Closing Bell - Closing Bell Overtime: Bill Nygren’s top value picks, Analyst who just downgraded Alphabet, Compass CEO on real estate outlook 6/27/23

Episode Date: June 27, 2023

Stocks closed sharply higher as the Nasdaq led a strong rally on Wall Street. Venu Krishna from Barclays and David Doyle from Macquarie discuss the action and their outlooks for the market. Value investor Bill Nygren shares his top picks at current levels. Compass CEO Robert Reffkin gives his forecast for real estate, following strong new home sales data. Plus the Bernstein analyst who just downgraded Alphabet, and a gut check on Tesla’s valuation.

A rally for stocks today with the Nasdaq finishing at its best levels or having its best day in just over a month. That's the scorecard on Wall Street. The action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort. Coming up on today's show, investor Bill Nygren opens up his value playbook for the second half. We're going to talk about his top picks and some familiar names that he likes at these current levels. Plus, Alphabet catching its second downgrade this week as Bernstein takes the stock down a notch, citing a variety of headwinds. We will talk to the analyst who made that call. Let's start with today's action, though.

Solid rally across the board. It was led by the Nasdaq, as we just mentioned. And joining us now are Venu Krishna, head of U.S. equity strategy at Barclays, and David Doyle, head of economics at Macquarie. Good afternoon to you both. Venu, I want to get your take on this. Yes, we saw the tech-heavy NASDAQ lead the charge today. The S&P also finishing the day up.

It looks like about 1.1 percent, 43.78. Higher from here? I think it's going to be more of a range-borne market. We like tech. We like the AI players specifically. But that said, we think the risk-reward is asymmetric. It's difficult to make the case for a lot more upside, but macro uncertainties mean that downside is still a meaningful risk.

Okay. Venu, I mean, we got some strong data, or stronger than expected data this morning, whether it was housing, whether it was consumer confidence, whether it was some of the other economic readings. Want to get your thoughts on that and what it means for the Fed, especially on a day where Morgan Stanley has now reversed course and is expecting that July could see a 25 basis point rate increase. Yeah. So we also as a house do believe that rates are going to be higher for longer and probably there are a couple of more rate hikes left, which really means that, you know, end of the day, we are paying significantly higher multiples in the market today than we were when interest rates

were zero and growth actually was better. So I think that is going to face a challenge for the market but uh in terms of the macro data it's mixed there are elements like you said which are positive at the same time if you look at the leading economic indicators you look at manufacturing pmis or if you look at the yield curve, whether it's a three tens or the two tens, all of them suggest that, you know, there is still some risk to to growth. But I think the bigger issue is we have to probably live with higher rates for longer. And that probably means that we cannot continue paying the same multiples we've been paying. David Doyle, to you now, I just I wonder about this market being a bit weird,

particularly looking at the S&P 500, in that tech has led particularly this year and you've got some big tech stocks that have gone higher on AI hopes and others haven't gone as far higher. So even if we're sort of range bound here, even if we kind of maintain, just go down a bit, if those big stocks have run out of steam or if there's a valuation reset, how much danger is there overall to equities? Yeah, I mean, I would agree with the tone of that question. I think that, you know that there is a lot of vulnerability in the market right now, not just because of the run-up you've seen in the tech sector, but also because of the macro conditions that the previous guest has laid out. The yield curve being deeply inverted,

the Fed inclined to keep hiking rates, some signs that the labor market may be starting to struggle. All of that to us suggests that the equity market may be starting to struggle. All of that to us suggests that the equity market may be challenged in the back half of the year. And so, David, how should investors think about, not, I don't want to say it's binary, like either you're in stocks or you're not, but do you take some of the gains and wait to figure out where to put them? Or do you just maintain the positions that you've had? Given that we're just about at the halfway point of the year, it's one of those times when people might want to rebalance anyway.

Yeah, I think for the individual investor, they have to know themselves and know what their own inclinations are and what suits them best. For someone who's a long-term buy and hold type investor, you might not want to disrupt that strategy. But for someone who is more inclined to time the market, I suspect that now may be a decent time to take some chips off the table and look to redeploy them later in the year. David, I've got one more question for you. I mean, we had Ed Bastian from Delta. They had their investor day earlier today. He was on our air. Here's what he had to say about the consumer.

