other ones. All right. Let's get to Starbucks now. shares at this point are up 3 % after the company reported its third quarter results.

21:31The coffee giant met profit estimates missed on revenue. Sales are broad falling more than expected. Kate Rogers is on the conference call, has the very latest. Hey, Kate. Hey, Melissa. As you said here, mixed Q3 for Starbucks, EPS in line, revenues a miss. Take you through the comps here. Global comps down 3%, North American down 2%, both of those roughly in line. International comps down 7 percent. That's more than the 5.1 expected. And key market China comps down 14 percent. Transactions also fell in all operating segments. And the company's release said that financial outlook will be discussed during the conference call.

22:03It has not yet come up. CEO Laksman Narasimhan, though, did say we're not satisfied with the results. Our actions are making an impact and leading business and operational indicators are trending in the right direction ahead of our financial results. And our runway for improvement is long. Some of its new equipment and training systems, he noted in tandem, have shown the ability to drive a 10 to 20 second wait time reduction. That's key. And a resulting comp opportunity range of one to one and a half percent, he said, shares up around two percent after hours, as you said, with the call still ongoing.