Closing Bell - Closing Bell Overtime: Meta Posts A Strong Quarter & The Fed Hikes Again 7/26/23

Episode Date: July 26, 2023

The Dow eked out a positive close, marking its thirteenth straight day of gains – the longest streak since 1987. BD8 Capital’s Barbara Doran and Jefferies’ David Zervos break down the market action and earnings from Meta, Chipotle, eBay, Mattel, Lam Research and ServiceNow. Evercore’s Mark Mahaney digs deep on Meta’s quarter – and where there may be some increased costs. Stephens’ analyst Joshua Long talks the consumer and Chipotle’s latest quarter. Jason Furman and Evercore’s Krishna Guha on the Fed’s rate hike.  

We'll take it. You just heard it from Scott. The Dow closing higher for the 13th straight day. This is the longest win streak in 36 years. Thanks largely to Boeing. 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. Stocks swinging in general today on Wall Street after the Federal Reserve hiked interest rates by a quarter point. And Chairman Jay Powell said rates could hold steady at that September meeting. And investors are now set for another huge hour of earnings. Meta, Chipotle, eBay, Mattel, and Lamb Research all set to report results. We will break down all those numbers as well as ServiceNow as soon as they hit the wires.

Yeah, let's get straight to it, though. Joining us now is Barbara Duran, BD8 Capital CEO, and David Zervos, Jeffrey's chief market strategist. Good afternoon to you both. David, want to get your thoughts not only on the increase, which the market expected, but what we did hear from Chair Powell today, especially what he had to say about inflation and specifically the wage piece of the puzzle. Well, I think he did talk about wages and he certainly was interested in that ECI number that comes out later this week. But, you know, he was very specific, I think, on data dependence, no forward guidance. September is really about these next two CPI reports, the next two pieces of payroll data, a little bit about that wage data. And then he

kind of even pulled it back and said, really, it's the inflation data that's the primary driver. So I think he laid his groundwork pretty, pretty simply for September and really tried to steer away from anybody's questions on what's coming for the rest of the year. A lot of people quizzing him on rate cuts for next year and whether those were likely or unlikely. And he said, of course, a few people are projecting those in the SEP. But, you know, I don't think he gave us a lot. He just said September could go, could not go. And it all depends on really two pieces of data.

I think the next two CPI prints. Yeah. What do you think, David? What do I think? Look, I think that's exactly right. I think that's the right way to do it. So I don't have any issue with the way he did it. And I think those CPI prints are, you know, I wouldn't say that. Look, I think a lot of economists have some pretty good ideas of where these are coming in, whether they come in at point three, point two or point one is a really difficult story. And, you know, we could at the margin be at a point three and a point two and they go another 25 or we could get a point one and a point two and they sit pat. Honestly, Morgan,

I in the grand scheme of where stocks are going, where bonds are going, where the economy is going, we're talking about a lot of very fine tuning. We've done 525 base points tightening already. This is this is about as fine tuning as you can get. So I really think the story is moving to the back burner. And now we're more or less talking about, I think, bigger picture issues, which I don't think we have a lot of answers to, which is how have we raised five hundred twenty five base points? And this economy has stayed so resilient. Well, maybe that means that it's less about the Fed, because we're not going to get a whole lot more action from the Fed for a while now, more about these earnings. Alphabet closed up nearly 6% today. You think that bodes well for Meta, which you own.

I mean, what's this really going to move on, though? Maybe not threads, since it's so small, relatively speaking, but beyond just that core ad number, you know, Google moved on Google Cloud and also on YouTube. What matters to Meta? Yeah, no, first, I agree that it's not about the Fed. The Fed, even if they raised another, you know, 25 bips in September, November, I think that's already discounted the market. So we are appropriately focusing on earnings and in general, this is the trough. I think Google results do bode well for Meta. Meta does have high expectations going into this, although the stock did trade off this last week, except for today. And I think investors are going to be looking at a number of things. One, 98% of their revenue is

ad spending. So people are going to be really looking at that and what's happening because it's one, it's a macro issue. But two, they've also seemed to have gotten hold of how to really maximize the ad targeting and optimization. They're doing very well in that. So we want to see that. But we also want to see the user engagement and base. Is that still strong? And that's sort of a given, but you never know what's going to happen there. And yes, we want to see all the other revenue streams. I mean, Reels for Instagram is ramping up very nicely and there should be good advertising numbers to report there. We want to know what they're thinking, WhatsApp and the monetization, when and how are they going to do that? And of course, threads, which probably won't

be much to say. There was a big sign up, probably not a lot of engagement to talk about yet. But I think the ad story is going to be the big one. But I think it's going to be more about how they're optimizing, you know, and getting good advertising dollars in there. And then, Barbara, I wonder about the also ran effect. Snap didn't fare so well yesterday, even as Alphabet did. And then you look at Lyft, for example, versus Uber hasn't done well lately. We got eBay up, which is an also ran to Amazon. What do they need to show or what's the danger here? Yeah, I think I think it's very, very tough for eBay. I mean, if you look at any of the long term forecasts, you're talking maybe low single