Households making $100,000 or more make up 75% of our revenue base. As an industry, Delta arguably is even higher than that. The wealth that that cohort has accumulated just since 2019 is over $25 trillion. They have the wealth. And we talk about excess savings in terms of incremental cash savings. That number is still well over a trillion dollars for that cohort. So that's very strong. Trillion with a T. Meantime, Walgreens, the worst performer worst before the dow big move lower their nine percent uh... saying earnings as they cut their guidance on blaming the consumer as part of the reason i offered for those poor results

who's right right now but i think what you're seeing and you know this and make signals out there depending upon what area of consumption you're exposed to a what type of consumer that you're exposed to uh... if you're exposed to or what type of consumer that you're exposed to. If you're exposed to the services sector and reopening of the economy, which is still ongoing, right, there's still gains being made, particularly in travel, potentially you're seeing very strong demand still. Whereas if you're more exposed to the goods sector, potentially folks on the lower income side of the equation, your company, your business may be struggling more so. So that could explain that dichotomy, that differential. And what we're expecting going

forward, though, is challenges for the consumer broadly ahead. We feel as though a lot of those excess savings that were built up in the pandemic have been exhausted or will be exhausted over the next few months. And we're starting to see signs of things like same-store sales growth, which were released this week up just half a percent year over year. So we suspect the consumer may be more challenged through the rest of this year than maybe some others believe to be the case. Okay. Gentlemen, thanks for kicking off the hour with us. David and Venu.

Thanks. We have a news alert right now. Spirit Aerosystems and the Machinists Union have reached a tentative agreement. This is according to a statement from the union. The union workforce at Spirit's plant in Wichita will vote on the revised offer this Thursday, June 29th. That's according to Reuters. You see, Boeing is Spirit is a key supplier to Boeing. Neither of these stocks are moving on this, but this has been a very big item, news item, John, in recent days for both of these companies and more broadly when you're talking about the supply chain within aerospace. You mean Boeing can make more planes, possibly?

Possibly. Is that the bottom line? Okay. Yeah. All right. Thank you. All right. Now let's bring in Senior Markets Commentator Michael Santoli at the New York Stock Exchange,

taking a closer look at today's Consumer Conf report. Mike? Yeah, John, in particular, one aspect of the consumer confidence report every month, consumers are asked their assessment of the labor market and basically are jobs plentiful or are they hard to get? And this is the differential between those answers. So at this point, a lot more say they're plentiful than hard to get. And you see how it compares to history and ahead of and in recessions, that's so shaded areas. So we had been declining here, very consistent with the kind of cooling off of the labor market, both that the Fed wants to see, but also that sometimes does precede an outright recession. And see if you could kind of catch that little bounce we got there. It's very consistent in terms of absolute levels with before the pandemic, like 2018, 2019 type levels, which

mirrors the fact that we have a very low unemployment rate. So this was a bit of a welcome piece of news within that report. Again, the Fed doesn't seem to be targeting a particular unemployment number. They want to see job openings go down, maybe wage growth cool off. So this is very in line with a lot of the other data points. The economy has hit this firm patch somewhat recently, and the market has figured that out. Look at the equal weighted consumer discretionary sector is now just barely outperforming the S&P on a year to date basis, also much more dramatically outperforming on a one year basis. So essentially it shows with industrials outperforming, here you see consumer equal weight and transports doing it as well

and the strength of airlines. It seems as if the market is getting more comfortable with the idea that the economy is not falling away, at least not rapidly, John. Mike, fair to say that inflation is cooling faster than labor market confidence, that first chart that you were showing. That's what it looked like to me. Well, yes, I would say inflation is coming down harder, considering where it came from, you know, nine plus percent a year ago. We'll get the PCE number on Friday.

And that has been the real question coming into this year was, was inflation going to get better more quickly than the economy weakened? And it seems like right now, halfway through, it's a tentative yes, that inflation is actually becoming more friendly and the economy hasn't paid a very high price for it, at least not yet. All right. Mike Santoli, thank you. We're going to see you later in the hour. After the break, Oakmark portfolio manager Bill Nygren joins us with his playbook for the second half and the top value picks he likes right now. Stay with us. Overtime's back in two.

Welcome back. Value investing had a resurgent 2022. That was last year. There were even some value investors who snapped up former high-flying names like Meta and Netflix. But so far this year, the growth ETF has doubled the value ETF. Joining us now to discuss his value picks is Bill Nygren, Oakmark Funds partner and CIO. Bill, great to have you here on set with us for Overtime. So, you know, Meta was a value stock for a hot minute. How, outside of just the traditional ways, are you defining value at this moment, and how should investors think about that for the second half

