The Bears Get Burned, and the Ultimate Debate Over Tesla 7/18/23

21:13Those are the big public headline. The liquidity test continued to assume that government securities, even if they are deeply underwater, even if you can't sell them except for significant losses, they're treated as highly liquid in determining whether a bank's liquid or not. That was a big problem with Silicon Valley. People said, oh, they should have had these liquidity stress tests the way the big banks do. It wouldn't have caught it because it treats government securities as super safe for both capital and liquidity purposes. Well, the current stress tests don't have a time element. I mean, they allow the banks to work things out over the course of nine quarters or something like that.

21:50Yes, they do. It's not like a quick change in the environment that can trigger all these stresses. Yeah, well, no, that's true. And I think, you know, the inverted yield curve, I think, should not be underestimated as a challenge for banks. and that they assume that what they're that the immediate it re and unabverts within a couple of months which is just not you know normalizes in a couple months which is just not the case this if we have a problem it's going to be more like the snl days where banks can't find loans and investments to match to cover their deposit costs deposits costs are going up so they start doing really stupid things taking big risks to get high yielding investments or loans and then And what becomes liquidity becomes credit.

22:33And you've got a banking crisis that also is not good for the economy. So, again, I think that's what if we need to worry about something, I'm not saying it's going to happen. But if we need to prepare for something, that's really the bad scenario that people need to be alert to right now, I think. Sheila, thanks for coming by. My pleasure. Great to see you. Sheila Baer. Dan, I don't think it's a surprise where you stand on the bank. No, I mean, listen, you know, I think the results, you know, from the big money centers were pretty good. I don't think people were particularly bearish on them, despite some of the things that Sheila just mentioned about the yield curve and the like here.

23:03And they were clearly beneficiaries from a deposit standpoint, which, you know, from the regional banking crisis here. And if you look at a day like today and look at a stock like Schwab, there was a lot of skepticism for months now. You know, to see that stock rally the way it did, to look at the KRE, the regional banking index at a technical level. I mean, if we're just trading here, you started off by talking about trading the market that we have. If you think that we are going back to the all-time highs in the S &P 500, the NASDAQ has a chance of getting back to its prior highs about 10 percent away.

23:32Then you want to start finding some laggards where the stories are maybe getting incrementally better. And that regional banking, it might be because we've all been saying there's other shoes to drop. I don't know what's going to happen. I don't know what's going to happen to the yield curve. But technically, those things look OK. And people can only buy so much of the same stuff that they've been buying for the last six to nine months. And I think we don't have a clear picture on the regional banks yet because they start reporting effectively tonight with Western Alliance and through the rest of this week.

23:59So this is going to be the real test of the true trends of what's happening because we know the big banks were the beneficiaries. But at the end of the day, if this is a soft landing and we really believe in it, you really want the banks to participate because they are cyclical, economically sensitive parts of the market. And so we do think that having banks show better performance is the best indicator that we are, in fact, truly having a soft landing that can persist versus just a breather in the economy and maybe a recession risk for 24. That movement, Charles Schwab, was big. Did you see the CEO interview earlier today?

24:32I missed it. I'm sure it was fantastic. Walt Bender was saying people are back in the markets. Yeah, they are. 20 % more buys and sells on the platform. Schwab weathered the storm without question. They were in the crosshairs for about a week and a half or so, and they got through it. Great. It's a wonderful, it's a great institution without question. But, you know, that's not Sheila E. talking about the banks. That's Sheila Baird talking about the banks, just to be clear. And she's sort of amplifying some of the things we've been saying for a while. None of us hope this happens. But, again, she talked about the consumer.

25:01I mean, everybody wants to say they're in great shape. They'll always spend. Should they be spending? I mean, credit card debt's north of a trillion dollars now. So the warning signs are clearly there for the banks and for the economy. Just the market doesn't want to listen right now. All right. There's a lot more Fast Money to come. Here's what's coming up next. In reverse, Lockheed Martin unable to hold on to a morning rally after a strong earnings beat. So what has investors changing their minds? The details next. Plus, the battle over Tesla. Bulls and bears sparring over where the EV maker is headed next.

