Closing Bell - Closing Bell Overtime: Making sense of bond moves, Cloudflare CEO on enterprise spend, Looking ahead to Disney

Episode Date: August 4, 2023

Stocks closed out a downbeat weak on sour note, finishing near the lows of the day after showing strength earlier in the session. Needham’s Laura Martin discusses the diverging fortunes of Apple and Amazon post-earnings, and what she’s watching from Disney’s results next week. Neil Dutta from Renaissance and Thierry Wizman from Macquarie discuss the major moves in the bond market this week and what it means for equities moving forward. The CEO of Cloudflare gives his read on enterprise tech spend following strong results. Plus the CEO of ecommerce giant Mercado Libre on the state of the consumer outside the US.

Well, things took a turn, literally, right around 1 p.m. You got your scorecard on Wall Street. The S&P near the lows of the week. Winners stay late. Welcome to Closing Dot Overtime. I'm John Fort with Morgan Brennan. Ahead on today's show, the signals from bonds. It was the busiest week of earnings season,

but the big moves in the Treasury market stole the show. We're going to discuss if bonds will continue to drive the narrative for this market. Plus, two CEOs join us to break down their results. The head of cloud cybersecurity firm CloudFlare, whose stock is rocketing higher today. And the CEO of e-commerce giant MercadoLibre, also turning in a strong week. But let's get straight to our market panel, as we saw gains fade throughout the session to cap off a volatile week. Apple closing near the lows, down more than 4%.

Joining us now is Goldman Sachs Asset Management Managing Director Candace Say and Truist Co-Chief Investment Officer Keith Lerner. Candace, you're here on set with us. Welcome to the show. Thank you so much, Morgan. Thank you, John. I want to get your thoughts on what we've seen, not only today in the equity market and this reversal into the afternoon, but just the incredible moves we've seen in the bond market and where we go from here. Absolutely. We've seen the 10-year hit its high since November of 2022. We've seen it come back down a little bit. But what we've also seen is the inversion of the yield curve, the twos and the tens, had reached about 100 basis points. But we are seeing some semblance of re-steepening at this moment. On top of that,

we've gotten a lot of economic data recently. We got all the labor numbers this morning. That's playing into some of the market movement. We've had the Fed raise rates by 25 basis points. We have 2Q earnings. We've had the debt downgrade. There's so many things that have led the markets to move the way they have over the course of the last couple of weeks. All right, Keith, I want to get your thoughts on this, too. Where do we go from here? Yeah, well, great to be with you on this Friday. Our view is that this market is set to consolidate, start doing some backing and filling of these strong gains. We actually saw the market last week hit around the 4,600 for the S&P level.

And what you notice is even before the news from Fitch, the market had a tough time cracking that. So we think that's a formidable near-term resistance level. We all know that August is a seasonally weaker period. So we just think it's going to be a resting period. I will say, we have to remember, we were up five straight months. When you look historically, a year later, the market's been up by about 93% of the time. So momentum is good. But in the near term, we just think this market has stretched. Sentiment has rebounded quite a bit. And again, we think there's some backing and filling from here. OK, Candace, often,

probably too often, we talk about bonds just for their impact on equities. But I'm beating this drum of what about bonds for bond's sake and bond funds for the folks at home? I mean, we're at this point in 2023 where you can buy bond funds for cheaper than you could a year ago. The yields are higher. And it could be that a year or two from now, people are saying, ah, wish I had bought when I had that chance to even out my portfolio. What should people do here? I'm on the same page with you, John. I do see the attractiveness of staying short duration. The market is very attractive at the front end of the yield curve. So it keeps a lot of investors from going out and diversifying across fixed income, particularly car fixed income.

But if you look out into the market and what investors can do at this standpoint, they can be thinking about extending duration now. Right. We're not telling you to sell out of your short duration because the yields are very attractive. But if you think over the long term, you can actually achieve greater coupons over the longer term while also having a secure hedge. So from that perspective, you can help with your reinvestment risk by extending duration. Makes sense. And Keith, so taking a step back, back to equities now, if strong results from Amazon and a just right jobs report weren't enough to take the major averages higher for the week. Is that a bad sign for the markets overall? Yeah, I think it's a sign that we have reset expectations much higher. So the bar for positive surprises is also much higher. So I think that's

another indication that this market just needs to rest. I mean, we've had this big first half stronger than pretty much anyone thought. So markets don't go in a straight line. It's often two steps forward, one step back. I think at minimum, we're going to see a correction in time and probably price. So I do think that tells us, though, that the market is somewhat heavy, especially when you think about how big, you know, regardless of your opinion about Apple, it's 7% of the S&P. It's 27% of the S&P technology sector, and it's about 11 or 12 percent of the QQQ. So, you know, that's going to have a big impact on this overall kind of top heavy market. Yeah, we've seen a couple strategists and economists kind of back off on recession calls.

