Mad Money w/ Jim Cramer 10/19/26

0:00Host Thanksgiving with industry-leading quality standards from Whole Foods Market. There are no antibiotics in their meat department, ever. So carve up turkey and spiral-cut ham with peace of mind. Shop organic sides like stuffing mix and cranberry sauce from 365 brand. And guess what? All their delectable pies are made with no high-fructose corn syrup. Gourmet Thanksgiving flavors with the quality you want. Only at Whole Foods Market. With the Discover Cashback Card, it's payback time when you earn cash back on everyday purchases. Activate and earn 5 % cash back at different categories each quarter on up to$1 ,500 in purchases.

0:41That's 5 % cash back at different places each quarter, like grocery stores, on gas, and at restaurants. It pays to Discover. Terms apply. See discover.com slash 5 for details. My mission is simple, to make you money. I'm here to level the playing field for all investors. There's always a bull market somewhere, and I promise to help you find it. Mad Money starts now. Hey, I'm Kramer. Welcome to Mad Money. Welcome to Kramerica. I'll be my friends. I'm just trying to make you some money. My job is not just to entertain, but to do some teaching. So call me 1-800-743-CBC. Tweet me at Jim Cramer. Currents cross, narrows get scuttled, truth gets obscured, all because of hedge fund managers and big mutual fund trigger pullers occasionally getting on the wrong side of the trade.

1:38One of the things I try to teach you on this show is how much stocks can diverge from the underlying value of the companies. Maybe your stocks were only going up today because some hedge fund imploded last week after eight straight days of the Philly Semiconductor Index being down, and we just didn't know it. With the ne 'er-do-well hedge fund out of the way, the stocks were free to lift. Buy, buy, buy! Maybe today's rally, with the Dow slipping 36.38 points, but the S &P gaining 0.4 % and the Nasdaq jumping 1.11%, has more to do with some loser fund being blown out last week. A so-called clearing event than it does with how the businesses underneath its stocks are really doing.

2:16This weekend, I told members of the CMUC Investing Club that I thought Friday, last Friday, had all the hallmarks of a hedge fund blowing up. Kind of like what we had happened with situational awareness this summer, but kind of a mini situational awareness. You didn't know situational awareness was falling apart when it happened. You only knew the denouement. But it knocked dozens of stocks off their flight path and caused tremendous havoc. As many analysts thought, something had to be wrong with the underlying companies, not just the stocks. Now, I bring up this manufactured, non-fundamental sell-off, because today is the 39th anniversary of the crash of 1987.

2:53I know, the 39th, not a big deal, not a round number. Still, it's incredibly instructive right now, and I recall it well. A few months into the year, my great friend Larry Levy and I left Goldman Sachs to form Cramer Levy, a hedge fund. It was a very novel thing to do. I was more of an outside guy raising money. I was an inside guy with a terrific relationship. But I think that once the money was raised, Larry wanted to move on, and I just wanted to settle down and pick some stocks. That was hard enough. I had a playbook of buying stocks in the best companies, so I moved the fund to Steinhardt Partners, where the legendary trader, John Latanzio, schooled me, but good.

3:24I was hanging on my fingernails, down almost 10 % where I would have had to open my fund, and it didn't help that I didn't have Larry to keep things together. I sat down with Latanzio, who promptly called me a Harvard-trained idiot, and a disciple of the research department of Goldman Sachs, which didn't know jack about how the market worked, and would recommend a bunch of bonehead blue chips regardless of the tape. He told me to sell everything, start over, stay attuned to the market. I had no idea what the heck he was talking about, attuned to the market. I thought I was making the most subjective analysis of each position.

3:54But he told me that stocks had nothing to do with companies. They were just pieces of paper blown with the stock market wind. Wouldn't you know it? He was right. At the time, we had a market led by a few stocks that the Japanese would buy every night. And they'd keep those stocks up in the morning. Back then, Japan was on par with us for the biggest and deepest stock markets. They were challenging our wealth, and in many ways, their economy seemed a lot better than ours. The Japanese loved the waste management stocks. They thought 3M was terrific. They had an appetite for the drug stocks, especially Johnson & Johnson & Merck.

4:23They thought Gap was really good. The whole thing was insane because their favorite stocks just seemed to go up every single day. Their buying knew no balance. In fact, the Japanese were responsible for most of the marginal buying of the whole move upward. They took the indices up to about 29 times earnings by the time October rolled around. The whole time the market was being taken up by Japan, there were these weirdo salespeople selling you what was basically something called stock market insurance, portfolio insurance. Yes, insurance. You could ride up the indices and be stopped out down 5 % for a fee if something bad happened.

4:55If you were up big, you were able to lock in the game of portfolio insurance, or at least they told you could. Most people don't remember that time or weren't alive to know it. But Larry mentioned to me this weekend, and it reminded me just how you can't take all the moves seriously. I say that because what happened next, what happened today, 39 years ago, is that the portfolio insurance didn't work. The insurance agents were shorting stock futures to stop you out. But the selling from the futures pits in Chicago, still a relatively young pit, overwhelmed the stocks in New York and everything cascaded down.