25:36Everything you need to know ahead of tomorrow's big earnings report. You're watching Fast Money, live from the NASDAQ market site in Times Square. We're back right after this.

25:55Welcome back to Fast Money. Shares of Lockheed Martin. A buzzkill in today's rally. Defense stock giving up early gains, ending the day down more than 3%. The move coming despite an earnings and revenue beat in the latest quarter. The war in Ukraine driving sales of Lockheed's F-35 combat jet and missile defense systems. Terrible price action in response to this earnings guy? Initially a very good price, but the reversal today was something we want to talk about. It traded three times normal volume. We didn't test the all-time high, which I think was north of 500, but had a pretty significant move higher.

26:24They guided higher for the year. This is a stock with that guidance that's trading below a market multiple, trading about 17 times, which is in line a little cheap to them historically where Lockheed trades. I don't know if it was just rotation out of the space into some of these high flyers, but it's something you absolutely want to watch. When people start devaluing names like this and flying into, flocking into some of these high growth names, that's a sign as well. I don't think there's anything wrong with Lockheed here. I think the stock is fine. I think the company is fine. This earnings release was fantastic.

26:55But the price action, to me, speaks about what we were talking about at the beginning of the show, this euphoria in other sectors. This just shows that there's no demand for defensives. because a name like Lockheed to beat and raise and to sell off on it just shows you that people want sensitivity to the economic cycle. They want the potential for greater upside. And Lockheed is the most counter cyclical name that you could own within a cyclical sector like the industrials. But it is getting cheap. It's trading at about a 17 percent discount to the market. To put that into context, you go back to the relative discount low, which was during sequestration.

27:30It got down to about a 30 % discount. So it could get cheaper, but the point is we're still in a very strong defense spending environment. So this would be a cheap way to add defensiveness to portfolios. Guy, did they not mention AI on the call? They did not. Well, there you go. There's your answer. LMT.AI and this is 800 bucks. But hold on. But I guarantee you that Lockheed Market, they spend millions and millions of dollars on machine learning. They're probably at the forefront. Right. And so it's just kind of funny in a way. It's embedded into their business. It's embedded. Innovation is what they do.

28:05How do drones fly? Yeah, well, exactly. Exactly. Coming up, the moment you've been waiting for, the EV wars are heating up out there. And right here on this very desk, we've got bulls. We've got bears. So is Tesla's future all green lights or is its battery about to run out? The big debate is next. Plus, it's going to cost a pretty penny to talk to Microsoft's new chatbot. The details and the huge stock reaction straight ahead. Fast Money is back right after this.

28:36Welcome back to Fast Money. A sea of green on Wall Street as major markets notch another set of highs for the year. The Dow surging past its December highs and notching its highest close since last April. It and the S &P now just 5 percent from their all-time highs. The Nasdaq also rising today. That index up more than 42 percent from October lows. Apple locking in another record high close today. But a couple stocks moving lower in the after hours. J.B. Hunt posting a top and bottom line miss for its latest quarter. Interactive brokers also dropping after an earnings miss. And Omnicom down after missing on revenues.

29:07Let's get to Tesla now. What we've all been waiting for. The EV maker set to report quarterly results after the bell tomorrow. The stock is up more than 130 percent already in 2023. But in the latest challenge for the company, Senator Elizabeth Warren is asking the SEC to look into Elon Musk's potential conflicts of interest with Tesla and Twitter. Joining us now is Fast Money friend and longtime Tesla bull, Gene Munster, managing partner of Deepwater Asset Management. Gene, I have to warn you, we've got some bears specifically on Tesla on this desk tonight. So I hope you don't feel outnumbered by bringing you into the fold here.

29:41But what are we expecting for the quarter? And how is Tesla going to justify where it's at right now stock wise? So there's the near term, which is tomorrow, and then there's the long term. And as far as the near term, I don't know if the stock is going to be up or down after they report their earnings. The key topic, obviously, for earnings is going to be auto gross margins, X credits. In the March quarter, the street was looking for 20 percent. They missed it. They hit 19 percent. The street's looking for 18 this quarter. I suspect it's going to be light, somewhere between 17 and 18 percent.

