Closing Bell - Closing Bell Overtime: Top Picks In Small Caps; What To Expect From Netflix Earnings 7/12/24

Episode Date: July 12, 2024

Stocks bounced back in a big way to end the week, with the Dow and S&P 500 setting intraday record highs. Envestnet’s Dana D’Auria and CFRA’s Sam Stovall break down the market action. Our Leslie Picker on the bank earnings so far. Goldman Sachs’ portfolio manager Greg Tuorto on top picks in small caps. Needham’s Laura Martin on what to expect when Netflix reports next week. Plus, Melius’ Ben Reitzes and Roth’s Rohit Kulkarni break down what is moving beneath the surface in tech stocks.  

That bell means the end of regulation. Draco Evolution Corp. ringing it at the New York Stock Exchange. Sun Country Airlines doing the honors at NASDAQ. Closing off the highs but green across the screen as the Dow and S&P 500 set intraday records. That's the first for the Dow since May. And the Russell 2000 once again another whoosh higher. ComService is the only S&P sector lower, and that's the scorecard on Wall Street. But winners stay late. You are now in closing bell overtime. I'm John Ford. Morgan Brennan is off today. Ahead on today's show, in this week's small cap rally, could it be just the start of a broader market rotation? We will ask Goldman's small cap portfolio manager about the tailwinds he sees for the group. Plus, Netflix underperforming this week, but it's been a major winner this year. Ask Goldman's small cap portfolio manager about the tailwinds he sees for the group.

Plus, Netflix underperforming this week, but it's been a major winner this year, and it could set the tone for tech earnings when it reports next week. Needham's Laura Martin is going to join us with her preview ahead of those results. And banks sitting out the rally today, as well as Fargo City and J.P. Morgan, pull back on earnings. We're going to look ahead to the big bank earnings you need to watch next week. But let's just get right into the market. Ending on a high note after a wild week of trading, although closing off the best levels of the day, the major averages higher for the week after today's pop,

with the Russell 2000 gaining more than 6% for its best week since November. Joining us now is Dana Diaria of InvestNet and Sam Stovall of CFRA Research. Happy Friday, guys. Sam, what happened this week with the small caps? And does today's everything rally challenge the narrative that things are broadening out? Hey, John. Well, I'm calling it an underdog uprising because those groups that had been dramatically underperforming the mega cap tech and communication services stocks really got a bid once they felt that Fed Chair Powell's comments were dovish. And then we

got a softer than expected CPI reading because I think they were waiting for more confirmation that the Fed would actually start to cut interest rates in September. And I think that's what they got. OK. And Dana, are investors betting too much, you think, on a September cut now? I mean, what is it, over 80 percent think that's coming or maybe too much on multiple cuts this year? Yeah, well, I think, look, we've had a Fed that's been a little bit slow to move. So I do think it might be a little premature to assume there's a September rate cut. I certainly think that there's a lot more reason to think it now after that inflation report. And I can understand why the market's starting to price that in. But I wouldn't

call it guaranteed. That being said, if the market is hearing noises from the Fed that they're going to cut, a lot of times that has the same impact anyway, right? They're going to price for that cut, whether it comes in September or November. Sam, I wonder if next week, as we start to get more regional bank earnings, if that's going to say some more about some of the themes that we got this week. I mean, a big part of what caused Wells Fargo and to some extent JPM to suffer was the consumer side of their business. A lot of these regionals are more small, medium sized business bankers. Should they do better than we saw the big banks do today? No, actually, I still think that from an earnings perspective, they will do worse. If you take a look at the S&P Capital IQ consensus estimates, the big banks were expected to post about a 5% year-on-year earnings decline, yet regional banks should be off more than 17.5%. So I think that these smaller banks

