Two Red Flags From Big Tech, and the Danger Lurking in Bank Balance Sheets 4/10/23

0:01Right now on Fast Hardware Hangover PC sales plunge as the pandemic spending spree grinds to a halt I mean, worries about a global slowdown pick up steam. The drop for Apple even worse than the rest. How big of a headwind is this for the tech trade? Plus, energy, excitement, chatter about a potential mega deal between Exxon and Pioneer, giving the oil and gas stocks a lift. Would a tie-up of this size boost the prospect for a wave of M &A in the sector? And later, Hollywood's Mario Party, the animated film crushing expectations here and around the world. Can Super Mario jumpstart the studios and theater chains ahead of the summer movie season?

0:35I'm Melissa Lee. This is Fast Money Live from the Nasdaq Market Sight. On the desk tonight, Tim Seymour, Courtney Garcia, Dan Nathan, and Guy Adami. We start off with two big red flags from the tech sector. First, there's Taiwan Semi dropping 1.4 % after posting its first monthly revenue drop in nearly four years last month. While full quarter sales were up from last year, they were still at the low end of previous guidance. And then there's this, PC shipments in Kewan plunging nearly 30 % from a year ago. Apple among the biggest losers, seeing its numbers drop more than 40 percent. The new sending shares down as much as 2.8 percent today.

1:11They close the day off by more than a percent and a half. So what could these headlines pretend for big tech as we get ready to kick off earnings season? Let's bring in Steve Kovach for more on the latest. Steve, I feel like we sort of knew this was going to happen, but maybe this underscores that sort of what we knew. Yeah, Mel, and this has been happening since last summer. So, look, PC demand fell dramatically in the first quarter this year. That's according to this new report we've been talking about all day from the research firm IDC. And that big number, PC shipments down 29 % year on year.

1:42That's for the most recent quarter. But even worse for Apple, Mac sales down more than 40 % for the quarter, even though it launched new Mac models back in January. Now, who knows how much worse this could have been without those new models. Also, this is the trend we've been seeing since last summer. PC demand has just collapsed after growing like gangbusters earlier in the pandemic. Apple, for example, was setting max sales records nearly every quarter for two years straight. What came, excuse me, all that came to a screeching halt, though, as max sales collapsed 29 percent in the December quarter of last year.

2:16And it's just going to get worse from there. And this report impacts other suppliers like Intel and AMD. and it's a bad sign for Microsoft's Windows licensing business, which was also down significantly in the December quarter. But Apple is less reliant on PC sales. So let's put this all in perspective. It's the iPhone, more than 50 % of overall sales. That's what you got to pay attention to. We'll get earnings on May 4th, though, to see if it was able to maintain demand for the iPhone into this year after all those production problems we saw last fall, Mel. Is there an upgrade cycle to come also in terms of Mac, Steve?

2:49Steve, people might be, you know, holding back and buying a new one. Well, yeah, well, that's not really happening now because that happened in the first two years of the pandemic. They released all those new models with those its own homemade chips when they got rid of Intel. So basically the almost the entire line of Macs had been refreshed. So all anyone who is going to buy one of those refreshed Macs bought one, you know, a year or two ago. All right, Steve. Thanks, Steve. Go back. All right. So Steve also mentioned the impact potentially on Microsoft. if you sort of like tease this IDC report out.

3:21Apple and Microsoft, 13 % of the S &P 500, Dan. This is why we hear about this. It's funny. This is a really tough headline a few weeks before they're going to report earnings again because I think Steve just said 55 % of Apple sales really are iPhone. And when you think about it in the last quarter, they just reported less than 70 % of their sales were PCs. They gained a lot of market share over the last few years. I think that's probably the better part of the story for Apple. And if they're losing or they're coming down year over year at mid-single digits or something like that. It's not that big of a deal.

3:49I mean, down 40 % year over year, but if you think about it in market share terms, it's not that big of a number, especially relative to the revenues. All that being said, if you think about the rest of the supply chain that goes into the smartphones, these are very similar supply chains and all the stuff that we're going to talk about with Taiwan Semi and Samsung, that's probably a bigger issue for the smartphone business. And those are the things that are really going to drive the stock here. So this is a tough headline to trade off of, in my opinion, weeks before the earnings report. Yeah, we're not trading Apple on MacBooks.