30:15I don't think that's going to be an issue for the stock, ultimately, because I think the commentary from the CFO is going to be to expect improving gross margins throughout the back half of the year. And so I just kind of put that as the starting point. I think all systems go when it comes to improving margins, despite what probably is going to be a miss for June. The outlook is positive. But I would love for the conversation, the debate to be focused on the long term. So I think that's what's more important, Melissa. And ultimately, I think the long term, if we're going to boil the question down, it's not about auto gross margins, X credits.

30:48The long term question is this. Can Tesla get to 10 or 20 percent market share of where eventually EVs will be 100 percent? And I will make the case that if their goal is for 20 percent share, if they do 10 percent share in a decade, so it's a long time, but 10 percent in a decade, that's a$1.1 trillion business. They are going to do$130 billion in revenue this year. If you're of the camp that traditional auto is going to catch up to Tesla, then I'd love to have a debate around that topic. Hey, Gene, it's Dan. And again, I think you're a great long-term thinker. I'm not, especially I've been a bad short-term thinker on this one of late.

31:28But it's interesting when you think about the short term right here. Into last quarter, the stock had sold off 16%. They missed on gross margins. The stock sold off the next day 10%. It has since rallied since bottoming out post earnings 100 percent. It's gained$450 billion in market capitalization since it was at 150 in the days after earnings. So when you think about the fact that they're likely to come in a 17 percent gross margin, who knows whatever they say on the call, whether that's true or not, whether they're bottoming out or not. There is a price war going on right now. And so to me, in the history of tech, and you and I have talked about this a lot over the last 25 years, When you have declining margins like this in a market like this where, you know, there's just aggressive pricing, the more units they sell, it's worse for the margin here.

32:16So I'm just curious, like, how do you square like the near term right now with your very positive long term vision? Because the fundamentals don't seem to be improving quarter over quarter. So I would square it up by saying I think margins are going to improve in the back half of the year. And if I'm wrong by a quarter, it's going to likely improve in 2024. And the reason is that they are ramping production at Austin. Their 4680 battery, which has been a drag on margins. We've talked about lithium prices going down. That benefits Tesla more than it benefits Ford and Giga Berlin. And so that's my base case.

32:50Agree. Facts are the facts. Margins have been down. But I think that they will rally back here, back half of this year into next year. And as far as the margins and the impact, I think this is a critical topic, which is traditional auto is getting smoked right now when it comes to EVs. Ford, they break it out. They lose 40 percent in their EV division. Polestar, half owned by Volvo, 45 percent. Tesla makes about 15 percent operating margin. My case is this. What you just described, Dan, that's going to be the world of traditional auto. I think they're going to continue to have struggles to improve those margins because it's not just about ramping production.

33:27They have to redo their factories, rework their labor contracts, redo their software stack, change their distribution network. They have to start to adopt a more nimble, profitable playbook. And so I agree, margins go down bad for the business. My bet is a year, two, five years from now, we're going to be talking about big traditional auto that is going to be a fraction of the size that they are today. Just look at what's happening with Toyota today. I think it is a tale of what's to come. Gene, Danny Moses here. The only reason I totally agree with you that the only reason to own the stock here is that you think that in the out years, all these things will come to fruition as far as market share and being able to produce these many cars.

34:05But to Dan's point, it hasn't been a supply problem. It was a demand problem, at least near term, cutting price to do that. Until I see these things which have been promised for years, FSD at the right level, whatever level that would be, or all these other things that are supposed to be on the come, I still see it as an auto company. Maybe that's naive. And I'm still trying to figure out how we got from$110 per share here to kind of$280 to$290 on what has been happening. Yes, there's AI. It's always been a part of Tesla. AI has been. So I'm trying to figure out why, where were all the screaming bulls?

34:36Because it feels like they kind of went away when stock was drifting below 150. What is the reason the stock you think has rallied here from 105, let's say, to, you know, 290? I think it's an understanding that they are recaptured, that sales dipped and they've rebounded. The June quarter, delivery is up 83 % year over year. The overall EV industry up 50 percent. I mean, they had a great June quarter, and I think that's part of the reason why you had the rebound here. But I want to see the Tesla bear bowl debate is great. I love the topic. I think ultimately, let's just quickly base it on maybe an agreement or we'll share something.