J.P. Morgan this afternoon, case in point. I just want to get your thoughts on the soft landing narrative and whether that makes sense in this market here. How to factor that versus near-term seasonal weakness potentially. We've had the soft landing scenario as our base case for a while. As you know, at Goldman Sachs, the scenario is a 20% probability of recession. So I think now many folks are actually agreeing that a soft landing is possible. What we found is that the Fed raised rates in July at 25 basis points. We do think they're at the tail end of this hiking cycle. And I think they've engineered a potentially

nice path towards a soft landing, averting a recession. So from that perspective, we do think that this is possible, right? The private sector is much stronger than we saw during the global financial crisis. We do see inflation coming down. The labor market is still tight, as we've seen with labor numbers today. But nonetheless, I think we're on the right path towards getting inflation lower, maybe not towards the 2% this year or next year, but we're getting closer to that. Okay, so Keith, to close us out here, talk to us about what signals we should look for in the economy from here.

I mean, if the hope was that the data today was going to show that inflationary forces are sort of helping the economy coast to a stop, that inflationary forces are coasting to a stop on their own. They won't need the Fed to slam on the brakes here. I'm not sure we got that since the revision right for June kind of puts July in line with it. I don't know. What do you think? Does this put more pressure on CPI and the August jobs report to give us clarity? Yeah, I think the CPI next week is going to be important because it's, now we're going to start losing that really positive year over year base effects where CPI was coming down. So there's a chance based even on on the consensus estimates, that you actually see a little bit of a lift

in inflation. And I also think, you know, the market is starting to bake in more than a soft landing scenario. So I think also what you noticed last week, at the same time the market peaked, the volatility index also made a low. Now, we also note that volatility tends to pick up in August and into September. So I'd be watching that. CPI report will be very important. And I'll also keep a close eye on the weekly jobless claims and importantly, credit. Credit trends have been very stable and benign. If you see any kind of pickup in that, that would be concerning.

OK, maybe the VIX comes out of hibernation. Keith, Candace, thank you. Thank you. Shares of Apple ending the day sharply lower, nearly 5% after last night's results. Let's bring in Senior Markets Commentator Mike Santoli for a check on the company's bellwether status, which we were talking about yesterday. Yes, and that's too kind because 24 hours ago I was reiterating my longstanding case that Apple in itself does not have some kind of veto power over what the rest of the market does. I still do believe that. Obviously, it's outperformed vastly, not just this year, but for multiple years in a row. Here's a couple of years, Apple, Microsoft against the equal weighted Nasdaq 100s. And these are similar stocks, just not market cap

weighted. And what you'll see is, sure, they're going to go in a similar direction most of the time. Most stocks go in the direction in a similar direction most of the time. Most stocks go in the direction of the overall market most of the time. But the magnitudes, the levels of outperformance and underperformance in short spans definitely has been more extreme. The other thing I've been pointing out for a while with Microsoft is you see how it's below that level, the peak level it reached before the downturn in 2022. So that broke down ahead to a degree, broke down ahead of Apple. So now it seems like maybe we're just in this, you know, if nothing else, digestion mode for the largest stocks. You see how much of outperformance to the average stock they might have to give back.

Now, another way to compare Apple with somewhat related names is Berkshire Hathaway. Berkshire Hathaway owns 5.8 percent of Apple. Apple's holdings at Berkshire Hathaway is equivalent to more than 45 percent of its public securities holdings in general. And more than 20 percent of the market cap of Berkshire is reflected in its stake in Apple. And what you see right here is really neat and tidy. On a three-year basis, they were in lockstep to this point up until today, basically, and then Apple's decline brought it lower. But again, you see how much room there was between that and the S&P 500. Even if the movements rhyme, there have been periods

of time in the last decade or so when Apple did nothing and the rest of the market has managed to make headway and vice versa. Yeah, and of course, we get Berkshire earnings tomorrow, actually. Mike, you and I have been having this conversation for 24 hours plus a couple of years. But about this relationship between Apple and the S&P specifically, and we were looking at a chart earlier today that shows that they have tended over the last five years to track very similarly to each other. That being said, there have been these moments, these pockets, where there's been a divergence. Yes, you've had these stretches of time,

and it could be over a year when Apple's underperformed. Or what's usually happened is Apple sprints ahead so far that it needs to basically just cool off for a while, and then the rest of the market, especially if it's a value-driven market, if we're talking about cyclicals, that's when you have a catch-up move in the rest. All right. Mike, we'll see you later this hour. that's when you have a catch up move in the rest.

