What a China Chip Ban Could Mean for Nvidia, and Digging In on the Bank Stress Tests 6/28/23

0:01Right now on fast, NVIDIA's A800 problem. The semiconductor giant facing a potential ban on exports of a key AI chip. How much could it impact the company? And why are lobsters getting caught up in all this drama? Plus, is it time to bet on the banks? Major financials releasing their latest round of stress test results. The first since the collapse of Silicon Valley Bank. But should the reports give investors confidence in this beaten down sector? We'll debate that. And later, a Pinterest pop. Netflix streams higher in all eyes on Nike earnings. The fast-moving stocks on our radar tonight. I'm Melissa Lee.

0:32This is Fast Money. We're live at the NASDAQ MarketSite on the desk tonight. Karen Feinerman, Courtney Garcia, Steve Grasso, and Tim Seymour. And we start off with an earnings alert on Micron. Shares are popping after the chipmaker topped fiscal Q3 revenue expectations. Ansett is seeing a recovery in its supply-demand balance. But the CEO wasted no time in addressing the headlines that weighed on chip stocks all day, the potential new restrictions on Chinese exports of AI chips. Christina Parks and Nebulas has been following both stories all day long. Christina, what's the latest? Well, the call is still under arraigned right now.

1:01Now, the CEO touting a recovery saying improved customer inventories are helping drive higher demand and products are actually helping reduce excess supply. He believes, quote, the industry has passed the bottom for both quarterly revenue and year over year revenue growth and sees pricing trends improve. So that key word there was bottom. The market liking the lower inventory write down and the reiteration of full year or fiscal year 2023 CapEx at seven billion dollars. So those are two positives as well. The overhang, though, is the Chinese ban on several of its memory chips. The situation is still, quote, uncertain and fluid with a quarter of Micron's worldwide revenue exposed to China.

1:39Micron reiterated that a low double digit percentage of total revenue is at risk of being impacted, slowing down the chip makers recovery, which is just a portion of the quote you're seeing on your screen right there. But Micron is the latest front in the U.S.-China trade war. I say that because there was an earlier report today suggesting the U.S. is considering tightening U.S. AI chip exports to China. NVIDIA's CFO downplaying the restrictions, saying there would be no immediate material impact to financial results. The bullish narrative, though, still intact on Wall Street with the stock coming off earlier lows from this morning.

2:12Melissa? All right, Christina, thanks. Christina Parts Neville is tracking the chip trade in today's session. You know, I saw the report this morning. You would think that that Nvidia for all the talk of it being overvalued or a high valuation, you would think that more would have come off of that stock, Karen, and it didn't. Yeah. Well, there was that very, very bullish report. It was a you know, that this is sort of a you have to be in this space now. This is the greatest growth thing ever. So I don't know what that would have been good for on the upside in an isolated market. it's interesting.

2:43I mean, you would think this would have prompted a pretty significant sell-off and it really didn't. And I don't know if it's because we don't exactly know what it's going to be. It's coming in July. It's still sort of vague. It could change. Who knows? I think that it wasn't enough to burst the very excited AI bubble that we're in. Yeah. I mean, this is like bad news, good price action. Totally. But you have to look at it this way. The AI, I think to your point, we don't know what's really going to happen. You don't know how it's going to really filter through to the actual business. So is it 25 % of the business or is it really 15?

3:22They say it's 25. But in Micron's case, it's basically 11%, but they keep throwing out that 25 % of global revenue. Or is it profitability? Right. So we don't know until we know. And to Karen's point, it might never happen. There's a lot of political jockeying here. So we don't know what what the case is truly going to be. I think the biggest takeaway is we went from a drought to a glut to a boom with AI. But every single night, not every night, almost every night, we talk about the tensions between the U.S. and China, tensions, tensions, getting worse, getting worse, getting worse. There's going to be some, you know, there has to be sort of some sort of a discount built into any company doing business in China.