are still reluctant to lend to the smaller companies and we'll need to see the Fed actually start to cut interest rates at the same time as getting confirmation that we are not headed for recession before they start increasing their lending. Well, I don't know if that gives us a lot to look forward to. Dana, what are the catalysts you think that we have ahead in the coming week as investors try to figure out which of these trends continues to pan out? Well, I would say that we do have some reason to think that small caps might continue. Now, granted, you know, there was some expectation of a pullback recently. Obviously, you're hearing more chatter around volatility in markets. We're heading into the election. We're at 18 percent now at the S&P. But I do think small caps may have a little bit of a runway here. They've

been priced very low. They've been very beaten down. We're seeing really high dispersion between like an equal weighted index and the market cap weighted index. And so they needed a story. They needed some revival. What people think of as the market doing so well is really the really large growth stocks doing so well. So I do think there might be a little bit of a tailwind here for the time being for small caps. Sam, speaking of stories, Netflix, people like to watch them on there. But is it potentially an important bellwether momentum wise for earnings season? Well, I think it is. I think any of the companies in the tech and the communication services area are important because they represent more than 40% of the cap of the S&P 500. What concerns me about the rally

we're seeing right now is the justification that we can see an outflow of investments in tech and communication services and into small caps. But realistically, small caps represent less than two and a half percent of the total U.S. stock market. So thinking that small caps will buoy large cap exposure is like saying you want to drain the Great Lakes into your backyard swimming pool. OK, I like that. Dana, so retail investors, what should they do here? You say to not abandon the winners, but also don't abandon the areas that have underperformed up to this point. And you guys are bigger alternatives, right? Yeah, look, I mean, there's an argument to be made that, you know, a lot of what you're seeing

now in markets, companies staying private for a lot longer, a lot of the innovation that may be used to power small caps over the long haul, if you look back at the empirical research over decades, right, small value has done very well. But you have to ask the question in a world where a lot of these companies now stay private for so much longer, is the benefit of that innovation happening when they're still private. In which case, we have to think in terms of how do you get retail investors and their advisors to be able to get access and democratize access to some of that. So we think along those lines a lot around how do we, you know, whether it's interval funds or better access to private equity and some of those parts of the market, obviously for the right client, for the clients that can manage that. So I do think alts as part of that 60-40 is increasingly interesting.

But I also, to the original part of the question, yes, I think you don't abandon other parts of the market. A lot of people are in market cap weighted or low tracking area to market cap. You've got a humongous bet on large growth just by being there, just by sitting in the market and AI. Right. So don't double down there. I would say keep your diversification into these other elements of the market, international, lower priced value stocks, small cap stocks, et cetera. All right, guys. Thanks, Dana Dioria and Sam Stovall. And I just noticed the Dow managed to just by a fingernail stay above 40K there at the close. Let's go deeper on the banks now.

The big banks, Wells Fargo, J.P. Morgan, and Citi all fell on results this morning. Ahead of numbers next week from Goldman Sachs, Bank of America, Morgan Stanley, and a lot more, Leslie Picker is with us for a look at what to watch next week. Leslie. Yeah, as we look to next week, John, Morgan Stanley and Goldman Sachs in particular are in focus, and that's because investment banking and sales and trading were actually, by and large, some of the bright spots in the two key reports we saw today.

You can see Goldman Sachs was up today. Actually, Morgan Stanley was up for most of the day and then dipped right before the close. Those two firms depend more on that side of the business for revenue, and therefore analysts are expecting revenue to jump 14% year over year at Goldman Sachs, and they're expecting 6% gains at Morgan Stanley. That's about double the top-line gains at the money center banks that have sizable lending businesses that we saw today.

Of course, a key question will be durability of banking and markets, and several executives pointed on the call to the outsized impacts of debt capital markets due to a pull forward of refinancings ahead of a potential volatility in the second half. And the IPO market remains muted with StubHub, this news today, expected to be one of the biggest deals of the year, actually now put on ice, at least for the duration of the summer. Also, it's important to note that in the higher interest rate environment of the last few years, we've seen below normal levels of things like M&A and IPO.

