Unstoppable Nvidia and Signs of Strain on the Consumer 6/18/24

0:02Live from the Nasdaq market, safe in the heart of New York City's Times Square. This is Fast giant has posted less than a month after earnings. And later, no reclining for shares of Lazy Boy inside the record-breaking winning streak at Netflix and Boeing in the hot seat, the apology and fireworks from today's hearing on Capitol Hill. I'm Melissa Lee. Come to you live from Studio B at the NASDAQ. I'm the desk tonight. Tim Seymour, Karen Feinerman, Bono and Eisten, and Steve Grosso. The S &P and NASDAQ closing at record highs again today. Just 117 trading days into the year, the S &P has set a record 31 times.

0:57That is better than 26 percent of the time. Not bad. But even with those gains, we start with the latest reminder that it's NVIDIA's world and we're all just living in it. The semi-giant jumping another three and a half percent today, closing at its own all-time high. The stock now up 42 percent since its earnings report less than a month ago. And for those not keeping track, that's a gain of nearly a trillion dollars in market cap bigger than all but six members of the S &P 500. And one more milestone here. The AI darling, now the most valuable company in the world, stealing the title away from Microsoft today, trailing Apple, not far behind.

1:35So is there any stopping this stock? It seems almost folly to try and think of when NVIDIA is going to stumble day after day when we see these records being posted. I think so. And I think that that earnings result, which is now about a month ago gave you kind of the relief to buy signal. And it gave you the buy signal in terms of the broadening and a little deeper look into the product line. And I just think that where people are now trying to also reassess technical aspects of the market, that means how much of semis do I really need to own? It's one thing to own the triple Qs and different places where people are looking at, you know, call it Internet technology or IT across the board.

2:12But I do think semis as a percentage of that. And we've seen different pieces of the semis chain. And, you know, whether it's Micron, which is making fresh new highs, whether it's Taiwan Semi, who just gave us kind of gave May supply chain numbers, where after an incredible April, actually May was up 3%, up 21 % year over year. So there's the cyclicality in cyclicals of at least what typically have been semiconductors is also very strong on top of just the dynamics. So a 40 % move in semis in 40 days, the outperformance is extraordinary. And what's to me, the dynamic is that the market is looking for weakness to buy.

2:46And I think there's a ton of people out there that would love to see that weakness. Karen, this is a holding of yours. It is. How uncomfortable are you right now? Because I'm guessing. Fairly uncomfortable, yes. Fairly uncomfortable. It's not just NVIDIA. I have a number of sort of peripheral satellites, right? I have Dell, which we've seen is highly correlated. And then I have, you know, Google's a big position, Meta's a position, Amazon's a position. So all of those will be riding in the, flowing in the same current, right? If the tide goes out, those will go down as well. So that concerns me.

3:15I have some hedges, but I'm always long. I clearly have exposure here. I did buy some NVIDIA puts last week. Those are worth a lot less than I bought them for. And that's OK, by the way. Yeah, that's fine. Right. It's insurance. I'm happy to have it not kick in. But I also sold some upside calls. I took off some Dell spreads today. And I do really believe we're still in early innings of A.I. I don't necessarily think we're going to track it exactly, right? It'll be undervalued and overvalued at various times. I'm sensing we're more in the overvalued right now. But I'm not great at trading around these things, so I'm hanging on.

3:54Yeah, and it's not sort of indiscriminate all AI chips. I mean, look at AMD. AMD cannot get out of its own way. I mean, it's up only, what, 4 % year-to-date compared with CD-R. I do have a little AMD as well. I bought some today. I was very late. I was early years ago to NVIDIA, and then the ascent scared me, and I couldn't buy it. I bought it last week, and I thought I was extreme. I am extremely late. I bought it last week, and I said, I expected to have a losing position this week. It always happens. You always buy it, and you always think that's the top. I did think that the announcement of the stock split was the top in the stock because I felt pulling that lever was sort of late in the game.

