Closing Bell - Closing Bell Overtime: Meta Reports Strong Quarter; “Higher for Shorter” Market Thesis 10/25/23

Episode Date: October 25, 2023

Another wild evening of earnings with Meta, IBM, Mattel, ServiceNow and Whirlpool reporting. G Squared Private Wealth’s Victoria Greene helps us break down the key numbers. Eric Jackson, Meta shareholder and EMJ Capital founder, on what to do with the stock while Bernstein analyst Mark Shmulik looks ahead to next quarter. Evercore’s Amit Daryanani walks us through IBM’s number. Canaccord Genuity’s Tony Dwyer talks his “higher for shorter” marker thesis. Needham’s Laura Martin looks ahead to Amazon earnings.

Well, the S&P 500 closing below its key 4,200 level. First time we've seen that since May as mega tech tumbled. That's the scorecard on Wall Street, but the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort. Meta and IBM headlining another huge hour of earnings after the bell. ServiceNow, Mattel, and Whirlpool are also on tap. We will also bring you all the results as soon as they are released.

Plus, meta shareholder Eric Jackson is going to react to the company's earnings and what he wants to hear during the conference call. All right. Nearly 10 percent of the S&P 500 hit new 52 week lows today on a very red day across the board for Wall Street. Tech slammed. Let's get right to it. Joining us now is G-Squared private wealth CIO and CNBC contributor Victoria Green. And Victoria, I want to start with this sell-off that we have seen. We just talked about the S&P closing at 41.89, but the Russell 2000 as well hitting a fresh 52 week low. Break down the market action. How much is being driven by earnings versus macro cross currents? I think they're both. But earnings has been really on the downside. You haven't seen other than Netflix. That was really the only large

cap company we've seen actually have a major move up on good, positive earnings. Look at Microsoft today. Solid earnings, great beats. Cloud revenue was doing all right. And they still didn't really get a lot of uptick. Yeah, they ended up okay, but it's not like they had a huge move up versus you're being very punished on the downside for any type of miss, especially Google's obviously slowing cloud revenue was a problem. So it's not only your earnings have to be pristine, but your outlook has to be good. And even if you beat everything you're supposed to beat, the market's kind of shrugging it off. So you're not seeing these upward moves that you'd like. So it's macro and really earnings aren't impressing anybody right now. Yeah. Mike Santoli, I want to bring you to this conversation, too. I mean, is the

bar just higher in a higher rate environment? We did see the 10-year Treasury yield move back towards 5%, for example, today. For sure, Morgan. Not just because of a higher rate environment, but a higher rate environment at the same time, you're having this growth scare in the economy and I say a growth scare not because of anything we're seeing in front of us but because people assume the higher rates are going to destabilize the economy enough that we're going to undercut the soft landing I think that's the entire feedback loop that we're dealing with right now does raise the bar for earnings. That being said, a lot of the numbers that are beating are not really beating based on what we expected to see three months ago. And I'd also say you wait for about halfway through earnings season, see where we are in terms of S&P consensus. The buyback window opens up and then you find out what the real number is that people are going to use as their basis for for earnings and valuation from here on out. So I get why you know we're getting a lot of attention on some of the carnage not being rewarded on upside beats. It's because you know those are by definition lagging indicators. And I don't think you have a lot of the faith that we can extrapolate the strength into current quarters until we get a lot more evidence. Victoria, what's the difference though? I feel like looking at those TMZ pictures, right? What's the difference? What's the difference for the market today? Was it Alphabet and the fact that it was down so much? Because also the WCLD, the Wizardry Cloud Computing Fund, was down almost four and a half percent that there was really

something intact across software even semiconductors and i i look at the 10-year yield it's been this high before it seems like it can't be that what made the difference i think investors are really what drove this market up was ai right we had this ai frenzy we had the magnificent seven now you've had two of the seven missed decently with Google and Tesla, and they were two powerhouses on the way up. And so I think investors are stepping back and saying, okay, are they really trading at multiples I want to buy it at? Some of them, as Mike had pointed out, they may be taking profits. You got some pretty big juicy profits still in a lot of these companies. So you may see this risk-off mood that, okay, we've seen two of seven miss, you know, what's under the hood for Amazon? You know, AWS, are they going to go the way of Google or are

they going to go the way of Microsoft? And that's a big question mark out there. So investors, I think they've got an option. They've got Tara now. They've got a real alternative to just investing in equities at a five and a quarter risk free rate. So investors are really taking stock and maybe looking to pull some profits off the sidelines as the risk increases that maybe these beats aren't going to be enough for the upside. And there's a lot of downside risk, as we've seen with Tesla and Google. Mike, I'm a little puzzled because Google Cloud was light, but YouTube and search and ads kind of seem to be OK. Beneath the surface, some of the fundamental drivers in that stock anyway seem to be strong. Do you have a sense from the chatter on whether Meta's results and

