Walmart’s Strong Results… And Medicare’s New Pricing Announcement 8/15/24

0:01Live from the Nasdaq market site in the heart of New York City's Times Square. This is Fast Money. Here's what's on tap tonight. Retail rally. Walmart popping after raising its outlook and posting an earnings beat. Retail sales also jumping more than expected. Can a resilient consumer help power the market higher? We'll debate that. Plus, the nuclear option. We are live at the first new nuclear power plant built in America in a generation. Will this boost the lagging fortunes of the uranium trade? We'll go inside the numbers. And later, a new surge for the semis behind the big week for chips. The worrying sign that could spell trouble for the auto industry.

0:35And instead of a baba boom from Alibaba, it's another baba bummer. I'm Melissa Lee coming to you live from the studio of Vieta Nasdaq on the desk tonight. Courtney Garcia, Dan Nathan, Guy Dami and Tim Seymour. And we start off with the latest signs that the death of the American consumer has been greatly exaggerated. Shares of Walmart surging more than 6.5 % to a new all-time high today on the back of better than expected earnings and raised guidance. the retail giant CFO, telling CNBC that revenue growth was driven by higher unit sales rather than higher prices. And more good news on the consumer front.

1:08Retail sales rose a full percent in July from the prior month, well above expectations. Those two pieces of data helping the broader market rally again today, with the Nasdaq up more than 2 percent. The S &P now positive for the month of August. So can we lay to rest any of those concerns that we had had about the strength of consumer spending. Guy. Negative ghost rider. I will say that. Listen, it's Walmart's. We've said this for a while. I think across the board, we've been very constructive on the stock for a long time. And what this speaks to is not necessarily the health of the consumer. It's where the consumer is going.

1:41And if you look at the comps and look at the margins and everything you look at suggests they continue to win in a meaningful way. And just not that they've been able to manage their inventories better. One quarter exception a year and a half, two years or so ago. They've done it magnificently. Now inventories are down 2 % year over year against 4.7 % sales growth, which means their margin is going to hang in there. So good for Walmart. But if you try to then connect the dots and say the consumer's in great shape, then basically you're saying all the things you've heard from Home Depot and a swath of other retailers and restaurants don't mean anything.

2:15I think what it means is everybody's going to Walmart. Yeah, maybe it's just a matter of where they are spending that money, Courtney, because they're saying that they're not seeing a weakness in consumer, they're seeing the consumer buy groceries and not pull back on discretionary. That doesn't necessarily mean that they're spending elsewhere. It's true. But you do also want to look at the retail sales numbers that came out today, and it is showing that the consumer is still hanging in there. So I think what you want to take away from this is the consumer is in fact stretched. And I think we all know that, right?

2:41I mean, inflation is really stretching everyone's dollar across all income cohorts right now. And that's why everyone across income cohorts is going to a Walmart. But they're really not at a dire standpoint right now. And I think that's what we need to see is if inflation does come down, the consumer could potentially get through this. But they're feeling it and they're going towards those value things like a Walmart and they're likely to continue to benefit from that. Well, it's interesting. You mentioned discretionary and I know Tim likes dicks here. And you think about this, this stock is up 55 percent on the year.

3:06You know, Best Buy acts pretty well here. The fact that Home Depot on that guidance didn't sell off. So there is some discretionary acting well. I know we've talked a lot about on the high end that there was some weakness and a lot of that comes from China. You know, that's what we've been seeing. And then on the low end, Guy mentions this all the time. Look at a dollar general. It does not act particularly well. So I think Guy is right. I think there's a concentration in the value that people are seeing. Karen talks about TJ Maxx a lot. That's also acting very well. They've had good results here.

3:36So to me, I see the retail sales number coming in much better than expected. Maybe that's seasonal, you know, back to school, like that sort of thing. Like, who knows? But I could also make the same case about if you're bearish on some of those jobs numbers for July, that also might be seasonal, too. So, you know, to me, I think that these two data points that we've gotten over the last few weeks, it's basically as clear as mud as far as the economy is concerned. Yeah. What I go back to is a line from the Pepsi earnings call, Tim, and that is that the consumer is getting choosier about how they spend.