So the gains that you're seeing in those businesses on a year-over-year basis are off of a pretty low base, John. Okay. Leslie, I haven't been able to help but notice. I'm sort of looking at Goldman Sachs versus J.P. Morgan. It looks to me like year to date and over the past 12 months now, Goldman Sachs stock has done better than J.P. Morgan's. I wonder how much that says about not only Goldman's dumping out of the consumer business, perhaps at a good time finally, but also this revival in investment banking. I think the capital markets tailwinds are strong here. J.P. Morgan also has a very sizable capital markets business.

It's also Goldman Sachs shares were trading under so much pressure as they were undergoing this transformation, as they were getting out of the consumer business, as they were taking losses. So once they were able to finally do that and get those kind of tough decisions in the rear view mirror, investors looked at it for what it is, which is now a sizable investment banking and sales and trading operation, as well as a growing asset and wealth management division. And therefore, the market has really been rewarding them so far, at least over the last year or so, for that effort. So I think part of it just kind of has to do with the timeframe that you're looking at, as well as just some optimism,

as you point out, around the capital markets division. Yeah, we'll see if Goldman can hang on to that narrow lead or not. Leslie Picker, thank you. Let's turn now to Senior Markets Commentator Mike Santoli for a look at how that classic 60-40 portfolio is performing during this push to record highs. Mike? Well, John, almost back to the high watermark of a few years ago, believe it or not, in terms of this one version of the 60-40 portfolio. This is an ETF run by iShares. It's basically 60-40 with a global equity component within that 60% of equities. Now, on a total return basis,

if you include all the accumulated dividends and interest payments, it has already been in record territory. But on a price basis, you just barely got there. Remember, this is late 2021, before that bear market simultaneous in bonds and stocks hit. And the climb higher has been a bit of a struggle at times because the bond market has not actually recouped a lot of those gains,

meaning yields are higher than they were as we as we started. Arguably right now, bonds start to become a better hedge when the main risk is economic growth as opposed to inflation. They can actually be an offset to equities. We'll see if that does actually pan out. Take a look at the U.S. dollar index. It's been a big mover this week. It sort of had this rollover here in the last little while back to around 104. This, of course, as we got the benign inflation numbers and pretty firmly now in place expectations for Fed rate cuts. So, you know, arguably this is a little bit of financial condition loosening, but also just shows you that basically the U.S. is probably deemed to be kind of joining the easing of policy movement that's been started overseas by now, John.

Yeah, and I guess along those lines, going back to that first chart of yours, a 90-10 portfolio would have worked a lot better over the last several years than 60-40. But these things being benchmarks and not necessarily hard and fast rules, I wonder if it makes sense to move back perhaps towards 60-40 with at least a couple of cuts, the market betting we've got coming. Exactly. I mean, I don't know that there's any particular magic to 60-40 over other mixes. If you have majority equity and you're not near retirement, sure, that makes all kinds of sense. And, yes, if you backtest it over most periods, owning more equities would have done better. The point is to kind of smooth out the ride over cycles and sort of avoid having massive drawdowns.

If you do have, you know, deep recessions and, of course, a lost decade in equities, which we had from 2000 to beyond 2010, frankly. All right. Mike Santoli, we're going to see you again in just a little bit. Now, after the break, big tailwinds for small caps. Goldman's portfolio manager joins us to break down the jump for the Russell 2000 this week and the, quote, very favorable set of tailwinds he sees for the group. And later, we're looking for opportunities in tech after wild moves this week for many of the NasdaQ 100's best known names. Overtime's back in two. Small cap stocks closing out the week with big gains.