certainly Amazon's results could also be a bigger deal for market sentiment from here? Well, I think that that's what the market action today told you that traders were maybe trying to anticipate, right? Not taking for granted that their numbers are going to be beaten not taking for granted that they're safe places really to take shelter I think that's partial answer to your previous question John which is we're three months into this market pullback and once that happens the market goes hunting for areas of complacency or market goes hunting for places to test that haven it yet been tested as much and I know that makes it sound like you know it's anthropomorphizing the market but that's the way the crowd psychology works. You know am I really safe here if yields don't calm down we thought we were out of the woods five percent treasuries for a minute. The other day pull back now we're right back there so I think all of that is just sort

of sapping anybody's- risk appetite to come in and bet on the happy ending. All right, guys, hang tight. We've got a news alert on Endeavor Holdings. Steve Kovac has details. Steve? Yeah, John, shares up about eight and a half percent after the company announcing a strategic formal review to evaluate strategic alternatives for the company. Also noting that these this review will not include its stake in TKO Group Holdings, that's WWE and UFC, that they recently invested in. And Ari Emanuel, CEO, saying in a statement, given the continued dislocation between Endeavor's public market value and the intrinsic value of Endeavor's underlying assets, we believe, in evaluation of strategic alternatives is a prudent approach.

Shares up now nearly 10 percent. I'll send it back over to you, John. I'll take it. Steve Kovacs, thank you. Mattel earnings are out. Courtney Reagan has the numbers. Hi, Court. Speed here on the third quarter for Mattel.

Earnings per share coming in at $1.08. Adjusted consensus was for 86 cents, stronger than expected revenues as well, $1.92 billion versus $1.84 billion expected. Gross margins also handily above, coming in adjusted gross margin at 51 percent. The street was looking for 49.4 percent. CEO Ian Unkrites does note that the results benefited from the success of the Barbie movie, which, remember, came out in the first month of the quarter. It debuted in theaters on July 21st. It is interesting here the numbers that we have for Barbie.

They're listed as gross billings, not revenues. However, very strong doll billings in total, up 27 percent year over year. Barbie billings up 16 percent year over year. The company is also increasing its full year guidance, but they're raising it by 5 cents, which is interesting because just here for this quarter, the third quarter, they're beating expectations by 22 cents. So it implies a fourth quarter of just 21 to 31 cents versus a 48 cent estimate on the street. However, the CFO does still note expectations for a strong holiday season here. So interested to hear some more details on the call.

But in the immediate reaction, the stock is higher by about 2% for Mattel on these third quarter results. Back over to you. Okay. Courtney Reagan, thank you. It's certainly interesting. Maybe a little caution there. Don't miss Jim Cramer's exclusive interview with Mattel's CEO coming up at 6 p.m. Eastern on Mad Money. Victoria, I'm going to go to you on this one. Dahl Billings up 27% year over year. Barbie specifically up 16 percent. Barbie Boost, is this the best it's going to be for Mattel, at least where that brand is concerned?

I think short term they're going to look at their their emphasis right now is that they want to monetize their intellectual property and they want to push more and more into entertainment. But how they get a success like Barbie, if they look at Hot Wheels or some of their other brands, is a little bit less known if it can be quite the hit Barbie was. I think Hot Wheels and Barbie have been the two main drivers for them. They've seen a little bit less growth than their other brands. And so the shift to entertainment, though, may be a little bit more lumpy. So I'm not surprised to see a key for a pullback. I think you can still see strong holiday shopping. You know, the Barbie effect is still alive out there. Taylor Swift kind of aided a little bit here, kind of really energizing people to buy the merchandise.

But now it's now what? Then what? What is Mattel going to do? What's the next big entertainment hit for them? They've got a good partnership with Warner Brothers, but they have to figure out what other lines are really going to translate and resonate as an entertainment variant value. Because there's always the risk of damaging your intellectual property if you push into entertainment and you don't do it well. All right. Earnings keep coming. Let's get to IBM results with Christina Partinevelos. Christina. Well, despite the strong U.S. dollar and its negative impact on revenues, IBM still beat

with its EPS number as well as revenue in the quarter. The company also reiterated that it would grow 3 to 5 percent this year and maintain its free cash flow of 10.5 billion. I caught up with IBM's CFO, Jim Cavanaugh, just about 10 minutes ago and asked him if they were going to hit 5.4 billion in just the last quarter of this year. That's a lot when they've only achieved 5.1 thus far. But he said historically IBM is more back-end focused, and he feels confident they'll hit those levels. 75% of IBM's revenue comes from consulting and software. IBM CFO also said they saw one of the strongest bookings quarters in their history, but consulting did fall a little light of estimates.

He blamed the strong U.S. dollar. Lastly, software grew about 6% on a constant currency basis, driven by automation, Red Hat, and their newly acquired firm, Apptio. IBM CFO said they are seeing, quote, nice green shoots of AI, which led to a couple of hundred million dollars in the quarter after they launched Watson X in July. It's an AI developer platform. No name, no word on the number of customers, but you can see shares are up almost 2% right now. All right. Christina, thank you.