4:00And yet here we're saying, you know what, it may never happen for this. So we're going to overlook it in the chip space. That doesn't make any sense to me, Courtney. Yeah, and I think that's why people are really, you're saying that they are much more putting a lot of credence on the fact that they're at the forefront of artificial intelligence. And people really think this is going to be the next greatest thing, which it very well could be. But they see that the upside there is a lot greater than the downside of the risk in China. And that's essentially what's getting priced in right now. I don't know if I agree with that.

4:26I mean, we've been talking about how expensive these things are getting, regardless of what's happening with AI. But clearly, the excitement is there. This isn't bringing it down. And I think you're going to continue to see some of that momentum. Just before we grab Tim into this, to Courtney's point, they're 85 % to 90 % of the market in AI. So if China gets taken out, we don't even know where the rest of the market is without China. And who's going to take China's spot? Is it India? Is it some other geopolitical area? We don't know a lot. In terms of buying up the chips. In terms of buying up the chips, but it's their percent to lose.

4:59Right now, if you want AI chips, you go to NVIDIA. So someone will fill that vacuum. And that's what the market's doing. They're saying, NVIDIA, if you're going to bet on a horse, NVIDIA's got 85 to 90 percent of the marketplace. I'd rather be with that player than someone who has an incremental part of the marketplace. I think what is kind of shocking is, you know, NVIDIA's huge rise is built on this enormous forecast raise, right, in the last quarter, Tim. And here we have news that puts a little bit of a dent in that forecast in theory, one would think. That's the logical extension of this news.

5:35And yet there is practically no reaction in the stock. Well, they they've indicated they have multi quarter visibility now. And does this affect it? As Steve's pointing out, they've also been quick to point out right now. They said it today. You know, we see demand elsewhere. We have no issue filling that demand. So I think that that multi quarter demand is clearly there. And I guess, you know, it's it's a fascinating time. I know we should not be discounting these headlines out of U.S. China, especially over the last couple of weeks when we've only talked about the true geopolitics heating up.

6:10The strategic and national champion companies over there, strategic industries here, this is what happens. And this is what's continuing to happen. The Micron announcement today, I think, should tell you what you need to know. They said this is a significant headwind and it clouds their outlook, even though there's some great stuff in there for Micron, including talking about how the demand for for memory out of AI servers is also really great for them. And they're starting to see that flow through. They're also really talking about a pricing trough. So Micron as a stock, which has underperformed the semis, is, I think, in an interesting place, even with these China headwinds.

6:48And frankly, I think it's actually performed very well, given those headwinds. Karen, how do you think about it? I mean, maybe this underscores the notion that you have put forth before that, you know, that forecast, what was it,$11 billion? That's lowballing. I think so. Because if they're saying that this is going to be really not an event, that tells you that there was upside here embedded in this forecast. Well, also it makes you wonder if they're no longer comfortable with that number, wouldn't this be an opportunity to say so? Right. Sort of a little bit of a draft behind this potential headwind.

7:21Right. I think it's going to be bigger than that. As I said, if you're, you know, why would you put out 11 if you're at 10 and change and hoping to get there? You wouldn't. You'd put out 11 because it's such a gigantic number. They could have put out anything. Because you're thinking 11 and a half or 12 or whatever it is. Right. On the upside. Sticking to that. Yeah. Or is this whole thing, is this whole sort of situation really a tell on this market that there's just a real desire to go where the quote unquote growth is going to be in spite of some, you know, I don't know, unknowns on the horizon.

7:54I think if you have BlackRock saying that this is the next greatest moment for the market, paraphrasing they had a lot more specific term on that but this is to your point we've already dealt with we've expanded out on those large cap tech names where are you going for growth you have to go to tech where you're going within tech you have to go to ai and then there's on the peripheral you have apple sort of in that updraft that hasn't really spoken a lot about ai yet and getting a lot of benefit from AI environment, so to speak. Right. And we add, of course, Jerome Powell today speaking in Portugal with all the other central bankers who are all largely hawkish.

