9AM HOUR: "Trillion-Dollar Club" Earnings: Alphabet Tumbles, Microsoft Rises, Eli Lilly CEO Exclusive 10/29/26

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1:11Good Thursday morning, everybody. Welcome to Squawk on the Street. I'm David Faber with Jim Cramer. We are live from Post 9 at the New York Stock Exchange. Carl's got the morning off. And what a morning he chose. Got the futures down significantly this morning. Why? Well, Well, you probably know parts of the reason. Of course, Google and a number of software companies as well. Let's get to our roadmap because it does start with two tech giants. Now, they are moving in opposite directions. Of course, post results. We're going to break down Microsoft results. Of course, that stock is moving higher.

1:43And as I said, Alphabet shares, they're plunging. Plus, Caterpillar shares also down ahead of the open. That would be its worst day in seven years. Again, this follows his fears of a slowing build out of data centers for the AI ecosystem. We're also going to have a CNBC exclusive with Eli Lilly CEO Dave Ricks. Oh, yeah, just another trillion dollar company here on the show. The company blew past estimates and it did hike its sales outlook. Let's start, though, with the mega cap tech earnings from the two companies I just mentioned. Alphabet shares. I've seen them down as much as 10, 11 percent.

2:19We'll see where they begin the session 29 minutes from now. Negative free cash flow. OK, not that much of a surprise, but that slowdown in search advertising revenue growth, that was the key here. It did overshadow strength in the cloud business. Take a listen to what CEO Sundar Pishai had to say on the call about CapEx. We really look at our businesses and really take a disciplined long range planning approach. To us, obviously, we are seeing very, very robust demand signals across a wide variety of areas. And so we view it as an extraordinary set of opportunities, and we are investing for that moment.

3:00All right, Jim, start us off, baby. Well, I think that this was, if you were back in fifth grade at the end of this office, you'd say this is Kufus and Gallant. This is what? Kufus and Gallant. The gallant that is Microsoft that is living within its means, run by Amy Hood, a fantastic CFO, who basically said to Satya Nadella, I think, listen, let's not go above. And now you could say, well, they didn't have to, they didn't spend as much because some of the neoclouds didn't do the job. But what I noticed is that this is a disciplined approach with AI. At one point, they were mocked. Well, you're talking about Microsoft.

3:34Microsoft. We're showing Alphabet right now. Okay, let's start on Alphabet. Okay, we're starting on Alphabet. We just heard from PSI. Google missed on every single line except cloud. There's a lot of questions about how the search growth's slowing, which it definitely did, only growing at 5%, essentially flat sequentially, very bad. But I think a lot of people really didn't like the reason. Okay. Because the reason seemed fatuous. They blamed currency and certain ad categories that were hurt by the World Cup. Now, we are all conditioned to hearing very good explanations that would make us feel, I feel confident about that.

4:14This is a one-time issue. This is something that, right, the market may overreact to. And I'm much more concerned that maybe in the end, and this was not written in all that I read about it, people aren't going there. I mean, people just, this next generation, David, they're going to chat GPT. They're going to crock. They're going to claw. Well, they also are going to Gemini. It's not like search queries were down. They were up. In fact, they were near highs. Five-year high for query growth. More and more of the queries are to AI as opposed to the old search. And we don't know how to monetize that, David.

4:52Right. They are not selling as many advertisements. And it's not clear, given how you behave when you're interacting with an AI chatbot, exactly how the advertising is going to be monetized or how you're going to interact with the advertising. You have to look at it straightforward. During the Ruth Porat days where we would see, wow, people going to the site and they're making a lot of money off those people. Now it seems like people who go to the site, they may not make that much money, which we now know could be considered existential. We had been so enamored of the cloud business, which, by the way, Thomas Curran did a fantastic job.

5:27The cloud business is great. We just, there had always been a concern, David, that one day this day will come. But they had Gemini. I mean, of course, the original narrative when, you know, and I forget the dates, it might only be a year ago when Google was suffering for some period of time, was that they are going to be disintermediated in search as a result of the growth of ChatGPT and what it's going to do. And then many investors seem to say, you know what, it's not happening because the results proved otherwise. Now we're confronted with this. And again, I want to make it clear here. they had year-over-year query growth was the highest in five years.

6:05But that did not translate into earnings, David. But management talked about more searches, not necessarily bringing in more advertising revenue per search. And so I guess I'll put the question to you. Is this a seminal change in monetization that is going to mean this is not going to be quite as profitable a company? I think it is. You do. And I'm very— You don't have to answer the question, by the way. No, no. Believe me, a lot of us have spent a lot of time this morning thinking, thinking, okay, we've written off this company before, and that's been a very big mistake. Especially because also, Jim, as you know, they are the best position, they would argue, in terms of having everything.