4:07And within Walmart's quarter, they're saying the majority of share gains that they're experiencing are from higher income consumers, which I thought was very interesting. I think it's a tale of many different retailers where Walmart actually is able to be a crossover play. The story around Walmart also, contrary to what a lot of these other earnings reports was, is that July was really strong for them. That is not a trend that we've seen in a bunch of other retailers. In fact, kind of the opposite of what you heard out of Home Depot. I think Walmart's story, though, is all about gross margin enhancement.

4:40Management even talked about their opportunity in Gen.A.I. The analyst community has done a lot of different modeling on what this could mean. I think it's Piper that's out there saying, you know, a$20 billion EBIT opportunity by 2029. But either way, that gross margin of 24-4 was better than anybody expected. It was up 43 basis points year over year. That's the story to me for Walmart. We know the trend is in their favor in terms of you see, you know, the demographics working for them. Certainly a trade down to Walmart doesn't really feel like a trade down to most people, by the way. And I think that's that's the story.

5:17So what are you paying for Walmart? Well, clearly you're paying probably 28 to 30 times now. And if they continue to grow. And again, part of this is around international, but also e-commerce. Then you're probably going to continue to be rewarded. The bottom line is, you know, where are most people going to go? They're not leaving Walmart to go some other place. And I think what we've seen within some of the apparel names and some of the other discretionary, I do think that there are a lot of headwinds. But I think Walmart is something that will travel through this. How do you connect Walmart results, Walmart's results guide to other retailers?

5:49Is this a good thing or a bad thing for Target? I think so. You can argue either way. You can argue either way. I'll argue the way you think I'm going to argue, which is it's negative for Target. Now, I know the stock bounced today. I get it. I think it's positive for Costco. We've said that for a while. Costco had a good day, but I think Target gets middled in this whole thing. And I don't think Target's done nearly as good job on the margin front and the inventory front as Walmart has. So I get why Target sort of got dragged up, but I don't think it's necessarily a good thing for Target. Yeah, and I would agree with that.

6:17I think when you're looking at a Walmart, that's much more of your discretionary purchases as opposed to your non-discretionary purchases. And I think that's going to bode better for a Walmart. But I do think set the consumer aside. And Walmart's higher margin businesses are growing faster than their non-higher margin businesses. So think of like advertising, third-party fulfillment. That's something that they have a target doesn't necessarily have as much. And I think that's why I lean more to a Walmart in that case. Walmart Plus memberships are up too. Right. And again, I mean, those are really small percentage of the total revenues at Costco.

6:48I think it's like mid-single digits at best. But I would also take you to the autos, right? So look at that. We're seeing auto sales like really weak. There's a lot of big ticket items that are just not going through. And I think that it brings you back to the sort of staples. They're not having any success pushing up prices, but they are like the ones that add value are getting a bulk of the sales. So, Tim, you alluded to the forward P.E., which is, I think, now 31 with the 6 percent pop of today's session. Is Walmart worth it?

7:18Well, it's a company that's transformed itself dramatically. It's the largest retail in the world. We kind of knew that. But but in terms of what they've done on e-commerce and again, some of the numbers there, they're going to they're going to essentially invest seven billion or so into into wages from an AI perspective so that they can do 130 billion more in sales with the same cost on headcount. That's pretty impressive. And that's something that I think will only work to their advantage. This is where the economies of scale and the operational leverage and in their business, they are truly someone that's going to be a beneficiary of AI and they're hard at work and they've been hard at work.

7:52They've invested in stores, but they've invested in technology and they've invested in people. That's kind of what management was saying today. And I think that's part of why it did what it did. These comps were better than the street had expected. Walmart's comps and the, as we've all said, the momentum around the Walmart sales trajectory is very different than what we've seen from other people. But to me, it's all about these investments. And back to your question, therefore, that translates into a higher multiple. Look, there's only so high it can go. I mean, Walmart's traded like a tech stock this year.