8:34I mean, Powell really reaffirming what he has said before, that there could be at least two more. He didn't take off the table too consecutive. It could be every other. It could be too consecutive. But Tim, did we really learn anything new from this, do you think? Or does this just underscore the notion that the Fed's in the fight still and they're not going to relent? Well, the bond market didn't learn anything new. The Fed funds markets definitely didn't learn anything new. We priced in. We're at 532 year end on Fed funds. We essentially have 25 bps priced in. We were there a week ago. We're not surprised to hear Powell continue to put his emphasis on we're going to go again at some point.

9:11So I look at where yields are. And we've talked about this and it was even came up last night on our show where some key levels to watch on the 10 year and where you start to see, I think, a breakout to the upside. At some point, equities wouldn't like that. The market is kind of banking on sideways yields here and a Fed that's largely at peak. And 25 or even 50 basis points probably doesn't really affect. It's how much longer the Fed holds ground here. But not surprised to hear central banks reiterating what they have to do right now because, of course, CPI is still stuck at 5.3 and not moving.

9:44Yeah. And I think, too, what you're seeing right now is people are they're discounting the news coming out in China. They're also discounting what the Fed says they're going to do. I mean, the markets are not reacting to this. And I think this goes back to when they said, we're not even thinking about thinking about raising interest rates. And now we're 500 basis points higher. I think people are starting to call their bluff because they're starting to see inflation coming down. And that's what you're seeing there. And I think on the AI side, one thing that this does bring into the markets right now is this is something that could bring productivity levels in the U.S.

10:14or global GDP, really, in something we haven't seen this sort of like incremental increase potential in productivity in decades. So I think that's something that really could help increase the global economy. People are looking at those two things and saying, well, inflation is coming down. We have this increased productivity. That's going to be good things for the markets. And I think that's really what what's getting priced in. I agree with the increased productivity notion, but that increase in productivity won't be seen for many years for I mean, for a while. I mean, when I ask, you know, out of Lark, when we have an economist, I always say, are you factoring in this AI boom in terms of your productivity forecast?

10:47And they're like, no, not at least. And that's and that's the problem, because when you look at someone who's an economist or a market participant, the market prices in six months to a year. An economist prices in what just happened. So you can't factor until it happens what really happened. But what I think the market is doing is Jerome Powell keeps talking about two more raises. He says it three times. That doesn't mean there's six more raises. It still means there's two. Right. So the market keeps looking at this as every time he says it, we have to reprice it in again. Do they? I think the market reprices it.

11:23Right. Reprices it. You know, he's cried wolf, but he has done it. So he hasn't cried wolf. But he's telegraphed this as clearly as he can for months and months and months. So I think the market doesn't react to it anymore. It just looks past it. It's almost like, please, just do it already. Then we can get to the pivot or the pause or whatever. And we're okay with NVIDIA being where it is, right? Yes. You're saying it. I mean, that's basically the message that we're getting. Right. We're okay with where stocks are right now. NVIDIA is not a Fed's, you know, what is the Fed going to do story. Well, growth stocks.

11:56Well, growth is. Yeah, growth stocks you're supposed to sell at a rising rate, but we're coming to the end of that anyway. I just think this is a very it's a different animal. Because you believe in the in the A.I. sort of the secular. The secular transformation in terms of where the money's made. I want to be in the picks and shovels. Right. And that's where NVIDIA is. All right. For more on what a ban could mean for NVIDIA, let's bring in Susquehanna Financial Group's Christopher Rowland. He's a senior analyst who focuses on semiconductors. Chris, great to have you with us. How are you thinking about a potential ban, particularly when it comes to an NVIDIA that gave a very bullish forecast and is trading at a pretty high valuation?

12:31Yeah, in our history and the history that we've seen from the government, when these kind of stories leak, they typically happen, come to fruition sometime in the next few weeks or months. So we are bracing for some sort of an impact here, which, you know, CFO Cress for NVIDIA was out today saying it would be limited. So that's how we're thinking about it. Do you buy that? I mean, so you're going to say we're going to take the CFOs at his word and believe that because wasn't the 800 chip, the workaround chip that they developed to get around the ban on the A100, which was subject to the original ban in October?