digit revenue growth and they're trying to interrupt you for a moment just to let people know meta results are out and we are going through them right now. You might not be surprised to know it is popping on that initial release in the after hours up about seven and a half percent. Barbara. We like that. Can't wait to see what's what's behind it. So but anyway, back to eBay, if you still want to chat about that. But I think they've got a tough road to hoe because one, you know, there's macro challenges for them. A lot of their items are just discretionary. For U.S., we know the consumers have pulled back from spending on goods, more on services and the experience, you know, and two, competition. They have been steadily

losing share. And it is the Walmarts, it is the Amazons, it is competitive platforms. So I think it's going to be and they have done this new focus, you know, focusing on used handbags and luxury goods and that. The luxury part actually did better the last quarter, but I don't think it's going to be enough. So I think this stock is very much an also ran and you're not going to see a lot of upside potential. I think you're more longer run. Well, let's get more on Meta. Julia Borsten has the details now. Julia. We see Meta shares spiking on better than expected results on the top and bottom line. Revenues were expected to grow 8%. Instead, they grew 11%. Revenues coming in at 32

billion versus their 31.12 billion estimated. So this is showing accelerating revenue growth. And I think that's really what's behind the stock jumping 7% right now. We also have earnings beating estimates coming in at $2.98 per share versus the $2.91 expected. We're going to continue to dig through these results here and take a look at the guidance. We'll be back to you with more. Back over to you guys. All right, Julia Borson, thank you. Barbara, do you want to get your reaction to that? We're still waiting on more details here, but the fact that you do have a top line beat for Meta, how does it speak to what we were just discussing? And I just add in there, since you didn't have a chance to mention, daily active people up 70 percent, monthly active people up 6 percent year over year, Barbara.

Well, that's really what got the stock started in the fall, that they were really, OK, we're getting, you know, we're going to cut 20,000 jobs, which they ultimately is the number they did in different tranches. And so that's also something people want to see. But we also want to hear on the guidance call, because everybody we know from listening to Google and Microsoft, they're going to up their CapEx on the AI. Yes. You mentioned guidance. So let's get the details on that from Julia Borsten as well. Julia, the company is guiding for revenue in the third quarter of between 32 and 34.5 billion dollars. This is higher than analyst expectations. Just to put this into context, analysts were were expecting $31.3 billion. So the fact that that guidance is higher than anticipated, I think, is another factor that's influencing the stock and moving it higher. And it really looks like a beat across the board here. So I'm sure we'll hear more from Mark

Zuckerberg, especially about the role of AI here, but strong results across the board. And he cites with Lama2, which is a large language model, threads, reels and new AI products in the pipeline, saying they have an exciting roadmap ahead. Stock now up six and a half percent. Julia, thank you. Barbara also mentioned that Meta is saying they anticipate full year 2023 total expenses will be in the range of 88 to 91 billion, up from the range of 86 to90 that they expected due to legal expenses. I don't know how much that matters, along with everything else that you're hearing in the guide. Yeah, no, I think it's legal, things like that, sort of one-time things. I think people are still a little nervous when it comes to the metaverse.

But again, we want to see a little bit more if they're going to do, how much is CapEx going to come up? We also want to see a bit about the margins, because if this is also the revenue beats across the board, it would reflect advertising and what's going on there. And that should be higher margin. So it'll be a very interesting call. Yeah, it looks like it also says Outlook includes approximately four billion dollars of restructuring costs related to facilities, consolidation charges and severance personnel costs. Reality labs operating losses to increase year over year in 2023 as well. We have eBay earnings, too. Courtney Reagan has those details for us. Hi, Courtney.

Hi, Morgan. Yeah, it looks like a beat on the top and the bottom line. eBay reporting earnings per share of $1.03. The street was looking for $0.99 on revenues of $2.54 billion. The street was looking for $2.5, so that's also a little bit above expectations. It does look like the third quarter earnings guidance is a little light. The range is 96 cents to $1.01, and the Shrew was looking for $1.02, although the third quarter revenue guidance does look about in line with expectations.

They are guiding to $2.46 billion and $2.52 billion. The Shrew was looking for $2.47 billion. As you can see, our shares, though, of eBay are down at least immediately in reaction on these results. Back over to you. All right. Courtney, thank you. And in that time, LAM Research earnings out as well. Christina Parts-Nevelis, what do the numbers look like? Well, we are seeing a top line beat EPS of $5.98. That's about $0.91 higher than what the street was anticipating on revenues right now of $3.21 billion for's about $0.91 higher than what the street was anticipating. On revenues right now, $3.21 billion for Q4 for Lam, also a very strong beat, contributing to that 3.5% pop in the stock.

And this is also considering that China, they have exposure, about 26% exposure to China at the moment. In terms of the guidance, we're going to put that out, but I think I just saw 3.4, but I will confirm in just a few moments for Q1. So overall, one statement from here says LAM executed well in the June quarter with profitability levels exceeding the guided range and that he was on to say that they're well positioned to outperform. So again, top and bottom line beat, and that's contributing to the 3.5% stock rise that we're seeing right now. John? Stina, thank you. And as you were speaking, ServiceNow results also crossing the tape. Let's see, what's that stock doing after hours? I'll have a look at the chart in a moment.