All right, Mike, we'll see you later this hour. It's great to have you here on set with us. Glad to be here. All right. Well, after the break, Needham analyst Laura Martin's first take on Apple and Amazon's earnings, plus what she's expecting from Disney. That's a key report on next week's calendar. And later, don't miss our exclusive interview with the CEO of Cloudflare that stopped jumping today after strong earnings last night. Overtime's back in two. Welcome back to MegaCap Tech Stocks having very different days today. Amazon rallying after reporting a blowout quarter thanks to strength in its AWS cloud business. Meantime, Apple falling after topping quarterly estimates, but reporting weaker iPhone and iPad sales. Media's turning the spotlight next week with Disney, the headliner,

reporting earnings on Wednesday. Joining us now is Needham Senior Analyst Laura Martin. She covers Amazon and Apple with a buy, Disney with a hold. Laura, okay, so let's talk about Disney, because that's what investors can do something about now. The biggest issue with Disney, it seems to me, is that the Pixar, Marvel, Lucasfilm virtuous cycle has stalled, and I don't see a clear answer to why.

All of them put out movies, streaming properties that seem to me either bad or just kind of meh. And it seems like it takes that a long time. It takes a long time to fix that. So is the stock going to move now based on cuts and ESPN partners only? So I think Disney trades on EPS and you have a writers and an actor strike, which means no one's making new TV or film content. So everybody's cash flow are going to go up and their earnings are going to go up.

And so Disney's P&L is going to look better and it's going to pay down debt faster. Meanwhile, it's not going to be able to make new Marvel or Pixar. So my opinion is those are the best content creators in the world. But right now, nobody's making content. So I think that actually the P&L of the Walt Disney Company will get better so long as the strikes persist, because nobody's making new content. So, OK, why a hold then if you think that at least temporarily it's going to

look better? And then is there also an issue with Apple services outperforming and with Andy Jassy telling us that he really believes in in prime video that these tech juggernauts are going to continue to have this impact on the content market where the likes of Disney benefit that Apple and Amazon do, which is they have an ecosystem. So they don't need to make 100 percent of their return on capital from content alone. Disney has parks and Disney has consumer products and that content feeds their engine. Similarly, we think Apple needs content to drive its new Vision Pro goggles. And I think Amazon Prime, they tell us that offshore, that actually Prime Video is the way that they get new customers for Prime Offshore, that it's sort of the on-ramp that a lot of people offshore find first, and then they become a Prime member over time. So in every case, content is used as an ancillary good to the sister subsidiaries to drive lower insurance and higher customer value.

Yeah, it's like a different way of commoditizing it. I'm curious, though, about Apple, because the stock did fall almost 5 percent today. That's a pretty big move for a blue chip that is beloved by Wall Street. I wonder if you think this is a buying opportunity right now, especially as we do go into another iPhone cycle, especially as services continue to grow. Yeah, absolutely. I think the issue is they told us that Macs and iPads are going to be down, and iPhone, as you saw, went negative in terms of sales, at least on a reported basis, constant currency. They said iPhone revenue was up. But the point is that for the next two quarters, we have really hard comps on a number of their products.

So we should expect to see negative product revenue. Our opinion is we love the services business. The services business is really driving margin expansion at this company. And so, yes, we do think this is a slight downdraft. And I think Apple is like the safe haven in the S&P 500. They have an ecosystem that has the monopoly on the richest 15% of consumers on earth. And they have a wonderful ecosystem lock in strategy where they keep introducing things that just lock people into that ecosystem longer, which increases lifetime value per customer. So, yeah, we do think this is a buying opportunity for Apple this weakness.

OK, so whether it's Apple, whether it's Amazon, I mean, we've covered Disney. Just looking across your coverage universe right now, if you could buy one stock, what would it be? Right now, I would buy ad-driven stocks. I would buy none of these. I would buy 100% ad-driven stocks because as we saw from the Google earnings and the Facebook meta earnings, advertising is bouncing.