of 23? Well, thanks for having me, John. I think what's important for investors to realize is as good a year as value had in 2022, that it's given all of that back so far in 23 and then some in a little less than six months so in 22 when the growth names were getting hit so hard at oakmark we were paying a lot of attentions attention to growth companies that we thought gap accounting didn't do justice to their income statement so companies that had a lot of income statement spending that we would add back because we thought it was long-term spending and should be capitalized. And it allowed us to purchase stocks like Adobe and Uber, along with some of the longer-term holdings that we've had like Netflix, Alphabet, Meta. So that provided part of our portfolio and it certainly helped us do well versus value peers

this year. But I don't want people to get a misimpression about Oakmark. Most of our portfolio is really cheap stocks on traditional metrics. And we think today's a great time to be a traditional value investor. After this big run that growth has had, we've got the S&P up close to 20 times earnings. There's still lots of stocks out there that are at single digit PEs that we believe through a combination of dividend yield, cash flow reinvestment, and just economic growth should be able to provide returns that are competitive with the S&P 500. I'm afraid that with all of the AI excitement, people can't internalize what you're saying about value and dividend. People run to that

when there's nothing to be excited about. But give us a couple of names that you are most excited about in that value sphere and a bit of the narrative online. Well, I'm going to go back to 40 years ago when I was starting in this business and everybody was looking at the big computer revolution and investors ran up the stock prices of digital equipment and Burroughs and IBM. But the real beneficiaries were the companies that learned how to use data faster than their peers did. So a company like Walmart that effectively put Kmart out of business because they were faster adapting data.

We're not trying to get into the chase on NVIDIA. It's a price point that doesn't make a lot of sense to us. But a company like Capital One sells at seven times earnings, tangible book value. That company got started 30 years ago because the entrepreneur saw an opportunity to use data better than the big banks were doing it. And I think it's quite likely that Capital One will figure out ways to use AI to their advantage before their large credit card competitors do. When you bring up Capital One, I mean, it speaks to opportunities in the financial

sector and among some of these maybe smaller banks, as you just mentioned. I mean, given the fact that where regionals are concerned, you had investors basically tossing the baby with a bath water. Do you see other opportunities along those lines right now? Well, we saw other opportunities in the financials in the first quarter, especially after the SVB failure, where in Oakmark Fund, we added a position in Truist, where we thought the market was too concerned about the mark-to-market risk in their mortgage portfolio and was not giving them enough credit for their non-bank businesses, which we think more than offset the mortgage hole, duration hole that they had. So I think there are a lot of opportunities in financials, but the single-digit PE group is much broader than

financials. And it sort of speaks to, as you just touched on earlier, this bifurcation in the market. I do want to play a soundbite from Seth Klarman of Bowpost, who was on our air earlier today on Squawk Box. Have a listen. I think that there are hunting grounds that one would want to look. We think real estate is an area that is full of so many fundamental challenges, but the fundamental challenges have caused urgent selling. You can see a pullback in lending, you can see vacancies in office, troubles in retail for years and years. And so that doesn't automatically make it interesting, but it may mean that as other

people abandon it, as other people face urgent pressure, there may be opportunities to buy, to inject capital, to make some rescue loans. And we hover around looking for opportunity, trying to meet counterparties that are eager to transact. Now, I see you have CBRE Group as a top holding as well. Is real estate interesting? Is that another area that's interesting? Well, I think, as Seth said, it gets interesting at times.

I think there are times when real estate professionals think their real estate can be valued at more in the stock market than it is in the private market. And because of that, we tend not to buy a lot of real estate. But CBRE is a great example, is the concern of people not going back to office and was that going to hurt the commercial real estate business. This is a great growing services business. It's at a low teens multiple. It's gaining market share. to hurt the commercial real estate business. This is a great growing services business. It's at a low teens multiple. It's gaining market share. It's returning capital to shareholders.

We think it's a great opportunity. Google has had Alphabet a couple of downgrades, including one today. You said you're not chasing NVIDIA. Why do you like Amazon? We like Amazon. We like Amazon. We bought Amazon right around the time of the split when it was trading at $2,000, so $100 a share today. And our argument was if you looked at their cloud business and valued it at a similar multiple of sales to what investors were paying for other cloud businesses, that could get you $100 a share. Forget cloud, and if you looked at the retail business and you put a price to sales multiple on retail that was similar to what other retailers

are selling for, that could get you $100 a share. So we thought when you combine the two, we were paying about half of what Amazon was worth. And it wasn't evident to other value investors because of so much income statement spending that neither the retail side nor the cloud side was very profitable. But do you still like it? Yeah, still like it. All right. All right, Bill Nygren, thanks for joining us here on set.