But it is a beat across the board and a raise. Revenue came in at $2.15 billion for Q2 versus 2.13 expected. Actually, perhaps a bit stronger even than it looks on the surface, because subscription revenue came in at two point oh seven five versus two point oh four expected services, which matters less was a little lighter. The operating margin was at twenty five percent versus the guide to 23. Earnings per share, non-gap at $2.37 versus $2.05 expected. The guide for Q3 revenue, $2.19 billion versus $2.14 expected. And the full year guide rises. The previous range was $8.47 to $8.52 billion. The new midpoint is above that full range at $8.59 billion.

It's a range of $8.58 to $8.6. Now, ServiceNow also announcing new premium AI capabilities. One set's going to be available in September with the Vancouver release. It's going to include something called case summarization, where if you've got customers who have had interactions with a company and you've got to hand that off internally to somebody else, AI will be able to boil that down and make it easier. Also, text-to-code capabilities will be in that. Also announcing a collaboration with NVIDIA and Accenture on something called AI Lighthouse. So I had a chance to speak with ServiceNow CEO Bill McDermott about

the quarter and about these AI announcements. He talked about their premium offerings, the ones they already have. He said their pro version growing much more than 50 percent on a year over year basis, which means demand from AI is insatiable, something that we've heard from NVIDIA, Microsoft and others. Also interesting, he was talking about that Vancouver release. And I asked him how it might affect Q4 revenue, since if it comes out in September, it'll be out October, November, December. He said, we did factor that into some degree, but I'm not going to tell you we factored that to every degree because I think there's a lot of upside in it. We have to see how it plays out. I asked about the AI Lighthouse project, when that'll bring in revenue. He said in 100 days, they should be

able to have some of these things ready for customers. We'll see how long it takes to replicate that and actually roll it out. He also mentioned this about the contract sizes, right? He said we just had the best net new ACV, that's average contract value growth that we've had in three years with our customer service management solution. He also talked about 70 deals that were greater than a million and net new ACV in Q2, a 30 percent increase. Nineteen of their top 20 deals had five or more products in the deal. He said they're doing a trillion workflows a month now. So pretty strong commentary from him. I mean, Bill McDermott, Morgan is often optimistic. These numbers certainly bear that

out with the beat, the raise, the AI products coming. I mean, this is the debate among investors and case in point, just it played out in the market just today after we got Microsoft and Alphabet yesterday. And that is the investment versus the monetization of all of these new AI capabilities. And case in point with what you just laid out here between the commentary and the results, I mean, this sounds like it's an example of company where the monetization is already starting to be realized or is poised to be realized. And yet, even as you're talking, the stock turned slightly negative right now. Well, it has run up quite a bit over the last several months since the last earnings report.

And, you know, there's more to come on the call as well. David Zirbel, to go to you, not specifically on ServiceNow, of course, because you have a broader perspective, but on the AI impact on the markets, the economy overall, there's some questions as to when that actually shows up, the impacts perhaps on productivity. How much modeling is there out there and how much are you even considering it when you think about what happens for the rest of the year? You know, John, I think it's one of those questions that we all struggle with, but have very few answers for. We're hopeful. And look, I think there's a real story that needs to be digested over many, many quarters of possibly many, many years here.

This is not something you're going to see that comes out of these numbers. I will say, though, revenue wise in the big picture and earnings wise in the big picture, one of the things we've really stressed to clients over the last couple of years is that in a higher inflation environment, a higher nominal growth environment, not necessarily real growth, but nominal growth, you can't get really large drops in earnings. And we're seeing a lot of folks who were predicting big setbacks for the equity market over the last year or two throw in the towel because they made the mistake of thinking that this was more of a disinflationary or deflationary recession. And I was very excited to watch here. You know, these numbers come in, the revenue beats, the earnings beats. And I've been watching this for many, many quarters now

and really sitting back and trying to, you know, push our clients to look at the big picture here, which is that we are still in a relatively high inflation environment by historical standards. And that is, generally speaking, a world where earnings and profits and all the things that are denominated in nominal terms are going to do better, even if they don't do better on an inflation adjusted basis, which we could debate till the cows come home. But I really think it's an important point that gets lost sometimes, that all of this sort of negativeness on equities that has largely dissip know, that has largely dissipated now was because of earnings and was because of earnings collapses that I think were really,

really hard to get. If you look through to understanding that in a higher inflation environment, earnings are going to go up, not down. Profits are going to go up, not down. I mean, if there's more dollars floating around, just easier to move the dollar. Yeah, it's a key point, David, and I'm glad you raised it here, especially as we make our way through more earnings right now, including for Chipotle. Those results are out. Kate Rogers has those. Hi, Kate. Hey, Morgan, a mixed second quarter here for Chipotle, a beat on EPS coming in at $12.65 adjusted. That is better than the $12.31 estimated by analysts. Revenue is a

slight miss though, $2.51 billion for the quarter versus the $2.53 billion the street was looking for. Same store sales, also a slight miss at 7.4% versus the 7.5% estimated. Restaurant level operating margin, 27.5%. This expanded 2.3 percentage points over the last year, also a small beat for the quarter. Food and packaging costs is a percentage of revenues down year-on-year due in part to lower avocado prices, the company said. Digital sales, 38% of food and beverage revenues for the quarter. The company's guidance here is seeing Q3 same-store sales up low to mid-single digits versus the 5.9% estimated. They see full-year same-store sales up mid to high single digits versus up 7.5% estimated here. And the stock was down by more than 6% last I looked.