The Russell 2000 jumping 6% for its best week since November. So is there still time to get in if you missed the move this week? Joining us now is Greg Tuarto, Portfolio Manager at Goldman Sachs Asset Management. Greg, tell me a story about why it's time for small caps, because higher for longer seems like that's the reality, even if we've got a cut or so coming and the banks aren't lending a lot to small businesses. Well, you know, I think it's been about two and a half years since small caps have had a leadership role in the markets. And I think that what you've

needed has been this rate certainty, you know, to kind of understand when the Fed was going to start cutting. And I think that as we've gotten through this last CPI report, we have a lot more line of sight to when that's going to happen. And I do think that as you kind of embrace the backdrop of a lower rate regime or lower from here, you're going to see a lot of the tailwinds start to come up, whether it's valuation, some idiosyncratic opportunities within the small caps themselves, or just that kind of explosive nature of small caps when they do start to work like they did yesterday that shows you that you really need to be invested in these things over a longer period of time, not try to time the market. My concern, though, is do they work consistently over a period of time or do they just not underperform as much as they were before?

And I look a lot at software stocks and some of those that seem to have some pretty good technology and some pretty decent growth, just valuation wise, haven't been able to catch a break. Yeah, I think that the part of the the parts of the market that you think about a lot for small cap software, biotech, banks, those those types of areas are going to be areas I think are fertile for stock picking. There's a lot of dispersion out there where you can find some companies with some really, really good trends. We like cybersecurity, for example. We think that there's durability there, and we think that there's some shielding from the AI trends,

which are siphoning some dollars out of traditional AI budgets. And I do think that the backdrop, as our asset management division put out a mid-year report this week, the small caps, as they broaden out, then they tend to outperform. Because I think as the catalysts start to add up, you start to see more allocation in there. And there really hasn't been any institutional allocation to small caps in a couple of years. So the money has to come back in. And I think that's when you start to see those, that consistency you're talking about being a real nice tailwind. At the same time, small caps tend to be less global, right? If they're U.S.-based, they tend to just be U.S. and Canada. Is that a good

thing because of how relatively strong North America and the U.S. has been? Is it a bad thing because they don't have access to some of these Asian economies that seem to be perking up? I think over the long term, it's a good thing. I mean, if you look at the last year and a half, consumer in small cap has been quite good. And if you think about where we've been worried about a lot of things in that area, been worried about the consumer in the U.S., would they continue to spend? You know, newsflash, they have been spending. And you see that in a lot of the companies that are out there, the retailers, the restaurants,

some of the footwear companies that we like, they've been spending there. So I do think you get some of that, you know, kind of rifle shot approach in terms of knowing what you want and getting it. And I do think that there is a, you know, a much better backdrop for the consumer overall. But I also think that the institutional piece of it, you know, the companies that are spending out there, big projects in semiconductors, big projects in electrification, Those things are happening as well in the U.S., and you're starting to see that money flow to the companies that we own. So strategically, aside from trying to pick individual stocks, how do investors, in a smart way, get better invested into small caps? Yeah, I think you have to be active, and I think that that's an area that, you know,

that we've been very convicted in for a very long time. Active management in small caps is important because there are things like high levels of indebtedness, some companies that aren't as profitable as others, and those things can take companies down and really continue to have multiples compress over time. So the quality nature of some of the more kind of established small caps

with some really nice trends in the future, you'll start to see that earnings path be a driver for not just growth, but multiple expansion as we go into 2025. And should investors look at domestic regions and think in those terms when looking at small caps and putting a filter on or no? I think that there are ways to kind of slice things up very, very narrowly. What we like is to play kind of multiple ways to win. In areas, I think I mentioned consumer. We like technology a lot. Semiconductors is an area where you have multiple ways of winning. You have some of the things that are going on in AI, but you also just have a lack of spending that has happened in the semiconductor space for a

couple of years. We think that that will catch up. And I think that those are things that you'll see. You know, the multiples have been depressed for so long that I think that you'll start to see some explosive moves out of those companies in the future. All right. Saw a little explosivity out of the Russell overall this week, but you've given us a lot more detail to think about. Greg Tuarto, thank you, from Goldman Sachs Asset Management.

When we come back, two tech analysts share their favorite names in the space after some big swings this week, including one out-of-favor name that climbed 8% since Monday's open. And as we head to break, check out the biggest decliners in the NASDAQ 100 this week. Meta, Netflix, and MongoDB topping that list. Over time, we will be right back. Welcome back to Overtime. The Nasdaq bouncing back today after yesterday's big slide in big tech, managing to close positive on the week.