It's bouncing off the bottom and advertising is 80% margins. So we on Wall Street cannot keep up with the estimates when the ad cycle turns. And it's my opinion that the ad cycle is turning. And therefore, you want to be 100% ad-driven names. Trade Desk, Magnite, Double Verify, things that have a lot more advertising. I would even accept Roku, for example, which has a lot of advertising in its mix. Those are the hardest stocks. The earnings estimates for those stocks will be too low for two years. And so they'll get margin expansion and they'll get revaluation upwards

for their multiple. I'm glad I asked that question. I was not expecting that answer. Laura Martin, it's always great to speak with you. Nice to see you. After the break, we'll talk about the major swings this week in the bond market that had equities on edge. And we'll discuss if Treasury moves will continue to be front and center for investors next week. Yields falling today after the July jobs report came in slightly below estimates, at least the headline number that raised investor hopes of a soft landing. This comes after a jump in yields earlier this week and ahead of more key economic data next week, including Consumer Price Index. Let's bring in Neil Dutta,

head of economics at Renaissance Macro Research, and Terry Wiseman, global interest rate strategist at Macquarie. I cannot, I guess, stress enough the moves we've seen in the 10-year and the 30-year yields. And Terry, I'm going to start with you because we saw, what, a 15 basis point move lower in the 10-year today on the jobs report. But it wasn't that weak or that soft. So I guess break it down for me. Well, look, I mean, compositionally, I think there were some soft things in the report. The more cyclical sectors of the economy, like construction, for example, and manufacturing, did see weak jobs growth. And the bulk of the jobs growth came in things that were not cyclical, like education and social services. So when you look behind the curtains

at the payroll number, I think it was on the soft side. Granted, other things were a little stronger, like wages. But I do think that July has been unusually strong for average hourly earnings, not just this July, but last July as well. And I suspect there's a problem with des seasonalization filter at the BLS. Putting that aside, this is a mixed report. I will stress, however, that when it comes to the bond, there really are two narratives out there in the marketplace. There's one that says inflation is going to come down and therefore bond yields should come down. But there's also this narrative that says that there's going to be a massive wave of issuance coming from the Treasury because of the federal government's incessant spending.

And those two narratives are competing with one another. That's why sometimes you see the bond fall, the bond yield fall a lot. And some other days you see it rise a lot, depending on which narrative is in effect. Yeah. And of course, then layer in Bank of Japan and some of the policy changes we're seeing take place there. Neil, I want to get your thoughts on this and whether you agree. Well, I don't think it was a soft jobs number. I mean, you know, we're continuing to generate fairly robust job growth on average over the last several months. I mean, I take the point about, you know, certain industries dominating the growth in July. But, you know, when you look at wage growth, it's actually the cyclical industries that are showing the most robust growth in average early earnings. I mean,

take a look at goods producing industries and average early earnings in those industries. It's surging, frankly, over the last six months. So, you know, I think the labor markets are fine. The unemployment rate is at three and a half percent. And I think the risk, frankly, is that the economy reaccelerates. You know, you mentioned construction. New home sales are up about 20 percent over the last year and single family starts are actually down. That's not a sustainable condition. I mean, ultimately, starts are going to have to pick up. And when that happens, builders are going to have to find construction workers to fill those jobs. And these are homes we've already sold, frankly. So, you know, there is some risk, I think, Morgan, that the labor markets actually reaccelerate here.

So translating this to the markets then, Terry, the equity risk premium, sort of what you can expect to get paid for buying stocks versus government bonds, it's at a 20-year low. So taking everything else out, what, if anything, should that tell investors at home about how they should be looking at their portfolios i think they should be favorably disposed towards bonds right now uh in the belly of the curve maybe around five years uh those yields i guess yesterday were about four and a quarter that that's quite attractive uh in view of the fact that we probably are seeing a disinflation in the u.s and it's going to continue into the end of the year. And as a result, the Fed is going to offer much more clarity on peak interest rates. The only thing holding back yields from falling, like I said, is this suspicion that there's a massive wave of issuance coming. But at the same time, hedge funds and most speculators are very short

the bond right now. If you look at the futures market, there's a huge short position. So any news that smacks of lower inflation or a bit of a slowdown in the economy will make that those bond yields come down a lot. And that could happen over the next few weeks. Okay. So, Neil, going back macro again, what are you modeling or expecting when it comes to what student loan repayment does to this consumer who's, you know, putting a lot on the credit card nowadays? And even if inflation is slowing down, the prices that the consumer is paying for stuff still really high. Yeah, no, I don't think the student loan issue really is that big of a deal. I mean, you know, you model this out, you're talking about maybe two-tenths to GDP growth in the fourth quarter when the loan payments restart. You know,

remember, as I mentioned, I mean, home sales are up. People end up having to fill their homes with things when that happens. That could be one reason why you're seeing names like Wayfair, Restoration Hardware, Ethan Allen surge, because the housing market is spreading its tentacles to other areas of the economy, and that's going to lift consumer spending. I do take the point about inflation. That will get better. But if the economy is growing above trend, which it is, and the labor markets are tight, which they are and are likely to remain, there is a risk that the Fed's patting itself on the back at the end of the year just as inflation accelerates. You look at

