Rate Rise Impact On Markets… And The Retail Resurgence 5/29/24

0:02Live from the Nasdaq market side in the heart of New York City's Times Square. This is Fast high. Shares of Netflix just keep on streaming up more than 20 % for the month while the competition is crumbling. Can you still binge on the home of Bridgerton? We'll debate that. And later, Chew Toys, Kix and Teen Fashion, a delicious year for an old school PC maker, and a Texas-sized deal in the energy patch. I'm Melissa Lee coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Feynman, Dan Nathan, and Guy Adami. We will get to the growing fear factor of rising rates and the impact it's having on the markets in just a minute, but we To begin with the massive drop after hours in shares of Salesforce, the software giant plunging on a revenue miss and weak guidance.

0:56The earnings call just getting underway. Steve Kovac is here to take us inside those numbers. Steve. Yeah, Mel, it's just this ugly move here. And it's largely due to that whiff on the second quarter guidance. So let me give you those numbers. They're expecting$9.2 billion to$9.5 billion in revenue for this quarter. Street was looking for$9.37 billion. On the EPS front,$2.34 to$2.36. cents. Street was looking for 240. Overall, mixed results, though, missed expectations on revenue, but a healthy beat on earnings per share. So what's going on here? Well, CEO Mark Benioff has been talking a lot about AI, but not showing any direct sales there.

1:33He said in this earnings release, quote, as the world's number one AI CRM, we're incredibly well positioned to help companies realize the promise of AI over the next decade, end quote. But clearly investors were hoping for more detail than that. As you said, the call is just kicking off now, and we'll be listening if Benioff gives some more concrete detail on how they will generate sales from AI. I'll be back here with more as we get it. And you can catch Benioff speaking with their own Jim Cramer on Mad Money at 6 p.m. Eastern, Mel. All right, Steve, keep us posted. Thank you, Steve Kovach. So what's going on here?

2:08It looked like the guide lower wasn't a huge guide lower for a stock that hasn't done that well over the past three months. So what's the story here? I'm not sure because, again, if you play the game, if you had told me what the quarter would be, what's the market reaction, I would say muted at best, not down. What would we be down? 16%. Yeah. I mean, that's pretty dramatic on top of the sell-off we've seen since March. Technically, and I remember talking about this in March and April of this year, you know, you have these little double tops from November of 2021. I think that scared some people.

2:37Obviously, you know, Karen said it, you know, maybe they're looking for a little bit more on the guide, clearly. But, I mean, the guide wasn't disastrous. I actually think you're trying to figure out where you buy the stock. And quite frankly, this 220 level-ish is a 50 % retracement of the low we saw. I think it was$100 and something in late 2022 in that recent high. So you're going to get a big volume day tomorrow. 220 should be huge support, in my opinion. But in an AI-fueled market, do you want to be in a SaaS company that sells on a subscription basis who says that the value will be delivered over the next decade?

3:13not in the next 10 months, in the next decade, 10 years. Yeah, and we've been talking about enterprise software and some of these SaaS names for a while now. The underperformance has been very notable. You know, some very expensive names trading down 20 % plus on the year. And, you know, again, we've been using this term kind of AI adjacent. There's lots of ways that generative AI is going to help their business models, make them more productive, make them better or more streamlined for their customers, but not right now. We're not even hearing about a big spend by a lot of these companies either.

3:41And so to me, I just find it very curious. I look at a snowflake. I look at Adobe. I look at Workday. We just talked about that. Had a disastrous quarter a week before last, I think. And so to me, I just think that you continue to see a bifurcation among tech. And it does lead to a concentration if you want to call it picks and shovels or whatever you want. But the more concentrated it becomes in the semispace around one name, that's$3 trillion in market cap. I just think there's greater danger to the broader tech sector if something starts to disappoint. We're talking about a revenue miss that's less than 1%.

4:14We're talking about a guide that is, you know, meant to be 11 % EPS growth that is maybe 9%. So down 18 % after being down 15 % already from its recent highs, that doesn't make a lot of sense. The multiple compression in software has been notable, especially when it has at least through the first three quarters of the semis rise been, you know, just one step behind. And certainly there is a software component to this. And, again, it's what we even talk about at some point is going to be great for Apple. But when you think about CRM, you think also that the data cloud is something that's on the come.