4:18I think that's what Dan's saying. You know, I get it. We knew where PCs were going to be. We knew where Apple really has pulled forward a lot of demand. But it's really more, I think, on iPhones. It's on services. And the question for Apple, which has outperformed the S &P by 8 percent even after this pullback today since the beginning of March. So we're talking about is this a big day for Apple? I mean, when you consider the outperformance, I think the reaction was probably in line as expected, maybe even better than expected. I think it's really just about the pull forward. But I want to watch services.

4:47I want to watch the parts of the annuity business because it gets back to should you be paying the same multiple for Apple today or in some cases, you know, a slight discount because I think they are growing earnings than you were a year, a year and a half ago? Absolutely not. And that's a world where also Apple did a lot of great things with financial engineering. They did a lot of, you know, issued long bonds. They paid back more stock. So, again, I think this isn't a crazy app. It's part of the stew. It's a piece of the mosaic, but it's it's not to trade off. I like that stew and mosaic in the same sentence.

5:15So spicy, wasn't it? Throw all that in. In terms, though, of Tim mentioned the annuity business, should we regard services as an annuity business when the macro is a little dicey? I mean, are people really going to renew every single app, every single service that they've been buying on their iPhone when they're trying to cut back? Why possibly not? But that is going to be stickier than people pushing off buying new iPhones. I think that's a lot easier to do. I mean, it takes us months for us to cancel our subscriptions. I think a lot of people know that, unfortunately. And I do think when you look at Apple, we've talked a lot about is the valuation justified right now?

5:49And I think bigger picture, it's not just Apple that you want to look at. When you look at the mega cap eight right now, the forward P.E. of those about 28 times earnings, where if you look at the S &P 500, it's about 17 times earnings. But if you strip out those eight companies, it's only 15 times earnings. So talk about how expensive these companies are. And I think this earnings season, that's really going to come to light. And later this year, it's going to become more and more important for you to really look at valuation. These things are very still expensive. But, Guy, but, Guy, these are supposed to be defensive.

6:17They've got cash on their balance sheets. This is where you want to be. Nobody's going to give up their iPhones, even if times are tough, right? Yeah. It's a good thing that Apple and Microsoft are not a big part of the S &P 500. Otherwise, we'd have a problem. Now, I love that sound in your voice. You're trying to wind me up here on a Monday. I'm not going to take the bait, but I will say this. I mean, people, this speaks, in my opinion, It doesn't necessarily speak to Apple necessarily, but it speaks to global demand for different very high priced products. And are we in an environment where people are going to pay up?

6:51Are they just going to say, you know what, my old iPhone is fine, my old PC is fine. And they're not going to do that upgrade cycle everybody talks about. And in that environment, Apple trading at 26 times next year's numbers with, again, mid to single digit revenue growth, mid to single digit EPS growth, declining margins, albeit strong margins, but declining nonetheless. It just doesn't make sense. By the way, the stock was$125, you know, three and a half or so months ago, stopped at a level we thought it could get to, and we've bounced nicely. It bounced a lot more than I thought. But this stock, if you look over the last year and a half or so, has been, Melissa, upper left to lower right.

7:30Noted guy. But I have a question about the consumer. I mean, we talk about the consumer in terms of the high-end consumer, the consumer that's willing to pay $100-plus for a pair of yoga pants, a Lululemon, and we say, okay, that consumer is going to fare well. And so why should we be concerned? I mean, if this is a high-price point product, which it is, and we've been saying that the high-end consumer is still doing okay, why should we be so concerned about them saying, you know what, we're not going to upgrade, Tim? Well, you know, if you own an iPhone 12, you know, the 14 is probably something you want.

