Closing Bell - Closing Bell: Overtime: Microsoft CEO Satya Nadella On AI Transformation, Productivity Gains With Copilot 11/15/23

Episode Date: November 15, 2023

Microsoft unveiled two new AI chips today; Jon Fortt sits down exclusively with CEO Satya Nadella to talk the transformation in tech. Averages closed higher after Tuesday’s mega-rally. BD8’s Barbara Doran and Ariel Investments’ Charlie Bobrinskoy break down the market action and earnings from Cisco and Palo Alto Networks. JMP analyst Trevor Walsh breaks down the drop in Palo Alto billings. Neuberger Berman’s John San Macro on the muddled state of the consumer that’s being painted during earnings season.

The stock's finishing in the green, but well off of session highs. It looks like the S&P at 45.02, closing right about there. That's the scorecard on Wall Street, but the action's just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan at CNBC headquarters. And I'm John Fort, joining you today from Seattle, where Microsoft's holding its Ignite conference, announcing two new in-house chips as the stock sits right near all-time highs. In just a moment, we're going to bring you the highlights from my exclusive conversation with Microsoft CEO Satya Nadella. Plus, a deep dive on the consumer following Target's spike. Those shares ended the day up almost 18%. We're going to talk to Neuberger Berman's John San Marco,

who manages the firm's connected consumer fund about his top picks in the sector. And we're awaiting earnings this hour from Cisco, Palo Alto Networks, and Sonos. But as we await those numbers, let's begin with the market more broadly. Stocks closing mostly higher after another cooler-than-expected inflation report. Today it was PPI. Consumer staples near the top of the pack, driven by Target's spike. Joining us now is BD8 Capital Partners CIO Barbara Duran and Aerial Investments Vice Chairman Charlie Brinskway. Great to have you both here. Barbara, I'm going to start with you because you were on the show just a week and

a half ago maybe and you said markets primed for an end of year rally here. Well, you're getting it. Yeah, we sure are. And, you know, the question is after yesterday where I think there was a lot of short covering, but obviously it was in response to the CPI and the PPI or the PPI number today being better than expected. But I think this has legs. I mean, I think a little backing and filling. You've seen some trimming today of positions, some profit taking, but we're still in a seasonally strong area. I think the time of the year you've had the Fed is likely not to raise rate. In fact, there's zero probability out there that they will hike and you're starting to see bets about when they will cut. Jeremy Siegel is just on, thinks

March. The market's saying 65 percent chance in May. And so I think that we're setting up very nicely and we're almost done third quarter earnings. Ninety two percent were done last year, last week, and 81 percent are beating earnings. And you're looking at some positive earnings forecast for next year, high single digit to to double digit. So I think the elements are in place, you know, for this rally to continue. Yeah. Charlie, we keep talking about the fact that the equity market is taking its cue from the bond market. I mean, earlier in the session, we saw the 10-year Treasury yields drift to its lowest since September. The data picture, your thoughts on it, and where we go from here. There's a reason why the greatest cliche in the market is don't fight the Fed.

There's a reason. And the reason is that the Fed can move the bond market and the bond market affects the discount rate that people use to value stocks. And importantly, the bond market is used by people to set mortgage rates. And that has a big impact on a volatile part of the economy, which is housing. And all of that has shifted. The Fed has gone from selling $4 trillion worth of bonds to force bonds to an unnatural 0.6 percent. And then it started, it bought up $4 trillion worth of bonds. And then in the last year, it sold a trillion dollars worth of bonds, forcing the 10-year to an unnatural 502. And so now there is a real feeling

that the Fed is effectively done and will stop putting its finger on the scale and will get a natural bond market, which in my opinion looks something like a 4% 10-year. And a 4% 10-year is going to mean that we don't have a Fed-induced recession, and that's going to be very good for, you guessed it, value stocks. Okay, so if that's the case, Barbara, what's next? What's left to bet on that didn't get caught up yet in the rally thus far? Are there underloved or even still unloved arenas where you're fishing? Yeah, I think it's an interesting question because obviously we had a big run up. The mega cap tech stocks, you know, I am there for the long term. Of course, they look a little bit ahead of themselves right now. But I'd be looking at

the area of financials, particularly the regional banks. In fact, this morning, I got a little bit of the regional bank ETF because those are going to be if interest rates have peaked and are indeed going to come down next year. That's the area where you'll see the best impact. And that's because it's the smaller businesses, commercial real estate, you know, consumers borrow from those banks and need lower rates. So I think that's something to look at. So I also think the Russell 2000 is interesting. We all know that small cap has lagged large cap for a decade now by some two hundred and twenty basis points a year and year to date. It certainly lagged the S&P and Nasdaq performance, which are up 17 and a half percent and 35 percent respectively. That's up

three percent. They will benefit. Small cap companies will benefit in the same way, you know, as the regional banks, you know, lower cost of borrowing. You know, it'll be easier to expand. Now, how fast rates come down, obviously, that's the question. And there is still going to be a concern, and we'll see that surface, you know, in the probably not so distant future about, you know, the lagged effect of the hikes. And, you know, has it already, is there too much negative going to come in terms of the slowdown? But, which I don't believe it is for a whole host of reasons. But I think those are those are two areas, the Russell 2000 and regional banks, you know, would be to me obvious beneficiaries of who we are.