Guys, back over to you. Interesting. Okay, Kate Rogers, thank you. Well, don't miss Jim Cramer's exclusive interview with Chipotle CEO Brian Nicol. That's coming at 6 p.m. Eastern on Mad Money. We've got more earnings. Mattel, those are out, and Courtney Reagan has the numbers. Hi, Court.

Hi, Morgan. Yeah, so Mattel reporting second quarter earnings of $0.10 adjusted. That does beat expectations of a loss of $0.02 on slightly stronger than expected revenues of $1.09 billion. The street was looking for just over $1 billion for those revenues. The company is reiterating its guidance going forward, though the CFO does note that there was some industry softness with retailers when it came to managing inventories, but says they believe it's mostly behind them. Obviously, a lot of interest in Barbie right now. Keep in mind, this Barbie movie and perhaps a lot of the halo surrounding it is not going to be encapsulated in this quarter

because the movie did just debut this past weekend. However, if you look at the doll segment, the doll segment overall was up 10 percent for gross billings. But there was a decline in Barbie within that doll segment. Still, though, the largest segment for Mattel coming in at four hundred and forty one million dollars. Shares of Mattel bouncing a little bit here, but looks like slightly down in the after hours. Back over to you. Yeah, it looks like we're down two% now. Courtney Reagan on double duty. Thank you. Barbara, I want to get your reaction because whether it's Mattel or Chipotle, these are two consumer facing names. And Chipotle, I would argue in particular, really sort of speaks to and has spoken to

the strength and resilience of the consumer, particularly here in the U.S. on the services side and in the face of higher and higher prices. The question now is, with a same-store sale miss and a top-line miss, whether we've kind of hit the top, hit the ceiling, if you will. Well, I think that is an important question. I'm actually surprised with Chipotle because they've been going great guns, and expectations going into this print were very high because they've executed so well, new product innovation and management continues to expand in their products and in customer service in terms of digital ordering. So it would be interesting to see what management commentary is on that because you've seen a lot of other

companies like McDonald's or Starbucks continuing to perform. So we have to see what this miss is about. Now for Mattel, Mattel is interesting because that is at the moment is a one hit wonder. I mean, the stock has run up 17 percent. It's about a 17 P.E. and it's been brilliant that they were starting to monetize their IP. And Barbie is obviously one of their biggest IPs. But and we'll see. And as Courtney said, we're not going to see it in this quarter, but we've got a lot of marketing licensing fees, high margin of business to come in. But the question is, what next? They've got apparently some 14 projects in the works, but the next one out, and they're going to monetize whether it's Polly Pockets or Hot Wheels, is not due until December 25. So the question is, what do they do in the meantime?

So the stock may not have a lot of upside in the near to medium term from here. We've got to hear more what they plan and what the timeline is for the rollout of these different projects. Barbara, before we go, I want to bring it back to Meta, which is up more than 5 percent after hours, kind of an echo of that alphabet move that we saw in overtime yesterday. What's going to make a difference one way or the other in this call, either making you more or less excited, you know, continued user growth or, you know, monetization of reels or other things? What? For me, it's really going to be the monetization, you know, and the ad revenue. I don't want to see any misses. I don't want to

see any discouraging news on the engagement. And I want to hear if they're going to continue their cost containment. And I probably don't want to hear much about the metaverse. That was kind of jinxing things. But we want to hear a lot more about what they're seeing with the AI monetization and how that's working and how they're incorporating that because they've clearly been working on that for a long time, hand in hand with the metaverse. So I think we want to hear a lot more on that. And I think that, you know, I think I expect it to be all very encouraging and reinforcing that this is indeed a good long-term core holding that should outperform for a while to come. We'll see what gets mentioned more, threads or the metaverse. Barbara, David, thank you. Thank you. Might be threads. Yeah, you never know. Up next, a top analyst reacts to Meta's results. Plus,

Julia Borsten is speaking with Meta CEO Susan Lee right now, and she'll bring us those highlights in just a few minutes. Overtime, we'll be right back. Welcome back to Overtime. Let's get a check on Meta again. Shares are higher by almost 5% after reporting better than expected earnings, providing optimistic guidance. For more on Meta again. Shares are higher by almost 5% after reporting better than expected earnings, providing optimistic guidance. For more on Meta, let's bring in Mark Mahaney from Evercore ISI. Mark, I mentioned it earlier, Julia Boorstin is talking with the CFO of Meta and might pop her on while you're still here to get some more insight in your take. But I was struck by the increase in usage across the family of products here. It looked a bit stronger than I expected. You? A little bit stronger. Just remember that this comp, that you're going against the Ukraine quarter a year ago. So it may have had a little bit of an edge, i.e. the numbers last year may have been a little bit depressed. But the usage