5:26Black Monday had arrived. Stocks totally divorced themselves from the fundamentals, but we didn't know that at the time because we figured there had to be some fundamental reason for the meltdown. It was impossible that the market could lose a quarter of its value in one day just because of wayward insurance policies. The Dow Jones Industrial Average doesn't fall 22.6 % in a single session for nothing. Not possible. Or so we thought. Yet it turns out there really was nothing fundamentally wrong of any consequence at all. Rampant automatic selling destroyed stocks, even as the underlying companies were quite strong.

5:57In retrospect, it was a spectacular buying opportunity. I had by that time started working with soon-to-be fiancee Karen. And she was from the Latanzio School of Thought because she worked with him. She hated the market right before the crash and urged me to keep selling until I owned nothing. She did that because for weeks in advance of black money, she said there were no real buyers, but a wave of sellers that were knocking down stocks for no reason. So after selling all my stocks earlier in the year and then buying back all different stocks, I just sold everything back again, except for some puts in Johnson & Johnson.

6:28I was in cash for the crash for no reason other than a trader's judgment that something is very wrong with the market, not the companies underneath, which were fine. She told me that we could buy all we wanted after the crash. So all I could say was, what crash? She said, oh, the one that's about to happen. Then Black Monday hit and we looked like geniuses. Best call ever. Anyway, as people searched for reasons why stocks would go down, was it interest rates? Was it recession? We pinned the blame on the actual stock market's machinations, not the companies. Our recognition that the sell-off had much more to do with the mechanics of the market, not the fundamentals, cemented us as people who must know something.

7:01And not much else. But it was enough to get my hedge fund to be able to raise a ton of money, albeit very small by today's standards. I think we're seeing the same thing happening right now. Stocks having little to nothing to do with the fundamentals in some but not all the data center stocks right now. They all go up in bunches, even if they shouldn't, at least not this fast. And when they go down, they go down in unison really quickly with nothing happening at the companies, just like 87. There is a big difference between now and then, though. These data center stocks have nothing to do with the S &P 500, which is doing pretty terribly anyway.

7:30They're out on their own and they're vulnerable to any kind of hedge fund blow up because the size of funds these days is immense. And they play with insane amounts of borrowed money. Here's the bottom line. On the anniversary of the great crash, remember on this Green Monday that you may be seeing huge moves based on the machinations of money managers who are out over their skis or crushing the slalom, all totally divorced from the fundamentals without a shred of alimony. Doreen in New York. Doreen. Hey, Jim. Thank you so much for taking my call. I'll take a call, Doreen. Thank you. Thank you for calling.

8:07How can I help you? I need to know my question I need help on is SoFi. It has been sliding ever since I bought in around$17. And at today's levels and last week's 52-week low, I need to know, should I be buying more to lower my cost basis or should I just hold the shares that I have? OK, SoFi is in the end a advisory bank. OK, but it is a bank and it sells for much more than almost all the other bank stocks. So as the other bank stocks get pushed down, it gets pushed down by them. Should you sell it? Look, here's what I think. It's not going to go up. It's down 45 percent. It's not going to go up until we see the other bank stocks go up, because that's what it's trading with.

8:49And the bank stocks right now do not trade well. So that's my admonition. I would not expect any big rally now unless we get some sort of huge move up in the big banks. And I don't see that coming right now. Let's go to Dale in New Jersey. Dale. Jim, how are you? Thanks for taking my call. Of course, man. I'm glad you're calling. How can I help? Yeah, I'm calling about Allstate Insurance. I already own a position. You know, it has a P of like five, paid the small dividend. It's been doing pretty good. And I was wondering if I should increase that position. I don't want you to. Look, the stock is incredibly cheap, OK?

9:27I mean, amazingly cheap. It's just had a really nice move off the bottom. And I just think that you've got to just—it's moved so much just in the last couple of weeks on nothing that all you're doing is betting that you know what's going to happen? You're going to have a multiple expansion from six to seven. I don't like to play that game. Let's see how the earnings go, all right? Now, sometimes it's the mechanics of the market, not company fundamentals, driving the action. Keep that in mind the next time you see a big move. On Man Money Tonight, after last week's tech wreck, I'm assessing the damage and hunting for buying opportunities among the world.

10:03Plus, what are small businesses telling us about the job market? I'm getting a read from Paychex. And could rising interest rates derail the data center build-out? I'm explaining why the biggest threat to the AI boom may have nothing to do with the AI boom itself. So stay with Kramer.

10:54Thank you.

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12:47Last week ended up pretty terrible for the market, especially tech, turning into a full-blown panic sell-off by Friday.