4:40You could own fractional shares with any type of program that you could buy stocks, and I don't think they really needed to do that. I bought it, and now there's another street high of 160 price target on it. It's probably going to continue the ascent higher. As long as the overall market plays nicely, this one will run as well. I am looking for a pullback. Everything can't be. I've been bullish, but I've been a realistic bull. I think that you have to see some sort of a pullback. But fighting the seasonality of extremely bullishness in the summer is very tough to get the pullback. But I still think we're going to get one.

5:16And I think that'll be your opportunity. As Tim said, when you see that dip, people are going to still be rushing in. I'm in it now and I know I'm late. By the way, 160 is not the street high anymore. 200 from Rosenblatt out today. Yeah, I'm with you. I think my order operations are just slightly different. I think that as long as NVIDIA and the other six, Magnificent Seven, continue their path forward, the market will play nice. So I'm with you in terms of I think those things will happen in conjunction, but I think that there will be more of the proverbial tail wagging the dog there. And I'm with you, Karen, in terms of some uneasiness.

5:50I think that's really kind of the secular shift that we're seeing in this day and age of investing or trading, however you want to define it, is that you're going to have to be comfortable with a much more concentrated portfolio. I mean, that's where your returns are coming. And I think that that's why passive, the passive versus active type of argument that we've had recently, we have recency bias around why those have done so well, because we get a larger and larger concentration of those outperforming names. And I think that's really where you're starting to really have to measure your risk and reward.

6:19I mean, I like to put by, you know, I'm an invidia bull, but I still like it in terms of hedging because so much of your returns are going to be determined by a handful of names. I'm with you. I like Amazon. I think they probably end up being much more involved in streaming. I think they're a cloud and retail giant. There's other names that you start to like, but you have to really be comfortable kind of getting far out over your skis away from what traditional portfolio construction would really indicate that you should construct your portfolio from. What were we talking about yesterday? We were talking about Julian Emanuel at Evercore ISI.

6:52Friend of the show going to 6 ,000. We were talking about FOMO. We're talking about we're mid-year here and people are feeling a little bit behind. And so to your point in terms of passive, active managers are feeling the same pressure. They also have to be in these concentrated positions or they are not going to be performing along with their benchmark. So there's all that. So does that make you more confident that this run can continue? Or does that make you more scared that when it's time to hit the brakes, boy, a lot of people are going to be rushing for those exits? They're incredibly crowded trades.

7:21The passive component of it is the part that makes me think things can go higher. And it gets back to what I was saying before, that I don't really know what percentage a semi should be overall of a 30 percent weighting in the S &P of where information technology or IT is. What does that term mean anymore? We don't even know. But when we look at weightings, I think there's going to be there's a recalibration going on. I think people are ready to be overweight. And if you look at where we've been over the last six weeks, getting numbers from everybody from Intel to Broadcom to Micron, And they've all told a slightly different part of the story of where they're active.

7:55With AMD, it is that much more fascinating because up until three months ago, this was toe for toe or step for step, whatever, right there with every other big AI story. But certainly in the semi space, down 16 percent over three months. I nibbled some AMD today. I think it's a case where, you know, the headlines around the security breach are things that could be scary. They certainly don't resonate well for a tech company like this. But I think it's really more about people are concerned whether they are taking share. And I think for them, server share is really important, data center and whether they can take share.

8:27We know where they sit overall as a second place play within AI. But I don't think you're counting this company out based upon where they've been. And I think this is an opportunity for people that are looking within that space and say what's underperformed. How are you feeling about your position in AMD? Not great. I like Tim. I didn't really love what I didn't buy it today. I bought it before today. lower than here, but that doesn't matter. If you went home long, you bought it, you know, whatever price it closed last night. I love Lisa Su. It's not cheap. It's not cheap. It's not as if they're priced like they're an also-ran.

9:03That's probably the one that I think is the most shaky valuation. How about Micron? Tim mentioned in the opening of the show, Micron is DRAM. It's synonymous with DRAM. If there's going to be an AI push and there was going to be a storage push, you need more DRAM. That is the most unsexy player. That's one I bought and let go way too early. And this one, now you're starting to see analysts really start to push this name, start to push DRAM, start to push the storage aspect of it. But this is probably one that's going to garner a lot more bullishness going forward. And it's already had an incredible run.