OK, hold tight. Cisco earnings are out. Christina Parts Nevels has those numbers. Christina. A slight Q1B for networking equipment maker Cisco, but guidance is very light. That's why the stock is plunging right now. 13 percentPS, $0.08 higher than expected on revenues of $14.6 billion, a slight beat. Gross margins, also a beat. But it's the guidance that really fell short of expectations. They're guiding Q2 revenues in a range of $12.6 to $12.8 billion, much lower than the $14 billion estimates. It's a similar problem with Q2 earnings as well. Management in the press release said they saw a slowdown of new product orders in the first quarter of fiscal 2024. Customers working through their inventory with one to two quarters of shipped product orders still waiting to be

implemented by its customers. So that backlog continues. On the full year outlook, the midpoint of the range is over $3 billion less than street estimates. Fuller EPS also light. CFO Scott Heron says, quote, we expect to see product order growth rates accelerate in the second half of the year. Shares plunging down 13%, almost 14. Oh, 13. Oh, yeah.

Christina Parts, thank you. Charlie, is this one we need to worry about? There was a time when Cisco was a bellwether for the whole tech sector because of the kind of equipment that people were buying for their data centers. Not as much anymore, but that idea of a demand slowdown for some of this hardware. Or maybe there's just a unique stockpiling inventory issue for networking equipment writ large. But how do we take this? I know you tend to look at value stocks, maybe not a name like Cisco, but is this a warning of any

sort or maybe just an indication? Yeah, Cisco is actually more reasonably priced than some others. We are seeing actually across the board this issue with enterprise tech spending and the fact that because people couldn't get the parts they needed, the systems that they needed, they pre-ordered. And because of the supply chain problems that we had when the supply chain got fixed in this space, too much product got sold into the market and into the channel. And we are seeing the ramifications of that with a couple of other names. So this is not surprising. It's probably bigger of a miss than we would have expected. But we are seeing this in other companies. Yeah, I want to get well, first of all, don't miss Jim Cramer's exclusive interview with Cisco's CEO.

That's going to be coming up at 6 p.m. Eastern on Mad Money. So we'll get some more details there. But in the meantime, Barbara, I want to get your thoughts on this name, too, because the commentary about the second half of the fiscal year and seeing a rebound there, I thought was interesting. Yeah, that is interesting, because I think one of the concerns coming in was that it would be second half slowdown was likely. And certainly the company had been talking about that. So that's a very instrument reversal. But there was also, I think, an expectation that the backlog would be largely worked down, you know, by the end of this quarter.

And that seems not to be happening. It's going much slower because that's the question. What are the new orders? Yes, revenues the last quarter were up significantly, but orders were down 14%. And it looks like all that is being pushed out. So I think that comment, and so it looks like it's not even so much a slowdown. We do know there's a slowdown in enterprise IT spending. We want to hear their commentary on that. But it really looks like it's taking them a while to work down the backlog of orders. But it's encouraging about the second half. So it'd be very interesting to hear what he has to say to Jim later. Okay, that's taking a big dive. We're still waiting on Palo Alto. Charlie, while we wait, I want to get your take on some individual names that you've mentioned that you're watching that are very much not tech.

Mohawk's one of them? Mohawk has had a nice recovery, John, since you and I talked last. This is in, obviously, carpets and surfaces. And it was really hit hard by the 8% mortgage rate that we talked about. And the stock got down to less than 10 times earnings, which its average has been more like 15 over the last 20 years, became just a very much of a cheap value stock. And it's had a very nice rally here the last week and a half, still way below its historic average, trading for less than six times EBITDA. So still a long way to go. But again,

if we can get away from that Fed henwind of people thinking the Fed's going to bring in a Fed induced recession next year, then Mohawk still has a long way to go. Yeah. Barbara, I want to get your thoughts on what we've seen so far from retail earnings and all of these consumer facing companies this week, because it has been such a big week for those types of readings. And as we go into the holidays, I can't believe that we're just over a week away here, what it signals not only about the end of this year, but as we look to 2024, as we do see signs of slowing down, even if not recession. Well, I think you're hearing a common refrain, and you heard it certainly this morning from Target in terms of what they're seeing with the consumers. You know, there's more sticking to, you know, essential goods, whether it's food and beverage and other purchases

delaying until the last minute. So you are seeing some pressure on consumer spending, even though we know there's still, you know, pretty full employment, 3.9 percent. It's crept up this year. Wages, you know, are still good. But you're seeing some pressure in terms of higher credit card usage and increasing delinquency.