13:17work. That's right. So Colette originally talked about this being a four hundred million dollar impact. We never really saw that in the numbers the first time around when they switched to the eight hundred. So we think sales in China are still very, very robust. There have been stories about smuggling other chips in with crates of live lobsters, for example. You can find those things those stories out there on the internet. We think sales into China are robust, but given Collette's comments today, what we think is that backlog for these products are tremendous right now. And so that if China's out of the loop here and they can't ship, someone else is stepping in.

14:06And so it tells us a little bit about demand here. It also probably tells us a little bit about supply, which we've been picking up in China or in Asia, excuse me, about some what's called COOS capacity, a technique that's put into these AI chips. And TSM may be limited in that COOS capacity going into the back half. So given limited supply and then demand coming from other places, we don't think this is going to be a big problem. So Chris, it's Karen. Thanks for being on. Who is going to fill that gap then? If NVIDIA doesn't need that business, can easily sell elsewhere, who's going to fill that gap?

14:47It's going to come from U.S. hyperscalers. It's going to come from chat GPT copiers. It's going to come from AI startups that want to put all this infrastructure in-house instead of using it on cloud. It is coming from everywhere. And it was really chat GPT last November that launched 1 ,000 chips. And so if 20 of those ships are gone, you know, they don't belong to China. They're going to be picked up elsewhere. So if they're just picked up elsewhere, that implies that there was a supply constraint on these ships to begin with. And they could actually sell a lot more, except that they're only putting a certain amount.

15:25I mean, if you're saying that if they don't sell to China, these other guys are going to easily pick it up. I mean, what does that tell you about the dynamics of the market here? I think that's exactly what I'm telling you, is that backlog has ballooned, has expanded over the past six to nine months. And NVIDIA is now in a situation where it has limited supply, particularly going into Q3, Q4. And so it, you know, this China situation might actually allow them to catch up with some of their backlog from their other customers here. And it puts China on the back foot in terms of competing in the AI race overall as well.

16:08But, Chris, I wanted to ask you because there's this notion that China, you mentioned the lobsters, and there's a story, and I think it was PC Magazine, so it's not like just some weird TikTok video going around about lobsters and chips, about these chips being smuggled, I think, from Hong Kong or into Hong Kong alongside crates of lobsters. but there was also this notion that there had been overs, not oversupply, but pull forward. They were stockpiling chips in China. How do we know that end markets in the United States are not stockpiling either? I doubt they're stockpiling in the United States.

16:46They've certainly put in some orders. There might even be some double orders there. But the point that you brought up around China we absolutely agree with we saw this take place in the FPGA market around 5G right before the U.S. banned those FPGA products we think China has been doing this they have been taking in supply over the past few months trying to stockpile these things because of exactly what we're talking about right now so that is a small overhang but if you can't chip shipped to China anyway. At least NVIDIA got those shipments in earlier. So that is how we're feeling about that. All right, Chris, great to get your take.

17:28Thank you. Thank you, Melissa. Chris Rollins, Susquehanna. Tim, what's your feeling about all this after speaking to Chris? Well, his notes were fascinating coming into the show. He also just talked about how there's no efficient real workaround, but that even someone like Intel at some point benefits from essentially maxing out on CPU for some folks. Chris's research report that came out after that Nvidia release back in the end of May was one of the great titles I've ever read, like something along the lines of greatest beat of all time. And so to the extent that I don't hear him backing off both the demand story and the next few quarters of visibility, gross margins now go north of 70 % for NVIDIA.

18:14And again, the stocks move 100 bucks since that report. I think he talked about this as a pre-Cambrian moment in the chip industry when it comes to AI, which really says a lot. Yeah. I mean, look, pre-Cambrian takes me back to my Latin studies, which I was really only good vocabulary, not translating. But I think we have a case here where you really have to understand whether you're going to get that full kind of CapEx build out by the tech community to warrant the kind of move we've seen across the entire mega cap tech sector. And that's still open for debate. Right. Coming up, a stream dream investors binging on Netflix as analysts forecast more subscriber growth.

19:02Where do they see the stock heading next? Plus, a picture perfect call. Wells Fargo getting bullish on Pinterest as an Amazon deal comes into focus how they expect it to boost the social stock's money-making power. Don't go anywhere. Fast Money's back in two.