And even as Christina was talking, ServiceNow results have crossed the tape. ServiceNow delivers a beat on the top and bottom lines. Q3 revenue, $2.29 billion versus $2.27 expected. Non-gap EPS, $2.92 versus $2.56 expected. Q4 subscription guidance is a beat as well. Service now guiding to $2.32 to $2.325 billion for subscription revenue versus the $2.3 billion street account consensus. I did have a chance to speak with CEO Bill McDermott about these results. Here are some of the most notable things he told me, particularly when it comes to AI, the strength of the demand pipeline and performance across

industries and geographies. On AI, he said the big focus is really landing several multi-million dollar AI deals, generative AI deals, doing it across multiple industries. I had a feeling, he said, it might start to show up in the fourth quarter. It actually started to show up in the third quarter. On subs, he said, if you look, for example, at subscription revenue, it was a point over guidance. You look at CRPO, that's a pipeline measure, two and a half points over guidance. Operating margin, also two and a half points over guidance. Free cash flow, 300 basis points over year over year. Now, Bill said the number four remaining performance obligations, that's CRPO, would have been higher, except ServiceNow had its biggest ever federal quarter. And because of the

way federal contract revenue has to be recognized, it makes the pipeline look less strong than it is because the feds have a built-in right to cancel. But he said federal renewal rates have been 99 percent. Now, finally, on geography, he said U.S. Air Force actually was the third largest deal we did in the company's history. We did a deal with Bank of California, State of California, Asahi Mutual Insurance, Fujitsu Technology Company. So it really was, he said, across the board in industry, all geos held their own and America's was the standout. So pretty, pretty solid performance from the numbers and see how the stock's reacting. It's reacting well, up six percent. You're talking in the stock is moving higher. We went from up one percent to up six percent. That was really interesting.

And also the Air Force piece of a military modernization that extends to IT as well. But that was kind of what I thought was interesting. How much of this is tied to these new AI offerings that he's rolled out recently and how much of it is tied to maybe a macro environment for IT spending that is better than everybody was thinking? Well, Bill's tone was certainly that ServiceNow is standing out, Morgan, that it's not the tide is lifting all the boats equally. He did say, again, that he expected more of that AI effect in Q4. As soon as they released this Vancouver release, September 30th, they got orders in. So it seems like what he's going to be saying on the call and what we might hear from him tomorrow as well is about that AI momentum being even stronger than he was hinting that it might be. He was holding back, perhaps, a little. Interesting.

Okay. Whirlpool earnings are out as well right now. Steve Kovac has those numbers. Steve. Hey, Morgan. Yeah, it's a beat on the top and bottom lines, but we're seeing shares take a dip after they revised their full year EPS guidance down a bit. Let me give you the results here. EPS 545 adjusted versus the $4.25 Street was looking for.

And then we got revenue coming in at $4.93 billion, looking for $4.81 billion expected. And then on that guidance, full yearyear revenue guidance is remaining the same, but they updated their EPS guidance to $16 for the full year. Street was looking for $16.06. That's also down from $16.18 they had previously reported, Morgan. Okay. Steve Kovach, thank you. I want to go back to our panel, Victoria and Mike. Mike, I'm going to start with you. Whether it's Whirlpool, whether it's some of the tech results we just got. Your reaction here. Yeah. Well, first of all, ServiceNow, a perfect example of you think you want to try to trade stocks based on reading through what another company says.

Stock closed yesterday, 554, trades down to 530 on the negativity out of the Google Cloud report and then after this number it goes back up to five sixty change so it shows you market doesn't always infer the correct thing of course the aftermarket move it could fade we don't know how it's going to go but I do think it's this is

why earnings season is more about kind of waiting till you get them all and put it all together see what the aggregate say. Beyond that Whirlpool, not too surprising to guide that. I'm really interested to see if this is the kind of stock that's already been really blasted and brought down to a pretty rock-bottom valuation

if it just doesn't go down on tepid news like this. Housing-related outside of the actual home builders have been really tough. Trades under eight times earnings, 5.5% dividend yield. So I'll be watching for that reaction. For signs that that type. Of stock might be getting washed

out. Victoria the W. C. L. D. again. You know a lot of software companies. Smaller though in that. Down almost four and a half percent today so if I'm looking at these results. Do I pay more attention to IBM. All in what

I what I heard from Alphabet i pay more attention to ibm uh and what i what i heard from alphabet yesterday or more attention to microsoft and service now uh going forward and as to what the hope for ai and software can be yeah and i think one you're looking for companies that can show the growth and show the growth and revenues honestly service now was very impressive if you looked at kind of the downgrades going into this result, you know, the death of corporate IT spending was greatly exaggerated, both IBM and now coming in with pretty solid revenue growth there. But now already having an AI lift is fantastic.