The half percent change since Monday belies some serious movement under the surface, however, including top performer Intel up nearly 10 percent. Laggard Meta falling nearly 7 percent, losing about 80 billion dollars in market cap. Joining us right now is Rohit Kulkarni, senior Internet analyst at Roth Capital Partners. And Ben Reitzis, Mellius head of Internet research. Guys, happy Friday. Ben, you made a call at the beginning of the week, some of it kind of PC related that certainly seems to have panned out. What did you say and why do you think it worked that way? Well, what we thought was that it was time to dust off the AI laggards and we highlighted AMD, Intel, IBM and Apple. And Apple obviously has had a nice run,

but we think it can continue. With regard to Intel, it's just probably the most hated name in my coverage. We are seeing an uptick in PCs. Actually, it's not due to the AI co-pilot stuff. It's really just due to some cyclical aspects. And we were picking up that some PC data in the 2Q was looking OK. And then we do think there's a big pop in the 4Q.

And we highlighted AMD as well. And frankly, AMD also has its AI chips, its GPUs that compete with NVIDIA. So there's a little more AI sizzle there. And they both had lagged in the first half, and we thought they could catch up. And, you know, with Intel, it's a little more risky. They have some more gross margin risks in the back half. But PCs and servers are looking up. And AMD, you know, we think that goes to our target at 210 pretty quickly.

Rohit, your top picks are Amazon and Uber. Starting with Amazon, we're about to get a lot of end of the year software type platform conventions and announcements. Is that a catalyst at all? Oftentimes people think it's not, but I look at Apple since WWDC. Anybody who sold it thinking that AI news wasn't going to be a big deal is probably a bit disappointed. I think Amazon gets the reacceleration in cloud. That's what's expected in the stock right now. Greater reacceleration with how they're playing catch up to Azure. The moment we start to have that narrative in the market that Amazon is no longer an AI loser,

that was the narrative in 23 and 24, that narrative is starting to reverse, they're playing catch up. That's as more industry events, more AI events occur in the next three to six months, Amazon will host their own big AI event in Vegas. So all of that should contribute to greater halo into how AI adoption is helping Amazon and they're setting themselves up for a very fantastic 25. So, okay, Ben, as we look at software, specifically over the next quarter, we're starting to get into earnings season.

We get Netflix and then we're going to get ServiceNow and a few others. For small software, the bar is arguably pretty low because they haven't been moving that much. But there are a few names that have actually been trading on some pretty high multiples. What's it going to take both in their overall results and in the confidence of the guidance to move the needle here? Well, I think software in general is still facing a challenging time here there is a shift in budgets towards AI which is

somewhat infrastructure related but also software you know has been raising prices the SAS companies been raising prices on folks for ages and especially in COVID and I just think the compounding nature of that- something's got to give

and we're seeing that-, you may have some companies fight back and drain some backlog for this quarter and fight back. But in general, software is going to be a tough spot. There's probably a bunch of trading calls. We've been saying Microsoft's probably more insulated than others just because they have the cloud and they obviously are safer. But I think software is a tough place to be over the long term. Wouldn't be shocked if some of the laggards weren't as bad as feared, though, especially those with ties to cloud. All the major clouds look like they're doing very well and some of the software companies help manage those platforms. Okay, if software is tough, Rohit, let's bring it back to the real world and wheels on the ground.

Uber, how are you feeling about the way people's desire to continue to be out and about doing stuff is affecting Uber, and where's the upside possibility for them as we head closer to Q4? I think Uber is doing a fantastic job with managing the three pillars, which is growth, profitability, and long-term investments. I think they're carefully balancing what investors expect and what they need to do to maintain that number one, number two position in all the three categories that they want to operate in. That's restaurant delivery, grocery delivery, and obviously mobility.