Thank you. It's great to have you. Well, AeroVironment earnings are out right now as well. So I'm just going to take you through the numbers. This is a defense contractor. They make the Switchblade drones, for example, that have been getting sold into and having some success in Ukraine. It looks like EPS for their fiscal fourth quarter was 99 cents. Unclear whether that's comparable to the street estimates right now.

Revenue, though, coming in better than expectations, $186 million versus a consensus of $164 million. The company also putting out full-year revenue guidance of $630 million to $660 million, better than analysts had expected. The company saying record full fiscal year and fourth quarter revenue. That revenue number, by the way, for Q4 was a 40 percent increase year over year, but record-funded backlog of $424 million, and the company on track for 20 percent top-line growth in fiscal 2024. In the release, saying that given our pipeline, record backlog, and global tailwind supporting our broad portfolio of robotic solutions, that it's bolstered by the strong performance

of systems in Ukraine, some of the systems I just mentioned, and beginning a new phase of growth that will lead to further attractive returns for shareholders. Shareholders liking it right now. Stocks moving higher in after hours on this print, up about 5%. John and I mentioned this is really one of the smaller, more pure play drone and unmanned contractors out there. The switchblade gets a lot of attention, but they're also involved in unmanned vehicles, missiles and munitions, which is a growing part of the defense budget as well.

So you can see they're capitalizing on that and it's showing up in their results. Yeah. Up five plus percent after hours, but a name down 5% plus after hours at the moment. Jeffries Financial Group, we have their numbers out as well. Kate Rogers has those. Kate? Hi, John. EPS of 5 cents here, including $72 million in pre-tax losses related to legacy merchant banking investment for the company, $1.04 billion in revenues for the quarter.

We are not comparing these to any estimates due to thin coverage here from analysts. The company says it's growing increasingly optimistic about the return to a more normal environment. And we should also note it raised its buyback to a total of $250 million. As you can see, though, the stock is lower by about 4.5%. Back over to you. All right, Kate Rogers, thank you. A number of economic data points topping expectations today, including new home sales, which dumped 20 percent in May from a year ago. Up next, Compass CEO Robert Refkin gives his take on real estate and the one part of the market that he says is red hot. Welcome back to Overtime.

Home prices rising for the third straight month in April. That's according to the S&P Case-Shiller Index that was out this morning. And new home sales jumped 20% in May versus last year. They were up month over month as well. That's according to the latest government data. Let's bring in Robert Refkin. He is CEO of Compass. He joins us here on set.

Great to have you back with us. Glad to be here. You know, this just brings me right back to the beginning of the year, Robert Refkin. He is CEO of Compass. He joins us here on set. Great to have you back with us. Glad to be here. You know, this just brings me right back to the beginning of the year, talking with you and you said, you know what, the bottom's in for housing. I'm going to call it right now. And so far, it does look like the data is moving in your favor. Bottom or not, it does seem to be stabilizing. We do seem to be seeing some green shoots. What are you seeing on the ground across the U.S. in your different markets? So across the board, there are more buyers than sellers. Buyers have accepted 6%, 7% mortgage rates as a new normal. We're seeing prices increase every month this year versus the prior

month. And now it's just 3% lower than it was at the peak last year. The issue that we have, it's there's just not enough inventory. And that's because 30% of homeowners are locked into mortgage rates at 3% or below, and 70% of homeowners are locked in at 4% or below. Great time to be a home builder because they're benefiting from the price increases that are a result of low inventory. Yeah, I spoke to Cheryl Palmer from Taylor Morrison this morning, and certainly the home builders do seem to be moving to fill in that void to the best of their ability. Are you seeing that in terms of where

you're generating sales, your agents are generating sales as well? And if so, how much are things like incentives playing a role in that? So there are definitely incentives and buy downs bringing mortgage rates down by two points in a number of our markets. But there was already a trend of not enough inventory and a second trend of people want things that are move-in ready. They want homes that are prepared. There's a product at Compass called move-in ready. They want homes that are prepared. There's a product at Compass called Compass Concierge. We prepare homes to make them stage, painting, deep cleaning, and just make them move-in ready. It's one of our best products.

But now there's just not enough inventory of existing homes because people are locked into low rates that home builders are meeting that demand. We actually saw last month the largest amount of housing starts since 2016. And that's because home builders, their sentiment index improved for the first time in over a year. Tell us about two things, two A's, arms and Airbnb. So adjustable rate mortgages, are you seeing people pick those more now that a lot of people think we're near the top as far as where rates are going to go? And then the last time rates were this high, it was a lot harder to sort of monetize a property that you owned if you weren't going to live there anymore. So has that affected the inventory issue in a way that you can really see? Yeah. So we're seeing people that are buying because they have a new kid,

they just got married, another life event or a new job that have to buy instead of selling their preexisting home. They're just renting it out and taking the financial arbitrage of high rents and low mortgage rates. So we're definitely seeing that whether it's an Airbnb or not. But, you know, the again, the issue that we are seeing is we need to have an unlock of inventory. It's probably going to happen when mortgage rates get to 5, 5.5% in a sustainable level. At that point, I would expect there to be a flood of inventory in the market, and it will feel like the pandemic craze all over again. And what are you seeing on adjustable rates?