home prices, they're actually up pretty much month in and month out all year. And that continues through the summer. And, you know, so you have to sort of think about what does the underlying inflation backdrop look like when a lot of these sort of bullwhip disinflation dynamics run their course. At the end of the day, wages are running four and a half percent and underlying productivity is around one to one and a half. That is not an inflation situation that the Fed can really tolerate unless they want to stop doing their job. And I don't think they will. Yeah. Terry, I just want to get your thoughts on whether we retest the yield highs that we saw last October. Oh, yeah, we might. And again, it all comes down to how much the Treasury is going to issue

and which part of the curve they're going to be issuing over the next few months. It's altogether possible we could see yields go higher. But my point is that if it does go higher, I'd be even more inclined to take the other side of that and buy the bond because it does look very cheap when yields, like I said, are above four and a quarter on the five-year. And with regard to the economy, I mean, yes, I do think inflation is going to continue to come down in the U.S., but the real basis for a slowdown going forward is not the fact that interest rates are

high or that the Fed has kept interest rates high. We need to separate the price of credit from the availability of credit. It's the availability of credit that is getting tighter and tighter in this economy. And you can see it with consumer lending coming down in the last few months. Absolutely. Yeah. I heard that from Tim Chen of NerdWallet earlier this week as well. Terry, Neil, thank you. Thanks. My pleasure. Time now for a CNBC News update with Contessa Brewer. Contessa? John, the United States has declined to give Army Private Travis King prisoner of war status despite being taken into North Korean custody last month. That's according to Reuters. The decision could mean that King is not covered by protections entitled to prisoners of war under the Geneva Convention. We want to take you live to Union Square in Manhattan as thousands of people flooded this area for a Twitch streamers

video game giveaway. Creator Kai Sanat posted on social media about the giveaway, which included PlayStation 5 consoles, massive police presence there. Apparently, things got really ugly. People were throwing objects, shoving others down. I just got an alert that all the subway stops are or all the subway trains are bypassing this stop now all over a game giveaway, a lot of traffic around there. All right. Oregonians have power at the pump for the first time in more than 70 years. The governor signed a bill allowing people to choose between having an attendant pump gas or doing it themselves. So now New Jersey is the only state that prohibits motorists from actually getting out of the car and pumping their own gas. Not that we don't see people do it all the time because it takes too long to wait for the attendant.

Right, guys? No, I don't. I like not getting out of time because it takes too long to wait for the attendant. Right, guys? No. I like not getting out of the car. Me too. I think it's delightful. But also, I'd be curious if you have the choice. Like, is there a difference in price on the gas? Maybe there should be.

Good point. They got to still pay a salary anyway, though, right? Yeah. Well, it's true. Contessa Brewer, thanks. Still to come, we'll talk to the CEO of South American e-commerce giant MercadoLibre about the state of the consumer outside the U.S. and the rest of the Americas. That stock closing out a strong week on the back of earnings. As we have to break, take a look at shares of Atlassian, a $50 billion collaboration software company,

getting a big lift today after earnings, revenue, guidance. Top expectations up 17 percent. We'll be right back. Welcome back to Overtime. Mike Santoli is back with his take on the jobs data. Mike. Yeah. You know, Morgan, you guys were just talking about how there definitely were some mixed elements in today's nonfarm payroll report. The headline a little bit soft. We had some downward revisions, but then, of course, the unemployment rate was good. This continues to be a bright spot in general for the labor market. It's the labor force participation rate among prime age workers. That's ages 25 to 54. Yes, I am still barely in that window. And it's interesting because there was a time here when we were just in the

into the recovery after covid that a lot of folks were trying to make arguments that this was going to be structurally capped below the 80 percent level. We've rarely been above that, as you can see, only in the late 90s and around 2000 have we gotten above there for any real stretch of time. And one of the reasons people thought we were capped is just in general, people at the upper end of this age spectrum, maybe just not being willing to come back into work. Maybe it was long COVID. But it seems as if running a tight labor market with good wage growth for a long period of time has done the work right here. So at this point, you know, the Fed seems to be willing to live with this as long as it doesn't feed into broader inflation. So I think we can celebrate it even while being mindful of all the elements of this jobs report that that maybe weren't exactly pristine. I guess the question now is how much higher might it go? Are there things like child care concerns and things like that that are still

a ceiling in general for participation? Yes, I do think that's the case. There's another little wrinkle here, which is even though it's the 25 to 54 age band, if you have more people toward the 54 than the 25 than we did back there when we were at the Heights, in general, there's going to be attrition in the labor force. You have people in their 50s that have definitely backed out of it. So maybe that's that's part of the element, too. But there's no doubt we could probably do plenty more to get people in, although work from home would seem to do part of that job. Yeah, I mean, at least the option. And I think it's great that you highlighted this sort of, you know, prime whatever group of, you know, working age, whatever.