35:15Are electric cars going to be the future? And I would guess that most of the desk there would say electric cars will be the future. I'm OK if demand slips for a quarter or two or four quarters because the end point is clear in my mind. Gas cars are going away. And ultimately, I think that is that what is most optimistic is the other players that are trying to grab this massive TAM. It's as big as it gets. The other players, I think, are going to struggle with profitability to get there. So that's why I'm OK. I'm not there's not like mental gymnastics or on Optimus Prime or their solar roof or their lithium refinery that needs for me to get more up to think that the stock's going higher.

35:53This is just very simple. The world's going to electric. Tesla has a competitive advantage around profitability. If you don't get profitable, traditional auto, they got problems. And I think that's the opportunity. Gene, thanks for playing. Gene. Thank you. Deepwater Asset Management. Is it possible that it's simply a process of elimination? Gas cars will be gone. Electric cars are the future. Who's going to win? Is it going to be GM? Is it going to be Ford? Look at Ford. They're cutting price because no demand. There's not a problem with demand. I mean, there is a problem with demand. There's not a problem with supply here.

36:26There are a lot of other auto companies which are going to be producing EVs, which are coming onto the market right now. I go back to what drove the stock higher. I think about their charging stations, right? They're going to open those up to other. It's 50 cents maybe in 2032. I just think incrementally we're in a market right now, and Tesla is one of the magnificent seven, as we call it, that's getting the benefit of the doubt in all aspects. And I think it's kind of fed on itself. And I'm not short a lot here because, again, it's not trading on fundamentals, in my opinion. It's trading on the out years and the promises.

36:54Last time we had Phil LeBowen, we asked him the question about margins. You know, it's that Wells Fargo note. And so the bull case is this will be the trough quarter for margins, or at least a quarter or two away. and that's when you buy the stock. And then the bear case is margins are going to continue to deteriorate. So you go from 17.5 % to 16 % margins, then it's a whole different paradigm, I think, for the stock. So if you're bullish, this is a trough margins. If you're bearish, it gets worse from here. And listen, I'm not an expert in the stock, but I think given the run you have, it's very hard to make a continued bull case given the run that we've seen over the last few months.

37:28There's clearly a demand problem. Gene just mentioned that EVs in the first half of this year were up 50 % year over year. You know what they were up last year? 71 % year over year. So that growth rate is actually declining. And when you think about, okay, ramping Giga Berlin, well, I don't know about you guys, but Europe's in a bit of a recession. China is dealing with a deflationary environment right now. And Shanghai is a large part, I think, of the valuation off of the lows that started in January when basically the Chinese did an about face on zero COVID. And I don't think China's much better.

38:01So to me, you know, I don't I don't get it here. And I've been on the other side of this. I had it right on margins into the Q1 print. And I think if you're willing, if you're new to the story, I think there's probably a good trade right here in and around 290 for the same reason. I think they print 17 percent. And whatever they say, I think you want to discount whatever they have to say about margins dropping in the back half of the year. It's not to say that fundamentals will matter, but what is the right multiple to pay on a company that has declining margins might be growing rapidly, but is incredibly capital intensive.

38:32Because at the end of the day, that's what this business is, capital intensive. So at 70 times earnings where it is today, the valuation has never really mattered. But at some point, once it hits that rate of maturity, growth rates decline, valuation will matter. Coming up, Microsoft closing on Apple's market cap as the company's latest AI news sends shares to an all time high. The details on its new subscription service and how much it could mean for the stock. Next, more Fast Money in two.

39:02We've got a market flash on Oddity Tech, the direct-to-consumer name just making a pricing its IPO. Pippa Stevens got the details. Pippa. Hey, Melissa. Well, Oddity pricing above expectations at$35 per share, according to the Wall Street Journal citing sources. Just yesterday, the company raised its target to between$32 and$34 per share, up from initial expectations of$27 to$30. The company will start trading tomorrow under the ticker ODD. Melissa? Pippa, thank you. Pippa Stevens. Meantime, Microsoft tapping the tape. The tech giant marking a fresh all-time high today after unveiling a subscription service for generative AI tools.