9:39By the way, did you catch the action in Broadcom today? New high on Broadcom, very heavy volume, finished the day lower. And you've got to wonder if you're going to look back on this day and say that was a turning point for Broadcom ahead of its stocks. If Guy were here, he would certainly say that. He would say outside reversal. Outside, yes. So we'll watch that one. Meantime, let's turn now to the latest signs of strain on the consumer. Retail sales rising just a tenth of a percent in May, slower than expectations, excluding autos. Sales were actually down in May. That's after a preliminary read on consumer sentiment for June came in at its lowest level of the year.

10:13Maybe no surprise then that discretionary stocks are among the worst performers this year. Names like Lululemon, Etsy, Ulta Beauty all down 20 percent or more in 2024 while the S &P is up double digits. And take a look at restaurant stocks where we are seeing a real case of haves and have-nots while names like Starbucks and McDonald's are under pressure this year. Cava, Wingstop, Chipotle are at an all-time high. So can the runs in these stocks continue? I mean, we saw evidence already in today's print that the run is going to slow down, at least at this point. That's what it sounded like. Well, when you're Karens Kava, and the example is CMG, which goes higher and higher and can be, you know, can certainly support a 50 times multiple.

10:51That's the story of CMG. I think the question is, as you get into fast casual or as you get, you know, in different nuances and pieces of this entire space, the question is, where are we with the consumer running out of gas? I think in the CMG side, it's at some point just the growth is very difficult to attain and to keep this kind of a pace going. But I'll say that they're going to survive in a world where we've had higher inflation and their prices on a relative basis don't look that bad. I think McDonald's continues to struggle a little bit here. I'm someone who's owned McDonald's for much of the last five years.

11:22I don't own it here. I want to buy it lower. And same with Starbucks. I think they are both really dealing with cost issues. Inflation for them hasn't really abated to a point. They have zero pricing power. The whole point is they actually I actually I don't know if I've seen any price cuts at Starbucks, but I can see that they've stopped raising prices. McDonald's with their$5 meals and they're going toe-to-toe with Burger King and everybody else. That's the problem. We still don't know where this settles in. The retail sales numbers, discretionary. I will continue to believe discretionary gets worse before it gets better.

11:53Yeah, I'm with you. I think you continue to like the trade-down names like a Walmart, dare I say a Target, if they're able to get inventory corrected. But I think that trade-down story is there to go. And then on the CMG side, another stock split. I believe it's 50 to 1. I mean, this is this definitely has a signaling effect, but I think we should not understate the psychological effect that seems to be surrounding these stock splits. Whether you can buy fractional shares or not, I think there there is a cohort that still looks at the dollar figure and feels compelled or, you know, or at least they feel like they are able to afford a share or two as opposed to a fraction and all and all the middle gymnasium that go on that.

12:31And I'm with you. In terms of it being price to perfection, I'm not sure where the incremental growth comes from. But then digging in and looking at the financials, still over a billion dollars in free cash flow and zero net debt. I mean, it's tough to really bet against a company that's structured that way, whether or not you believe the next incremental percentage of growth becomes harder and harder. All right. For more on whether the restaurant stocks will see a reckoning, let's bring in Nick Setien. He joins us on the Fast Line. He's the managing director of equity research at Wedbush. Nick, great to have you with us.

13:01Thanks for having me. You've got a neutral rating on CMG. What are you worried about? The stock keeps going higher and higher. People love it. They've got pricing power over the consumer, even though that's sort of running out a little bit. People are still paying. Yeah, so I mean, the reason why we're neutral and why we went to neutral, you know, last quarter was because we were worried about the second half comparisons. You know, at the end of the day, it's priced for perfection. And if we start to see transaction trends start to decelerate on a two - and three-year basis, it's going to be difficult, at least in my opinion, to hold these multiples.

13:37We haven't seen it yet. The chicken al pastor is doing really well. You have a lot of throughput initiatives. At the end of the day, you're going to have to anniversary carne asada in the second half. Yeah, I was worried about that anniversary. I got it. Watch out. No, but all kidding aside, can't they think of something else they can bring back? carne asada? I mean, McDonald's does that with McRib, and I sort of joke, but I'm serious in that if it's so well-loved, can't they sort of manage those comparisons by bringing things back? Well, you can. You can bring things back, but they have to do even better than they did the year before, right?