numbers, user numbers were good. But what really is going to pop out to every single person, every investor out there is that revenue growth acceleration. So the ad revenue growth, if you adjust for currency, it was like 13% in the quarter. Google was at 5%. And then next quarter, they're guiding for that ad revenue growth to be north of 20% at the high end of the guidance range. And I think the market was thinking maybe they'd get to 20% by the December quarter. But they're like a quarter faster than the market thought. That's really the big surprise. There's some negatives here, John. I know Barbara was mentioning earlier, she'd love to see them tamp down that metaverse spending. That's not happening. They're telling you that they're going to increase materially their metaverse operating losses. I think that's

what took the stock down a little bit or dragged it down a little bit in the aftermarket. But outside of that, this looks like a really good, clean, beaten race quarter. There were people a little more than a year ago saying that Facebook was a dead platform. Forget about Facebook, blah, blah, blah. And now what? Right. You've been pretty bullish on it all along. What do they have to do now, even in terms of messaging or, you know, cost control? You're not excited about that metaverse spending to get things accelerating. Well, I think you're going to the, I guess the answer to your question, John, I think it's product cycles. And that's what they did. So they had to rebuild their ad tech stack after Apple gutted it for performance marketers online. Facebook's doing that. They have

to better monetize reels. They're doing that. They've got this click to messaging ad opportunity. I think it's really unique to meta. And I think they're starting to really ramp that up. There's nothing in the press release about that. So listen on the call. And then they've got this threads, which seems to be growing. And it's never up and to the right perfectly, but it certainly seems to be growing while the kind of most obvious competitor seems to be imploding. So I just, all of a sudden, we've got like these multiple product cycles for a company that against an ad market, that's still not really inflecting back up. So it's really this, all this company specific outperformance on product cycles. When you layer in a truly recovering ad market, I mean, these growth rates

are going to be a lot, lot higher than people thought six months ago and certainly 12 months ago. Yeah, you just touched on it, but it sounds like a lot of this is meta-specific versus kind of the actual meaningful recovery taking root, at least not yet, for digital advertising, Mark. I'm just curious, can we just say all the Apple iOS privacy changes that were so painful to this company over the last couple of years, are those in the rear of your mirror now too? I think they are, Morgan, but I think it's because this company devoted more resources, more money to figuring it out. You know, I'll give Meta credit on something. They were out front saying this is going to hit us by $10 billion last year, $10 billion. And they were

right. And other companies like Snap sort of said year, $10 billion. And they were right. And other companies like Snap sort of said it wouldn't be any impact, and they were massively impacted. So somebody got the call right. They had to scramble. They scrambled hard. It really hurt their business. But I think they're coming out the other side now. And, yeah, mortgage, I think this is meta-specific.

I don't think there's Internet advertising that's not inflecting backup like this. This is meta-specific. Hold tight just a moment. Julia Boorstin, we want to get back to her. She just spoke with Meta's CFO, Susan Lee. Julia. That's right. I spoke with Susan Lee. She told me they've seen solid execution across the full family of apps, noting that Reels continues to grow and drive incremental engagement with content as well as that incremental revenue. She did note they're on track to have reels be generating profits as a tailwind rather than a headwind by the end of this year. She said they've made good progress on expenses with this year of efficiency and that

these efficiency efforts have been paying off. She said, quote, this puts us into a better financial position and a better cost structure going forward. But she does note that there are factors that will drive expenses in 2024, including AI, which means a lot more computing power, hiring. They're hiring, especially in technical roles. And then when it does come to the metaverse, she said they are committed to Mark Zuckerberg's Reality Labs vision and that because of that, because of those investments, the operating losses in that division will continue. I asked her about the health of the broader advertising market, and she said that they are clearly in a better place than they were last year, which is, of course, more closely tied to the heels of the start of the war in Ukraine.

So tomorrow, I will be talking to Susan Lee on CNBC. It's a first on CNBC interview and it's her first interview since she's taken on the CFO role. That's going to be in the 11 a.m. Eastern, 8 a.m. Pacific hour. Morgan. All right. Julia Borsten, great stuff. Thank you. Stocks up 4%. Mark, want to get your reaction to everything we just heard in those comments from Julia and her conversation with the CFO, particularly the spending side of the equation and what was just said about Metaverse, but also spending and investing on AI and computing. Well, you know, we've been talking about the 30 billion CapEx club is going to become the 40 billion CapEx club. And I mean, Microsoft, AWS, Google and Meta. And actually, I don't think Meta is

actually going to quite get up to those levels. But AI, we're going through a massive AI CapEx cycle now. And I think Meta is going to be part of that. They lowered their CapEx guides for this year, but they were pretty clear that there were some timing elements. And it sounds like that's exactly what Julia just picked up from Susan Lee. So CapEx is going up next year. Expenses are going up. The advantage is that revenue base is going to be growing faster and it's going to be larger than we all thought, myself included as a bull, we all thought three months ago. So it's impressive what they've been able to turn around. And again, this is without internet advertising really recovering. If that

does, you just got more upside. This is a heavy fixed cost business. So when revenue growth accelerates, it drops a lot to the bottom line. All right. As I mentioned, stocks up 4% real quick. Buy it here at these levels. Yes. Yeah, I think it's trading at 17, 16 times gap earnings. It's cheap. It's the cheapest high quality tech stock out there. You buy a meta. OK, Mark Mahaney, thank you. Thank you. Chipotle's earnings call is just getting started. Coming up, a top analyst on what he wants to hear from the company. Stay with us. Welcome back to Overtime. The conference call for Chipotle is underway right now. That stock is sinking after a revenue miss. Shares are down 8 percent.