12:58Hey, today we got a reprieve from that meltdown, but it's extensive enough that we got to go over exactly what happened last week. Why it happened before I can start getting truly excited about the AI data center space again. Yeah, it was that bad. So how did last week become such a disaster for tech? Well, it started slowly. On Monday, the Dow actually managed to gain ground, in part because the bond market was closed for Columbus Day, but parts of the AI data center cohort still got slammed, like the memory stock. Didn't help that the weekend before last, Hock Tan, the CEO of Broadcom, that's a charitable trust name, explained that capital might be the biggest constraint to the AI build-out rather than ship shortages.

13:37In a world of rising interest rates, the cost of capital is a major problem when we're talking about a multi-trillion dollar cycle. On Tuesday, most stocks were down, including tech. But it wasn't what led us lower. Instead, people were worrying about the banks. At the same time, we heard more negative chatter about the financing side of the AI data center build-out. By Wednesday, things took a hideous turn. Oh, it started with, yes indeed, CoreWeave. A company that builds data centers that rents out their computing power. This thing has been a great growth story, but they've had to accumulate a mountain of debt to pay for these warehouses full of servers.

14:11Until last week, we seem to be okay with that. Why did investors start keying on CoreWeave in particular last week? First, I point to the fact that Elon Musk, who has a similar business contained in SpaceX, drew attention to CoreWeave's borrowing costs on Tuesday night. Like the fact that some of its recently issued bonds have yields approaching 15%. And Musk, then what happened in response to that fact, get this, Musk tweeted simply, yikes! Wow! If 15 % of your cost of capital, then it's going to cost you an arm and a leg to build a data center. Word to the wise, don't ever have anything that Musk could say yikes about.

14:48Separately, there was a poorly timed article in the Financial Times last Wednesday featuring Corweave's co-founder and chief development officer, Brandon McBee, who talked about a desire to tap insurers' unlimited pools of capital for his company's financing efforts, making the insurers sound like they were like brain-dead marks. unacceptable. That's not how you raise money. Regardless, investors started panicking and the stock plunged more than 15 % on Wednesday. The broader Nasdaq went 100 % down 2%. Thursday seemed like it might be the beginning of a recovery of the AI data center cohort. After Asian markets had followed U.S.

15:23stocks lower overnight from Wednesday to Thursday, we had a down-open U.S., but then we stabilized. In part, why? Because of some reassuring comments from Jensen Wong, the CEO of NVIDIA, about, yep, CoreWeave. He gave CoreWeave his seal of approval. It makes sense as NVIDIA is already a huge share horror and said it didn't need any help. That was really important. It did not need any help. In fact, he said it was doing better than people seemed to believe. The Nasdaq finished the session in the black, the Dow and the S &P both roaring higher. But on Friday, the bottom fell out of the entire market, with tech leading the way lower.

15:58To me, this felt like pure fear taking hold, with the CBOE volatility index spiking from 16 to 22. Sell, sell, sell. It closed just under 20. The Nasdaq Composite finished the day off 2.15%, the worst performance since July 23rd, when that over-leveraged hedge fund, that situational awareness, when that thing blew up. Now, over the course of last week, there was an escalating sense of doom about the AI data center boom. So, Anthropocan released some updated financial metrics as part of its early roadshow, because, you know, they want to come public someday. And while the AI lab's still growing nicely, it's not growing as fast as the bulls hoped.

16:38Believe me, if it had been better, we wouldn't have had such a tough week. Insult joined injury. There were also some rumors swirling about another AI-focused hedge fund possibly blowing up, like I alluded to at the top of the show. That would definitely fit with the action. We even saw signs of stocks getting hit by AI displacement worries for the first time in months. When Perplexity announced they released an open source project to help combat rogue agents, some of my favorite cybersecurity stocks got slammed. It won't hurt their businesses, but people have to go about selling first because the stocks were up a lot.

17:10But also, secondly, because the owners reflexively can't resist selling when they see any of the generative AI companies say something about providing their own cybersecurity. These companies are believed no matter what. But whatever the exact reason for the negativity, this all ended up being a rather rough week for the tech stocks. They're not necessarily the entire market. You know, the Dow actually finished the week up 0.67 percent this week, even as the Nasdaq 100 was down almost 5.5 percent. It was the worst week since April of last year when the Liberation Day tariffs hit. I bet you you felt it.

17:39I know we felt it to trust. So let me give you a quick damage assessment of the hardest hit parts of the AI data center story. Let's start with, well, you tell me. That's right, CoreWeave, with its trouble balancing. This is what's known as the neocloud, and all the so-called neoclouds were crushed this week, with most down more than 20%, and CoreWeave down 25%. Even after some decent bounces today, these names are still well off their highs. Nebius is the best off, down 43 % from its June high. But the rest, CoreWeave, IREN, HUT8, Applied Digital, Core Scientific, have all been more than cut in half from their 52-week highs.

18:17The second worst subsector, memory and data storage. When we start hearing lots of chatter about how expensive it'll be just to raise money to build data centers, then the demand for these components that go into the data centers gets called into question. The memory and data storage group peaked in late June, sold off at hard during that situational awareness-driven crash. And although these stocks rebounded dramatically, they never got back to the previous highs. And that is a real bad sign for you charters out there. Micron, SK Hynix, Sandus, Western Digital, and Seagate were all down 15 % to 20 % last week.