6:39They've got the cloud. They've got the search chatbot. They've got the chips. Okay, so the chips. They've got all the ways to deal with you and all of their different... Spending a lot of money on their TPU chip, and yet they're still having to borrow from Musk. They're paying a lot of money for a compute. They don't have enough compute. David, We have been always impressed by YouTube. I was not impressed by YouTube. They didn't monetize it correctly. They did get saved by the cloud. If they didn't have the cloud, then we would come in today and the stock would be a piece, be lower. And then let's go.

7:12Let's go into something that the so-called free money, the at-the-market sales, are pressuring the stock. Yeah, you really believe that. I just wonder. It seems like it's such a small amount. Did they give any detail at all? Well, they still have$27 billion left. $27 billion left. Okay. Okay. $27 billion left to sell of stock. Yeah. It's a company that already sold$85 billion, obviously, in one offering back in the spring. Also, we got some kind of hot money in it because they felt that Berkshire Hathaway came in and bought a lot. Jim, I would come back to the fact that reminds me. I mean, they were negative free cash flow.

7:43Yes, they were. To the tune of$9.1 billion in the quarter. And again, that just shows you, we've talked about it endlessly here, how quickly companies that were once the most profitable companies the world's ever seen have decided to spend so much. They're going to spend over$200 billion in capex this year and going to, what,$300 billion maybe or more next year? The cap, like I said, this was a highly undisciplined call. I know in that eskenazi from Eli Lilly, the CFO, very good at Eli Lilly. I did not sense the kind of discipline that you got from Amy Hood. CFOs are very important. We don't talk about them enough on the show or any of our shows in the network.

8:21But Amy Hood is a titan. Everybody knows that. They don't cross her. You don't spend more than you have. I did not feel that that was the case with this alphabet call where I kind of felt like, all right, we're supposed to give them a free pass. When we now start thinking, wait a second, this core business they had, isn't it being eroded by other companies? And I think it is. You do. I do. And look, we're going to hear from Amazon tonight. Am I worried about Amazon because of this? Yes. And I think Amazon's terrific. But why? This is about monetizing search. Search and Amazon. But maybe I wouldn't want to advertise with Amazon if I'm finding that I'm being directed to the site by Muse.

9:02I mean, here, you know, Microsoft Azure obviously had, I mean, the cloud here was a huge. 48 % growth. No, no, it was a perfect. Google Cloud was$30.7 billion of revenue, up 103%. Yeah, but you see. Operating income was, you know, increased from$3.6 billion to$11.1 billion. There's no issues on cloud. So why would you say you're worried about Amazon? Oh, no, I'm worried about Amazon. You know how we love that ad component? That's what I'm worried about. Just because you think it also could have been impacted? Well, I just think that if we all get to Amazon via a different way, instead of studying Amazon and deciding which one we want to buy, instead we're directed to one.

9:38It's entirely possible that they won't have as much ad revenue. I don't think that will happen yet, though. All right. Final word for me on Alphabet. Let's move on to Microsoft. I mean, you're going to get the analysts defending Alphabet today, though, and talking about what I discussed, which is that they are still seen by many as the best position in the overall ecosystem, given they have all the levers. They do, and they can come back. I just, look, they can come back because they're really smart and they'll think of something. And do you know that a year ago we were sitting here saying, you know, Microsoft's not spending enough.

10:05They don't know what they're doing. It turns out they knew exactly what they were doing. So for me to just say, I'm saying that this query issue has to be solved. Right. The query issue, because we don't want, if you have a five-year high growth in queries and it produces this kind of result, then query is no longer the fulcrum of this company. And that had been something that I had come to love. That was the free money we all loved. I get it. All right, let's move on to Microsoft. A very different story, as we sort of alluded to already. And you can see it reflected in where the stock is going to go as well.

10:41You know, Azure, they're talking about 49 to 50 percent growth in the second quarter. Demand exceeding supply and on from there. Not to mention, when you come back to free cash flow, it is notable that this is a company that's still generating it. 18.6 billion in free cash flow. You talk about being disciplined. I think they're tremendously disciplined. For example, at Alphabet, they still added 24 new data centers, five continents. I know that some of the neoclouds apparently didn't deliver their product. I'm trying to figure out which ones. All the neoclows are down, betting that maybe they were the ones that Microsoft didn't get the product from.

11:15I think that Copilot, once again, had great esteem. The customers really love Copilot. That's something that Wall Street got wrong when they initially saw Copilot and thought it was limited. The companies that are taking Copilot and taking more and more Copilot is terrific. And remember, there is actual leverage to Copilot. So you had actual leverage. You had tremendous spending discipline. You had Azure putting up numbers that were extraordinary for a big property. And you come away and you say, you know what? This is a company that is growing revenues and margins are growing. And you know how rare that is for a company the size of Microsoft?