39:38Enterprise users will pay$30 a month to use the AI-enhanced Microsoft 365 programs. Microsoft's market cap closing in on Apple, now standing at just under$2.7 trillion. Dan was making the point earlier, it's adding all this market cap. We don't know how much it's going to cost off of these services versus the revenue they receive. But it is recurring. It's not a one-off spend by customers. It would be a recurring subscription stream. Remember back in the day, IBM got that premium valuation because they had a recurring revenue stream. They had visibility. The market said, that's great. This is great as well.

40:10But how much you will right now, given the close, I think Microsoft is trading close to 32 and a half, 33 times next year's numbers. They report on the 25th and I've said it on the show 50 times. It's one of the five most important companies in the world. We've been bearish. We've been bullish. But at these levels, you have to question the valuation and go back and look at the last couple of quarters. They were fine, but they weren't fine by Microsoft standards. And they don't justify, again, my opinion, a 33 multiple. Too expensive, Cameron? It does price in a lot of good news and growth. And we are back to the pre-pandemic or actually the pandemic era peak.

40:45So back to that 2021 level, which, as we talked at the top of the show, was a very different environment. So you have to see the earnings materialize. You cannot see just sort of mediocre growth. It really does have to knock the lights out in order to justify the valuation. Coming up, game over for GameStop. Why one of our traders here calls this the ultimate meme stock and is still playing it from the short side. More on the meme mania right after this.

41:15Welcome back to Fast Money. One of the hottest stocks with retail traders over the past few years is also catching one of our traders' eyes, but not in a good way. GameStop is up 25 percent this year, but down more than 6 percent since Ryan Cohn was elevated to executive chairman on June 7th. Dan, even trading around it right now, you have a small short position. Put option. Put out. OK, so walk. I don't want to be taken out, obviously, like some other funds have. But it was the making of the meme king, your documentary, that really got me thinking about it again. I watched it the other day. But when I think about this name in general, through all the iterations of what we saw during COVID and all the meme stock trading, it is the quintessential meme stock.

41:50And Ryan Cohen has a lot of money. Ryan Cohen has an ego. Fine. That's all good. And he puts his money where his mouth is. He said as much. So this last quarter, when the CEO resigned and there was no conference call at all, he went and bought$10 million worth of stock at around$22.50 on average. I would say he's a bad trader because I think he could have bought it much lower,$15 ,000,$16 ,000,$17 ,000. There was also two other board members that bought 5 ,000 and 10 ,000 shares, you know, respectively. There's a history to this. Back in March of 2022, after a disastrous quarter, he bought what?

42:21$10 million worth of stock right around the same level split adjusted. So call it$24. So this company has$1.2 billion or so in cash, right? They're not making money. They're probably going to lose money here for the rest of the year. And I don't know a company with a$7 billion market cap that looks like this other than the faith in Ryan Cohen. And listen, he wants to keep buying stock. Great. But it's just not something that I would own at this point. All right. Let's get the options action here. Check in with Mike Coe. Mike, what did you see? Yeah, I mean, GameStop has actually remained one of the busier single stock options, even though it is certainly not one of the bigger companies as traded as Danny was just alluding to.

42:58We've pretty consistently seen calls outpacing puts over the course of the last 20 days. That was true again today. Calls outpacing puts by about 3.6 to 1. The busiest options were the weekly 24 strike calls. We also saw some buyers of those calls that expire at the end of next week paying 65 cents for those. But I would say that what Danny's doing buying puts is probably as good a price as we've seen. implied volatility, that's the price of options, is essentially bouncing around at four-year lows right now. Thanks, Mike. For more Options Action, tune into the full show Friday, 5.30 p.m. Eastern Time.

43:29And you can see the meme king. Oh, stop it. It's streaming on Peacock. It's also on YouTube. So catch it. Up next, Final Trades.

43:45Time for the Final Trade. Cameron Dawson. XLE, the last they'll be first. Danny Moses. Long Sprott Physical Gold Trust, P-H-Y-S. Dan. Yeah, yields, I think they go lower, long TLT. I watched you talk so many times, man. I love them. So good. Devin Energy, DVN. Flattery is everything. No, just kidding. Thanks for watching Fast Money. Mad Money with Jim Cramer starts right now.

44:31Thank you.

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