The fact that they've got these government contracts as well that are pretty secure recurring revenues kind of gives them a baseline to continue to grow off of. So honestly, it was an impressive result from both of them. And I think it just shows the resiliency and spending on corporations feel they have to continue to evolve in AI or they're going to be left behind. So maybe these pockets were a little bit more protected from cutbacks because corporations can't afford to not enter this AI arms race and they need consulting like IBM or they need a platform infrastructure like what ServiceNow

is providing to really run their companies with efficiency because it's all about cost cutting these days. You know, if they can save headcount, if they can reduce costs, companies will be absolutely happy to pick up some AI software or workflow software that can help them reduce headcount or just generally contain ongoing costs. But both of them, impressive results, especially ServiceNow. That was one of those I was pretty nervous about. Well, I'll quickly mention meta results are out. We are going through them. Stocks initial move is down a couple percent. Yeah. Mike, just to go back to you, I mean, it's been a mixed bag, I would say, in terms of earnings. And we're even seeing it here. And we're going to go to Julia Borson because we do have those meta results ready to go. Julia. Meta beating on the top and bottom line with earnings of $4.39. That's ahead of estimates

of $3.63 per share. Revenues also coming in higher than expected at $34.15 billion versus the $33.56 billion that was estimated by analysts. We are continuing to dig in through the results here, but I just want to point out that the company is lowering its 2023 total expense outlook, lowering the range to $87 to $89 billion from the prior range of $88 to $91 billion. They're giving 2024 total expense outlook in a range of $94 to $99 billion. Many analysts in the street were saying anything over $100 billion would be too high, but below that, now in that $94 to $99 billion range. I just want to point out that operating margin of 40% is ahead of the estimate,

the consensus estimate was 34%. We see shares are now up 4.8%. And one last bit here. The company says they expect fourth quarter 2023 total revenue to be in the range of $36.5 to $40 billion. So just giving that guidance there into the fourth quarter. Back over to you. All right, Julia, we know you'll continue to look through that for us. And I suspect we'll hear from you again. For now, though, let's get a reaction from a Meta shareholder. Joining us now, EMJ Capital founder Eric Jackson. Eric, it was an initial move down, but it was very short.

Now it's higher after hours. Should we pay more attention to the top line here or the fact that Zuckerberg and Co. seem to be keeping a rein, at least somewhat, on expenses that they're projecting? I think it was 94 to 99 billion for full year 2024. And they have a history of reining that in when they need to. Yeah, I think that was the biggest surprise, John, of what Julia just said is that that was, you know, much less than I think what the street was expecting from the operating expense side. That means the next year's profits have to go up,

just like they did this year as they started to kind of pull that back. So I think that was the most important thing. Obviously, they're the king of digital advertising. You know, we had some hints last night with the Snap results and with Google's results, as you pointed out, with YouTube and their core business, that the ad market is reasonably healthy. And, you know, we saw, you know, a greater beat on the top line here,

but it's that operating expenses that I think is going to get investors most excited tomorrow. So does this somewhat nullify the alphabet effect that we felt in the market today? The one area where they really fell short of expectations was Google Cloud, but now we have ServiceNow coming out strong. We had Microsoft before. And if you were concerned about the ad market, these meta results should give you perhaps a little solace, no? Yeah, I mean, it's not at all clear. Obviously, Tesla's commentary, I think, spooked the market, you know, a week ago. So you have to take each of these events as sort of a case by case basis.

But, yeah, I think Google Cloud, you know, is a special case in dealing with with Google. Obviously, we didn't see the same results from the Microsoft Azure results. So, you know, I think looking at a number of these earnings reports so far, there's more good than bad for sure. And then the ad market, I think, is coming back. Remember, you know, the digital ad market was really, you know, one of the first to kind of go into the tank. It wasn't just the Apple changes. It was, you know, a lot of people just started pulling back on ads sooner. Now they're starting to come back. They need the business. Yeah.

Eric, just a few other stats for Facebook here, because it looks like daily active people, that that metric actually beat expectations, 3.14 billion on average for September, an increase of 7 percent. Daily active users were 2.09 billion, and then monthly active users were 3.05 billion dollars. And talking about ad impressions and price per ad in the third quarter of 2023, it looks like across the family of apps that increased 31 percent year over year, but average price per ad actually decreased by 6 percent year over year. I guess to your point, how does this speak to the role of meta in the dominance

of online advertising? And after Snap and Alphabet yesterday and with more results from more companies expected in coming days, is this a tide that lifts all boats or is it really meta and everybody else? Definitely in the ad world, Morgan, We're all playing in Meta's sandbox. I think what's also interesting and what I'm going to spend some time looking at in the results is just how AI has really gone to the revenue growth and gone to some of the strong results that you just spoke to. We've seen reels continue to do well from a monetization perspective. Is there more evidence of that in the report? How did chatbots do in terms of driving increased revenue at things like Messenger and WhatsApp and Instagram as well? So Meta has a lot of levers to pull. And in some ways, compared to a lot of the other Mag7, they can benefit much sooner from their AI investments than many others can.