18:51Even after bounces today, the highest quality memory stocks, I don't talk about Micron, SK Hynix, they're still both down over 25 % from their highs. The others are down more than 40%. These are major bad bear moves. In the case of Western Digital, it's down 50%. Now, we like Micron for the child's trust. Why are we gluttons for punishment? No, we bought it after spending some time at their Boise headquarters. We're situational aware that the stock's not acting as well as we would like, but the business is great. We saw the same dynamic with the previously red-hot fiber optics companies. Lumentum, coherent, down 25 percent.

19:23Corning dropped more than 15 percent. How about the broader semiconductor industry after a vicious beatdown? Last week, the Philadelphia Semiconductor Index, or the SOX for short, finally broke its eighth-session losing streak today, and the VanEck Semiconductor ETF broke a nine-day losing streak. Regular viewers know that these losing trees can get real ugly for the semis, but man, this group was just hammered, hammered mercilessly. Secondly, when you look at the main semiconductor capital equipment makers, they don't paint a pretty picture either. These are really great companies. Applied Materials, KLA, Lamber Surge, ASML.

19:55They were down anywhere from 8 % to 19 % last week. ASML, by the way, reported a really strong quarter. I thought it might turn things around. That was wrong. Finally, let's look at the hyperscalers. Now, those are the true tech titans, and they fall into a different category entirely. They are the ones that are doing the lion's share of the spending on the great data center build out. These stocks were, by and large, spared from the worst of last week's selling, with the exception of SpaceX and Oracle, which are the most financially tenuous. But Alphabet, Microsoft, Amazon, and Meta only had modest low to mid-single-digit declines.

20:26By the way, Amazon stock rallied back more than 12 points today on a Morgan Stanley upgrade, showing these stocks have a very technical term going for them, Mojo. Oh, and I can't resist showing you that Apple, the only tech titan without major exposure to the AI data center theme, remember, Gemini is basically their partner and Alphabet pays them, was actually up 2 % last week. And some of that is because, yes, the duo. Own it, don't trade it, it's worked well, and I think the duo is going to be terrific. I actually heard some people say things negative about the duo today, which only made me emboldened to say buy Apple.

20:59Here's the bottom line. Last week, AI data center meltdown was so severe that I had to use a whole segment just to cover the extent of the damage. Stick around after the break, and you know what we'll do? We'll tell you what needs to happen before the tech wreck can turn into a buying opportunity. Notice they didn't say it is a buying opportunity. Their money's back after the break. Coming up, are the tech stocks out of the woods after Friday's beatdown? Kramer is breaking down how they can find their way back next.

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23:02For the break, I walk you through the details of last week's nasty tech sell-off. Even though the AI Data Center stocks kind of rebounded today, the whole theme has been called into question, right? And I think that this group will struggle to find its footing for the moment, especially with this sort of core weave hanging over us. So what needs to really change before we can start bottom fishing with some degree of safety? And we know I say some because it's never safe when you bottom fish. First and foremost, it sounds simplistic, but you know what? The charts need to get better. The data center stocks peaked in June, then rebounded until last week when they got obliterated again.

23:36That does make for some ugly charts. When you look at some of these groups represented by ETFs that have been at the core of the AI rally earlier this year, I'm talking about the Van X Semiconductor ETF or that newer round hill memory ETF. The athlete tickered DRAM. They sure look like they've made double tops, and DRAM is actually DRAM, D-R-A-M. That's one of the worst patterns out there at double top. It almost always leads to lower prices. So they need to break that double top pattern, which means we need a nice rally, more than we got today, that proves there's still a plausible path to a pattern of higher highs and higher lows.

24:11Worse, the ones that don't have double tops have the most pronounced head and shoulder patterns that some people think is even more negative, to the point where the only way out seems to be lower. To the seasoned chartists, these stocks have no bottom. If you're an optimist, the good news is that as bad as things got last week, we did not take out the lows from late July. Now, that's when we got that crescendo of AI data center selling, a situation awareness, a highly levered hedge fund finally got liquidated. Today's bounce, though, I'm going to call it a good start. How about that? With Friday's puke session now known to us as get out now selling, both the Nasdaq Composite and the Nasdaq 100 fell below their 50-day moving averages.

24:53They haven't lost touch with those moving averages, and today's bounce has kind of helped us get back closer to the key levels, but it would be very helpful if the Nasdaq indices would just rebound above the 50-day moving average, ideally by the end of the week. Beyond the charge, which means many of you are about to turn the show off because all you care about is the charge, but I think the fundamentals still matter. The next big test for the AI data center complex will be hyperscaler earnings reports. Now, SpaceX, you ever know that guy Adam Jonas, he writes a piece every day about SpaceX. SpaceX is going to give us some color when it reports tomorrow night.