8:20It's outperformed Target by 40 percent. There's a reason for it. But at some point, I do think and look, I am flat Walmart. I missed this move. I've been long the stock effectively for two years. I'm disappointed I'm flat. I think I can probably get it lower. I hope I do. If you want a nitpick, though, on this quarter. Third quarter guidance. Oh, well, yeah. Yeah. They raise their full year by just the amount that they beat in the first half. Yeah. I'm glad you brought that up because third quarter guidance, it's interesting. People are looking right past that. They're saying, you know what? They're probably sandbagging for the rest of the year.

8:52They're looking at this exceptional quarter, looking at margin improvement. AI is helping on the margin front. Inventory's in line. They're looking at all that stuff and saying, we don't care. You're going to beat. We know we want to get ahead of it. We want to be behind it. I'll say this quickly. Tim probably will get it cheaper because when you see a two-and-a-half, three-time normal volume day on one of these gap-hire opens, they typically fills the gap. But you don't run too far from Walmart here, folks. Our next guest says Walmart has a massive advantage over target right now. Now, excuse me, former Walmart U.S.

9:21CEO Bill Simon joins us now to break down today's numbers, what we can expect from Target's report next week. Bill, great to have you with us. I'm going to start off with a question that I posted to him just a couple minutes ago, and that is at 31 times next year, is Walmart worth it? Is it overvalued at this point? Is it well valued? Well, you know, Walmart's worth whatever anybody's willing to pay for it. Right now, it's Walmart's world and everybody else is just a visitor. that are literally built for this. You're seeing the magic of the super center, the velocity that comes from their just massive grocery business that's now being translated into some growth on the general merchandise side, which is really, really encouraging.

10:03As far as Target goes, you know, if you break down their category, the comparisons category by category, the performance is not too different. The real difference is in the food mix at Walmart and the traffic that that food mix delivers. And Target just can't match that, nor can really anybody. Amazon was a little bit soft this last quarter, softer for Amazon, because they don't have the ability to deliver the buy online, pick up in store grocery model that Walmart's delivering. And with the trade down now coming from the 100 ,000 plus consumers that they mentioned in the earnings report today, things are lining up really, really well for them.

10:46All right. So you see Sam's Club. That was an outlier as well. You start connecting dots, Bill, and you say, you know, Target next week. I mean, there's a huge bullseye on that report in the form of a lot of things. But, you know, declining traffic growth has been a story. I don't know how that gets better when we hear from Walmart and hear what they have to say. What are your thoughts on that? Well, the only thing that makes me a little bit encouraged is that Walmart reported some flattening flattening or even slight growth in their general merchandise categories that we hadn't seen in probably two years since, you know, since the peak buying of the pandemic.

11:22If that carries through to Target's report, if we see an improvement in Target's general merchandise business, I'll feel a lot better about the consumer going forward. That's really what I'm going to be looking for in Target's report. Bill, it sounds like you're really favoring Walmart at this time. And, you know, one might think that you would always do that, but you haven't when you've come on the show in the past. But what sticks out in my mind is something that you said the last time that you were on, and that is that the gain of the high-income consumer as a new demographic, that's sort of a risk to the Walmart store because they typically don't hold on to those consumers when times turn better.

11:58Is that still a risk in your view or not as much anymore, seeing that they're still continuing to gain in that cohort? Well, it's a risk, I think. They'll keep a portion of them, a percentage of them. But as things brighten up in the economy, sort of turns back into a much more positive direction, the higher income consumers go to quality and they go to convenience. And Walmart is a fine quality product, but they're not the high end of grocery. And so a good portion of them will move back. But on the other end, you'll see a filling in on the bottom side as people in the middle income group start to recover some.

12:40So that's a dynamic that constantly fluctuates for Walmart. I like Walmart in the next 12 to 18 months. But as this food tailwind that they've been sort of riding for the last couple of years eases, and the economy returns to a more robust general merchandise business, I think they'll have challenges from Amazon, from Target, and from hopefully we'll see a rebound in some of the department stores. Hey, Bill, you've obviously been in retail for a lot of different economic cycles, let's call it over the last few decades or so. When you see unemployment rise the way it has over the course of the last year, what do you expect to see from a consumer looking out six months, 12 months, that sort of thing?