4:44You don't know where they're going to be, but that is something that they have been talking about. And that was just referenced. So certainly a trailblazer in cloud computing environment. And that's what's been the story. Also, just integrating, integrating, integrating new businesses that they've taken on. I don't think it's terribly cheap, even though it's been sort of cheap relative to itself over the years. This move is shocking to me. As Guy said, I'm, you know, the guide was that. The quarter was fine. It takes it from what I had always imagined. No, this is too rich, too rich. It's not really anymore, right?

5:16It's just as you're saying. I mean, this multiple isn't crazy. And yet it's going to come down tomorrow. More, you know, it's going to be lower tomorrow. I think we'll see that thing we normally see, which is analysts getting a little bit nervous and then cutting. And so then we'll maybe have some lowered price targets. And that sort of leads to that downward spiral. But so far, this doesn't look as terrible as the reaction. Very curious, obviously, to hear the call. So much context in the call that we might not know yet. 20 times. You know, right now, given the guide, even take the lower end of the guide, you know, with this price, talking about maybe 20 times next year's numbers, which it's not ridiculous given I still think the earnings growth they have.

5:56I mean, I'm not some defender of Salesforce. And, again, technically with those double tops, it did not look great. But at a certain point, you're looking for places to buy and not sell. And I think that's where you're up against tomorrow. Does this underscore the notion that in technology, there is also bifurcation where you want to be has to be the picks and shovels, the places where there is an immediate benefit to that AI spend that all the hyperscalers are doing, that JP Morgan is doing, et cetera? Yes, I think so. Although one of the questions sort of looming out there is, all right, that's where everyone wants to be.

6:25But remind again, what is the return? and NVIDIA tried to address that and talking about, you know,$5 for every$1 that you spend. But that's not we don't know that for sure yet. But I think in the short term, yes, I think that phenomenon seems to be gaining steam. And I but I wonder, as you are pointing out, Melissa, there are winners and losers. And the losers seem to be the ones that are not getting the marginal dollar of enterprise spend. So if you think about what's going on with client spend, and this is the message I think that they have for that next quarter, is that the client spend on cloud and some of the partner surveys, and if you go through broker research, you can kind of see they've been trying to gauge this going into the numbers.

7:02I don't think anybody had this kind of weakness out there. But again, it does tell you that the margin of the dollar is being allocated elsewhere. And we've heard how much is being allocated to AI. So it's not a huge surprise. All right. CRM shares down 16.5 % in the after hours. Conference call underway right now. We'll keep you posted on any developments. Now let's get to that surge in rates that we've been seeing over the last seven days and the blinding effect that NVIDIA has had over most investors. While the tech giant has surged nearly 25 percent over that same period, yields have quietly moved higher, too.

7:33The two-year is now just a couple of basis points from 5 percent. The 10-year is now back above 4.6. These moves putting a hurt on a number of sectors outside of technology. Utilities dropping over 4 percent. Transport's down close to 5 percent. The KBE, the big bank ETF, falling over 6 percent. Tim, this is something that you flagged and you were concerned about. Well, to the extent that semis have led, and that's been enough of a path to follow to take the broader market higher three or four days or six or seven or eight or nine days, which is depending on which subsector you're looking at. Again, transports down 7 percent in eight sessions, industrials down three and a half and four sessions, energy down five in five sessions.

8:10I mean, there's different places you can look at it. But as said, the bright light from NVIDIA and semiconductors has masked what has been weakness in the broader market. And the broader market weakness began when you started to see, again, that uptick in rates from 430, 431-ish on the 10-year, now up to 460. Notable that the move in Japan, I know people don't follow JGB yields, but I think you should because the higher move in the 10-year in Japan is something that I think has pressure upward on U.S. rates. I would also just say that that uptrend in the long end is something that's well-established.