Still not the danger point, but the trend is definitely showing a consumer that's weakening. You know, even the initial jobs claims, by the way, tomorrow will be very interesting because that is a leading indicator. And so far, that has been below historical averages. But if you look at the running claims or continuing claims, it's up seven weeks in a row. So I think we're getting the message from retail and from stats like that, that the consumer is weakening. And it's again, not yet a crisis, but we'll see even the savings rate, you know, and the savings rate is not what your securities or your house is worth, but it's really the difference between your disposable

income and your expenditures has decreased from 5.4 in May to 3.4 percent in September. So lots of stress is showing on the consumer, but still spending. OK. Barbara Duran and Charlie Bobrinskoy, thanks for kicking off the hour with us. Thank you. Palo Alto Networks, those earnings are out. Pippa Stevens has the numbers. Pippa. Hey, Morgan, the stock is dropping 8 percent here after the company gave weak billings guidance. But starting with their Q1 results, they earned an adjusted $1.38 per share. That was 22 cents ahead of estimates.

Revenue coming in at $1.88 billion, a slight beat. Now, their guidance, even though the overall guidance was OK, it was that billings guidance that is sending shares down now 9.5%. They reduced the full year billings guidance and also reduced their Q2 billings guidance. And remember, Palo Alto is just starting their year, and so this does not bode well looking forward. The company said that their billings are being impacted by the cost of money. Once again, that stock now down 9%. Morgan? Okay. Pippa Stevens, thank you. There were a lot of high hopes coming into this print. Palo Alto's CEO will break down those results in an exclusive interview tonight on Mad Money.

Well, Microsoft is sitting... Oh, do we want to chat about that? No. Okay. We're going to chat about this one. Microsoft, which is sitting at all-time highs, up more than 50% this year, as it rides the wave of AI hopes. And the company just revealed a brand new custom AI chip in Seattle. John, you had a big interview earlier today. You spoke with CEO Satya Nadella exclusively. Yeah, yeah. He was here after his presentation, then had to run to San Francisco, of course, where Chinese President Xi's big question was on enterprise demand for AI. And we're seeing those questions on enterprise demand in general cropping up in both Cisco and Palo Alto networks earnings after hours today.

But I asked him about the AI demand and, of course, about these new chips that Microsoft announced here today. I have more on that from my conversation with Nadella after this quick break. Welcome back to Overtime. Microsoft shares hitting all-time highs today, and I spoke with CEO Satya Nadella here in Seattle at the Ignite conferences. They launched both new chips for their internal use in cloud and for AI and talked more about their plans for AI software

as a co-pilot. And I asked Nadella when we would know that there's a strong trajectory, data clearly stating that people are adopting these AI co-pilot technologies, getting use out of them, and investors will be able to track how that will grow revenue and profits into the future. Take a listen. NADElla listen. It's very, very, very promising. I mean, obviously the developer one is the one that where we have conclusive, I would say, data and it's becoming, it went from sort of, this is a good idea to mainstream just like that because of the obvious benefits both individually and for organizations. I do believe like firm level performance,

you'll start seeing divergence if you are adopting or not adopting some of this technology. The next place I think is even things like customer service. We ourselves deployed our co-pilot for customer service, in fact, for Azure support.

You know, it turns out when you're a customer service agent, by the time you're trying to solve a problem, it's already a very hard problem to solve because the automatic bot didn't solve it. It's been escalated to you. So you have an irate customer on one end and a tough problem. So Copilot helping you there is fantastic. And the idea being that the AI can go into the database of the company,

figure out when did they call before, what were their problems. Correct. Or the knowledge basis and bring the sort of the solution to you, so to speak, versus you going foraging around it. But here is the interesting thing. We had not realized that it's not just that that was hard, but it is also the pain every customer service agent had of summarizing everything they did to solve the problem at the end of the call, which took like half hour with all the artifacts, the logs and what have you. And all that's automated, right? So that's real productivity gain. So we're seeing massive throughput. Same thing is happening in sales. Same thing is happening in finance. So broad strokes, I think, you know, in this conference, we are launching all the data we have already with the