13:27Maybe, you know, does it signal the potential or a higher potential for a recession than maybe some economists are pricing right now? With employment at the levels that we're at, we've never had a recession. We'd have to see significantly more job loss for me to start to get worried about a recession. I still worry more about a return of inflation as wages are improving, and they have been, and if employment stays at these levels or even improves with the reports today. I worry that there's going to be too much money in the market again, and we're going to start seeing more inflation. So I'd be more cautious of inflation than recession.

14:07Bill, great to see you. Thank you for joining us. You bet. Happy to do it. Bill Simon. All right. I don't think a return of inflation is on most people's bingo cards for the rest of this year, Guy. Jamie Dimon's bingo card, I think, had sort of been on it, and he's backed off a little bit. You know, what Bill says makes a lot of sense, and it's about wages at this point, and I think the Fed is laser-focused on that. So then one has to ask, if nothing's breaking, you see a retail sales number like this, right? Unemployment is still basically, granted, off 3.4%, but still historically low. What's the rush again to cut rates?

14:45I just don't get it. So, you know, if that is a concern, there's zero reason to be cutting rates in September. in my opinion. And I also I don't know what his time frame was there for saying that inflation could be coming back, because I think there is an argument for that where inflation is coming down over the short term. But I do think longer term, we could still stay at this more elevated rates than we have been over the last decade. And I think that's something a lot of people need to understand and acknowledge is a risk here. Like, yes, interest rates are very likely to come down in September, probably a couple times this year is what's getting priced in.

15:13But after that, I think there is a question of how further down do we go down or does inflation continue to stay high? Another look at stocks today rallying thanks to that strong retail sales number. Weekly jobless claims also coming below expectations. The data pushing Treasury yields higher across the curve. The 10-year climbing 10 basis points, topping 3.9 percent. You know, interestingly, once upon a time, this data would have been market negative. Yeah. I mean, it seems like the market likes it when the potential for more than expected rate cuts are priced in. And then when you have better than expected economic data, it likes that, too.

15:47I mean, like, I can't make heads or tails of it. I will say this. You know, as you think about, again, we heard this about a broadening out a few weeks ago when money moved into the regional banks and the Russell 2000 and maybe some other sorts of names, and they were selling mega cap tech. One of the things that interests me right here is, like, I've always thought if the S &P was going to make new highs over the last few weeks, it was going to be the same leadership that was powering ahead for the last year and a half. And if I look at the S &P, which is up about 16.25 % on the year, I look at the NASDAQ, which is up 17.5 % on the year, And then I go look at the Mag 7.

16:18Tesla's obviously still down. Apple's up in line with the Nasdaq. But look at this. Microsoft's up 12 and a half percent. Google's up 16 and a half percent or 15 and a half percent. And then Amazon's up about 17 and a half percent. Those three that I just mentioned, forget the Apple. They are 30 percent of NVIDIA sales. NVIDIA is up 140 percent. They report on August 23 or August 28. Investors are actually. So think about the three hyperscalers that I just mentioned there. OK, and they're up either below the market or in line with it. What are investors saying about this generative AI trade right now if you can't get those three outperforming the broad market again?

16:57And so to me, they all underperformed today, which I think is really interesting other than Amazon, by the way. But, you know, that's something I think you really want to keep an eye on, especially these leadership names. Yeah. Tim? Well, Microsoft, I would certainly emphasize that one. And yet it's you've got beta, which is almost, you know, back up at all time highs. So it's pretty fascinating. Some of the separation you're seeing within the ranks. The other things around just the macro and the market, I mean, you know, that yen is a whisper from 150 again. Is that good news or bad news for markets?

17:27I'm not sure we want to see it going a lot higher. Meanwhile, the dollar is slowly weakening. And I think the trend there is one that probably continues. So, you know, what we've seen is we are going to get weak prints in terms of the sentiment around growth. They may not necessarily be taking us straight to a recession, but we know how sensitive the market will be to this. So that's really what we know. I agree. I mean, semis did have a catch up day. The leadership was back there today. The S &P is within two percent of all time highs. And I think if you expect that volatility is gone, I think you're going to be sadly awakened.