So on adjustable rates, we are seeing an increase in adjustable rates. But the topic around adjustable rates, which I think people don't fully appreciate, is that around 30 percent of the people that are locked in at three or four percent mortgage rates had had adjustable rate mortgages that are five years, seven years or 10 years. So the value of a five% arm they got in 2022, in six months, it's not that valuable anymore. You only have another year, year and a half. And so I think there's going to be some new inventory entering the market, even if rates don't come down because of those arms that are getting less value over time.

Dynamics around agent growth and retention, something we've talked about in the past. Yeah, so we're happy to say, and we shared in our first quarter, that every month in the quarter, we hired more agents than the month before. Every month in the quarter, we lost less agents than the month before. And so it's a good time for Compass. It's still a competitive environment. There's 1.5 million agents in the country. 5% of them left the business in the last five months. And so we're seeing agents leave the business. That said, Encompass agents are outperforming. Stock's trading at about just under $3.50 a share. You went public at $18 a share.

Investors missing something here? How do you react to the fact that we have seen the stock? I realize it's rallied since the start of the year, but it's sold off dramatically since it went public. Yeah, look, we IPO'd in the hottest real estate market maybe in history. The environment that we exist in right now is one where the backdrop is mortgage rates went from an all-time low to a 20-year high in less than nine months, creating the sharpest decline in real estate transactions in the history of the country. There are many brokerages that aren't surviving. I'm really pleased to say that I shared in the last quarter our commitment to being free cash flow positive for the second

quarter, the third quarter, the fourth quarter and the full year. All right. Robert Refkin, thank you. Great CEO. Thank you. Time now for a CNBC News update with Contessa Brewer. Contessa. Hi, John. Ukrainian officials say at least three people were killed when Russian missiles hit a crowded area full of restaurants during the dinner rush, and another two dozen people were injured, including a child. Those strikes hit the city of Kramatorsk. It's just west of the front lines, and it's been a frequent target of attacks. Russia has denied accusations that it is targeting civilian sites in the war. Men and women's tennis players will soon win equal prize money at more of the sport's top events.

The Women's Tennis Association announced that change today. The prize money is already the same at the four Grand Slam tournaments, but this change will make that the standard at WTA 1500 events. And Scottish singer Lewis Capaldi announced a break from touring and canceled all of his future tour dates today. The 26-year-old says he has to adjust to the impact of living with Tourette syndrome. Capaldi released his latest album in May, and we're wishing him the best in that adjustment. John? Yeah, what a role model. I didn't realize. Thank you, Contessa.

After the break, Mike Santoli takes a look at Tesla's market cap dominance versus its peers and what's really being priced into the stock. And take a look at shares of Regeneron slumping in late trading today after the FDA failed to approve a higher dose version of its drug, Ilea. Shares ended down. Are they down that much right now? Almost 9%. They finished the day down almost 9%. We'll be right back. Welcome back to Overtime. We're following a number of movers in the EV space today. First, Lucid Group, higher for a second day, this time on news that the Saudi investment fund has upped its stake in the company with a nearly $2 billion investment. Yesterday, we spoke to Lucid CEO Peter Rawlinson following news that the company had struck a deal to supply battery technology to Aston Martin. Today, shares finished up 10 percent. We're also watching Lordstown Motors, which filed for

bankruptcy today, said it would put itself up for sale. The company is also suing Foxconn over a failed investment, shares plunging 17 percent. And finally, Tesla closing higher today due or after, I should say, a rough few days of downgrades from the likes of Goldman Sachs, Morgan Stanley and others. But bouncing back and trading up about 4 percent today. Yeah. And sticking with Tesla, Mike Santoli is back with a look at that company's market cap versus its auto peers. Mike. Yeah, John, not really a new notion that Tesla has, you know, a vastly higher market value than almost all of the traditional automakers. But it really has widened out again, that gap. Take a look here. Tesla's up to about an $800 billion market value once again. This