co-pilot. It's early days. But we're very, very optimistic that this is probably the thing that we've been looking. In fact, the last time information technology showed up for real in productivity data was when PCs became mainstream in the late 90s and early 2000s because work and workflow changed. I hope that that's the same thing that gets replicated in this AI era. Yeah, it's a generation ago. How long do you think before the data is conclusive enough that you'll know on the demand side, the customer benefit side, kind of what the calculation is, and that'll be able to aid your sales effort? Yeah, it's a great question. In fact, one of the things we're also developing is a bit of a methodology on how do you go about measuring, because it's kind of one of the things, right? What's the productivity measures here? By cohort, can you think about some evals, some tasks, and really look at,

deploy the software, look at and follow the cohort, you know, in a month, in three months, look at your own data. And that's one of the other things that we're realizing is it's like every business is different, every workflow is different, every business process is different, and it's also different in time. And so that's why even having these customization tools, so we're very excited about the Copilotpilot studio because you need to be able to tailor these experiences for your specific business process needs. And so I think all of these will add up. And I'm hoping that in 24,

I think of calendar year 24 is the year where we will have, I'll call it classic commercial enterprise deployment and deployment data for all of us. Well, I wanted to start there because that's sort of the top line, right? Customer demand, what are the problems that it's solving? But I also want to talk about the bottom line and cost. And that's where some of your chip announcements come in. You talked about Azure Maya, Azure Cobalt. Start with Maya, AI Accelerator, ARM-based. This is not competing

with NVIDIA necessarily, or Jensen wouldn't have been on stage with you, but running, starting with, you said, Microsoft's own workloads, the software that Microsoft is offering out in the cloud, this is going to help run that more efficiently. What kind of savings, what kind of efficiency is possible, do you think, with your own designed chip versus what you could get off the shelf? Yeah, I mean, the thing, John, that we are seeing is as a hyperscaler, you see the workload and you optimize the workload. That's sort of what one does as a hyperscaler. A hyperscaler, meaning it's you, it's Amazon, it's Google, you're the cloud. And you've got billions and billions of dollars spent on these data centers.

That's right. I mean, so you're a systems company at this point. I mean, everything from sort of how we source our power to how we think about the data center design, right? The data center is the computer, the cooling in it. Everything is all optimized for a workload. So the fact is we are now what? We saw these training workloads and inference workloads, quite frankly, first, right? We have three, four-year advantage of trying to sort of learn everything about this workload.

That's kind of, to me, in a systems business, you have to be early to the next big workload that's going to take over, so to speak. And that's what we got right. And so we've been hard at work on it. The other thing is we also, when I think about, you're talking about AI, for us, OpenAI's models are the ones that are deployed at scale. Both, obviously, those are the models that we are training at scale and deploying for inference at scale.

It's not just a bunch of models, but it's this one model. So we now have a great roadmap for how we think about Maya, how we think about AMD, how we think about NVIDIA, all in our fleet. Let's get some reaction to what we just heard from Microsoft CEO Satya Nadella. Joining us now is Jefferies analyst Brent Thill. He's got a buy rating and a $400 price target on the stock, along with Microsoft shareholder Malcolm Etheridge from CIC Wealth. Guys, welcome. Malcolm, you excited by what you heard out of Ignite today? Can you buy more Microsoft at these all-time highs?

Well, it's tough to listen to Satya Nadella, as a shareholder, listen to Satya Nadella talk about what his vision for the future of this company is, specifically as it relates to the co-pilots that they rolled out at the beginning of this month and not get excited. Let me just say that firstly. Also, any tech that's going to help to improve the customer service experience whenever I have to call into a place is going to be welcomed. But I think that at its all-time high, it's a little bit tough to buy Microsoft here solely because I'm concerned that a lot of the buying we've been seeing is just the catch up trade from however many institutional portfolio managers there are trying to catch up on being underweight tech at the beginning of the year. big part of whether you can buy Microsoft here probably has to do with margins, profitability. These chips they announced today, if they work as advertised, are going to probably have to make the case. Which do you think is the bigger deal here, the co-pilots that they're selling, trying to boost the top line, or the chips to drive efficiency in these massive data centers?