8:43And it's certainly established year to date. So there's been a couple tests of it coming back in. But right now we're in an uptrend. And even though there's volatility within that trend, Guy talks about it, Dan talks about the Treasury markets that are more volatile than they should be. But the trend is higher. Yeah. Oh, I thought you were going to mean it. I thought that you had nodded, indicating that you wanted to say something. Yeah, it's interesting. I mean, like you guys keep kind of coming back to Japan and what's going on there. And sooner or later, there might be a knock on effect as it relates to rates.

9:11Do they start selling, you know, U.S. Treasuries and the like? I mean, just from a technical standpoint, I think if you look at that uptrend that's been in place from that 4 to 5 level or something like that, it looks like it could get up to 5 percent. I just go back to if we get to 5 percent, the last time we were at 5 percent, the S &P was at 4 ,200. You know, and I think it's a very different place if we get there in the next couple of months than if when we were back in September. And again, I think some of the reasons why it was at 5 percent in September were kind of technical. Right now, it feels like a lot of things are lining up against treasuries, if you will, and that means higher rates right now.

9:44Jamie Dimon today at a conference said something to the effect of, you all out there act as if you've never seen, and you probably have never seen, 5 or 6 percent on the 10-year yield. But it can happen. It has happened before. And that's the average rate over the last, I don't know, 40, 50 years. Exactly, but our memories, collectively, maybe not here on this desk, tend to be short. Well, and it's, you know, you get used to zero interest rates for 15 or so years. The market gets very complacent. So he's 100 percent right. And he's doing a lot of talking these days. Good for him because I like what he's saying.

10:15And, you know, Tim talks about it. Not only are 10-year yields in Japan now north of 105. I think they closed today 107.5, 108. Their currency is weakening as well, which shouldn't be, makes sense to me, shouldn't be happening. So now you have dollar yen back above 157.5. Bank of Japan has intervened twice trying to strengthen their currency. They got it down to 152 and a half. It's right back headed to 160. So you tell me. I mean, it looks like a currency crisis to me. Nobody wants to say it. And when you're talking about I still think the third largest economy in the world and the largest holder of our bonds, that's somewhat problematic.

10:49And for people that feel that the rates, well, I am one of those people that feel that sometimes the rates markets and the credit markets really are not only where you need to be focused, but that the equity markets are not even paying attention. And when you get data like we've just gotten from Goldman's prime brokers unit that that the essentially we've never been a greater position towards the mag seven stocks, about 21 percent of total exposure. This is record exposure, folks. So not. And again, it's one data point from one prime broker, certainly one of the bigger ones. It just tells you that it's been easy to hide out in these names.

11:20Now, they've been defensive during difficult times in the market for three years. So they may continue to be. But but it could also be masking where there really is a broader dynamic that I think people need to pay attention to. We know they're defensive in a higher rate environment. Again, these remember, these are companies that have more cash than God. These are companies that don't necessarily have interest rate sensitivity across their business lines and they're in the middle of secular trends. So maybe you just put your eyes or your ears closed or whatever you do. I don't know. But Karen doesn't.

11:49I mean, I looked at her, but she's not. She's one of those people that does it. But anyway, that's something that also combines with this news on rates that some parts of the market don't care. But, I mean, when does the rubber hit the road, so to speak? When do the two actually meet? Because if you're an NVIDIA, what we've seen data point after data point starting from NVIDIA's earnings is that the spend is going to AI. The spend is going to the picks and shovels. That part of the market keeps going in the hyperscalers. That part of the market keeps on going higher. And so who cares about higher rates at this point?

12:16Because they're really not 4.6 percent really isn't that high. Well, I think there's other parts of the market, right? Actually, most of the market is not them. They certainly have a huge outweighing. But to me, I think about it. What's the effect on banks and different banks? Obviously, different effects. I think for JP Morgan, to the extent their book is really short duration, which it is good for them. But to the extent that deposits look for higher, you know, higher places to go, that's not so great for an interest margin. But where it really does start to hurt is refinancing. And, you know, we talked a lot about commercial real estate in the last few weeks.