19:22Welcome back to Fast Money. Netflix topping the tape today, jumping 3 % after a bullish note from Oppenheimer. Analysts upping the price target by$50 to$500, seeing more growth potential as Netflix phases out its lowest price ad-free tier and continues cracking down on password sharing. $500. Grasso, what do you think? So I was long this below$200. I sold it up$30, thought I hit the ball out of the park. And now in hindsight, you look back. I think the last time I was on, we talked about Netflix. How much can they make off of cracking down on password sharing? So I know Tim and Karen have been bullish on it.

19:58I think it could move a little bit higher from here, but I think it's hitting a wall. They're going to make it, but that's going to be continuing. I mean, it's going to be recurring, right, in theory. In theory, until someone actually has to pay for it, and they've done the password crackdown, and then you go somewhere else and decide you're not really watching enough of it. And I don't know how that really comes to a conclusion. Well, the ad-tearing subscription, that as well has really been, I guess, overperforming what they thought it would. I think there was a fear that there would be a cannibalization of other subscribers trading down.

20:31And that's not what's happening. They're just seeing additional subscribers. And so they get that revenue that they don't have, that marginal revenue. Plus, they get the advertising revenue. And the more eyeballs, the higher their advertising revenue is going to be. So they've got a lot of great things going, even though, you know, Tim always likes to talk about it seemed like they were playing defense. But now it's offense again. And then there's this sort of macro picture of what I think of the day of reckoning in the streaming space, right? So many competitors. They're not clearly money is no longer free.

21:00And so I think we're going to see consolidation, which ultimately I think is good for Netflix. Yeah. Tim. Well, and that head start that Netflix had that I frankly didn't appreciate for a big part of it is what has allowed them to actually now start to generate free cash flow. Then there's some other little things you can layer in in terms of a writer's strike and dynamics that really favor both their content slate and just the ability of them to outperform. You get back to what's truly happening now with the quote unquote borrowers of the service. JP Morgan, in a note a few weeks ago, said that they'll monetize about 13 or 14 million in 23.

21:39They'll monetize 24 million in 24 and they'll monetize 33 million in 25. So, you know, that's that's about 67 or 68 million. I forgot what I was just counting up there. 68 million out of 100 million. That is accretive. that is an aggregate building upon itself for a company that's just starting to get into free cash flow and will probably be north of seven billion soon. So that's that's to me the story. I'm you know, I'm having a little trouble being as as bullish as I was. And in fact, I've sold one third of that position. And I think I might slowly be taking a little bit more of it off, although it's not because there's any, I think, breakdown in this story.

22:23There's a lot more Fast Money to come. Here's what's coming up next. Picture this. Pinterest surging by nearly 30%. That's the call from one analyst getting bullish on the name. The details next. Plus, we're all stressed. And banks have really been feeling the pressure. The group out with its first set of stress test results since the collapse of SBB. But our next guest says he's still constructive on the space. You're watching Fast Money. Live from the Nasdaq market site in Times Square. We're back right after this.

23:05Welcome back to Fast Money. Pinterest shares popping after Wells Fargo upgraded the stock to an overweight from equal weight, boosting its price target to$34 a share. That's just about 20 % upside from where the stock closed today. The analyst writing that the company's partnership with Amazon set to kick off in October will be a key force in driving monetization, an area in which Pinterest has previously struggled. Courtney, are you on board the Pinterest train? Yeah, I understand the upgrade. I think they really do have a lot of potential when you look at international. Gen Z has actually been their largest increase in customers, and I think there's a lot of potential there, but they do need to monetize it.

23:39This can't just be another social media site. It needs to be somewhere where you can actually buy the things you were looking for, and I think this does bring that to it. It's still not a cheap stock, and I think that's kind of my trouble with it. So, yes, it could have some short-term upside because clearly these markets don't care about expensive stocks right now. But, you know, I would be a little hesitant for that reason. I agree with the premise. And when you look at the stock chart that you're showing on the screen right now, actually looks like a pretty impressive performance on the name.