Mike, your reaction to these meta results, I wonder if it takes some of the focus away from just pure AI as a momentum builder as well. You would think, John. I mean, on June 30th, the consensus earnings forecast for this quarter was $2.98 for Meta. The estimate got up to $3.64. Buy side was looking for $3.88. They come in at $4.39. So assuming that's a pretty clean number, it shows you that there was a lot of momentum based on what was expected at the beginning of this quarter. The stock on June 30th was like $2.87, so a little bit below where we are where we close today so it all makes sense. That there has

been. A lot of enthusiasm behind this rotation back into into meta now whether it has coattails tomorrow whether we can kind of take the pressure off of. The Nasdaq in general I think there's a decent chance of that. But during earnings

season is when these stocks are most their own thing. They're most different. Between earnings seasons, we can kind of treat them all as one big blob called the Magnificent Seven. But during earnings season, it really is a lot of back and forth and making distinctions among them. Victoria, I want to get your thoughts and reaction here to Meta, whether it is some of these advertising metrics, these user metrics, we're talking about spending, or even the role, and we're going to be looking for more color on that,

but the role that some of these new AI products and offerings, Lama, et cetera, are going to mean to this company moving forward. Yeah, I actually think it's quite impressive what they've done. First, can we talk about the fact a third of the world locks into some sort of meta platform every day. I mean, that's impressive. Over 3 billion out of 8 billion people are logging in daily. It's just like take a bow there. But if you look at what they're doing with AI, they're driving AI external with the chatbots and Lama, as well as internal to help combat some of the ways to target ads without having some of the restrictions from the iOS hold them back. They've probably adapted best

to some of the iOS and privacy restrictions on them. So I think for us looking forward, they've done a great job with cost cutting. We're going to want to see what Reality Labs is doing. How many billions did they lose there? But if you look at what they just came out with their conference and what they talked about with their virtual reality and AI and how they're blending it all together, as well as their new partnerships with Ray-Ban and others, their price point's a lot lower for their VR headset. They could see some nice pickup there. I wonder how much of that's being subsidized to put that price point below $1,000.

But it is an impressive quarter. And I think one other thing that investors miss is some of Twitter backing out or X or whatever formerly known as Twitter. Advertisers have to go somewhere. So if it's not to Google, they're definitely looking to go to Snap and they're looking to Facebook products as a way to continue and a more risk-free way for advertisers to reach their end user. And so I think they've been a big beneficiary from some of the issues over at X. That makes some sense. Let's get some more on Meta now from our Julia Boorstin. Julia.

Hear about the regulatory landscape, especially given the lawsuit yesterday by those attorneys general about concern about Meta's impact on negative impact on teens. They say we continue to monitor the active regulatory landscape, including the increasing legal and regulatory headwinds in the EU and the U.S. that could significantly impact our business and our financial results. They say the Federal Trade Commission is seeking to substantially modify our existing consent order and impose additional restrictions on our ability to operate. We are contesting this matter, but if we are unsuccessful, it would have an adverse impact on our business. And then one more thing here, John and Morgan, in terms of the costs of reality labs, because you were just talking about that, they say for reality labs, we expect operating losses

to increase meaningfully year over year due to our ongoing product development efforts in the augmented reality, virtual reality space. Back over to you. All right, there you go. Julia Boorstin, thank you. And our thanks to Victoria Green and Eric Jackson and our own Mike Santoli, who we'll be seeing later this hour. I mean, we're still in the first block of the show right now. We are. A lot of tech higher. IBM up 1.5%. Meta and ServiceNow both up 4+.

Mattel now down 6.5%. Wonder what that's about. Yeah. We'll continue to monitor that. But coming up, we will break down those numbers from Meta plus analyst reaction to IBM's earnings over time. Right back after this. Welcome back. Well, we can't blame weight loss drugs for this one. Earnings alert from Align Technology, the Invisalign maker. It doesn't look good. Steve Kovac has details. Steve? Yeah, that's right. Shares are down about 20% here after some misses on the top and bottom

lines, John. We got EPS coming in at 214 a share versus 226 expected. And revenues $960 million versus an estimate of $995 million. Gets worse from there. Lower than expected demand commentary coming in the press release here and a tougher environment in the first half of 2023 and offering some weaker than expected guidance for the current fourth quarter. John shares off 20 and a half percent, it looks like. Okay, Steve, thank you. Let's get another check on Meta. That stock is higher right now in overtime. Joining us now is Mark Schmulich from Bernstein. He has an outperform rating on the stock. You were very bullish on this name, Mark. I think it was your top pick or at least one of them coming into this print. Your reaction to what we've gotten so far?

I thought it was a very good performance for Meta. And certainly with the volatility in the market today, there was a lot of fears coming in about, you know, some of Snapchat's commentary on kind of geopolitical impact on advertising. And I think they did just fine. You know, certainly the bars crept up as everybody seems to like Meta on the top line. And I think they did a great job of also quieting down some of the fears of what happened last year in the third quarter with expenses running away. They kept it in check. So the guidance on both expenses and CapEx look very reasonable, very digestible. And, you know, I think this feels like a de-risking type quarter for Meta.