14:14So the carne asada in Q4 and Q1 was going over the garlic guajillo steak, which was a disaster the previous year. So they had a very easy comparison. And now if you bring back to carne asada it's going up against what was a very successful carne asada offering this year right so you almost have to you know do one better than what you did last year and now we have almost no pricing flowing through particularly in the second half so all of the comp has to be transaction growth and all of that transaction growth is going to come from essentially throughput initiatives at this point nick it's karen so just furthering that point i mean in terms of there being more profitable, more efficient, are those levers that they can pull that you think would actually have an impact?

15:00Yeah, I mean, commodity crops have to behave. You know, we can't have outside avocado growth, et cetera, because, again, they're not in a position to take a lot of pricing, particularly. I mean, like on the line, like when they make, you know, how, you know, whether it's what's not skinning the avocados. The autocado. The autocado, right. All along the line. Yeah, I mean, absolutely. Right. That's the kind of stuff that has been driving that line faster, right? So that's what we're talking about when we talk about throughput initiatives. And so they have been driving that line faster, but there's also some blowback around that as well, right?

15:36Like we saw in terms of the social media kind of pushback to negativity around portion sizes and where pricing has gone. But that's kind of a two-edged sword as well. So, I mean, those are all the things that they're doing now to try to move that line along faster and faster. That was a big contributor in Q1. It's going to be a big contributor in Q2. The question is how much of a contributor can it continue to be as we go into the second half? All these concerns with CMG, Nick, sound very CMG-specific. But when you hear the line of the retail sales number this morning that spending at restaurants and bars down four-tenths of a percent, on that's the most since January.

16:16How much, you know, how worried are you for the overall space? Do you think that that's going to translate into a tougher quarter for a lot of these stocks? Well, we're definitely going to have another very tough quarter across the industry, just like we did in Q1. There's literally, you know, the number of names that we can say have positive transactions, you can count on. On one hand, at this point, you know, Chipotle is obviously one of them, which is why you're seeing, you know, everybody kind of crowd into those four or five names, and you're seeing the kind of multiples that we have out there for those four or five names, Cava, Chipotle, Roadhouse, Domino's, and essentially Wingstop are the end of that list.

16:58You could probably throw Brinker in there as well, more of a kind of near-term marketing spend issue there, more of a structural win, but those are kind of the names, and the list ends there. almost everyone else is in a very, very tough position relative to expectations. All right. Nick, thank you. Nick Setian of Wedbush Securities. So what do we think? Do we want to crowd into the ones that are executing? Yeah, I think so. But if you look at the list that Nick just said and that we put up on the screen, those are the names that don't have, they don't have an international presence yet. So when you look at Chipotle, they're probably, they're trying to add 200 to 300 U.S.

17:35stores, but they're still under 100 international stores. So all the names up on that board have a huge international growth prospect to them. The other ones are too mature and they don't capture that growth. That's why they're crowding to those. What's interesting is names like Domino's and things that have been very resilient with an international profile are ones that are struggling a little bit here. And so that, you know, those have been places where you've had resilience in across the demographic chain. I mean, the fact that we, you know, Asada and Pastor are part of our lexicon, you know, it tells you what Chipotle's doing.

18:11I mean, it's extraordinary. What is Pastor? When you're doing a Pastor. Like a chicken out Pastor. It usually has like a little pineapple in it. Did they invent that? Or am I just showing my culinary ignorance here? You go to a Mexican restaurant. We'll have to do a fast money outing. Like we're supposed to know what Pastor means? Come on. We live in New York City. I like it. I order it. I don't know what it means. And here we are using the term. You notice anything when you order it that's unusual in it that it's tasty. I mean, but I mean, Asada, you know, past. Anyway, it's all good. Coming up, Boeing on the Hill.

18:44CEO Dave Calhoun personally apologizing for the company's safety shortcomings in front of packed Senate hearing. But will the remorse be enough to turn the stock around? Plus, some after hours action in KB Home, the numbers, the latest headlines from the homebuilders earnings call right after this. This is Fast Money. With Melissa Lee, right here on CNBC.