18:04But I think the dynamic here is that the jury is really out where leadership comes from. But I do think Microsoft is a concerning chart. I do think that we're going to continue to see some pressure from deleveraging that's coming from a lot of different places in the investor community. And I think the long only passives are looking to buy the next weakness. That's the reaction you get after the kind of move we've had. It's 10 days later and the market's almost back at all time highs. Coming up, an historic time for nuclear power in the U.S. and a make break moment for uranium. What the first new reactors in 30 years could mean for the future of the energy trade next.

18:41But first, some after hours action and applied materials, the numbers and the latest in the earnings call right after this. This is Fast Money with Melissa Lee, right here on CNBC.

19:04Welcome back to Fast Money and Earnings Alert on Applied Materials. Shares are lower by almost 3%, despite reporting a beat on the top of the bottom line. Seema Modi's got the details. Hey, Seema. Hey, Melissa. The stock falling a bit more here on After Hours Trade. Fourth quarter guidance for AGS and Display 2 businesses came in a bit lighter than estimates. However, CEO Gary Dickerson on the call said discussions with leading AI companies reducing power per operation is becoming increasingly more important. That's where he thinks applied materials can play a role and that the need for more energy efficient compute is driving major architecture upgrades.

19:35Dickerson adds it's seeing growing demand for high bandwidth memory accelerating in 2024. Expects to generate more than 600 million dollars of high bandwidth packaging revenue. On China, executives remain cautious. Exposure to China is around 32 percent. Expects DRAM demand in the fourth quarter to be at nominal levels. Remember, the Biden administration is reportedly discussing whether to further limit China's access to memory chips. On Intel's CapEx cuts, applied materials doesn't see any impact, though. Analysts have been arguing that that may be more of a 2025 story. Melissa? Seema, thanks.

20:11Seema Modi. So why do you think the stock is down, Guy? 5 % year-over-year revenue growth in an environment where it should be much, and this is just my opinion, much better than that. And to me, the market was sort of sniffing this out. Look at the move from July 8th. I mean, the stock went from$252-ish to$170 even in the blink of an eye. And the setup was actually pretty good on the long side than you see in the pullback. Margins sort of in line. Look, it's a fine quarter. But given the backdrop and given the importance of AMAT to the whole AI trade, I would have thought it would be a lot better.

20:44Yeah, you know, this feels like it did a few weeks ago when we had companies that were just kind of meeting and giving kind of cautious or mediocre inline sort of guidance. So you have to kind of beat and raise. And that didn't happen here. I think the point Seema made about architecture upgrades. I mean, that's going to be a theme, but also 30 percent to, you know, exposure to China is also an issue. I just mentioned this Samsung, Taiwan Semi, Intel Micron. They make up about 35 percent of their total sales. And we've had, you know, Taiwan Semi had some good things to say. Samsung, not so great.

21:13Intel, obviously, is a disaster. Micron's kind of mixed. Yeah, and I think this is a scenario where the bar was set high after you had really strong momentum in the second quarter. But really, when you're looking forward, I do think when this artificial intelligence story, it's going to be long term. You're going to need the equipment. You're going to need the services there, which they're going to be able to benefit from. But in the short term, you're seeing how much people are punishing the AI trade. We've talked about that change in leadership, but everyone's really wanting to see the numbers actually back why there's so much spending in artificial intelligence.

21:41So if you're light on guidance or you're light on your numbers right now, you're going to get punished. I think that's what you're seeing right now. And the risks of 30 percent of your revenues being the revenues from China, Tim, that's no joke. Well, I was actually going to say I thought these numbers and the guide, they basically pointed out that despite China, DRAM demand was decent. They're pointing out all of the secular or the themes we have going on in terms of HBM or high bandwidth memory. So these numbers were fine. Nobody expected a lot. I agree with everybody that it's a high beta stock in a world where there are some questions.