11:54It is rare. I think the stock could be$600 in two weeks. Of course, as you recall, concerns widespread about their software business, obviously. being potentially disintermediated by the likes of Chad and of Claude in particular. So many concerns on where that stock has come from now. Basically, the outperforming almost the S &P, when it was down over, it had lost almost more than 20 % of its market cap at one point this year. People didn't believe the co-pilot was great. No, it was after those co-pilot numbers. Jim, I remember being here with you talking about numbers that were not what you were hoping for a couple of quarters back.

12:34But that's why before I completely write off a company as great as Alphabet, I say, well, wait a second. I sold people. I never sold any Microsoft. It's a huge position for my trust. And I didn't because I said, you know what? Satya and Amy, I cannot bet against them. They will find a way to make money. We don't emphasize how important CEO and CFOs are together to be able to change not only the narrative but the actuality. But Google, I didn't. World Cup? Yeah. World Cup? Really? World Cup? I know. You know? Practice? That's a strange thing to come back to. And Schindler's so good, man. Schindler's good.

13:17By the way, I'm hearing. He did the NFL contract. That guy's a genius. I don't know if you're hearing this. I do want to come back to. No one's saying anything to me in my ear. Microsoft's saying it will stay free cash flow positive in fiscal year 27. They can do finance if they want. But they will do financing. Let them do it. And in fact, I've heard they may be in the market for a bond offering. Yes, but that's as opposed to this ATM that everyone thinks is such free money. We do have some sound from the CFO, Amy Hood, talking about the flexibility they have in terms of raising financing. Take a listen.

13:48We're lucky. We have a lot of flexibility in terms of our capacity to raise financing. I've talked about this before. or there's a form of financing called leasing, and we've been using that one as a vehicle. There's also we're fortunate to have access in the debt markets, given where our ratings are and sort of we haven't been able to, and we haven't yet, I would say, tapped that. And then, of course, there's other options. But I think the way I see it is we're feeling good that we're free cash flow positive. We feel good that the return on every dollar of CapEx we're spending, we're confident in that.

14:29And therefore, we feel like we have lots of options to be able to tap the financing markets when they make sense and they're attractive. All right. I do want to see if I can confirm that in terms of them actually hitting the debt markets right now. Do you think search is dead? Do I think search is dead? I think it's changing. I think it is changing. And I would never say that these companies are not smart enough to figure out other ways to monetize it. But they have changed a lot of algorithms that have hurt other sites. Maybe that wasn't helpful. Maybe. And it is a different cert. When you do AI, you may get the answer and that's all you're really looking for.

15:06You know, young people do not search the way. Those young people. Do you know that maybe this product, like maybe scotch and vodka, has aged out? Two most dangerous words in the world. aged out because you can't age back in. No. I don't know if you've noticed. I've noticed. All right, coming up, we've got another trillion-dollar company out with earnings. We're going to speak with Eli Lilly, CEO Dave Ricks. That's coming up right after this break. Legacy credit scores only look at a brief snapshot in time, and that limited view often leaves millions of qualified credit seekers out of the picture.

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17:09Download the latest episode and subscribe at schwab.com slash market update podcast or find Schwab Market Update wherever you get your podcasts. David, Eli Lilly's shares are gaining big. Not a tech stock, it's a pharma stock, but it's got a lot of technology, bottom line beat, huge height to its full year guidance. Here to break down the quarters, Eli Lilly's chair and CEO, Dave Ricks. And Dave, I'm so glad to see you because this is a revolution that's occurring. you're leading it. How many people, what percentage of people are going to be on these drugs, given the incredible things you're discovering about how they help people?

17:48Well, I don't have an exact number, Jim. Good morning. Good to be on your show today. But it could be a lot more is the bottom line. Today, globally, I guess we'd estimate maybe 3 % of eligible patients access obesity care. In the U.S., maybe 10%. So the room for expansion here of this market is dramatic. Of course, Lilly's at the front of that, and that's going to be driven by both our access efforts and new innovation. Jim, we've got four projects, four new molecules in phase three now. Of course, just introducing our oral, and terzepatide is the big story today with its continued rollout and success.

18:27So we couldn't be more excited about the future for treating obesity at a global scale and conquering the more than 200 diseases that it causes. You know, David, there are things that happen in life and you just say, well, what is happening with Medicare? Is it really helpful? Is it too expensive? I'm looking at your Medicare GOP-1 bridge. This has got to be one of the most successful programs in history. Tell us about how everybody can afford to be on your drugs if they're on Medicare. Yeah, that's right, Jim. Starting July 1, we worked with the Trump administration and Dr. Oz deserves a lot of credit here for his vision to develop a special program where seniors can use our obesity care products, ZepBound and Foundayo, and access those for$50 a month out of pocket, which is a compelling value proposition for seniors, often on a fixed income.

19:22It's important to note too, Jim, that obesity takes its toll over time, and seniors present with more comorbidities, more cardiovascular risk, more diabetes risk, and other manifestations of obesity. So this program is taking off, and it's not surprising because it's very affordable. But interestingly, today, the USC Schaefer Center, which is a third party that analyzes healthcare markets, put out a preprint paper showing they estimate the U.S. government will save$25 billion over 10 years by using more obesity drugs. So I think this is a key to the future, which is prevent disease before it starts, cut it off at its trunk.