But but it's and we're talking about this with Steve Leesman earlier today. It's it's the older workers and some of the boomers, for example, who have left the jobs market and have been putting downward pressure, or at least keeping it stubbornly stuck, that overall labor participation rate right now, too. Which is really why the overall economy would seem to just operate at a lower metabolism, in a sense, and therefore the capacity for how fast things can grow, including jobs, probably is lower than we were used to decades ago, because the median age in the country is well up and the population is not growing that fast. And CNBC.com tells me there are lots of people retiring early, living in tiny houses with passive income. So, you know, we've got to somehow incorporate that into the models.

Make it. Thank you, Mike Santoli. For more Mike Santoli, be sure to tune in tonight, 6 p.m., for the CNBC special, Taking Stock. Mike and Josh Brown will break down the tech and bond trades and much more coming up at 6 p.m., for the CNBC special, Taking Stock. Mike and Josh Brown will break down the tech and bond trades and much more coming up at 6 p.m. They got to be double counting Mike Santoli because he was on at 8 and he's going to be on at 6 and he's still in that demo. All right. Data-focused enterprise companies having a good week. Informatica posted results Wednesday. The stock is up about 15 percent for the week. I spoke with CEO Amit

Walia yesterday about how steady AI-fueled demand might be compared with the demand spike we've seen, say, from NVIDIA's AI chips. I think overall, see, we saw a big spike in infrastructure because I think it was more related to demand and supply. Everybody wanted to hold a certain part of the infrastructure like chips because they all want it. So I think that was, I believe, a spike that at some point has to get gradually down. I mean, it's law of supply and demand over there, right? Because there's just not enough AI processing chips. But when you think of enterprises, I think there will be naturally a curve. It may be of a higher slope initially, and it'll settle down. But that'll happen,

without doubt. It won't be like crazy hockey stick up, belly up, belly down. I'm never a believer in that one. See, even during the growth at all-cause days, our cloud business is growing healthily above 40%. Some people are growing like 70%. And then from 70%, they all decline to 10%, 20%. So I think those booms and busts are not good and i think we will see good growth that will be the next tailwind i i call that the next wave of digital transformation will be ai fuel digital transformation we are walking into that as we speak so investors watch out maybe a little lumpiness now we will have much more on the state of enterprise spending next when we're joined by Cloudflare CEO Matthew Prince,

whose stock is getting a big pop today on the back of earnings. We'll be right back. Welcome, Black, and welcome back. Software firm Cloudflare posting a strong Q2 earnings beat Thursday, growing revenue by 32 percent last quarter. That stock closing higher by about 7% today. It's up more than 50% year-to-date. Cloudflare also raising its full-year guidance. That comes as more and more companies are increasing enterprise technology spend, perhaps given the stabilizing macroeconomic outlook. Joining us now is Cloudflare co-founder and CEO Matthew Prince. Matthew, good to have you. So you're

still factoring in these elongated sales cycles, close rates not being what they were. So tell us what the stabilization in enterprise really looks like and how that outperformance influences your guidance. Yeah, so I think that throughout all of 2022, enterprise companies saw their time to close, their sales cycles extend. And they gradually went up quarter after quarter after quarter. And we called that early as an early indication that the economy was slowing down.

What happened in Q1, though, was what felt like really a freeze-up in the enterprise market, where we in one quarter saw a 20% elongation in sales cycles. And I think that that was in part because it felt like every week another bank was failing and people were really afraid. And so they held back on budget. In Q2, what we saw is that that 20% dropped back down. We're still not at our historical sales cycles length. We're sort of what we saw is that that 20% dropped back down. We're still not at our historical sales cycles length. We're sort of what we were at the beginning of Q1, but that's certainly better than it being 20% worse again this quarter. So tell me what you see in the AI ecosystem

in general, because you guys work with a lot of AI startups. Is there the possibility that we're seeing a temporary AI surge in activity? Not saying that it's a bubble or anything, but that it'll ease out because we're seeing this chip hoarding, perhaps. Amit Walia was just talking about, yeah, maybe there's a bit of experimentation going on that'll normalize over time. What do you think? Well, I think that AI for sure is a trend that's going to stick with us for quite some time. And there is a real shortage in the silicon that is needed. What we see from the companies that are using us is that because Cloudflare's mission is to make sure that you

can have the data that you have anywhere, you can work across multiple different clouds. We're actually helping mitigate some of those shortages by making it so that companies that are doing AI, especially in the training space, can move their data to wherever there's available GPU capacity and not get locked into just one cloud, you know, hyperscale public cloud provider in just one region. And that's why company after company after company in the AI space has turned to us. We've had a 270% increase in AI companies that are using us. And we think that we are actually the most common cloud company being used across the leading AI startups based on everything that we can measure. So I don't think it's going away anytime soon.