8:01But I think we're getting to a place where, and I'm not one of these people that has felt Apple needs to continue to innovate, But I think that the refresh dynamic isn't quite I think the demand and the FOMO isn't quite there. I think we have a place where we're also convinced that Apple's kind of created this hardware as a service dynamic. It just gets back to where we all are here. This is this is a stock that it's not going to get away from you on the upside. It's really what I think. And we've been waiting for that. I've been waiting for that that real commentary that says we had our pull forward and we see some some demand weakness and we haven't heard it.

8:34When we hear it in the smartphone, it's going to be a big deal. We've heard it from some of the – we're going to talk chips in a second. But, I mean, that's where you'll get some read through. But this isn't the headline on Apple. I just think that Apple has owned the market because rates have gone lower and people have been defensive. Yeah, I would just say, listen, if you put this together as a bit of a mosaic or a pastiche or something like that, let's do – No, but if you were to see China sales weaker than expected, if you were to see iPhone sales weaker than expected, If you already see services sells weaker than expected, those would be the things that would send that stock back to 140 or something like that.

9:05We see that. Well, I do. I listen. I think you're going to see. And, you know, it's interesting. The reporting, I think, on May 4th or something like that, a little bit later than they normally do here. And there's just so many cross currents as it relates to what's gone on with China, with supply chains, the costs associated with it. We're starting to see inflationary readings kind of tick back up. And it's interesting. You know, I was looking at the December quarter just a bit ago. They bought back$25 billion or returned$25 billion to shareholders in just that quarter. And when you think about it, that stock was down, traded really badly.

9:35This is one of the last big NASDAQ stocks to bottom. I think it made a 52-week low in the first week of January. And it was down 15 % in Q4 of last year. Now it's up, what, 26%, 27%. It would be interesting to see how much they bought back in an environment where the rate situation is different, right, the cost of capital in general. When they were able to raise tons of cash, they were like way like a bank. And this company has literally since Tim Cook instituted the cash return in 2012, they bought back, I think, like a half a trillion dollars worth of stock, which is truly astounding. Which is good for investors.

10:12It is good. But I'm just saying it'll be interesting. I'll just say in this quarter, it'll be interesting to see. But you can't borrow at zero and buy back stock anymore. That was the best use of capital. That was smart thing to do. That's my point. And it'll be interesting to see what they did in a quarter where rates are much higher and the stock was much higher. Turning now to Tesla, shares closing well off their lows of the day, down about a third of a percent. The stock had been down nearly five percent at lows. This after the company slashed prices across its EV models for the fifth time this year.

10:39And it's what, only April now? It's coming about a week before tougher EV tax credit rules are set to take effect. Our Phil LeBeau joins us now with all the details. Phil. Melissa, this is one of those moves that surprised nobody. In fact, if you talk with people who track the company on Wall Street, almost everybody says the same thing. Yeah, we figured they were going to be cutting prices. Weren't sure they were going to be doing it this soon in the second quarter. But that's what Tesla has done. So let me recap this again. As you mentioned, this is the fifth time that Tesla has slashed prices here in the United States this year.

11:13Cumulative, going back to January, the Model Y prices have come down about 20%. Model 3 prices have come down about 11%. So it raises two questions. One, how much will this stoke demand, which is important because the company, as you take a look at their annual deliveries, it delivered, what, 420 ,000, 422 ,000 vehicles in the first quarter. The target is for$1.8 million this year. Does this really juice the market? Remember, wait times had been dropping for both the three and the why. And then the other question is, what does this do for gross auto margins? I realize that we're not going to get the Q2 auto margins number until well into August.

11:54But if you take a look at where they have been trending and the expectation for the first quarter, which, by the way, we get in a couple of weeks, that 20.5 % is the line in the sand. When I've talked with analysts, almost all of them say the same thing. You go below 20.5%, that's going to put some pressure on shares of Tesla. above that, then it's probably a far different story. And as you mentioned, Melissa, the new EV tax credit rules go into effect next week, next Tuesday, as a matter of fact. That's when all of the automakers will report to the Treasury Department. They'll say this model is eligible for$3 ,750 or$7 ,500 or nothing at all.