We'll listen to the call to kind of hear around how quarter toto-date trends are tracking on advertising, particularly around some of that sensitivity with the geopolitical nature. But otherwise, it looks pretty good. So what's the new narrative, Mark, on Meta, Facebook, whatever you want to call it at this point, Meta is what it's named. I mean, a couple of years ago, people were saying, oh, well, the model's broken. Plus, they're spending too much on the metaverse, which, hey, they might be. But what's driving this narrative now? Is this a signal of the overall health of the digital ad market, along with Google's positive results in that vein? Or are they really vulnerable to a strapped consumer?

Or are advertisers going to have to advertise more to get to consumers who are looking to spend less? Yeah, you know, they may well be spending a bit too much on the metaverse. You know, certainly I don't think that debate's off the table. But, you know, as far as the core advertising market, particularly the digital one, you know, I think both Google and Meta, you know, the two stalwarts have kind of shown stability in the space. Smaller names look like they're recovering as well. You know, now, obviously, the whole market's coming off of like real pressures and a real tough year as rates rose and we were no longer in the zero interest rate era. So folks actually cared about, you know, how much they were spending to acquire customers. But we're seeing steady improvement in the market overall. We're going into a holiday season where, you know, even if

consumers are a bit more cost conscious, I think that season where, you know, even if consumers are a bit more cost conscious, I think that just means, you know, expect advertisers to spend more, you know, in promotional activity to try to win those sales. Mark, I just want to dig into the expense piece of this for Meta a little bit more deeply. I mean, the lower 2023 expense outlook, their forecast for next year is 94 to 99 billion, which is perhaps a little better than the street had anticipated. Nonetheless, with Reality Labs, they're talking about the fact that they expect those operating losses to increase year over year in 2023. Is there more room to be trimmed here, or is this really, truly longer-term the vision for the company, and it needs that meaningful investment? You know, I think they've kind of put the brakes on that business for pretty much all of this year,

right? And so, you know, there was always a view internally that once we get through the kind of year of efficiency, we're going to need more resources because we have a lot more stuff to go build for the long term. And, you know, I think we saw that at Connect a few weeks ago, the slate of new products coming down. It's no longer just the Quest 3 and, you know, kind of the metaverse dream. There's a lot more taking place with the, you know, the Ray-Ban, smart glasses, etc. And, you know, so I think they think they're building for the long term. You know, the AI wave certainly kind of helps maybe usher in some of that stuff a bit sooner than expected. So perhaps there's a bit of urgency there to some of that stuff a bit sooner than expected. So

perhaps there's a bit of urgency there to kind of go build a bit quicker than, you know, certainly investors may have originally liked. But, you know, I'm OK with that spend so long as the core business continues to do what it's doing. You know, and I think that's exactly what we've seen with this print. It's well off the highs, though, up one and a half percent. Mark, thanks. Mark Schmulich from Bernstein. Let's get a news update with Christina Parts in Nebelus. Christina. Thank you, John. Well, former President Donald Trump was fined $10,000 today for violating a gag order to not talk about court staff.

The judge asked Trump to testify under oath in his civil fraud trial about who he was talking about when he told reporters today that the person sitting next to the judge was, quote, very partisan. Trump said he was referring to Michael Cohen, not the judge's clerk. But the judge said that was not credible and said, quote, don't do it again or else it'll be worse. The House of Representatives is set to vote on a bipartisan bill condemning the Hamas attack on Israel. The vote follows the swearing in of the newest House speaker. That would be Republican Mike Johnson. This will be the first vote taken in the House since Kevin McCarthy was removed as speaker on October 3rd. Bad news. The first snowstorms are making their way through the Northwest. Winter storm warnings, watches, and advisories are in place for Washington, Oregon, Idaho, Montana, Wyoming, and North Dakota. Helena, Montana has already seen 13 inches of snow with several inches expected to fall

throughout the region tomorrow. Not good. Morgan? I know. When I was reading this, I said the same thing. Oh, gosh. Here we go. It's going to be a white Halloween. All right. Christina Parson, thank you. Thanks. All right. We've got some breaking news on Rocket Lab. Rocket Lab announcing that it has received authorization from the FAA, its main regulator, to resume its electron rocket launches from Launch Complex 1. This comes after Rocket Lab experienced an in-flight anomaly on September 19th. Basically, it was a failed mission due to something that has happened with the second stage of that rocket two and a half minutes after it launched. The FAA has now confirmed that Rocket Lab's launch license remains active. That is the first step to enable launches for the company to resume. The company saying, quote, a meticulous review of the cause is underway. The full review is expected to be