25:26I'm going to be sure to read him. I think he matters the most of anyone. It's going to be huge. Meta platforms with fewer moving pieces might be even more useful when it reports on Wednesday night. After that, we'll hear from both Alphabet and Microsoft on Wednesday of next week. With Amazon reporting the following night, yeah, we got some billions. What do we need to hear from the hyperscalers? Well, if you're hoping for a resurgence in the AI data center cohort, these companies need to maintain their gigantic capital spending. That's right. Need to maintain, not cut. See, if they start to signal that they're preparing to dial back their investments, the whole group's going to get whacked.

25:58Why? Well, because, you know, we need to see that they believe in it. We have what we want to hear. How about this? We have line of sight to hundreds of billions of dollars in revenues. It would be foolish to cut back, and we don't have to, because 2027 will be the year of the bountiful AI harvest. Remember, hyperscalers, please take that down. It's really good. On top of that, we want to see the hyperscalers continue to make serious money from data centers. We've started to see this from some of them, like the excellent cloud infrastructure growth, numbers from Alphabet, Microsoft, Amazon. SpaceX has shown it because it can build data centers, then lease computing power to others for significant sums of money.

26:36It's the best example yet of exactly how much money you can make when you create what we call compute. Meta's been less clear because it doesn't have a cloud business, but maybe it moves in that direction, or perhaps it will use this compute for Muse. That's the personal AI agent platform that is going so incredibly well. In short, we're about to run a high-stakes gauntlet of tech earnings, and if the hyperscalers blink on AI spending, then the whole data center edifice could be like...

27:09As long as they don't blink, though, I think we can get through this, especially if they put up strong cloud infrastructure numbers. Third, and maybe the most important, I don't think the AI data center cohort can put in a sustainable bottom until after the midterm election. That means we're in limbo until people go to the polls two weeks from now, two weeks from tomorrow. We know that data centers have become politically toxic, even in states that have been previously supportive of these things. So far, the Democrats have emerged as the party that's more opposed to data centers, and the polling suggests they'll likely do pretty well.

27:41Very high odds of taking the House, decent chance of taking the Senate. However, I'm not that worried about Washington here. I think the main issue is optics. No politician wants to endorse data centers ahead of the election because they don't want to drag their party down. But that becomes much less of an issue on November 4th. At this point, I think investors just want some certainty about what Washington will look like at the start of next year. Although, who knows if we'll have certainty after the election. You have to wonder if the Justice Department will sue to block any Democrat from taking a seat from a Republican.

28:10Don't laugh. It could happen. Maybe we get one last washout in the group after the results come out. But outside of campaign season, state and local leaders generally like bringing in new business. We just got to get past the election day. In regards to the results, our leaders won't be so afraid of the backlash, at least until 2028 rolls around. Data centers may be unpopular, but elected local officials who want to cut taxes can do so by doing some hard bargaining with the hyperscalers who want to locate data centers in their towns. Everyone likes lower taxes. They like them more than they care about big buildings with machines that might or might not cut employment five years from now.

28:46Finally, there's the looming IPO of Anthropic, one of the leading privately held AI labs. Ideally, we see Anthropic come public and trade well after it's open, But I don't even want to get that greedy at this point. I just want to see the deal happen. Before the break, I mentioned that Anthropics pre-road show event last week contributed to the sell-off because quite a few people were disappointed by the numbers. They previously said they want to come public in November, although now we're hearing whispers of December. Great. When you get this done, guys, we need to see that someone is making money or will soon be making money from all this data center investment.

29:20Sure, the hyperscalers have seen great returns from their cloud infrastructure businesses, But Anthropic and OpenAI represent a huge amount of their business for these platforms. Microsoft's new cloud revenue is hostage to OpenAI. Amazon and Google's cloud growth is hostage to Anthropic. So we need to see at the very end of the spending chain that this can be a sustainably profitable business that's worth investing in. That's what Anthropic's IPO represents. If there's enough demand that Anthropic's IPO is successful, that will give investors much more confidence that the AI data center theme has legs, although we'll also suck a massive amount of money away from the rest of the group just because Anthropics is so darn enormous.

29:58Here's the bottom line. Even after today's bounce, I still think it's just a little too early to say that the coast is clear and it's safe to dive back into the hardest-hit AI data center stocks. I just don't think it's safe to be aggressively bullish on the group until the charts improve, the hyperscales report, and the elections in the review mirror and Anthropics manage to come public. That's what you need to keep your eyes on before circling back to this newly beaten-down group. In other words, don't get too excited about today. If we get the cost be down tonight, we'll be right back into that.

30:26The House of Pain. Jerry in Missouri. Jerry. Hey, Jim. Thanks for taking my call. My pleasure. Jim, my cost basis is$82, and I am now up over 178%, even after last week's 12 % haircut. I've taken out over half of my cost basis. Do you think I'm being reckless, letting the rest of my crowd strike ride? Just the opposite. We just decided to wet out your bases and say, well, not where you got it. It's come from, but where it's going. I think you have a good chance it's going to go higher. And let's not forget, because you took out so much. You are playing, my friend, with the house's money. And that is ka-ching, ka-ching.