I think the co-pilots are number one, John. If you think about it, I'm at the conference and that's what everyone's talking about. If you just look right across the way, there's a packed session you can't even get into to hear the session on co-pilots. So customers don't really care about the infrastructure. They just want the technology to work. And Microsoft has been very clear, it's margin neutral year one. Year two, three, and four, this is going to be margin accretive. This is a company that gets incredibly economies of scale. So this is more, in our opinion, about the co-pilots and the revenue opportunity. We think that they'll be able to solve the bottom line as long as Amy Hood's

running the CFO role. We have huge conviction and she's been doing this for quite some time. So I don't worry about the bottom line. I think what we worry about is just the pace and the adoption and the hype. It's clearly today, really early. And as Nadella said in your interview, it's going to take time to get revenue at 24 is really where the big commercial deployments get proof. We're all in an early stage of adoption right now, but the session's packed. I've covered Microsoft for 20 years. I haven't seen this level of excitement

in a long, long time around the Microsoft ecosystem. Interesting. Malcolm, as a shareholder, I mean, is AI really the thing you're most focused on or the fact that this is a company that has so many other businesses as well and is now integrating Activision Blizzard, for example, too? Does any of that matter? Is it really all about AI? Yeah, Activision Blizzard might be long-term a creator for Microsoft, but Satya Nadella has made

it abundantly clear. I caught the entire interview that John did, and he's made it abundantly clear that OpenAI, AI, and then specifically the co-pilots are all of his focus, right? And so I'm excited about these types of collaborations that Microsoft has been rolling out that create these sort of win-win environments. Heads, Microsoft wins. Tails, Microsoft wins similar to where at the open AI developer conference they announced that they're going to allow developers to come in and buy compute power not compute by co-pilots from open AI directly or they can get it from Microsoft but either way they're going to be building on top of the Azure cloud which is a win win for Microsoft also in that interview Satya Nadella was excited to talk about the GitHub partnership and how that had been accretive for them longer term. And they're also in the background working with Oracle and Adobe in similar ways. And so I think as they continue to build these co-pilots specifically to other companies that they'll collaborate with rather than compete with, it's going to be long-term accretive for Microsoft. But the excitement, I think we can't necessarily call it hype right here around this company. Okay. Well, Brent, finally then, are there

other stocks in your coverage universe that have big AI potential but aren't priced for success to the degree that Microsoft is? We think the two furthest ahead are Adobe and Microsoft. They're shipping products today. Others are not at the same level. So those are the two that are further ahead. So Adobe is one that is recognized in the stock. I'd say the other one that has not been recognized is Intuit. The concept of us as consumers trying to find better bank and credit card loans to optimize small businesses, how they run accounting. We think Intuit's going to benefit in a really big way. I think Salesforce.com is going to be a big winner longer term, but short term, they still have a lot of work to do on the product.

So the company that needs it the most is Salesforce because they have a lot of data trapped in their system. But we think Salesforce will be a big beneficiary over a period of time, a little bit further out than where Microsoft and Adobe is at, but we like Salesforce long-term as it relates to their play there as well. Okay, interesting insights there, especially when it comes to small business and the opportunity there. Brent, Malcolm, thank you. Thank you. Well, a programming note here as well. You can watch my special extended conversation with Satya Nadella Monday, 8 p.m. Eastern. That's part of the CNBC Leaders series. Morgan, can't wait to watch that. And just great discussion earlier today on the exchange. John, too, with shares of Microsoft hitting another fresh all time high amid all of this excitement around the company's future. Well, Paolo Alto's earnings call is about to get started and shares are sinking.

When we come back, we'll talk to an analyst who says the stock's a buy. We have a news alert on Elon Musk's SpaceX. The FAA granting authorization for the second launch of the Starship Super Heavy rocket, saying it met safety, environmental policy and financial responsibility standards. The authorization is for one launch and SpaceX already taking to X to confirm that it will attempt that flight as soon as November 17th. So this Friday from Texas. Starship is the mega rocket. It stands about 400 feet tall in capsule. The most powerful ever built that has been designed to bring astronauts to the surface of the moon for NASA

and eventually humans to Mars for those Musk colonization efforts. The first flight blew up pretty spectacularly back in April, strewing pieces of Starship and the launch pad around the area. Just a note, SpaceX is worth some $150 billion in the private market. It's expected to generate reportedly something like $8 billion in 2023 sales. Starlink gets a lot of focus, but Starship is the other thing to watch because it represents very much a new chapter in this commercial space economy and for SpaceX, John. Yeah, important to watch.