12:33And we already know that there are some Tesla models that will not qualify for the full$7 ,500, including the standard range Model 3, which is the one that they've cut the prices by another$1 ,000. So this is Tesla saying to buyers, in essence, OK, you may not get the full tax rebate, but we believe that these lower prices are going to attract buyers, and that's what they're doing here. So how does that stack up, Phil? I mean, when you take a look at the closest competitor to the Model 3, which is what, the Bolt? I mean, does that qualify for the tax credit? The Bolt EUV likely does qualify for the tax credit.

13:12But then when you look at a vehicle like the Hyundai Ioniq 5, which we haven't gotten the final word on that, but those are manufactured in Korea. Odds are they don't qualify for any type of a tax credit. So, you know, there's this is every month we will get this report, Melissa, and we'll be able to say, OK, this these number of vehicles for this manufacturer qualify for X dollars, whether it's thirty seven fifty or seventy five hundred. All right. Phil, thanks. Phil Lebeau. You bet. Guy, what's your take on this? Well, I mean, they've been to Tesla's defense. Not that I'm an apologist, but I will say they have said for a while, probably since last fall, that margins would come down.

13:53That line of demarcation, Phil says 20.5%. My instincts suggest it'll probably break that line. I think the legacy automaker's around 16%. So I don't think they're going to get there. But I think 18.5%, 19 % is probably in the cards, just given everything we're seeing in terms of the consumer and the economy. In terms of the stock, I'll be the first to say it, and I've said it dozens of times now. I thought the right thing to do in the earnings last quarter was to sell the stock. That was incorrect. Subsequently, it traded right to the 200-day moving average. I think it was 220 or so. And it got down to that 165 level, almost to the screws.

14:29But this bounce has gotten us less than we got last time. And I think that sort of, again, upper left, lower right is intact. The stock is still down 55 % from the November 2021 high. And it feels as if that 165 level is in play again, Melms. Yeah. Tim? First of all, Guy, we're pulling for you on the SAT. Just everyone can see his SAT books in the sidelines. What did I do now? What happened? No, you've got the SAT book right next to you. So he's had it there for pulling for you. Pulling for you. I know it's interesting. There are some interpretations of Tesla's price cuts as they are bullish and that Tesla is only trying to expedite the demise of the internal combustion engine.

15:08They're really trying to put to the screws, use guys term to the competitors who can't handle price cuts even as much as Tesla can. And there's, you know, Piper had a chart out there. It's an interesting chart that it says every time wait times get below four to six weeks on the Model 3, they start cutting prices. And they do this because they're playing offense, not defense. Again, an interpretation. I'm not chasing this. I think this stock's wildly expensive, and I think there will be some demand. But, you know, Tesla is so far ahead that they can probably push the market around. And you could be in both camps simultaneously.

15:40You can believe that Tesla's on the offensive. but you know but still they're going to cut they're going to uh you know be overvalued and not worth buying yeah yeah there's two ways to look at them cutting prices one is because they're not getting up demand and they have to cut prices which is one opinion the other is that um yeah they're on the offense they want to cut prices here because they can and they have the margins to do so and it's going to be extremely um really an issue for their competitors think of like a lucid or rivian who is burning cash right now and they don't have the cash to burn whereas tesla does i think it's going to put them in position where they can probably put some of their competitors out a lot quicker.

16:13I think that's probably part of the reason of what they're trying to do. I'm hard pressed to see like like the bullish version of four price cuts. If we were talking about Apple, we just spent five minutes talking about Apple and we talked about four price cuts for like some of their premier products to kind of it would just be another conversation. It would just be a totally other conversation. And so to me, when you think about cars, you think about this looming recession we have, you think about what it costs to finance a purchase of this stature now for most people. It's just it can't be a good thing.

16:41And I'll just say this, you know, that chart, if they could pull up a five-year chart, this is still I know that a lot of you guys are emboldened by the 50 percent rally that it's had off of its lows in January. This is still one of the worst looking charts in the entire stock market. I'm just going to tell you that right now. It's a series of lower highs. It's a series of lower lows. The company is cutting prices. The CEO of the company is doing five different things at once. Literally, he's a CEO of five different companies at once. And if we do have this recession that everyone's expecting here, I just don't know how a company like this is going to avoid some of the issues.