Let's bring in Stevens analyst Joshua Long. Joshua, I want to get your thoughts on what we've heard or at least what we've seen in the results so far from the company, including the same-store sales of 7.4 percent, which for many other companies might be considered good, but here was a mess. Absolutely. So what we're seeing here is still a very strong brand, although same-store sales came in a little bit lighter than what everyone expected, and including the 3Q guide here, maybe disappointed. I think the key point is that it's still transaction-led. This is an amazing brand with a lot of power and brand consumers that really, really, really want to be here. So at the end of the day, although those top line came in below expectations, if you look at the margins, that's really where the story is here. They're going to focus on throughput and really be able

to still drive higher ETFs. Still higher than it was at the start of April, I guess. Does this make you more cautious on McDonald's tomorrow morning? Great question. You know, I think at the end of the day, no, I think there's going to, you're still going to see a lot of momentum in these large cap limited service names. We actually took our numbers up into the print. There's a lot of momentum at McDonald's as well. They've been hitting home run after home run with the recent marketing initiatives that they've been going through. And I don't know if you spend any time out here, but lines around the block at every drive through I go through. So I think there's still going to be room for upside there on the top line. And the big question is just how this plays out over the course of the year.

And that's something that we're talking to with our clients across the group as well. Yeah, it would seem McDonald's has been benefiting as well from high inflation and folks looking for affordability when it comes to going out and eating. Chipotle has been a little bit of a different story because they've had price hike upon price hike upon price hike. And I realize that last quarter, Brian Nickel, the CEO, had suggested that maybe they were through the most of that or the worst of that in terms of trying to offset higher costs and inflation. But is it safe to say, given the top line miss, that maybe we're seeing a little bit of consumer pushback in terms of how high those prices have gone so far? That's a fair point. But I think really when we get into it, and obviously the conference call is ongoing right now, I think when we dig into it, we're going to see very strong traffic trends. And really, this miss on the top line, albeit small, is going to be a function of just

the price getting cut in half. So think back to 1Q. Chipotle had about 10% price in place. That was at the higher end of where they've been historically. Inflation's really come down across the board, across key inputs like avocados, cheese, dairy, beans, et cetera. We think that that's going to continue to play out. And so that's really driving the strategy of allowing some of that price to roll off. So here in the 2Q period, they had about 5% price. That's a meaningful step down versus where they have been and headed in the right way. So at least now, if inflation holds in where we expect it to, that value proposition can really hold tight as price falls off over the course of the year

and comps are still going to be transaction driven. All right. Joshua Long from Stevens. Thank you. So will today's rate hike from the Fed be the last one this cycle? Former Council of Economic Advisers Chairman Jason Furman and Evercore ISI Vice Chair Krishna Guha are going to weigh in when overtime returns. You didn't think we were done with earnings, did you? L3 Harris earnings are out as well. Those shares right now are down about 2% in after hours. However, we have a beat on both the top and bottom lines. EPS, $2.97 per share. That was 3 cents better than estimates. Revenue also beating $4.69 billion, better than the $4.37 billion that analysts had been expecting. That represented a 13 percent increase in revenue or a 12 percent increase in organic growth. In the release here, the company also saying that

it was strong revenue growth across all segments, sequential margin expansion and positive cash flow, and that given the performance to date, the company is increasing full year revenue and earnings per share guidance. Also worth noting that L3 Harris has been advised today that the FTC will not block its acquisition of Aerojet Rocketdyne. Therefore, they are moving forward to close that transaction on or about July 28th. That is very notable, John, because and you can see those shares are higher right now by about one percent in after hours because this is a company that makes solid rocket motors. They go into things like missiles. There has been an incredible amount of demand and there has been an incredible amount of issues around supply chain and also just boardroom drama that

played out last year for Aerojet Rocketdyne. Lockheed Martin had tried to buy that company and was blocked by the FTC and challenged, I should say, in court. And so that deal had been scuttled. So this is very notable. And when it comes to Aerojet Rocketdyne specifically, that is a company that folks in the defense industry will tell you could use some investment as some of the supply chain gridlock is needing to ease. I'd also just note that there is a very, very specific trend that is emerging from this earnings season, and that is with aerospace and defense, commercial aerospace, particularly the aftermarket, but commercial aerospace is really strong, continues to recover. And on the defense side, that's really strong, too. All of that demand, all of those dollars

that are being allocated not just by the U.S., but by allies as well to defend spending are now starting to make their way into the finances of these companies, into the earnings results of these companies. Case in point here with L3 Harris, but also Boeing today, General Dynamics today. We've got Northrop Grumman on tap tomorrow morning as well as that parade continues. Very newsy report and newsy group. All right. Well, the Federal Reserve raising interest rates by a quarter percent as expected. Fed Chair Powell saying in the news conference it's unlikely the Fed will cut rates this year.