19:11If anybody's coming out of this deal good, it's you. Why haven't you resigned? Senator, I'm sticking this through. I'm proud of having taken the job. I'm proud of our safety record. And I am very proud of our Boeing people. You're proud of this safety record. I am proud of every action we have taken. Every action you've taken. Yes, sir. Wow. Well, there's some news for you. That was Boeing CEO Dave Calhoun and Missouri Senator Josh Hawley in a tense exchange over the planemaker's safety culture. The CEO getting grilled today in front of a Senate committee over Boeing's handling of mechanical incidents and whistleblower complaints.

19:49Calhoun kicking off his testimony by apologizing directly to the families of whistleblowers and 737 MAX crash victims. He actually stood up from his chair, turned around and faced the families. For more, let's bring in Sheila Kiyalu, the aerospace and defense analyst at Jeffries. Sheila, great to have you with us. Thanks for having me. That was sort of surprising how Dave Calhoun answered. Should he have answered that way? I don't know. Senator Hawley came in pretty hot. I would not want to be questioned by him, if anyone. But I think the reason he hasn't stepped down yet is we are having trouble finding a new CEO.

20:23That seat is still open and nobody seems to be wanting the job. Yeah, I mean, it's a thorny issue. It's a thorny problem that Boeing is in the midst of, including potentially prosecution. And you write in your note that you just put out after after today's hearing that prosecution is, quote unquote, almost certain, quoting Senator Richard Blumenthal, who called who called this entire hearing. What's your take on the violation of the deferred prosecution agreement and what the various outcomes could be? You know, I think Boeing will probably face another fine just given the timing of the Alaska incident and the last settlement they had about three years ago.

21:06But I think, you know, the key theme from this hearing was there needs to be more personalization in this CEO job. But it's hard to do that. How do you do that when you have one hundred seventy thousand employees? How do you hear them all out? How do you do them when you have two point five million parts on a seven eight seven like Dave Calhoun said? So what the hearings were asking for were hard. But I got to see another aircraft manufacturer yesterday, actually. You know, I think safety is apparent. We've seen that in the business world, whether it's General Dynamics and Gulfstream or Textron and Cessna.

21:38Safety can be done on aircraft. And Boeing's safety culture is in question. They're trying to turn it around. And the new leadership is going to have to infuse its take into it. Why are you so bullish on Boeing at this point when things seem so unclear? We actually just published a note today on why we're so bullish on the cycle, despite all these short cycle headlines we're seeing and negative pre-announcements, whether that's American. You know, some distributors are pre-announcing negatively. This is a global duopoly. There's only two aircraft manufacturers in the world, and air traffic is basically at 2019 levels.

22:11So we've had five years of flatlining and underproduction. So we're quite confident that the market demand is there. And as long as the supplier can supply, they could gain price as well, given it's a global wobbly. And that's our underlying thesis. Unfortunately, with Boeing, what's happened over the last four years and why the stock has not worked has been they have not been able to produce the price. Sheila, it's Tim. I share your bullishness, although it's been a frustrating move. I guess if we had traded this aggressively over the last four years, there was money to be made on both sides.

22:43No one does that perfectly. But I'm looking at your note and I want to cut to free cash flow or cash burn, because that's the story in a nutshell to me. And obviously, 24 is a difficult year. I saw from your note you think Q2 burn could exceed Q1. Where do you think this inflects and why does it inflect, even though it's a duopoly and you would think it eventually has to? It's easy. You just look at 737 max production and Boeing share price, overlay them to each other, and it's essentially a perfect correlation. We think Boeing generates about $10 million of free cash flow with the 737, each of them they ship out.

23:21They were supposed to be doing$500 this year. Now the number's down to$400 and probably pressure on that given what we've done over the last five months. So they need to produce the maxes, but they also need to do them without price concessions. We think the price per max doubles to$20 million. So Dave Calvin was right today in that he hasn't been generating profits over his tenure. And part of it has been the concessions that have been plagued in the backlog. So they need to produce 737s. they need to do it right to customers. And they're having some new issues with the max certification on the seven and the 10 variants, because there's four variants, if you recall.