And as it's continuing to go, we're trying to make sure that AI companies can get access to the GPUs that they need in order to be training their models and doing their inference. Yeah. And of course, it raises, I would imagine, the need and the demand for being able to secure all of those applications and all of that data as well. Yeah, that's exactly right. You know, what is challenging for these AI companies is that every time you submit a request to a chatbot or submit something to be generated by a generative AI company that produces images, that costs behind the scenes somewhere between half a cent and 25 cents, depending on what you're doing. And so what that has meant is that AI companies have turned to Cloudflare to use our platform to make sure that only the good guys, only the real actors are getting access to their tools. So we're literally using AI ourselves in order to protect AI companies. And again, I think that's one of the reasons we've seen such

explosive growth in the AI space. Matthew, I think a lot of investors are asking whether they underestimated AWS this week after Amazon's earnings and all of the attention that Microsoft has been able to draw since its announcements in February. Do you have the impression that one hyperscaler or another has a particular advantage yet when it comes to AI infrastructure and ecosystem?

Yeah, you know, I think each of the hyperscalers have different characteristics. And if you looked at it last quarter, sort of Amazon seemed like the dog and Microsoft seemed like the leader. I think the real indication there is to measure the sales cycles of those companies. In the case of Amazon, they're very fast twitch. They sell very quickly. They sell a lot of times directly to developers. And again, that means that when you have sales cycles slow down, you're going to see it much more quickly in their business. And when you have sales cycles come back in, that that's going to rebound much more quickly in their business.

I think we see those same characteristics. Microsoft has longer sales cycles. They're more likely to sell to the enterprise. And so you're going to see that those fluctuations in sales cycles get smoothed out over a longer period of time or show up later in that. And so I think across all of the hyperscale public clouds, the clouds are winning. Who's losing in this space are the hardware providers. And we're going to see, I think, time and time and time again, those hardware providers are getting replaced with the cloud, whether that's security in CloudFlush's case, storage and compute in Amazon and Microsoft's case. And that, I think,

is the real trend that we're going to be following going forward. Unless you're a specialized hardware provider like Supermicro, which has just been, I mean, it's been running faster than NVIDIA. So everybody check that out. We had the CEO on a couple months ago. Matthew Prince, really unique insight for investors in there. Appreciate that. Thanks for joining us. Thanks. We have a news alert on Icon Enterprises. Sima Modi has the details. Hi, Sima. Hey, Morgan. Icon Enterprises confirming that the SEC is looking into the company's corporate governance and structure. No claims have been made against Mr. Icahn himself, but it does follow unconfirmed accusations from short seller Hindenburg

and a dividend cut that did send shares down today, stock down just about 2% right now. Morgan? All right. Sima Modi, thank you. Up next, we will discuss the global state of the consumer, or consumer spending, I should say, when we are joined exclusively by the CEO of Latin American e-commerce giant MercadoLibre. Stay with us.

Welcome back to Overtime. Amazon was not the only e-commerce giant to report earnings this week. Latin America's largest e-commerce operator, MercadoLib Libre beat expectations this Wednesday. The company seeing its fastest profit growth in Brazil and Mexico. Shares ending the day down 2%, but it's up more than 5% for the week. Joining us now is Marcos Galperin, CEO of Mercado Libre and founder. It's great to have you on, Marcos. I guess just walk us through what you're seeing in terms of the health of the consumer in Latin America, particularly in these markets that really shone bright like Brazil and Mexico.

Hi, everyone, and thanks for inviting me. It's great to be here, Morgan. So the consumer in Latin America is rebounding very healthily after the pandemic, we're seeing strong growth in e-commerce across the board. We grew north of 50% on our e-commerce business, over 100% on our fintech business. So we're seeing very good growth, obviously secular growth with respect to the internet in general. Your expectations for whether that continues to accelerate in brazil especially when this week we saw a cut by the central bank there that was much larger than had been expected yeah that was very good to see brazil was probably the first country to start raising interest rates uh inflation has come down pretty dramatically. It has relatively high real interest rates.

So it's good to see that the central bank took this measure and brought down interest rates by 50 basis points. I think that will also probably help the consumer and in general consumption to continue growing. Marcos, strong e-commerce results. Some on the street are describing the fintech results as mixed. Lay out for us what the main drivers of fintech growth are, kind of what's happening with point of sale and consumer trends in the countries that are most important for your growth in total payment volume?