20:06And in seniors, this is a program that's really working. We're pleased with the early uptake and access. And I think doctors and patients are as well. One of the things that's great for people who get the decades, page 19, there are a huge number of indications occurring, but a lot of what you're doing that we're seeing is something you told me when we first had dinner together about when these drugs came out, which said, Jim, don't get really excited until we have solved the persistence problem. In other words, people who have side effects, but you will be working on them. I see a huge number of trials about drugs that have fewer and fewer side effects for people.

20:42How is persistence when I first met you versus now? Yeah, you know, I think there were a lot of reports a couple years ago that there's a lot of drop-off, etc. And that happens in certain segments. But a key driver that is the economics, Jim. So coverage and programs like the Medicare Bridge program are key. And so far, if we look at first and second fills for patients who are seniors in that program, the drop-off is very low. Similar when you have consistent access through your employer and Medicaid. So I think the key story here isn't that people don't tolerate the drugs over time. It's that they worry about the affordability.

21:23We need more access and coverage. We're working on that very hard. But we're also changing the technology. There's a key project in our phase three pipeline now that's in the middle of enrolling. It's a large program, actually the largest phase three program we've ever invested in with a drug called Alora lintide. This is a highly selective amylin receptor agonist, a new mechanism to treat obesity, similar to GLP-1. It's a cousin of that, but works in a slightly different way, but doesn't appear to manifest the same nausea and GI side effects that bother many people. That's a program I'm very excited about.

22:00In phase two, we showed 19 % weight loss with a single acting mechanism with very, very low GI symptoms. So this is an example of the next generation that we're working on and will launch over the next couple of years. A lot of elderly want to take these drugs, but they're afraid that they'll be losing as much muscle as they are losing fat. How are we doing on a pill or an injection that really just attacks fat and leaves muscle so that the expansion of the category would be dramatic. Yeah, we have a number of efforts in that regard, but we should just rebase on what the facts are, because I think there's more talk about this than probably is worth it.

22:44If we lose weight by diet and exercise or gastric bypass or medical therapy, we're going to lose muscle and fat. with our studies that ratio tends to be between 75 percent to 80 percent fat to other types of weight loss which is about the same as diet and exercise or surgery so why is that well i think there's a number of reasons people are eating less nutrients we can we can adjust the nutrients we eat and be more protein focused i think if you talk to food companies or retailers jim on your show they'll tell you that sales of protein-based products are way up, and people are actually changing what they're eating because of these medicines.

23:28Also, resistance training is key, and we recommend that with everybody. Those two interventions probably solve most of this problem, but people are still attuned to it, and I think we have to worry about some patients who are very overweight and maybe are not ambulating enough to begin with. And so there's a medicine we have in our pipeline, Bimagrimab, which focuses on muscle growth. And then there's some new data we're developing as part of the RETA program, RETA True Tides program, that will really more carefully examine where the weight is coming off. And in particular, with this drug, we're excited by the possibility for really dramatic changes in visceral obesity.

24:09So the kind of fat that's in your organs in your stomach. This is very harmful. There's a lot of studies that show this is what causes disease, particularly liver fat. So look for that data coming out early next year on RADA. All right, David, it's David Faber. I'll just ask the final question here because we're almost out of time. You know, capacity constraints have been an issue in the past. I think you're spending, what,$11.5 billion for some new plants in Houston and Richmond. Where are you? When do expect to actually have product coming out of those sites? Yeah, Jim, we're, David, sorry, we're, I think, through the worst of that.

24:48If we look out, certainly the oral technology we've developed is pretty much unlimited in capacity right now. And with Trezepetide, the ingredients in Zepan and Manjaro, we're in great shape. That said, we're probably about 40 % of the way through completing our$50 billion capital program. So a good portion of that 50 is online and working. I think, actually, Jim, you visited one of our plants in North Carolina that was part of that, and those are at full capacity. For Houston and Richmond, those are obviously just starting, so we're three or four years out from that. The biggest single investment we made is here in Indiana, in Boone County, just north of Indianapolis.

25:29This is going to sum up to be something like a$15 billion plant by itself. It's the largest drug factory we've ever built or ever existed in the U.S. That'll come online next year. So we're in great shape to solve obesity at a planetary scale. Well, Dave, thank you so much for coming on. It's really terrific. I spared you the horse race stuff against Novo because you're winning. I don't need to go into it. Dave Ricks, CEO, chairman, Eli Lilly. We'll be keeping an eye on those chairs and so many others. We've got a lot more for you when Squawk on the Street comes right back. Ever notice how every new AI tool asks you to explain your business to it all over again?