So that's the careful balancing act that they are demonstrating that they'll continue to do. And it adds layers of cake on top of how much free cash flow they can generate as a marketplace. And it's a story that will keep compounding in a way that a marketplace will generate more free cash flow for every new dollar it brings in. And that's what Uber is doing. So state of the consumer is healthy. State of travel is healthy. Summer travel tends to add a few extra profitability dollars to Uber. So we like Uber here.

And I think the free cash flow story is just something that is not yet appreciated for what they can do in 25. Okay. More layers of cake sounds good. Finally, Ben, what about the AI winners up to this point? I'm thinking of NVIDIA first and foremost, but then also the likes of Supermicro and Dell. How much of an influence are they going to have on the overall market, you think? Well, I think that they're obviously, NVIDIA is the most important stock potentially in the market, as we know. And I think that they continue to lead. They had a phenomenal performance in the first half. So there is, and they did this

last year too, by the way, they were only up 17%. I know, pretty good. Only up 17% in the second half last year. Wouldn't be shocked if they had a more normal performance in the back half and gave some room to others. I think that Dell has more room to go. They're going to play an important role in enterprise. Supermicro, we don't cover, but obviously, they've got a strong position. We really like, actually, Broadcom here. I think that they're a really good play as well on the Cloud CapEx, and we're looking for them to continue to execute quite well. And their play in infrastructure software is a little safer than application software at this point. So NVIDIA is going to be important, but there may be some room for others to pick up here.

Yes, indeed. Yeah, VMware looking pretty good for Broadcom in the last report as well. Ben Reitzis, Rohit Kulkarni, thank you. And now time for a CNBC News update with Kate Rooney. Kate. Hi there, John. Rudy Giuliani's bankruptcy case is over. A judge today threw the case out on grounds that Giuliani wasn't being financially transparent. The dismissal means Giuliani is still on the hook to pay his debts. His creditors can find other legal options to recover their money, including getting a court order to seize his assets. And an appeals court upheld the FCC's approval of SpaceX satellites to provide space-based broadband internet service. The decision strikes down a challenge from Dish Network and an environmental group

that said the FCC didn't consider the risks. The decision comes after SpaceX's launch of Starlink satellites failed to reach the proper orbit last night, leading to a temporary grounding of the Falcon 9 rocket. And Meta, meanwhile, preparing to roll back restrictions on former President Trump's Instagram and Facebook accounts. Meta wrote in a blog post today that it is making the change to ensure parity among the candidates. Trump's accounts were banned in the wake of the January 6th insurrection, but were reinstated early last year. Back over to you guys.

All right, Kate, thank you. Up next, Mike Santoli looks at this week's rotation into some of the market's beaten down names, and if earnings season could keep things rolling. We'll be right back. Welcome back to Overtime. Mike Santoli is back with a look at the rotation into laggards this week and how earnings season might influence what happens next. Mike?

Yeah, John. So one of the points that we've made repeatedly as people have kind of marveled at the concentration of the index gains and maybe were a little bit nervous about how top heavy the market was, was that it was really following fundamentals. This shows you the magnificent seven annual earnings growth by quarter compared to the other 493 stocks in the S&P 500. What you see here over the last year is that, you know, 30 to 60 percent earnings growth from those top seven growth stocks, along with, you know, kind of flatlining earnings from these blue lines. You can't even see them

because they're basically around zero. Now, here's the quarter we're about to hear companies from right there. That's the second quarter of this year. So you start to see some earnings gains from the other 493, like kind of low mid-single digits, maybe with some beats it'll be above that, and decelerating earnings growth from the MAG-7. So by the end of this year, you're supposed to see a little more parity there in terms of where the earnings are coming from. In theory, this should substantiate

a little bit more kind of diverse leadership in the market or support for other areas of the market that had largely been left behind. We'll see exactly what kind of multiples we want to put on those earnings if they come through. But this is the inflection point, really, the quarter that we're about to hear about in the coming weeks, John. Interesting if the focus stays on earnings, but if it also goes back to the top line, I know it seems like a far, far ago memory when that was the case. When does that start to happen and how positive is that for the smaller caps, which might have some top line growth more than they have earnings. Yeah, I mean, I think it's not necessarily going to be stellar on top line growth because you do have a lot of kind of the loss of some pricing power and things like that. I do keep pointing