17:14We might be talking about eight price cuts this year. But on the fifth price cut, this price cut, the stock didn't do much. It was down 5 % this morning. Yeah, but then it recovered. I mean, the recovery. I know, but I mean, they come in for it. I mean, there's a bit of a cult following, though. I don't know if you follow the stock a little bit over the last 10 years. I mean, like, it's not like every other stock in the market. There's like a different thing going on. And I don't know if you know this, but the CEO of the company, he's also CEO of Twitter, changed his name on Twitter today. Oh.

17:43Yeah. What should we call him? What are we going with? Well, it's Harry, and then it's B-O, and there's a line, a horizontal line of the O. I don't know what that does to the O, the pronunciation L-Z. That's what he is on Twitter right now. That's the CEO of one of the largest market cap companies in the world, and he's messing around with the other company. Thank you for spelling it out. it. Yes. Rather than saying it. Yeah. Folks at home, get out your pen and paper. We'll just check it out on Twitter. See what it spells. Coming up, could there be a mega energy deal in the works? Exxon Eye and Pioneer for what could be its biggest acquisition in nearly 25 years?

18:15What it means for the sector straight ahead. Plus, a soaring semi. Micron topping the tape today after one competitor cuts production. So will the chip trade keep surging? We'll debate that when Fast Money returns.

18:33Welcome back to Fast Money. Pioneer Natural Resources, the third best performer in the S &P today after the Wall Street Journal reported that ExxonMobil has held early talks to acquire the company. CNBC has reached out to both firms for comment. The deal would be Exxon's biggest since buying mobile back in 1999. Speculation about a deal helping the OIH gain more than a percent today, even as crude oil prices fell. Guy, do you think the backdrop is there for a wave of M &A? Yeah, and I think Tim would probably agree. I think he stated as much. I mean, the balance sheets of so many of these companies are in a position where they can do things like this, or conversely, they can use their stock as currency and do it that route.

19:17I happen to think the administration, the current administration, will lose their collective minds if something like this happens. I mean, last I looked, Pioneer was in the shale fracking business, which I'm sure is frowned upon. But you know what? It speaks to this underlying strength of the industry. And I don't know if necessarily this will happen. I think if it did happen, the deal would be north of$65 billion, by the way. But I think it's noise. But I think that noise is justified, given what's going on in the space. For sure. I want to believe that energy companies are thinking differently than they have at other cycles.

19:49And I also think that I don't think this deal is going to get done right here. I, you know, look, unless they were really sloppy and I wonder why they'd be leaking this out there, how they could get it out there. I mean, Pioneer doesn't trade at a discount. And typically when you've seen these takeout kind of a place, you've seen the targets be trading at some discount to NAV, not a 40 to 50 percent premium to NAV. We know that the Permium assets are blue chip and they're some of the best. And if you're a PINAT shareholder, this is what you've been waiting and you've been holding PXD because this is a takeout play.

20:19Will there be others? Yes. I think they're going to wait for the cycle to pull back a little bit. Yeah. Courtney, what do you think of this potential deal? Yeah, I agree. I think it's too early to say that this deal is going to happen. Right. I mean, even in the news that came out. Right. I mean, this is kind of a whisper deal. They're saying it probably won't happen till later this year or next if it happens. But I think realistically, you look at somebody like an Exxon, a lot of your energy companies, they had record profits last year. They did really well, better than they have in the last decade.

20:45And they have done these large mergers in the past. So yes, I think whether this deal happens or not, I think this is probably bigger picture. There's going to be probably somebody they're scooping up or somebody they're trying to scoop up. Whether it's Pioneer or not, I think is going to be the question. All right. There's a lot more fast money to come. Here's what's coming up next.

21:02One semi's pain is another one's gain. Micron heading higher after a fellow tech giant cuts production. But can the move higher last? Plus, get ready for bank earnings. Our next guest says it may soon be time for the big lenders to pay up. The deposit details ahead. You're watching Fast Money, live from the NASDAQ market site in Times Square. We're back right after this.