31:09Even after today's bounce, I think it's too soon to say, hey, it's safe to die back. That's very glib, OK? And we're not going to play that game. Now, much more mad money, including my shoes, with paychecks. I'm getting the state of small business and hiring in the U.S. with the CEO. Then I'm explaining why you shouldn't underestimate the importance of interest rates in the AI-driven market. And all your calls rapid fire in tonight's edition of The Lighting Round. So stay with Kramer.

31:39A little less than a month ago, we got the latest set of earnings results from paychecks. That's America's second largest payroll processor, big outsourced human capital management division. Stock bizarrely plunged 9 % in response. What went wrong? Paychex's core business posted a revenue miss. That said, the stock has now rebounded from its lows and erased most of the decline. I think some of Wall Street's actually reevaluating that quarter. They delivered a solid earning speed, and their overall revenue was slightly higher than expected. But their management solutions business, by their own admission, came into little light.

32:08And that was enough to overshadow everything else. Now, Paychex says the customers are simply moving from a la carte HR solutions to their one-stop shop HR business. Still, investors were underwhelmed by the company's guidance for the current quarter, and that didn't help. Last week, the company held its annual shareholder meeting where the management hammered home their new agentic AI technology that's being built into their payroll and human resources system, which is the future. So let's check in with John Gibson. He's the president and CEO of Paychex. Mr. Gibson, welcome back to Mad Money.

32:38Jim, it's great to see you. Okay, so John, I want to tell you, look, if I were managing your call, I would have said instead of being right up front like you always are and said, listen, you're a little unhappy yourself. I would have said your PEO portion of your business is taking share like it's never really happened before. This is the most this is the quickest growth I've seen. And that was why I think the stock came right back. Yeah, I think you're right, Jim. Look, when you look at the first quarter, as you pointed out, we exceeded consensus on both revenue and earnings. We had double digits earnings growth, strong growth in our PO advisory, in our HR advisory and PO and in our retirement business.

33:19And as you point out, our PO and insurance solution segment grew 12 percent. And, Jim, it accelerated beyond our expectations. We saw both the migration from our traditional HCM package into our HR advisory and our full HR outsourcing business. That was double our expectations. So to your point, we saw some migration going on in the marketplace. And Jim, this is a continuation now of what we've seen is really a trend in small and medium-sized business markets. They are really looking not just for AI-enabled technology. They're also looking for advisors to help them implement it so they're getting the full impact and outcome.

33:59And that's what our HR outsourcing business does. So I look at the quarter. Our operating income growth was up 14%. Our margins, Jim, 42 percent. As always, industry leading. We had strong retention, both client and revenue retention. So we're seeing our clients really appreciate the value we're bringing. So when I step back and look at it, I think we're very well positioned going into the AI era of human capital management. I couldn't agree more, particularly because two of the firms that had been downbeat about you had no choice. They had to take you up because the growth is so extraordinary.

34:35Now, how much of the growth is or I think is a very easy to understand by watching the video wise issue? Yeah, yeah. So you're really you're really getting into it. The what we're doing from an A.I. perspective is really incredible. And I'm incredibly proud of the work the team is doing. You look at our wise, which is our A.I. intelligence engine, just won the top H.R. product of the year at Executive Magazine. Matter of fact, HR tech is going on right now. We'll be picking up some hardware there in a few days. And it is a patent pending technology coupled with over 50 trillion data elements that we've built over the decades.

35:17It's combined with our expertise, strong government with governance, with guardrails and controls, which is really allowing us to apply AI responsibly. And that is going to set us apart, Jim. We not only have the data set, we also have the expertise. And now we're driving that integration in every one of our platforms. We're driving that integration. We announced an integration with Microsoft. So now you're going to be able to access our WISE platform in applications you use today. We've also launched new AI solutions. Our 650 is an eugenic AI compliance tool. Our WISE hire is an AI native recruiting and hiring tool.

35:57Both of those can be purchased standalone. loan. You don't have to be a payroll customer of ours. Another Paychex first. And then today we announced the industry first. And I really think this is what's important and what AI is going to enable us to do. Now we're talking about outcomes and guarantees. We announced today that we're going to provide a tax penalty protection service that if you're with Paychex and we're doing your taxes and filing your taxes, if you have an error and we don't catch it or we can't abate it for you, we're going to pick up the bill. That's how confident I am and we are that the way we're using AI to capture errors in advance, the way we're using and enabling our advisors to have AI tools to do their job faster and better, we now believe we can go all the way and say, when you come with paychecks, you don't have to worry anymore, small business owner, that some invoice or some filing or some error or some letter is going to arrive from a state because we're going going to take that and we're going to run with it and you're not going to have to worry about it.