completed in the coming weeks. Rocket Lab currently anticipating a return to flight later this quarter with corrective measures in place. You can see shares of the space company popping 4 percent right now on this news. Up next, a top analyst reacts to IBM's results and tells us what he wants to hear from executives on the earnings call that kicks off at the top of the hour. Stay with us. IBM shares are in the green after beating on the top and bottom lines, reiterating its growth of 3 to 5 percent this year. For more, let's get to Amit Dharani of Evercore ISI. You're watching the services line. Consulting is up about 5 percent. Constant currency, is that enough

um it's a lot better than what their peers have been seeing right so ibm's consulting value was down from six in the first half to five much more moderated diesel versus what you've seen at extension others so i think the fact these numbers are in the zip code of expectations is much better what everyone else was afraid about so i do think this is enough for the stock right now. Amit, how much does free cash flow matter for IBM? Apparently to reach the target for 2023, the company must generate now $5.4 billion in the fourth quarter, which is more than it's picked up in the first nine months of the year. Is that going to matter or does top line matter more for this company? Well, you know what?

I think that free cash flow is a great point because we've been trying to figure this out too. It matters a lot, right? I mean, IBM doesn't guide for EPS, for example. They guide for free cash flow. So getting to $10.5 billion matters a lot. You're absolutely right. It's a $5.4 billion number that you need in Q4. They've done that in the past, but if you go back to 2017, 2018, they've had this hockey stick pre-cash flow number.

But soon you want to hear how they're going to get there. I think that will be a big, big focus on the call. I think that matters more than the revenue trajectory right now for them. All right. Amit, Dharianani, thanks for joining us. Thank you. Up next, well, the rise in treasury yields has been creating some headaches, but maybe some opportunities too.

Canaccord's chief market strategist, Tony Dwyer, is going to join us on the opportunities that the market might be yielding. We'll be right back. Welcome back to Overtime. Our next guest says expect rates to stay, quote, higher for shorter. Joining us now, Canaccord Genuity's Tony Dwyer. Tony, it's great to have you on. What do you mean by that? So, Morgan, our whole case this year was that a soft landing

economic scenario is the worst case scenario because it does create that higher interest rate environment. We've seen a 25 percent increase in rates on the long intermediate and long end just over the last since mid-September. That ensures a recession rather than debate whether you're going to go into one because that spike means you're going to go into one, because that spike means you're going to have that much more of a slowdown in economic activity. So at some point, the higher you go in rates, the quicker it's going to shut down economic activity and the faster it's going to create to the other side of the mountain in rates. So you don't think a soft landing is in the cards? No, I don't. It would be historically unique on the leading economic indicators on money. There's so many different areas that I see.

And I understand that the unemployment rate is still low, but it's four tenths of a percent off the low. Anytime you've been five tenths of a percent off the cycle low, it's been right before or in a recession. So I think, you know, between now and the first quarter, we're going to be in an economic recession. Most stocks reflected. If you look at the number one question I get, Morgan, is do you still think we're going to break last October's low? Because, as you know, I've been pretty defensive for a year and a half now. And the answer is so many areas already are. The financials, the Russell 2000 small caps, the health care space. There's so many areas that are already beaten up and reflecting a

pretty bad environment that as those rates come down, we're looking to get less pessimistic, more bully. I don't care how you want to phrase it. As the as the market comes down, gets as oversold as it is and rates start coming down, that could be a good catalyst. Well, it's an important distinction, Tony, given that you've been defensive for the past year and arguably maybe you shouldn't have been. So when you say defensive sectors are going to relatively outperform, does that mean they're worth buying here or just that they're going to go down less? Well, Chad, I would debate that I shouldn't have been. You know, if you look back to where the market peaked, the small cap, all these areas are, again, back toward the lows. So the time to be really negative and fearful of the market, just broadly as defensive as you can get, was last year

when the Fed was moving rates 75 basis points at a clip. The reason I say the defensive sectors now is because they've underperformed so dramatically because of the rise in rates. When you get rates to come down, if I'm right, and rates come down pretty dramatically over coming months, it'll give a little bit of a tailwind to those areas that have been beaten up on the higher interest rate environment. So do you buy more of those defensive names now? Yeah, we've been light and tight for a while now for this year. And that basically means a little bit extra cash and a little bit defensive posture. I don't really see any reason to change that until we get that signaling from rates, even in the soft landing

environment, guys, 1995, 2008, 19, 2016, any of them, you had a dramatic drop in not just treasury yields, but mortgage yields and corporate yields. And we really need there's got to be a catalyst for a recovery, not just an oversold condition, but that catalyst. And as I said, I think that's coming in the next few months for sure. All right. Defense, Tony Dwyer, thank you. Coming up, we're going to get another check on all the earnings movers that should be on your radar, plus what to expect from Amazon's big report tomorrow. We'll be right back. United Launch Alliance, the joint venture between Lockheed Martin and Boeing, finally has a date for its maiden flight of its powerful new Vulcan Centaur rocket.