Meanwhile, Palo Alto shares plunging after reporting results, beating on the top and bottom lines, but issuing weak billings guidance before the earnings call kicks off. Let's bring in Citizens JMP Securities Senior Analyst Trevor Walsh. Trevor, you say this is a buy. Billing's a bit disappointing. Firewall seems to be having some trouble. Does this concern you? Not really, John. I think the firewall business was meant or kind of not necessarily surprised for it to be kind of seeing a downtick that it saw in the quarter. Management's been messaging this for a while now, expecting not more than single digit type growth rates

for the firewall business. So that's not necessarily kind of a shock there. And as we've talked about before with Palo Alto, they've got a platform of pretty rich software offerings that are kind of bolstering growth in other areas. And I would note two pretty strategic acquisitions that came through this quarter as well that are going to help kind of, again, be part of that puzzle as well. So if this tumble after hours holds up, it does take the stock down to a bit of a concerning level

based on the gains that it's made over the past while. What are the things that you're looking forward to, You think they're going to get done in 2024 that justify seeing this as a buying opportunity? Yeah, so I think Q1s are always a challenge. My time in industry working at a cyber company, you have the kind of the challenge of coming off of a sales course that's really worked hard to put their best foot forward for finishing out the year. So I think this is a good step forward for Palo Alto in the sense of they came in kind of on target for their earnings. Yes, the guidance was a little bit lackluster, but I think they're being cautious in kind of what they're seeing in the pipeline. And again, they've got a lot of other growth vectors across their SASE business,

their cloud security that, you know, are the higher growth areas of the business in general. So I think as we look into 24, I think those will be the levers that they're going to look to continue pushing on to, you know, to continue to have the success in the stock that we've seen kind of year to date, which, you know, is even despite the pullback today, going to be have a year to date performance that's probably at the top end of our coverage as far as cybernames go. Trevor, I want to go back to some of this commentary because, yes, management talks about an unprecedented level of attacks fueling strong demand in the cybersecurity market. But in the same paragraph, they talk about the fact that billings were impacted by the cost of money. What does that mean exactly? Yeah, I think that's probably taking a variety of forms.

Obviously, they're a hardware business, so the cost of inputs into those hardware pieces and components are going to be more expensive. But then also just generally in terms of people costs as well, the interest rates are making kind of wages expand, et cetera, which we've all seen. And so keeping key cyber talent on board at Palo Alto is definitely a priority as well. And there's no, you know, there's a shortage of industry talent just generally within cyber, whether it's working for organizations to protect them or to bring it on as, you know, good sellers, engineers, et cetera, at a company, at a vendor like Palo Alto. So I think it's probably a combination of all those things that we'll hear Nikesh talk about on the call today.

All right. Trevor Walsh, thanks for joining us. Sonos earnings are out. Pippa Stevens has those numbers. Hi, Pippa. Hey, Morgan. Well, a mixed quarter for Sonos, reporting a wider-than-expected loss of $0.25 per share, revenue coming in at $305 million.

That was a slight beat. The company also announced a $200 million stock buyback. In terms of guidance, the full year revenue guidance was in line, but their adjusted EBITDA guidance was short of estimates. The company did say that it was a challenging year in the categories in which they play and that as they enter the fiscal 2024, they are, quote, laser focused on execution and positioning. We've heard a lot about execution so far and cost cutting measures that stock modestly higher here. Morgan. OK, but thank you. It's time now for a CNBC News update with Bertha Coombs. Bertha. Hey, Morgan. After four failed votes, the United Nations Security

Council passed a resolution today calling for multi-day humanitarian pauses in Gaza. The vote was 12 to 0, with the U.S., U.K. and Russia abstaining. The final draft calls for pauses that allow aid groups to get supplies to the region and asks for the immediate and unconditional release of hostages held by Hamas. Democratic West Virginia Senator Joe Manchin told NBC News today he would absolutely consider a presidential run. Senator Manchin made the comment just days after he said that he would not be running for reelection in the Senate. He suggested he would try to mobilize more moderate Americans. And Gwyneth Paltrow's legal battle with a skiing optometrist is being turned into a musical in London.

Gwyneth Goes Skiing is based on the court trial between the Hollywood star and the man who sued her for $3.1 million, claiming that she left him with a brain injury and other issues when she skied into him. She claimed he was the one who hit her. The jury ruled in Paltrow's favor. I don't know, John. A musical? Sounds like a comedy.

Sounds like more legal fees coming for Paltrow. Right. Bertha, thanks. Up next, Meta makes a U-turn. The Wall Street Journal reporting that Facebook and Instagram now allow political ads that question the legitimacy of the 2020 presidential election. We're going to talk about what's behind that decision and what it signals about the primacy of politics and the market. Also, don't forget, you can catch us on the go by following the Closing Bell Overtime podcast on your favorite podcast app. We'll be right back.

Welcome back to Overtime. Meta making some changes to misinformation in political ads, including relaxed guidelines around questioning the legitimacy of past elections. But this change apparently happened very quietly last year. Julia Borson has the details. Julia. That's right, Morgan. Political advertisers can pay to say on Meta's platforms that past elections were rigged or stolen, and Meta decided to allow this last year.