36:59Well, I'll tell you, John, I know you advise the Federal Reserve Board. You know, I keep hearing, well, I hasn't done anything other than made it so radiology is a little bit better. You just described something that is really rather amazing, which is that you're putting your neck out, basically saying it does catch things. Why are not more people talking like you and saying you can't believe how productive the productivity gains of AI, which is not what you're really talking about. You're talking about productivity gains because all the stuff that could go wrong. It's what sets back small businesses.

37:28Yeah, Jim, you're exactly right. Look, the reason is, and look, I think this is why Paychex is a better position than it's ever been before. We have 800 ,000 customers. We've been doing this for 50 years. We have a large clean data set. That is the key to AI. You cannot stand behind unless you have big data sets. And Every day, we got more and more transactions going through our wise engine, and it's getting smarter and smarter and smarter. And our people are using AI to get more productive. And so now one of our tax specialists now can check thousands of customers and see if there's an issue that needs to be dealt with.

38:07As you can imagine, there's been no way for us to do that manually in the past. So you're going to see continued advancements. What we're really looking at is we want to apply AI to really drive AI-based outcome products and solutions for our clients so that our clients get more of their time back, improve their cash flow, and quite frankly, reduce the stress that small business owners worried every day that some compliance error somewhere is going to catch them with a big bill that, as you know, could put them out of business. And that's really what we've been about since we were founded, helping businesses succeed.

38:42And now we have the tools and coupled with our experts. I really think we're like I said, we're better positioned than we've ever been. I think you definitely are. And I think you're absolutely right. Great that you mentioned the stress because that's what drives people crazy. And of course, what makes it so that they make even bigger errors. And that really sets them back. John Gibson, Paychex, president and CEO. Congratulations on those upgrades. Those guys are finally starting to get it, John. They realize the kind of franchise you really have. Thank you, Jim. Appreciate it. Absolutely. Good seeing you.

39:12Absolutely. May I be back here for the break? Coming up, he's the fastest mind on Wall Street, so we're putting him to the test with your help. Bring on the lightning round next.

39:31It is time. It's time for the lightning round. It's time for the lightning round. It's time for the lightning round. It's time for the lightning round. It's time for the lightning round. Bye-bye. Sell, sell, sell. Just put it in a new course.

39:40And then the lightning round is over. Are you ready, Steve? Let's start with Jackson, Georgia. Jackson. Hey, Jim. Jackson. Jackson, what's going on? I wanted your thoughts in the future for AppLovin'. You know, look, AppLovin' is a really, well, it's come down a lot, geez. But you know what? In the end, I think that AppLovin' is in the crosshairs of Alphabet, Google, and I don't want to be there because whenever they do, I mean, it's just kill stocks and I'm just going to have to say no, I don't want you to be there. Let's go to Raj in California. Raj. Yes, sir. This is Bagaia Raj from California.

40:18Symbol is V-A-L-E. It's a copper. Valet? Yeah, I like it. I think that's a good idea. Nice head against inflation, too. Let's go to Daniel in Wisconsin. Daniel. Hey, booyah, Dan. Booyah. Hey, I'm Dan the Bear fan from Pleasant Prairie, Wisconsin. The Bears came out last week. All right. So did the cardiac kids. My wife just transferred a bunch of money from her IRA. I was wondering about MFA Financial. No, okay, so this is, MFA is one of those real estate investments. We have no idea what they are. These residential mortgage-backed stocks have just been absolutely horrendous. and I'm going to just say absolutely unequivocally, do not own that stock.

41:04Okay, I don't care how low the price earnings mobile is. Sorry. Let's go to Oliver in Connecticut. Oliver. How are you, Jim? I'm doing fine. How about you, Oliver? I'm good. Thank you. Oh. My question is about Kratos. They had great earnings last quarter and the stock is down. People hate the defense stocks. People hate the defense stocks. I don't want to touch the defense stocks. I'm going to bow to the crowd on that one. Let's go to Sam in Texas. Sam. Oh, yeah, Jim. Thank you so much for everything. Me and my father look forward to your show every morning and evening. Oh, I like that. Thank you.

41:36I got a question, of course. I got a question about Twilio. With Twilio positioning itself as a critical communications infrastructure for AI agents, do you think Wall Street is undervaluing its competitive advantage? No, I think it's valued correctly. That's the problem. I think it's valued correctly. Therefore, I don't see any upside or downside that I can pin anything on. I did have a bad week. I dropped a big one there last week. I didn't like that. Let's go to Sue in New York. Sue. Hello, Jim. I love the show and your book, How to Make Money in Any Market. So thank you. I love that. Thank you very much.

42:10Thank you. This speculative stock has strong phase three data results for the administration of psilocybin for treatment-resistant depression and PTSD. Ahead of the FDA approval, are the commercialization hurdles too big for this small-cap biotech to overcome, or does it still have room to grow? You know, this is the kind of thing. Okay, here's the way I feel about it. This is the kind of thing. You're up against J &J, okay? I will not go up against J &J. They're too big and too powerful. I want to stay away from that one. Look, you can spec, small position, spec that they get approval, but it's very, very difficult.