Yeah. No, we were very happy with our growth in total payment volume. I think it was north of 90 percent, reaching $42 billion for the quarter. We grew very healthily both in online payments, in our point of sale business, which is offline payments for merchants uh we saw strong growth as well in our wallet you know payments peer-to-peer payments or payments uh you know to top up your top up your phones and things like that uh so our wallet is is growing really very very rapidly as it is becoming a mainstream way of paying uh in the region. We are seeing cash losing market share in payments and digital payments growing very rapidly. So consumers are really using their telephone as a wallet. And we're seeing a lot of growth in that aspect as well.

And then finally, in fintech, we have a very important arm, which is our credits business. We saw our credit portfolio grow very nicely with non-performing loans very controlled. So overall, very profitable growth. It was a very profitable quarter for us. That's why we announced on Thursday evening and our stock price, sorry, on Wednesday evening, our stock price was up 10 percent on Thursday evening and our stock price, sorry, it was evening, our stock price was up 10% on Thursday. So I think that the market liked the results as well. Okay, so you said defaults or non-payment is under control. Within what band is that?

I mean, I don't know how new that business is for you, but how close is it to being at a level of concern? When would you know? No. So we have three point three billion dollars of loans on our portfolio. This business has been going on for six years for us. Obviously, as interest rates started to go up, it was a time when we wanted to be very careful because we had never experienced portfolio growth in an environment of interest rates going up. That happened throughout last year, particularly in Brazil. But we continue to see very profitable growth on our portfolio. And now as interest rates are coming down, we expect that to continue.

So I would say overall overall it's a very healthy portfolio we have also launched our credit card in Brazil and our last quarter was for the first time where we saw our the cohorts for that quarter in terms of credit cards being profitable as well and that was a one area where we had been investing meaning the credit card wasn't profitable, but now it is. So we really have, and we started to also grow the number of credit cards that we are issuing both in Brazil and in Mexico. All right. Marcos Galperin, CEO of MercadoLibre. Thank you. Thank you, guys. Disney headlining another huge slate of earnings next

week. We'll discuss all the potential market moving news when Overtime returns. Unidentified anomalous phenomenon, or UAPs, that's the official government nomenclature for objects in the sky that cannot be identified as aircraft or known natural events. Objects formerly referred to as UFOs. Hundreds of military and commercial pilots have reported UAP encounters. The Pentagon has released several videos in recent years showing some. NASA formed a team to study the phenomena. And lawmakers have been investigating, including last week when a House subcommittee heard testimony from three former U.S. military officials.

One of them was Ryan Graves. He's a former Navy F-18 fighter pilot who has had his own UAP encounter and says these events are common and pose national security and flight safety risks. And not just for the military. For a commercial air crew, if they actually gain sight of something, there's a decent probability it could be significantly closer to that commercial traffic and pose a safety risk. And so as air crew are potentially seeing these objects, paralleling them for 20, 30, 40 minutes with the FAA controllers not being able to see this on their radars, that's a cause for concern. Graves says there's no method for pilots to be able to report this information in a way that leads to any type of resolution.

Right now, it's part of the reason why he recently co-founded Americans for Safe Aerospace. This is a nonprofit dedicated to supporting aviators who witness these unexplained events. Membership? It's already in the thousands. And by the way, this is one of the few topics that has bipartisan support in Congress with a proposed amendment regarding UAPs in the 2024 Defense Policy Bill, the NDAA. For more on the topic that until recently has been shrouded in a lot of secrecy, has spawned conspiracy theories over the decades, well, check out my conversation with Graves on Manifest Space.

It's available wherever you get your podcasts. Yeah. Why do they have to change the name to UAPs? I mean, UFOs, everybody knows what those are. The stigma. Okay. Well, looking ahead to next week, more big name companies are gearing up for results, including Palantir, UPS, Eli Lilly, Lyft, Disney, and Alibaba.

And the key data point next week will be the Consumer Price Index. Results including Palantir, UPS, Eli Lilly, Lyft, Disney and Alibaba. And the key data point next week will be the Consumer Price Index. That's due out Thursday. We'll also get producer prices on Friday along with consumer sentiment. But producer prices are like Luigi. You know, CPI is Mario. CPI is Mario. You get PPI as well. But I think Palantir on Monday is going to be one to watch when we've had so many conversations about AI.

That is a name that has more than doubled just in the last couple of months. We'll see if it can continue when we talk about the monetization of some of these new applications. Trying to see if I can get her to say it's a me, a Mario again. Oh, wow. I totally didn't pick up what you were putting down. That's going to do it for us here at Overtime. Fast Money starts now.