The Wall Street Journal shining a spotlight on this decision in a story today. Now, Meta says it does prevent political ads from questioning the legitimacy of ongoing or future elections. When I asked Meta about concerns that undermining legitimacy of past elections with disinformation would damage confidence in the electoral process or spark violence,

as it did with January 6th, they pointed me to blog posts explaining a focus on free speech. One says, quote, we remove misinformation where it is likely to directly contribute to the risk of imminent physical harm. We also remove content that is likely to directly contribute to interference with the functioning of political processes. Now, Meta announced in April it would reduce how much users see unpaid political content, which can be seen as driving more focus on the platform to political ads.

And in September, non-profit Media Matters alleged that Meta violated its ad policies in failing to appropriately label right-wing content targeting kids. Meta responding that it pulls down ads when they're flagged as breaking their rules, and they did pull down these spots. John?

All right, Julia Boorstin, thank you. Target shares, meanwhile, taking off after blowout bottom line results. Up next, a top retail portfolio manager is going to join us on what that could mean for Walmart's earnings tomorrow, where he sees the biggest opportunities in the sector heading into the holidays. We'll be right back. Welcome back. As earnings keep coming and the holiday season kicks off next week, a clearer picture of the state of the consumer is beginning to emerge. On its earnings call today, TJX's CEO Ernie Herman said consumers' wallets are, quote unquote,

stretched, contributing to the off-price retailer same-store sales jump as consumers hunted for bargains and more value. For big-box retailer Target, which posted a huge beat on cost controls, not rebounding sales, CEO Brian Cornell signaling belt tightening is continuing for discretionary spending. Pressure is coming from higher interest rates, student loan repayments, increased credit card debt, and reduced savings. Home Depot CEO Ted Decker also flagged pressure in big-ticket discretionary categories this week. And it's showing up in credit and debit card data, too, according to a Bank of America note, which shows discretionary spend lagging behind consumables and general merchandise. The drop in October retail sales, the first monthly decline since March, also showing a drop- in big ticket items. Another signal demand is slowing and more insights are still to come.

Tomorrow, we get earnings from Walmart, Macy's, Gap and Ross stores. BJ's reports on Friday and next week we get results from Nordstrom, American Eagle, Kohl's and Lowe's. But for more on the consumer and retail earnings, let's bring in John Sanmarco. He runs the Connected Consumer ETF at Neuberger Berman. John, it's great to have you on. And I'm going to start right there. What are you seeing in the tea leaves that we have so far around the state of the consumer as the holidays get ready to kick off? Yeah, thanks for having me on. I don't have a ton to add to that pretty rich perspective, and that's what the data we track show us is that the consumer is indeed continuing to shift from wants to needs and trading down

to value channels and discounts. Perhaps my two cents would be we don't see any reason to expect that trend to reverse in the near term. The excess savings that have kind of kept the consumer artificially aloft the last couple of years, that's been depleted. And some of the forward-looking job data that suggests perhaps less robust employment ahead, that could become a challenge. So we think the consumer kind of continues to muddle along spending on needs and pulling back on wants.

Yeah. I want to get into the needs versus wants piece of this a little bit more. I mean, because there's some very clear cut needs versus wants. Groceries, for example, versus some of the more discretionary big ticket items that, you know, Target talked about, for example, today. But then you have this gray area. Makeup, for example, has had a strong showing so far this quarter, which is going to make Ulta earnings interesting, too. And that is almost, at least among women, seems to be falling into more of the need category. So how are you thinking about that definition? And what does it mean as you look across different retailers that are participating in different parts of the value chain. Sure. I would put beauty broadly into a bucket of niche categories that are kind of the exception.

And I think there are demographic trends at play. There are attitudes around makeup and the use cases for beauty products. There's innovation that expands the categories. And this has just been a very, very long-term secular growth trend. So even if there's probably some cyclical pressure we will see there, I still think you likely stay in growth mode in a terrific category like that. So we own Ulta in the NBCC ETF that I co-manage. And our view there is exactly that. We see great data around how young people are approaching the category and coming back to the category. John, this seems all encouraging for people who are long Walmart since they're big in grocery, which is an essential, and since they're a big discounter. But what sorts of things are you going to be looking for in walmart's report to see whether it can continue

to grow beyond these all-time highs for a seat sure yet open walmart is is absolutely as your question alludes uh... deluge student in the right place at at the right time was something that you know that that's not to take anything for management were working execution is has been phenomenal getting the right product at the right price to the right place uh right product at the right price to the right place, also at the right time. I think incrementally from here, we just learned today from Target that there could be some tailwinds on the margin side that ought to help things like merchandise mix and perhaps shrink.