Joining us now, former Council of Economic Advisers Chairman Jason Furman and Evercore ISI's Krishna Guha. Guys, welcome. Jason, so what's the bigger challenge here or risk here as we get lower in inflation and it gets harder to lower it, not raising enough going forward or signaling cuts too soon and letting inflation come back? Look, the biggest risk in our economy is inflation. That's already there. It's not a hypothetical. Recession risks have diminished quite a lot. I think it's more important that the Fed signals that they have a very high bar for cutting rates than it is that they raise rates more. But if inflation comes in on the path that they had

back in June, they'll need to stick with the interest rates they had in the path they had back then with at least another hike. Krishna, has the Fed gotten this under control now? Well, it's a long road ahead, but the incoming information is constructive. It's encouraging. We are seeing the disinflation advance without a large weakening of the labor market in particular, without a significant increase in unemployment to date. Now, I'm sure Jason will remind us that the jury's still out in terms of how this will play out going forward. But so far, so good. It feels like this is the last hike in all likelihood. And my sense from Powell today is that privately, he probably thinks it's the last hike, too. Interesting. Jason, I want to get your reaction to that, but also to the fact that now with this 11th hike today, we've seen 525, 550 basis points of tightening since last March.

And you can make the argument that financial conditions are still not particularly restrictive. Why? Yeah, so first of all, I agree with Krishna. You know, we've had a lot of good news and I'm feeling good about that news as well. But the job of the Fed is to be really, really nervous to manage risks. And the question is, what is the risk they're trying to manage? That risk is inflation. And I think your question is exactly right. When you're thinking about additional hikes, you have to think, where are financial conditions right now? Interest rates, the ones that matter, basically haven't increased since last June. The dollar is weakening. The stock

market is up. Add on top of that all the fiscal stimulus we have, we have a lot of things that could potentially reignite or at least stop the decline of inflation in this economy that I think the Fed still needs to be worried about. Yeah, I mean, Krishna, just going back to this, to the shift from modest to moderate in the language from the FOMC release today, and also just the comments from Powell at the presser, soft landing. When will we know that we have achieved a soft landing, if that is, in fact, the case? Well, so let me take both parts of your question. First off, I think the change in the assessment of growth from modest to moderate is important. It's also important that we read it in a nuanced

way. So modest is weak growth in Fed speak. Moderate is the soft side of trend. So they are upgrading their assessment of what they're seeing on the growth side. They think the signal here is A, we see it, we're on it. But B, we're not overreacting to it. We're not characterizing growth as strong, as firming, as strengthening. Let's see how that plays out. I think the point is that upside risk to growth is one of the risks, per Jason, that must be on the Fed's radar screen right now. But I think their assessment is so far we are not in the terrain where that

upside risk to growth looks like the dominant factor in the Fed's calculations. In terms of a soft landing, really the whole premise of the soft landing all along is that we can continue to disinflate without a sizable increase in unemployment. I've been on the more optimistic side of that debate from the start. I'm gradually becoming additionally optimistic as the new data comes in. But I would certainly say that the jury is still out on that and that his case is not yet proven. Jason, a couple of quarters ago, I had a lot of business leaders complaining about how aggressive the Fed had been and kind of thinking that the Fed was going to tank the economy. That didn't happen. And now it looks like after getting so many things wrong they're getting some things right

so what are really the risks uh... ahead outside of a hot cpi print or something like that uh... you know it looks like we got labor uh... we some some breathing room there for the economy with with u p s uh... being able to get that done out what for the rest of the year, are the risks that you're watching? I'm watching the risk that you see that inflationary process that we've seen so far slow down, that other components of prices other than shelter start picking up and offsetting

the decline in shelter. And then recession risks are not front of mind but they always need to be there. You know everyone was sort of too strong on predicting a recession. Maybe now you know forgetting about it entirely is the other extreme as well.

There's always all sorts of risk of which refinancing commercial real estate is the most obvious one at the current moment. Christian, to what degree are you concerned about student loans causing a drag on consumer spending? There will be a drag there for sure. It doesn't feel like the sort of thing that is going to knock over this resilient economy. There's a gradual phasing of those repayments. The new income-based repayment plans are quite generous. So yes, it's a material factor.

Is it going to be the difference between recession or soft landing? Probably not. The only thing I would emphasize, maybe a little bit more than Jason is I do believe that there is still significant tightening in the pipeline, that monetary policy doesn't work instantaneously. And indeed, even changes to financial conditions take time to work their way through the economy and maybe more time this time around than in the past, in part because households were sitting on a big stock of excess savings that they're gradually running out of now, and that businesses and households had also refied at low rates, but again, gradually reset over time. So I do think there's still something

in the pipeline. I do think we're still getting some impact on credit from the bank stress earlier this year, not dramatic, but it's there. And so I'm probably a little more optimistic than Jason that there's enough still working its way through the system to support an ongoing cooling off and rebalancing of the economy. Yeah. And of course, it kind of speaks to the fact that we're starting to see perhaps some regional bank mergers take shape as well and what all of that will mean to this entire discussion, too. Guys, thanks so much, Jason Furman and Krishna Guha, for breaking down the Fed with us. We have a news alert from the gaming and hospitality industry.