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27:31All right, we're going to have an opening bell, you know, 40 seconds or so from now. You can see we're headed for a lower open, particularly on the NASDAQ, given pressure from Alphabet in particular. But it's not alone. Here's the ServiceNow, Fortinet in terms of security. We're going to get to all of those, Jim. We're more isolated than people. People are extrapolating and they're making mistakes today. They're doing too much, making too many decisions. Slow down. Slow your decision-making process. Go do better today. Okay, with that said, let's get to an opening bell right here at the big board.

28:02It's Verizon celebrating the rollout of its small business supplier accelerator. Over at the NASDAQ, Macon Square, Interbrand Consulting, please celebrating the best mobile brand. Chicago, the governor of Illinois, J.B. Prisco, highlighting Chicago's leadership in the global sense of commercial markets. And innovation. One of many potential candidates for the Democratic nomination for president. But who knows? We've got the midterms before that, of course. But we've got so many stocks. You know what? I'm going to give you the opportunity here. I know where I want to go in terms of some important things.

28:41But you haven't had enough airtime today, Jim. No, I've had plenty of airtime. We're doing a good job here. Where do you want to start? All right. I want to talk about how I think that FedEx was very misinterpreted last night. There were a number of analysts who were saying, well, wait a second. and they were having a problem with truck drivers. Otherwise, the margins would be good. When I speak to Raj Subramanian, which is a lot more than a lot of people do, the future pricing of contracts will reflect the cost. It's only 10 % of long-haul trucking is outsourced. They will simply insource. The margins were good.

29:09It's going to be an incredible holiday season for them. People are misjudging the fact of how profitable this company is, and I want you to buy Federal Express. All right. Wow. Look at that. It moved up a little bit just since you began to speak. The analyst just had it wrong, and the reportage was even worse. You're going to do FedEx. I'm going to take us back to AI and Oracle. Obviously, we'll come back to Microsoft. We'll come back to Alphabet, as you might imagine. I want to hear from you on service now. But let's talk Oracle, because they had their investor day, and they ended it on some very positive notes, particularly from comments from the CFO.

29:41Now, that's not showing. Remember, it moved up. If we had a couple of days, it moved up dramatically later in the day. Now it's kind of flat. But the keys here are as follows. Path to free cash flow positive sometime during the second half of their fiscal 2028. By the way, that begins in May of 27. And to 30 billion plus, that's the number they're using in free cash flows in fiscal 29. And so they also talk about margin expectations and the like. continue to be confident in the plans they have to deliver around 7 gigawatts of incremental capacity over the next couple of years. And then they talk about getting to 10 gigawatts at the end again of fiscal 28, Jim.

30:25And that is going to sort of be the peak in CapEx. So you've got this promise of significant$30 billion plus in free cash flow by fiscal 2029, which starts in May of 28. Remember, we were looking for a loss of$7.3 billion. The swing is really rather dramatic. Right. It is a dramatic swing. It is what the bulls had been hoping for. Yes. And remember the bets against their debt, David? That may be now, I trust Oracle. We've known these for years. These two great projections I thought were very recent. You do. Yes, I do. I mean, they seem very confident in them. And there you can see what we're talking about.

31:03So the stock moved up. Again, it doesn't look like much on the longer-term chart. But it was a significant move late yesterday. Now it's essentially flat. Do you take Oracle off the table? I don't know, Jim. But I do. You know, I'll end with this on Oracle in terms of the needs for capital. Remember, they did the$20 billion at the market. That took place in June. They did that pretty well. Someone was very good. Of last year. The CFO said, quote,$20 billion in incremental capital is what we are committing to today to complete the funding of this investment cycle. And they're going to split it between$10 billion of equity and$10 billion of gross debt.

31:40And they claim a bit less than what might have been anticipated. We will look to execute that opportunistically as early as calendar year 2026. So there's not much time left right now in the year. Do you take it as if they're actually making money with it? Remember, because that's what Microsoft was saying. We're making money with our compute. Take it all together, peak in CapEx coming, starting to generate significant amounts of free cash flow again. Not yet, but soon. And done with their funding when they finish the$20 billion. If you take them at their work, those would seem to be quite positive.

32:15I will take Larry Ellison and his team, the two co-sos, at the word. I took Oracle off the table as a worry and concern about the building. Really? Yes, I did. As a result of the comments from this investor meeting. I also want to straighten some people out about Caterpillar. Caterpillar, people feel, is a big miss that's completely wrong. Caterpillar became a story where the analysts finally caught up with the greatness of Caterpillar in the data center. What does that mean? So it was no surprise. Well, how could it not be a surprise? Stock's down 10%. It was no surprise because we knew that they had finally done, in fact, incredibly well in power and energy, which was up 18%.

32:54They knew that construction industry is up 18%. You can't have a surprise if nobody's surprised. This is a surprise party where I told you. Well, then who's surprised by deciding to sell the stock so that it's lost 10 % of its market value? People who are so enamored of the idea that there would be even larger turbine plants where we would have many more neoclouds creating a plug-in to the Marcellus shale that goes right behind the meter. it didn't work out. They had their capacity constrained. It's a great company, but everyone had heard of it. I know people on the board. I know this company pretty well.