If it's not getting better, at least it's not getting worse as quickly. Freight has improved. But what we really like about Walmart, and we own this one because it's in the right place at the right time in our fund. And what we really like is some of these strategic adjacencies where they've had a ton of success, areas like online advertising and third-party marketplace. Those are the two big ones that are super profitable businesses where the data show us that Walmart has a right to win in those areas. And we think that can change their P&L in the years ahead. Third quarter tomorrow should be a proof point along that journey.

Okay. We'll look for more detail on those areas. John San Marco, thank you from New Burger, Burman. Thank you. Up next, all the after hours earnings action that needs to be on your radar, plus the big news coming out of the APEC CEO Summit in San Francisco. We'll be right back. Welcome back. We are tracking some big moves in the after hours session. Check out Cisco. It is getting crushed, down more than 10% at the moment, despite a beat on both lines.

The problem was guidance sharply below estimates on EPS and revenue. And Palo Alto Network's similar but off the lows, down just a little less than 7% right here, beating on both lines, giving weak billings guidance. Morgan. It isn't just Biden and Xi gathering in San Francisco today. Top CEOs and world leaders from the Asia-Pacific region are also meeting as the APEC CEO Summit kicks off. We will bring you the highlights on the other side of this break. Welcome back.

The APEC CEO Summit kicking off in San Francisco today, bringing together leaders from the Asia-Pacific region and some of Wall Street's biggest CEOs. Kate Rooney is there with today's highlights. Kate. Hey, Morgan. So there are thousands of executives at this Apex CEO Summit. It's happening alongside the meeting of member countries and global leaders from member countries here in San Francisco, Morgan. Again, thousands of executives, we have heard a lot about the U.S. private sector and the commitment to the Indo-Pacific, as well as the green energy transition. I just sat down as well with Al Kelly, former CEO of Visa. He's now executive chairman and the co-chair of the CEO summit happening in San Francisco. He said he's hearing and feeling a sense of optimism from other CEOs, also a sigh of relief that economies, he says, are holding up for the most part amid higher interest rates.

Also told me he is optimistic about a soft landing. Told me the consumer is still looking resilient. And then he said he's hopeful as well for that meeting today between President Biden and Xi Jinping. Here's what he said. I'm personally not expecting a long laundry list of things we've agreed to. The issues between our countries are complicated and they're not going to be resolved in four hours. But what can get done in four hours is that you can continue to build relationships and you can continue to put together potential next steps of things that you want to focus on. And that's what I'm hopeful

comes out of it. Tomorrow, we're going to hear from a lot more heavy hitters. We'll hear from Elon Musk, OpenAI's Sam Altman, and then Google CEO Sundar Pichai are on the list of speakers, guys. Back to you. Kate, it's really fascinating to me, this idea that many CEOs are talking about feeling hopeful because we still have so many uncertainties in the economy. We know, at least from the Fed, that we haven't felt the full impact of interest rates yet either. Any sort of sense from Al Kelly what data specifically they're looking at to have that sense of optimism? I was shocked by that as well, Morgan. It tends to be around consumer spending and almost a surprising amount of consumer spending. He actually mentioned return to office boosting consumer spending, which was a surprise, but also makes sense if you think about things like paying tolls and buying a

bus ticket and then spending on things like lunch. So that, he said, is actually boosting visa spending volume. He said certain areas are not quite recovering. China as well. You heard a lot of CEOs sort of dance around that topic, a lot of diplomatic, careful answers when it comes to Xi Jinping and what's going on in the broader relationships and geopolitics with China. You have heard some careful answers on stage, but he was almost describing it as we made it through COVID. We made it through higher interest rates and it's better than expected.

But again, there are some big picture economic readings that, you know, say else, say otherwise, Morgan and Al-K Kali still seemed resilient and optimistic, but he really was talking about consumer spending there. All right. Kate Rooney, thanks for joining us on the sidelines of APEC. Thanks, Morgan. John, that was really interesting to me. Tomorrow, jobless claims, we know they're a leading indicator on the labor market and thus the economy. We get them every week, but Barbara Duran, you know, signaling that this would be that much more important this week, given how much other data we've gotten along the way here.

Yeah, perhaps something to be encouraged about on the consumer side. You could use that, as you mentioned earlier in the show. You got Thanksgiving and then the shopping season about a week away, but we heard some optimism from Satya Nadella today as well on AI spending when it comes to these co-pilots and talk on the industry of a shift from GNA, general administrative spending from companies, toward these AI possibilities. We'll see if it happens. Yeah. And of course, Microsoft hitting another all-time high today. John, hurry home. Safe travels. Great work today. That's going to do it. Looking forward to sitting next to you tomorrow. Me too. That's going to do it for us here at Overtime. Fast Money begins right now.