42:44Anything brain is really hard. Let's go to Thomas in California, please. Thomas. All right. Hey there, Jim. I have a question for you about a high-quality compounder that's been in the penalty box for a couple of years now. The defensive business, deep mode due to its scale, and it's finally making a move away from the 200-day with some recent earnings. All right, Jim, it's got an AI tailwind due to trade workers, but an M &A overhang. What are we doing with Cintas? We want to own Cintas, but it just had a really, really big run. I want to buy Cintas right now, but if it comes in, I do. I think it's a terrific company, really well run.

43:20And that, ladies and gentlemen, concludes the Lightning Round.

43:27The Lightning Round is sponsored by Charles Schwab. Coming up, Kramer thinks investors are misidentifying the potential risks for Corweave. He's revealing the real threat. Next.

43:44Booyah, Jim Kramer. I'm a first-time caller, a happy club member. I want to thank you for being the biggest champion of investing. Thank you for helping me become a millionaire.

44:14Interest rates are either the hidden hope of this market or the possible death knell of the bull. We spent so much time today talking about CoreWeave, the very successful data center builder, and its debt load. Right now, some of their publicly traded debt is going for 15 percent, and that's just too expensive for them to raise more capital. The return on the investment is simply not big enough for CoreWeave to make money if they're borrowing at 15 percent to buy NVIDIA GPUs. Bond buyers are apparently skittish because CoreWeave has too much debt and people think its GPUs won't hold their value.

44:47But I actually think that the chips they buy will more than hold their value. The whole world's desperate for high-end GPUs. Why is this important? because Corweave borrows against the chips it buys. And if these chips hold their value, then after the borrowing is done, Corweave owns the chips free and clear. That's when the real money gets made, when the borrowing time is over. But all of this may be a giant sideshow, because I think the real issue here is interest rates. Corweave is fine on its own versus the other neoclass like Nebius or Irene, two companies actually that I worry about more than I do about Corweave.

45:18If you're worried about Corweave, by the way, you really need to be concerned about the latter two. At the end of the day, Corweave's principal worry should be that rates could go up big. The company thought it would benefit a great deal from the ratings agency saying good things. It was positively received at first, but then entirely forgotten about. Remember, the cost of capital didn't rise just because of questions about Corrie's balance sheet. When long-term treasury yields go higher, everybody's cost of capital rises. Why do I care so much about Corrie, which has been mentioned multiple times this show?

45:45Because it simply shouldn't be having these problems if the great data center build-out is still humming. I consider Corrie the premier builder of data centers, But if you listen to St. Gartner, which was on Squawk on the street today, you think the quarry was just dead, which would be horrendous for the entire complex. I don't believe that will happen unless rates blow out because of inflation, which could force the Federal Reserve to take short term interest rates much higher. The Fed chairman, Kevin Warsh, is adamant that we must get inflation down to a level that doesn't hurt the working person.

46:15When he took up rates a quarter percent, we got a sudden surge in yields across the board. I think that's what hurt Corweave's cost of capital more than anything else. In short, Corweave is a metaphor for this moment. If it can stay alive, it can keep building. And I think that AI will gain steam again and will see the real impact on the economy and the world. If it collapses, then we'll see many others collapse with it to the point where the whole AI data center complex could get really smacked. Corweave is indeed the key to this market. Corweave may seem significant when it comes to the growth of AI, but it's a little boat in a sea of interest rates.

46:46If the yield on the 30-year Treasury goes north of 6%, it's currently at 5.47%, then look out. If we get another rate hike soon, then I believe Corwin will have a difficult time raising money. And the dominoes will indeed fall. It could be a casualty of the Fed's war against inflation, not its valuation or the value of its chips. We need to factor interest into everything these days because ever since Kevin Warsh became Fed chair, his agenda is to crush inflation. And there's a heck of a lot of inflation to crush, including all the debt that's needed to finance the data center buildout. Increasingly, I worry more about treasury yields when it comes to financing anything versus the intrinsic cost of capital for a data center builder.

47:20Why? Because we are underestimating the power of rates and the determination of Warsh. If rates come down, I bet Corby's fine. Although I still, again, worry about Nebius and Iran because they're tertiary players. Still, so let's spend less time on whether NVIDIA's GPUs hold their value, more time on whether the Fed's satisfied with its progress in the fight against inflation. In other words, we kid ourselves if we don't think that rates matter. but it's the treasury rate you need to care about, not the full faith and credit of core reap, which could be in doubt if the 30-year breaches a 6 % and change level, even if their business stays as strong as it is now.

47:55I like to say there's always a bull market somewhere. I promise I'll find it just for you right here on MadMoney. I'm Jim Cramer. See you tomorrow. All opinions expressed by Jim Cramer on this podcast are solely Cramer's opinions and do not reflect the opinions of CNBC or its parent company or affiliates and may have been previously disseminated by Cramer on television, radio, internet, or another medium. You should not treat any opinion expressed by Kramer as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Kramer's opinions are based upon information he considers reliable, but neither CNBC nor its affiliates and or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such.

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