33:31Everyone was very happy with the quarter because they delivered a fantastic quarter. But David, if I tell you it's going to be fantastic and it's fantastic, that's not a surprise. If I'm reading through here then to say, well, these data center delays are having an impact on Caterpillar being there to help with backup power and everything that has been so additive to its business, you're not a believer. No, I just think that they're maxed out. It's a good company. People got too excited because so many like these ancillary plays. Yeah. Saying, well, you know what? Caterpillar's not really related to GDP anymore.

34:04Now, the fact is the GDP part of his business is doing quite well. But, you know, David, when you get too excited, like Samsung, huge company, Samsung Electronic, we got really excited about it. It was SK Hynix last night. Well, these guys came out and said, well, first of all, they missed on revenue. Second, they weren't nearly as bullish about the outlook. And the next thing you know, well, Samsung was down 4%. And that's a gigantic company. I'm just saying that if you have tremendous, great expectations, Mrs. Habersham, it doesn't always work out. Okay, I believe you. By the way, on the data center story, just to end on Oracle and my comments here.

34:41Again, the CFO during this meeting yesterday, you know, trying to assuage some of the concerns around data center build out here in the United States and slow down, made the point that they have 38 data centers under various forms of construction in 11 countries. And so you can focus all you want on sort of the key Stargate ones, and they obviously are larger in terms of the gigawatts, but making the point that there's a lot going on even outside the U.S. I think it's made to talk about because it was a worry. Now, David, a company you often tell me to focus on, because it's a half a trillion dollars, MasterCard.

35:17A remarkable quarter, just straight out positive, cross-border up 11%, tremendous execution, great quarter. And I will tell you, David, people are still spending. So MasterCard, a remarkably good quarter from Michael Meebac. Okay. You know, the good quarters are easy to spend time on. Let's talk about service now, because that stock is looking down. Not looking down. That stock is down 24 % right now. This was one of the names that was caught up early in the year in the old SaaSpocalypse and then rebounded dramatically as its business did. Was Bill McDermott with you last night? I believe he was.

35:56Yes, and it looks a little more convoluted, but I think the stock got ahead of itself. I think Bill delivered a good quarter. He's doing a lot of integration, a lot of artificial intelligence to his control tower. But the problem here, David, is I think people are concerned about the model. Is it a seat model? Is it a consumption model? It's become harder to analyze. But the business is there. They did a good job. But you know what moves to the top? To the floor. Our workday and Salesforce as being a SaaS pocket. All right, you say it's a good quarter, but it obviously didn't hit expectations.

36:27Otherwise, it wouldn't be losing a quarter of the market cap. Convoluted course. Can you explain what that means? Well, because we don't know. I mean, some of it is a seat model. You have to buy a certain subscription. Others, they're just selling kind of one-off. But they did have good growth. They had good rule of 57 and good margins. All I'm saying is people decided that the SaaSpocalypse was over, and they're reintroducing it as a concept. So that's why you have to talk about what Salesforce is doing, and you have to talk about what Workday are doing, because they have come out the other side with no decline.

37:06I do. I do want to make a point. I sometimes do. It depends on the company. Sometimes I've done it with MongoDB. I've done it with other companies. On ServiceNow, the gap between gap and non-gap reported numbers is quite large. So non-gap, they did a dollar a share, diluted EPS. Gap, 27 cents. So their net income was$277 million. Gap income from operations,$385 million, I should say. But they added back stock-based comp of$630 million amortization. And they still missed on that. You're absolutely right to bring that up. You know, it's funny because I don't know if this will ever come up as a real issue in some ways.

37:44There are a handful of people who are very much focused on it. That is the difference between some of these companies. Bill Burley introduced that to me and said, Jim, you're not looking at stock-based compensation. That adjust so much and what they adjust for. Gap operating margin, by the way, has got it to 12%. Non-gap operating margin is 32%. So that just gives you a picture. Okay, let's talk about another. Remember I said that people are extrapolating incorrectly. Fortinet reported not a great quarter. No. So people say, wait a second, that's got to be bad for CrowdStrike. That's got to be bad for Palo Alto.

38:11Yes. Fortinet is what's known as an appliance company. They have a firewall. It's a firewall business. That in the new world of what we're seeing with cyberterrorism is not enough. You need a platform the way that Palo Alto offers. You need an all-encompassing program the way that George Kurtz at CrowdStrike offers. I'm saying that Fortnite is no longer a growth company and look to others and do not presume anything other than the business is going away to Palo Alto and to CrowdStrike. So you may be selling those because Fortnite without realizing. But you see a real difference in their business.