here is Toyota, around $200 billion or thereabouts. GM and Ford, each right around the same level, just above $50 billion. So Toyota, GM, Ford together, 300 billion. And Tesla at 800, well more than twice as large. Now, to me, it's not so much a new phenomenon. Maybe it's not apples to apples. And you'll hear bulls on Tesla saying it's not a car company. It's a vertically integrated technology company. It's going to be a software platform. It's somehow now a real direct AI play as well. And I think you could grant all those things and still say, does the $800 billion in value already more or less account for that? Yes, it did get well up above a trillion dollars, like $1.2 trillion back near the NASDAQ peak. But it's just an interesting thing. It's trading that stock is right in lockstep with NVIDIA most

days, including today and yesterday, yesterday on the downside, today on the upside. It's worth asking. I mean, I don't know what AI is different now that Tesla is executing relative to what it's been doing in terms of self-driving technology for years at this point, but just worth spotlighting the divergences here. Is there any hay to be made, Mike, around the fact that whether it is Tesla or, by the way, Nvidia, these are two names that are very, very heavily traded and held by retail investors? Absolutely. Certainly on a day-to-day basis, you see the flow of the upside call options going into names like this. It worked for a while. It was a self-fulfilling dynamic back in 2020, 2021.

And I also think that that reflects to some degree the fact that they are these sort of pure plays on whatever area people are excited about. You know, you can talk all day about how Toyota has massively higher volumes and they have good hybrids and EVs as well. And GM and Ford have their businesses that are running fast to develop EVs as well. They're going to have all these models. But the market is always reluctant to bestow value on those efforts in a legacy form rather than just grab for the super expensive pure play on it because it feels like it's moving fast. Plus, on some level, you've got these are video game players and they like trading the one day the fast-moving stocks. All right. It works until it doesn't. Thank you. Meanwhile, investors have been gaga for Google, betting big on Alphabet, sending the stock up more than 30%

this year. But Bernstein says it's time for investors to move to the sidelines. The analyst behind that call is going to join us when Overtime returns. Welcome back to Overtime. Bernstein Research downgrading Alphabet to market perform with a price target of $125, citing valuations, differ competition, and an aggressive push to compete in the AI game. This comes a day after the stock was downgraded by UBS, citing similar concerns. Let's bring in the analyst behind the Bernstein call, Mark Shmulek.

Mark, I love it. It's a call that's worth talking about. So, but I got to push back on it because it seems to me, valuation-wise, like Alphabet, Google's the underdog right now still compared to Microsoft. Why downgrade it here and now versus after it's run a little bit higher? Yeah, you know, it's good to be able to talk about it, John. And, you know, I think the first thing we called out on it is, look, the valuation still certainly is is not demanding especially on a multi-year view um but even with a not demanding valuation um you know this is a stock that's run

up from you know kind of the 90s to this level primarily off the back of a narrative as well that they are getting better at ai we saw their own io developer conference and the stock shoot up as they put together a compelling uh I narrative so there's still volatility at these levels and our call really isn't an A I call it's about everything else that we might have been missing. When all attention was focused on a I and this is. You know stiffer competition from the likes of retail media- you know this is a kind of increased spend required- you know to kind of not just maintain market

share positioning, but to get into some of these newer initiatives. So there's a lot more that's been kind of going on under the surface. And so our fear, you know, is that over the next year, maybe a bumpy road where any softness in kind of top line search performance may be perceived as AI weakness, creating further volatility in the stock. But what about Thomas Kurian, CEO of Google Cloud? I mean, we've got Satya Nadella saying he wants to double top line revenue between now and 2030, and nobody really seems to be breaking a sweat at that. Do you sort of have to believe that Thomas Kurian isn't going to continue to succeed to believe that Google

Alphabet doesn't also have a growth story here? I fully believe Google has a growth story in cloud. I certainly admire and appreciate what they've been doing. And they've certainly got a green light to go spend and do more of it. You know, I think for better or worse, the stock fate of Google is still very much going to be tied to the performance of search. You know, and so if there's any weakness in search, even if you start seeing it offset by cloud strength, I think it's going to put into question the long-term growth thesis of the business that many investors have really been kind of baking into

to kind of the reason to own it for the last several decades. I mean, you're basically saying that the risks match the rewards here. Valuation, it's even, it's fully priced. If you were to see a pullback in this name, would you change your call here? Yes. You know, so long as the pullback is for the right reasons. If I see a narrative driven pullback, you know, happy to step back into the name. You know, if it's a pullback because, you know, search is maybe sowing some weakness and whether it's coming from, you know, AI disruption, which we don't really believe, but, you know, from other areas of stiffer competition as pretty much every single end

platform on the internet starts launching their own product, search product, you know. And so if it's coming from search weakness, probably not the right reason to step in. If it's really narrative, you know, more than happy to step in when we do see some break in the valuation. Got it. So if you're not putting money to work in Alphabet right now, where would you be putting money to work? You know, I've got two other mega cap names that I cover that I like in Amazon, you know, and Meta. You know, Amazon's one where the narrative still doesn't match the fundamentals. There's a dislocation, you know, with folks wondering if Amazon's in last place in AI, you know, happy to own a name where that dislocation exists. And, you know, one of the benefactors of some of the Google softness is dollars returning up to meta as they continue to fix their workarounds tied to Apple's privacy changes.