12:51I don't think of these money center banks as having huge commercial real estate. But that is why, obviously, why the regional banks aren't doing as well. Yeah, I'll just say this about like NVIDIA, for instance. So you're talking about picks and shovels. I mean, the out year, next year, fiscal 2026, did not go up that much. We're seeing like, you know, consensus at 30 % EPS growth, 31 % sales growth. and you think about where the margin gain has been this year, this is where they have the sort of pricing power. And I think it, like I extrapolated out a little bit, we've talked about this a lot.

13:20When you think about Microsoft, you think about Google, and you think about Amazon, I mean, there's massive customer concentration right now, and they are competing with each other for all intents and purposes. This means like with NVIDIA. They're trying to build their own high-end GPUs. So at some point, the rubber's going to hit the road a little bit, and you're going to see a decel. And then the other thing is, think back to late 2021, okay? When some of our most favorite stocks were on the precipice of selling off 75 percent, Nvidia, Tesla, Netflix, Meta, all down 75 percent from their highs in 21 to their lows in 22.

13:54Stocks like Salesforce got cut in half. I mean, I could go on and on. Amazon got cut in half. So the idea that it's just so concentrated right now and it couldn't happen again seems silly because what are we just talking about? We're talking about rates. Jamie Dimon just said, what do you think it's going to be like if we have 5 % or 6 % rates? Well, I remember the last time that the Fed signaled that they were going to raise rates, and they weren't even signaling that they were going to get to 5%. How many hikes were they talking about? We were thinking 3 % or something like that. That's what Fed funds.

14:21So to me, I just think we have reached a really silly place here as far as, you know, just enthusiasm about what is obviously a huge, huge secular shift. But guys mentioned this. There's cyclicality that will come into play here. And when things start to go lower, you know, there is no price that makes it look like a great level to buy, not on valuation or anything like that. So that's my little warning. But, you know, whatever. So if you put the pieces together, I mean, if we put the pieces together and you can pick any pieces you want to make any story you want. But let's put the pieces here that we're sort of laying out here on the desk, at least tonight.

14:52And that is a potential slowdown in the A.I. spend in the out years. And then you couple that with where rates are now. And if they are here or higher, that really puts a dent into the companies and sectors that need to refinance, whether it be commercial real estate or even corporate debt holders. You were just talking about Walgreens today and how they are leveraged up the wazoo. Yeah. And that is it's really an issue for them right now, as we can see in the stock. Yeah. Net leverage of, I think, three point nine times. Although Karen was saying she thinks it's higher, you know, and it's a company that if anything, you know, the talk is that they're thinking about selling off boots.

15:24That's not necessarily out there. It's just what the analyst community is talking about and what they could do. But higher for longer, for sure. And at some point, this does create problems for companies that have debt burdens. And I just drop it back into the snapshot of the market. This is also a market that eight days ago was at all time highs. And so we have to think about this. And this is what we do on the show. We talk about the day's action, but we try to drop it into the perspective of short, medium and long term. I think the long term probably, you know, nothing I'm terribly worried about in terms of doom and gloom.

15:56I do think you have a dynamic here where higher rates still haven't exerted their toll. They haven't exerted their toll. We know that there's been a sequencing for the economy based upon a post-COVID environment, a post-Fed hike environment. Let's just move slower. We've got a big payroll number next Friday. Boy, that might, you know, imagine that could be bad news being bad news. And if you started to see jobs really fall out, it might be the first blush for the market to get excited that rates come down temporarily. But, you know, a lot of people feel overstaying the welcome by the Fed means actually economic pain.

16:24I don't I want to push back on Dan, if for no other reason than just to push back on Dan. But can we split them up? In the 2022 time, we still, you know, rates were zero. Right. That's a very different place from where we are now, where rates have either plateaued. Maybe they move up a little bit higher. Maybe they move down. Yeah, but isn't it, I'm sorry, isn't it the expectation where rates are going to go? Not exactly where they are right now. Tim just mentioned the long and variable lags once you get to that level. And again, do you understand what I mean? It's like we didn't know how high they were going to go.