38:49You just explained it. You're selling Fortinet. You're selling CrowdStrike because you're thinking of Fortinet. CrowdStrike is taking Fortinet's business. Because Palo Alto is offering a really terrific solution, Nick Casarora, that encompasses many other things. And they're selling his stock. He's probably sitting there laughing, saying, don't they know that Fortinet is a shared donor to Palo Alto? P-A-N-W, buy it. Fortinet, no thank you. No thank you on that one. How about, though, let's go nice. Let's go nice. How about Chipotle? Let's go nice. Really, we're going to get to Chipotle. I've got to get to these deals at some point, not to mention T-Mobile.

39:22I was just going to say, congratulations. Congratulations. I think Scott Boatwright's turning the ship three straight quarters of beating Connors. Well, you're just doing all the guests you had last night on Mad Money. That's all. It's one big promotional effort. You're just shilling for the show. One big promotional effort because, you know, my contract is determined by how many of them. No. My contract is determined by me. Thank you. You're welcome. And that stock is up. I'm not trying to promote. I know. I'm just kidding with you. That hurt. That hurt? No. All the things I've said to you and that hurt?

39:53No, no. Chipotle, I'm just saying this. I enjoyed Scott because I want Scott to win. I do want Scott to win. I do want to try to get to T-Mobile as well because I did have a conversation there. But how about the deals, David? Let's get to the deals. Do you want to do Georgia Telecom, T-Mobile? Let's start with, well, there's T-Mobile. All right, real quick. By the way, numbers look strong across the board. Then why are people saying it's not a growth stock anymore, David? I think these companies, and you've made this point, are going to operate under the shadow of what Starlink may or may not do to their business, even though it's going to take that company, I should say SpaceX, could take a long time and huge spending.

40:30They're going to stay focused, as the CEO tells me, on delivering what they call the best experience on what they believe is the best network. They like the volume and value balance of the quarter. And then they're going to try and get people focused on the AI build-out and the things that may occur as a result of the use of their network when you put GPUs at the edge of that network. Robotics, for example, various use cases that they will have over time as well, whether it's the Las Vegas Metro PD using drones or the Buffalo Fire Department. And various use cases they believe as we move into physical AI that they will be a beneficiary of.

41:07But T-Mobile, generally a very positive quarter. Now it's got a 3 % yield. I don't buy that stock from yields. But you know what, Jim? I don't know how you changed the narrative there. that ultimately Starlink is coming for you, even if it takes them a long, long time to get there. They need to have a program to bring in many more customers, and I think they're going to have one. You do? Yes, I do. All right, let's start with a deal that was announced, and then we'll get to the one that was reported but is yet to be announced. Let's start with DoorDash buying Instacart. You say yet to be announced.

41:36You're presuming more than I do. The Marvell Lumentum. I know. Listen, I'm relying on reporting of others. We'll get to that. and I'll just give you some thoughts. I mean, DoorDash, first of all, let's just share with you, 65, 75 % in cash. There it is. It's up to about$17 billion. There's a look. The stock has already moved up previously on reports of potential deal. Remember, first reported to give them credit. I think it was the information had the first story about them being for sale and then there were some follow-ups. None from me. But, Jim, what this is going to be all about is antitrust and it's going to be a battle.

42:11And I would note a few things. One, they are talking about not closing this thing until the first half of 2028. So that tells you, yes, that tells you that they do see a potential battle there. Will the FTC, which typically does a lot of consumer facing deals, get it? I'm hearing they want it and maybe they want it. Who knows? Because they want to take a very close look at it. The key is going to be how you view the market. is that three going to two, three supermarket delivery companies, namely DoorDash, Uber, and Instacart, going to two. If you view it that way, this thing's not going to happen.

42:47If you don't, and if you believe that Amazon and Walmart, of course, represent enormous competitors, as they conceivably do, you know, Wedbush says Walmart's 30.9 % of U.S. online grocery and Amazon, 23.6%. And then you talk about delivery there, third-party delivery. Kroger, it didn't work with the Braves administration. Well, one of the key things is going to also be, will Kroger and Albertsons come out and say, we're in favor of the deal, or we're not going to oppose it, or it's actually going to be good for us. The release from DoorDash, as you might expect, is just filled with the words that you'd anticipate if you thought you were going to have a really tough antitrust father in your hands.

43:25Commission to help local businesses succeed. Families turning to Instacart. You know, in an affordability environment that we're in right now, we'll see. We'll see. But the view is this is not going to be easy in terms of getting through. Well, that's right in people's pocketbook. Yeah. So they've given themselves a long time to fight that battle. We'll follow it as it goes along. But they announced the deal. And so DoorDash isn't a deal. It would be one of the largest deals of all time. This would be potentially, you know, you could call Lumentum getting bought by Marvell if it were to come to pass.