Christmas Eve. I spoke exclusively with CEO Tori Bruno yesterday at the CNBC Technology Executive Council Summit about the mission, which will carry a commercial lunar lander and cremated remains of some people associated with the original Star Trek series. If all goes according to plan, ULA expects to launch, quote, several times in 2024 before ramping to a rate of every other week by the second half of 2025. The company, which recently launched Amazon's first two test Kuiper satellites to orbit, will use Vulcan to fulfill a massive contract with Amazon as it builds its space-based Internet service. It does change the nature of our business and makes it a lot more balanced.

Before we were probably about 80 percent government. And now with our other commercial work and Amazon Kuiper constellation, it's about 50-50. And so that's a lot healthier place to be because when one is up, the other is still fine. All of that investment to ramp Vulcan's launch rate over the next few years, though, that will mean more ability to answer national security needs as well. So according to Bruno, which is in focus as geopolitical tensions, of course, flare. For my full interview with ULA CEO, Tori Bruno, check out the podcast Manifest Space wherever you get your podcasts.

All right. Now, let's see if Amazon stock takes off after earnings tomorrow. Coming up, we're going to discuss the key numbers that investors need to watch when overtime returns. NASDAQ sliding today after a weakness from Alphabet, but Meta is in the green up about 3% in overtime. Now investors have to look ahead to Amazon, which is reporting right here on overtime tomorrow. Joining us now, Needham Senior Analyst Laura Martin. Laura, Amazon just got slammed today, down 5.5%. So what matters more tomorrow, AWS performance versus Microsoft or guidance for the holiday quarter? I think it's actually the cloud business. As we saw Google down 9% on weak cloud numbers, Microsoft up 3% on strong cloud numbers. I think the market is saying that the future of generative AI and these cloud businesses

is what's going to drive the stock values long term. Recall that there is a big dispute about margins coming out of the e-commerce business, which is technically Amazon's core business. But frankly, it's less than 50 percent of their revenue and way less than 50 percent of their operating income. So I think slowly the market is viewing Amazon as less of an e-commerce company and more of a cloud and generative AI company. So in terms of the generative generative AI piece of this, I mean, Amazon doesn't get talked about to the same extent Microsoft or Alphabet are. Is it the dark horse in this so-called race? It is really. We care a lot about margins. Their cloud business is three times larger than than Alphabet's.

The other thing I'd say is that advertising is another dark horse here. Speaking of dark horses, we're at 14 billion. The numbers coming out of Meta and Google, very strong on the outside. Remember, that has 80 percent margins. So that would over deliver the Amazon margin if advertising is really strong. It's like Black Stallion around here with all these dark horses. It reminds me of Meta a couple of years ago. People were counting them out and their model out. They seem to. Well, I guess you do have a sell on them. So maybe we'll talk about that.

But might there be the risk of the same with Amazon, that people are assuming that because Microsoft came out first talking about AI, because Google is Google, that Amazon isn't on top of it? Maybe. I mean, I think that's possible. But remember, the big thing that data is the big asset in generative AI, because you need data refreshes every week, every month, every two months, because data basically becomes stale over three months. The two biggest data input or fire hoses are Google, which controls one out of every three dollars of digital advertising globally, and Amazon, which has all your e-commerce purchases, which is bottom of funnel. And we know that retail is really strong right now based on what Alphabet said last night. So all of that is great for data. So let's just call Amazon a data company tied to a cloud business, which together makes a really strategically well-positioned generative AI company.

Yeah, a lot of antitrust scrutiny, regulatory scrutiny. We're seeing legal challenges right now, whether it is Amazon with FTC, for example, or even Meta, which did just report results. How much does this matter to these stocks? I do think it matters the most for Meta because it's basically they are on a device called an iOS device, and Apple, which doesn't have advertising, is really locking down privacy on basically 50% of revenue from Meta. And there's nothing Meta can do about that. In the case of Google, Search and YouTube both grew advertising 12% and it's permissioned data. You give them permission to track you while you're on YouTube or search. So really, regulators aren't going off after that kind of data because the consumer gave Alphabet permission. Similar with Amazon,

you give permission to them because you have to buy stuff. They know where you shipped it. They know what you paid. All of that is permissioned first party data. So, yes, while it's big and specifically the FTC is just big as bad, let's hope for a Republican gets elected maybe. And then we get all new clearing out of all the chairmanships of the regulatory and then it flip flops. But right now there's really a lot of regulatory scrutiny coming out of the Democratic regulatory chairman. OK, Laura Martin, thanks for joining us. Thanks. We've got so many more earnings coming tomorrow. And then, of course, we got the Q3 GDP read in the morning, too.

Boston Scientific, we saw what happened with Align MedTech-wise. And, hey, Northrop Grumman, right? I can't believe I'm the one saying that. But, yes, aside from Amazon, there's a lot more. It's been a very robust earnings season so far for the defense contractors, for sure. So that'll be one to watch. But as we've been talking about, so much to read in on from Amazon itself. That's right. And of course, the S&P closing below 4,200, which we've been talking about for so many weeks now. That's going to do it for us here at Overtime. Fast money starts now.