Contessa Brewer has the details. Hi, Contessa. Hi there, Morgan. Vici, the gaming REIT and the largest property owner on the Las Vegas Strip, just announced a notable shift in strategy. It's closed a deal to invest in its future tenant, Canyon Ranch. Vici says health and wellness is a huge opportunity, so it's putting $150 million to work as preferred equity in Canyon Ranch. That's part number one.

It has the right to buy Canyon Ranch properties. And number three, if Canyon Ranch develops That's part number one. It has the right to buy Canyon Ranch properties. And number three, if Canyon Ranch develops new resorts, Vici now has the right to provide the financing. That news on top of the earnings beat on top and bottom lines, revenue coming in 36 percent over last year, and Vici raised its guidance. Vici's CEO, Ed Petoniak, and Canyon Ranch owner, John Goff, will join me here at Canyon Ranch Lenox for an exclusive conversation on Last Call tonight. Morgan, John, big news out of the gaming slash REIT world. Contessa, thanks.

We're wondering where you were. I was literally, you took the words out of my mouth. We are now, thanks Contessa, moments away from Meta's earnings call. Up next, an analyst with a buy rating on the stock tells us the key things investors should be listening for. We'll be right back. Welcome back. Align Technology giving investors a picture-perfect earnings report. Shares of the Invisalign maker up better than 12% in overtime after topping Wall Street estimates. Strong full-year guidance as well. IMAX to the movies, also higher, beating analyst estimates.

The company saying this past weekend was one of its best all-time at the global box office. All right, well, tomorrow will be another massive day of earnings. It's actually the busiest day of earnings season. McDonald's, Honeywell, MasterCard will all report before the bell. And in overtime, we will break down results from Intel, Ford and Roku and many more. Plus, Honeywell CEO Vimal Kapoor breaks down his company's results in his very first broadcast interview since taking the top job at the blue chip. That's going to be tomorrow at 11 a.m. Eastern on Squawk on the Street. I'll be there as well for that interview. So we're going to break down those results. In

the meantime, we are minutes away from Meta's earnings call. Shares still seeing some gains I'll be there as well for that interview. So we're going to break down those results. In the meantime, we are minutes away from Meta's earnings call. Shares still seeing some gains in after hours trading. You can see up about 5% right now for more on what to look out for on the call. Let's bring in Mark Schmulich from Bernstein. Mark, key questions you have as we do go into that call. Yeah, it's going to be an interesting call. I think the first question on top of investors' minds is how durable is this revenue growth? And is this something that Meta is doing specifically or more a reflection of really what's happening in the digital ad space? Getting back to 20 plus percent growth?

We're talking about a growth company again. We haven't been able to talk about that since, if we recall, nine months ago when the stock sold off dramatically. Now the only thing to kind of watch for and why the stock has kind of pulled back a little bit here after hours is one of the fears we had was once Apple announced their mixed reality device, was Mark Zuckerberg and co. going to get very excited to kind of catch up? And so one of the comments we've seen in the press release suggests that, you know, expect a meaningful increase in losses next year tied to Reality Labs. So just how aggressive are they going to be going after that opportunity? Yeah. I mean, how much does that matter? The

increase in CapEx that they are now forecasting versus the fact that you did see this very notable acceleration in top line growth? How do you balance one against the other right now? Does the CapEx matter as much if they are re-accelerating? Yeah, on the CapEx front, I think a lot of that is going to be very much tied to their AI ambitions, which you could see a clear pathway to monetization, integrating it into the ad tools. They released Lama, integrating it into WhatsApp. So I'm OK with the CapEx. But talking about increased losses

in Reality Labs, look, I'd say when you're growing 20 plus percent, you buy yourself a lot of space to invest in pretty much whatever you want. But they were already losing somewhere in the neighborhood of $13, $14 billion a year. Seeing a meaningful step up from that, what kind of number are we talking about? What about the opportunity cost, though? I mean, they could have given a dividend. They could have bought something. They could have done a lot of things with that money aside from metaverse so how long before we know i know they've given us kind of you know five year ish time horizon whether it was worth it yeah look i think it's a great question right this is still a company that makes 98 of their revenues from advertising they've tried you know in several different ways to kind of diversify those revenues.

I'm sure we'll hear a lot on the call, not just about what they're doing in Reality Labs, but what they're doing in AI, what they're doing with WhatsApp, what they're doing with threads. So they've got a lot of kind of spokes in the fire here. And so we'll see how close we are to some of those actually returning revenues

and contributing to this business. All right. Mark Shmulek, thanks for joining us. Shares are up after hours right now. We're going to continue to monitor as that call does get underway. I mean, this has been the conversation around meta, right? The fact that like, OK, maybe you're seeing some stabilization, maybe even some early green shoots in terms of recovery around digital ad spending, but that this is very much a company specific story. We'll have to see what additional detail they give on the call. Yeah. I mean, you got Alphabet in there as well. I'm watching ServiceNow after hours now down about three and a half percent, putting it in the same bucket as Microsoft, which also reported a quarter. A lot of people found impressive,

but was down. Raises questions for me about the appreciation, the run-up. How much is enough for investors? All right. Well, as we mentioned, we've got the busiest day of earnings kicking off tomorrow. The S&P finished the day basically flat. That's going to do it for us here at Overtime. Fast money starts now.