Yeah. So basically you're talking about a rotation, not only on the business side from Google to meta, but also based on this call on the investor side, too. Mark Schmulich, thanks for joining us. This was a note that definitely got circulated quite a bit, discussed quite a bit on the street today. Well, up next, we will discuss how new proposed merger review changes by regulators could impact the outlook for dealmaking. And take a look at the action in Unity Software, the maker of video game making tools, other tools spiking more than 15 percent today after announcing a marketplace for software, which it says will accelerate driven game development and gameplay enhancements. Shares are now up more than 40 percent so far this month. We'll be right back.

Welcome back. Tomorrow, I'll be speaking with Snowflake CEO Frank Slootman from Snowflake Summit. We'll bring you some of that exclusive interview in the 2 p.m. hour power lunch. And, of course, right here on Overtime at 4. Snowflake had interesting AI partnership announcements with Microsoft and NVIDIA, sent the stock up 4 percent today. Last night, I spoke with the CEO of the late-stage analytics platform ThoughtSpot, Sudheesh Nair, about a big day of data deals, including his own $200 million purchase of Mode Analytics. Databricks Summit is happening in San Francisco and Snowflake Summit in Las Vegas. So between these two, this is the week of, this is the carnival

for all the data geeks. We are all here hanging out. So there are two themes that will emerge. One is obviously no surprise, it is generative AI. And in the world of generative AI and business analytics, I think ThoughtSpot plus more news is going to be the biggest wave maker. Obviously, Databricks made a huge acquisition on the language model with an acquisition there. And that also is going to be a story there. That is the first generative act. The second thing, in my view, is going to be business buyers who are coming in and saying technology is good. How do you justify the business value?

And that is going to be a surprise for a lot of vendors who have been pushing technology first without attributing it to the value directly. That is a big challenge, translating AI magic to saving businesses money in a predictable way while mitigating the risks around AI. I thought this was really fascinating and it kind of goes back to Deirdre Bosa has been reporting on some of these dynamics and some of these deals from Aspen as well today. And the way she sort of put it was that, you know, data is the new gold in this AI rush and this idea of commoditizing data and maybe more explicitly finding ways to monetize it and what that's going to mean in terms of protecting it, thinking about data protection, maybe in a new way for some of these businesses. It kind of goes back to this idea of, you know, the value that's attached to it. But some data is worth more than others. The type that's really

good for training models that work for your business versus just general stuff out there. And businesses are going to have to distinguish between the two. Yeah, and the Snowflake News, big deal. Looking forward to that interview tomorrow, John. We'll see, thanks.

Well, speaking of M&A, the FTC and the DOJ announcing proposed changes to how mergers are reviewed. The changes would require more information for pre-merger forms, and the process could delay deals by months. Joining us now, Raymond James, Global Head of Private Capital Advisory, Sunaina Sinha-Haldea, who joins us here on set.

It's great to have you. I do want to get your thoughts on this, because we've already seen regulators here in the U.S. Europe, too, but throw some cold water on the the M&A and dealmaking and consolidation landscape. That as the IPO window, at least up until recently, has been pretty closed. What does that mean in terms of options for companies and the types of deals you're seeing get made or not get made? Well, I think any process that adds efficiency is welcome. I think the jury is outstanding as to what this proposed change actually means to deal timing. You said it could add delays.

That's not going to be welcome, especially as you think about who are the major buyers of M&A assets, right? It's strategics and it's private equity. In the case of certainly the latter, they need certainty to close and they need certainty to funding. And there's a certain time clock on which they base their valuations. And the longer that completion date gets delayed, the more it impacts their certainty of pulling the trigger on a deal. And capital is in motion always, right? So they can think about where do they want to park their capital and where do they want to allocate deals. So I think the jury's out. Does this add efficiency because they're asking for pre-merger documentation and therefore does it make post

signing deal completion a little bit more certain or is this just more paperwork that adds to more inefficiency and more delays and more less certainty? In terms of private equity specifically is this a good time for private equity and those companies those firms that are on the hunt right now or given the fact that we do have high interest rates and a much tighter credit market has it been more challenging? Depends on the size of deal you do in the private markets, right? If you're looking at a mid-market or lower mid-market type of deal, so think about companies with sub-50 million of EBITDA. This is a great time because you don't really need access to the syndicated loan desks to do those types of deals. And private equity, remember, has $1.1 trillion in dry powder just in buyouts,