16:57Right now, we're in the same place, but we haven't really felt the negative effects of high rates over the last year and a half or so. I don't think that's true, actually. Really? We haven't seen a slow. Because in the real estate market, of course they've felt. Right? Understood. We're in this housing situation that is completely caused by rates. It does seem pretty contained, doesn't it? I mean, like, you know, we had a tidy little regional banking crisis and we just moved on. And it made all of the majors that much stronger. You know what I mean? Like, so I don't know. I mean, like, listen, I'm not calling for like a doom and gloom or anything like that.

17:26I'm just saying, think back to late 2021 and think back to a very orderly sell off in the stock market in 2022 that saw some of the most loved names lose three quarter percent of their value. OK, like, OK, they were I mean, some of those those that's dimming. They were in stratosphere. I understand. But the stock market didn't even crash is what I'm saying. And we've lived through crashes where we've seen the stock market get cut in half. And then we've seen our most loved names lose 75 percent. So what I'm saying is the next time around, if there's a reason for it. I'm right. I'm saying, you know, the economy is still in decent shape right now.

18:01People are still employed. No, I'm just going to say, you know, we don't necessarily need to call for 70 percent decline from close to record highs at this point. I mean, people out there do not want to see a 10 percent decline or 15 percent decline. I know people are buying Nvidia right here. Right. OK, so my question to this desk is, do you think Nvidia is going to be a four trillion dollar market cap before it's a two trillion dollar market cap? If you think it's going to be a four before two, I'll take that bet right now. Does it? So much closer. No, it's at three right now. So at 5.18 p.m.

18:32in 33 seconds. It's about to overtake Apple and market that one in the books. So do you understand what I'm saying? Four trillion, two trillion. And let me tell you something. A lot of our viewers, and I know this because we talk to retail investors, they never sell. They never sell. But that's a support for, first of all, a 10 % move in the market is not going to have retail selling. And we've seen that. That's a correction that passive investing and also ultimately, and I think you'd be dumb on some level to be trading in and out of the market. They will acknowledge, most people acknowledge, their advisors will acknowledge, we're not smart enough to time the in and the out.

19:02And if we believe in the long-term story, you know, we're going to continue to stay in this market. What we all will acknowledge, and I'll speak to your point, though, Dan, is even in 22, when some of these stocks, not all of them, you're right, though, the names you mentioned dead on, there's no question that the market levels weren't that bad. But there was destruction. I mean, think about airlines. Think about banks. Think about there were so many other parts of the economy. So when GM goes up 75 percent from October of 22 to where it's been just a week ago, as someone that's held it, I'm not doing cartwheels because, in fact, the stock's largely done nothing now.

19:33It's just gotten back to a level that it needed to go. And I think that's probably where you could make an argument for a lot of the market outside of the sanctity of the M7. At times, this Fed crisis has been something people have moved on. Quickly, understanding that the economy is much different, but the transports did not verify any of the move in the S &P without question. Those rolling over and the Russell still through the lens of the IWM has not been able to get through that 208 level. All right. Coming up, investors binging on Netflix. Shares continuing to climb this month. So what is behind the surge?

20:05We'll discuss that next. Plus, UNH dragging on the Dow as the insurance company weighs in on its Medicaid business. Why that trade could be a liability when Fast Money returns.

20:20Welcome back to Fast Money. Shares of Netflix sitting near three-year highs. The stock now of 20 % just this month. The winner of the moment in streaming wars is handily outperforming the competition so far this year. With new hits like the Ashley Madison documentary, which is among Tim's favorites. Coming sports events and a reality singing competition is a game over for everyone else. Julia Borsten, what do you think is behind this surge here? Well, look, we did have two very bullish analyst notes just in the past two days. Mark Mahaney reiterating his outperform on the stock and also raising his estimates and boosting his price target in Netflix shares to 700 in the wake of some detailed research that they've done.

21:00There are a couple of factors that are behind his bullishness as well as the bullishness of a new Morgan Stanley note reiterating it out. It's outperform. One thing that has been key for the stock's gains over the past six months or so is the fact that the crackdown on password sharing is really working. People are willing to pay for more dependents who are outside their home to let them watch Netflix. And it doesn't seem to really be driving the kind of churn that some people were concerned about. And then a couple other key things here is that the ad business, though new, seems to be working.