43:58An enormous deal, Jim. Talk about$100 billion. None of the reporting, and I, of course, don't have any for you. What else is new in terms of terms? The expectation is it would largely be stock, if not almost entirely stock. I hesitate in saying this, but there are a couple of people who have mentioned JDSU and SDLI to me. Well, I just wish they didn't do that because these two companies are run by some of the finest people. Those of you of a certain age will remember this deal. Way back, JDSUnaphase buying SDLI was like$30 billion. Which, by the way, at the time was one of the biggest deals. It was all stock.

44:36By the time it closed, I don't know. What were they worth? Virtually nothing, either one of them. That's not fair. No, because these companies are the optical part of the data center. And the world is going toward optical away from copper. Copper burns too much, too hot. Latency problem. I would say this, David, they are hand in glove. This is the industrial logic to this merger would be incredible. The problem is that you've taught me this. How many times has Marvell been pitched? Marvell was pitched out Terra. They were pitched merging with Arm. I mean, people just love to pitch deals. This would be something if I were in M &A at Goldman, I would call Matt Murphy.

45:20They would, although I don't believe Goldman's involved in this one. I do think there are bankers and lawyers engaged here. That much I can tell you. And so you have a number of different outlets reporting it, which tends to lend credence to the initial reports. That is not Matt Murphy. You would be surprised, is what I hear you saying. No, that's not Matt Murphy. Oh, we showed somebody it wasn't Matt Murphy. I don't know. There's a lot of Murphys. I thought you were saying this is Steve Murphy. You know, Jim, one thing for me, optical transceivers, they both apparently supply components for these optical transceivers that are made in China.

45:53And so if you do get an announcement on this, you may hear me talking about concern around China antitrust and things of that nature. Remember when Synopsys was trying to buy Ansys and how long that took in China? That deal took forever. Yeah, forever. But I don't have much else to share. You think it makes sense on the face of it. But remember, Matt Murphy's stock was just, they had a bang-up analyst meeting very recently and it moved the stock rather dramatically. But these two men are friends. Mr. Hurlson, I know him from Synaptics, and Matt's been a terrific guy. If you take a look at the long term, what he has done with that company, it's nothing short of incredible.

46:33It makes sense. I'm not going to say it doesn't make sense. Well, they already purchased lasers from Lumentum. Right. Obviously, they have other parts of the business. But again, to your point, this does go to just being even more central in the data center. Marvel obviously helps the likes of what Amazon designed its chips and everything. Marvel's got a good deal with Alphabet, where Alphabet has a lot of warrants. But Matt's taken this company to a level where Jensen Wong said it's the next trillion-dollar company. Maybe it's not the worst time to use your stock to do a deal that you think conceivably could be accretive.

47:05It could hurt the shareholders. But in the end, the world is going fiber. And this makes, like I said, there's great logic to it. And if you get Lumentum CEO to agree with you, and it is an all-stock deal, you are talking about providing your shareholder base with a significant ownership of the combined company. Does it matter that Michael just got that job? If you think the opportunity is there. Does it matter that Michael just got that job? I would point out 52-week high for Lumentum is$11.43. Well, I mean, they are, remember, they got the big NVIDIA boost. It's a very fun company. It's not like, look, Corning, remember, Jensen Wong decided to go all in to support Fiber because fiber is what's going to make it so that it's not so hot in the data center.

47:46And that's a big issue still. Got it. We did pretty well. No, no. We got through. No, I'm going to say I didn't do it. We got through a few on my list. All right. I'm told I have to quickly hit the bond report. Here's the bond report. Take a look. Usually it's about yields. We had a Fed meeting yesterday. They decided not to raise those yields. And there's a 10-year, and I can read. It's 4.966. We're right back. Jim, we got through a lot. There's always more. What do you got on the show tonight? I have the Hartford HIG insurance. By the way, I have Brinker and Vertiv. Now, obviously, I think it's interesting.

48:19Vertiv is a data center company. It's up 50 percent. And Brinker is a hamburger company. It's up 50 percent. Three for me. Kevin Hoffman understands social media and how to be able to drive customers better than anyone I've seen. It's very hard to beat the deals he has, including that incredible market. One day I'll take you there. I know some of your staff goes there. Yes, they do. I only got there wearing Brioni, and he says that's good. We'll make sure to get a driver if we go, though. Yeah, we'll do that. We'll do it somewhere in an urban environment so I can take the subway, because I will not drive after those markets.

48:50We pound them. We pound them. Great. Thank you. Good job, buddy. You did great today. We've got a lot more on Alphabet coming up. Of course, take a look at that. That is a significant market share loss for one of the biggest companies in the world. Keep it here. You've been listening to the opening hour of CNBC's Squawk on the Street. All opinions expressed by Squawk on the Street participants are solely their opinions and do not reflect the opinions of CNBC or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet, or another medium.

49:19You should not treat any opinion expressed on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Such opinions are based upon information Squawk on the Street participants consider reliable, but neither CNBC nor its affiliates and or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. To view the full Squawk on the Street disclaimer, please visit CNBC.com forward slash Squawk on the Street disclaimer. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab.

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