$3.7 trillion in dry powder overall when you add venture and growth money to it. So they're on a clock to put that money to work, and that clock's ticking. So there's pressure for them to go buy companies, and valuations are a little bit lower today than they were 12 months ago. So it could be a great time, but if you're at the very large end of the market and you're looking for the loan desks to be open to give you the debt to do your deals, you're a little bit stuck right now. I mean, Vista kind of cleaned up so far this week on, you know, turning around software names that are now getting bought. Even though people were saying these AI software companies are so expensive,

there's this urgency to get momentum and to be able to prove out to customers that you can deliver this AI suite. Do you think that has legs or will these regulatory hurdles, even though they apply to everybody, will they slow it down? Well, I think that momentum is momentum and it all comes into pricing. So if your deal is going to take longer to transact in because of regulatory delays, you're going to price that into your transaction, right? Simple as that. Markets are efficient. They'll find their equilibrium as a result of any regulatory pressures. But I think the Vista news, what it highlights is that

when there is a fundamental thesis-driven underwriting of a sector or an asset class, in this case, software companies that have a stable home in terms of recurrent revenue, high free cash flow businesses, which is what private equity loves to play in, there will always be a value at which they transact, even in tough markets. There's been a real reluctance continuing for companies to take a lower valuation as they raise. And it's even resulted in some liquidation preferences that are really bad for earlier investors. Do things continue going in that way? Or is there some force that's going to halt that? I think that we have not seen the worst of the news in that space when it comes to funding for growth and any kind of EBITDA negative companies right now.

You know, remember that the folks that raised at the end of 2021 and early 2022, those companies have cut costs and they bought themselves 12, 18 months of cash flow runway. We're coming to the end of that 18-month period. So a number of these companies are out in market right now trying to make a deal work. And the only way to make a deal work is if they cram down earlier investors and or give downside protection to new ones. And you're seeing those deals coming left and right. So I think whether you see the news coming out of Tiger Global and it's trying to move its assets out and not being able to do so, or you see it in other parts, we're just seeing the first leg of that shooter drop. There's more to come.

We're starting to see a little more real estate dealmaking happen and private credit starting to enter the fray in a more meaningful way. A lot being made of the SL Green valuation, the office deal that was done in New York City yesterday, too, and sort of this idea of raising question of have we seen an inflection point? Is real estate perhaps possibly commercial real estate back in play now? Potentially, but really early to tell. It's just like with the IPO ECM markets. Are we still is there green shoots because seeing a couple of things happen? Is that a turning point? I think time will tell. The problem with real estate underwriting is where is that where do you kind of price in the hike,

the terminal rate at the Fed, and where do you put your spread on top? So unless you have a high conviction bet because you're getting some kind of value play or you have some kind of edge on value creation there that others don't, it's really hard to get that market unstuck, and that's what we're seeing right now. All right. Sunaina, thanks. From Raymond James. All right. Up next, a look at the potential market moving events after the bell tomorrow. We'll be right back.

Tomorrow is going to be an action packed market moving hour of overtime, as always, and you can't afford to miss a minute of it. It will all kick off with Micron's earnings right after the close. Then at 4.30 Eastern, the Federal Reserve is going to release its annual bank stress test results. And just quite a bit to keep an eye on. There's quite a bit to keep an eye on. You've also got President Biden with an economic address expected tomorrow evening as well. Something else to watch. MasterCard.

The CEO of MasterCard is going to join us here on Overtime. Exclusive interview. We're going to talk about the outlook for consumer spending. We're going to talk about the economy. We're going to talk about some of the really fascinating tech-related investments that this name is doing. MasterCard, always affiliated with credit cards, but that's only one piece of a much bigger, broader payments infrastructure business.

It's a fintech company. It is. I mean, people want to be like, oh, only block and, you know, et cetera, crypto. But this is actual technology-powering financial transactions. That's right. And by the way, blockchain and crypto is a piece of that future technology. For sure. And AI, too.

So we're going to get into all that stock's been trading near multi-year highs also i would note but um john just to take a look at the markets i mean we did have a rally today the markets did finish higher um and the nasdaq really kind of led the gains here as we saw a rotation back into tech and growth for sure that's going to do it for us here at overtime fast money starts now