out, though, you know, even with inflation coming down and the economy slowing to some degree, we're still at four to five percent nominal GDP growth. That's kind of enough dollars kind of being piled onto the economy to have companies have some top line growth in aggregate. I think it's much more about whether these companies can kind of rebuild their margins toward a couple of years ago when they were kind of peaking. And also, of course, whether they can show a little bit of sales gains. And speaking of sales gains, the dependency on the domestic consumer, I take it, is going to tend to be greater among the smaller caps than those global mega caps. Yeah, to a fair degree, that is true.

And what's interesting, you know, at June 30th, we get this big reshuffling of the Russell indexes, right? So the Russell 2000, if you care about that, is now less techie than it was even before. And it's more health care, industrials and financials. And now that's what the average kind of representative sample of companies is more like as opposed to technology. So, yeah, there is a significant dependence on domestic consumer, although I wouldn't say necessarily that shrinking. It's become a little bit less of a fast growing part of the economy. All right. We're going to be all over those earnings. The whole team, my thanks. Still ahead, overall inflation might be cooling, but auto insurance premiums, as I'm sure you're feeling, keep driving higher. And while that's bad news for car owners, it's good for insurance

stocks. Those details are ahead. But first, will streams keep coming true for Netflix investors when the company reports next week? Well, a top analyst is going to weigh in when Overtime returns. Welcome back to Overtime. Netflix among the worst performing names in the Nasdaq 100 this week. But the stock's been an outperformer so far this year, up 34%. The company's set to report earnings on Thursday. Joining us for the preview is Laura Martin of Needham, which has a buy rating on the stock and a $700 price target.

It's not too much higher from here, but it is higher. Laura, what's the upside that you expect in this earnings report next week? So, I mean, I think we're waiting to hear now that they've actually anniversary their password sharing, how many subs they're going to add. So last quarter they added nine million subs. We're projecting two million and four million next quarter. But if there's any kind of weakness in those, that would be bad for the share price. We're also looking at where the subs are added, because recall that the U.S. ARPU, or average pricing, is two times higher than both Latin America and APAC at $16 a month here. So it really matters where they're adding subscribers. Otherwise, there's a threat to the revenue growth

line, which we don't want to see. We don't want to see a slowdown in the revenue growth line from that 15% that they already reported in Q1 and we're projecting for Q2. All of those would hurt the stock if they don't hit those metrics or over-deliver them. And then I really care about the content budget. They have told us that they are not spending more than $17 billion, but recently they announced they're doing two NFL games on Christmas Day. And I want to make sure that we're not seeing the content budget creep up to pay for sports, because that means it's a bad sign if they're going to be in these big wars for big NFL packages at Netflix. Right. Yeah. You don't want them getting into a spending competition with some of those mega caps out there. I'm wondering about the impact on Netflix

as mainstream consumers are feeling a pinch. We saw impact on the big banks today and some of those stocks, net interest, income, and things like that. But I know the prevailing wisdom is Netflix is the last subscription service that you drop. But are there churn dangers? Are there dangers of the ad tier not monetizing as well as investors might be hoping? Yes, absolutely danger. The

Park's data out last week said that the average spending on streaming has gone down from $90 a month in the first quarter of 22 to $63 a month in the first quarter of 2024, in part because all of these ad-driven tiers, people are sort of downgrading how much they spend per service. But what Netflix has told us is that people do not move from whatever tier they start at, which would imply if Netflix, because it's raised prices, is taxing you too much, people just disconnect. They actually don't move down to the ad tier, which is counterintuitive.

But that is what Netflix tells us. Do we need to think about hits here? I mean, the movie theaters are having a strong summer with some of the names. But we're waiting for Stranger Things from Netflix. If people are turning off more often, are they going to turn back on, if I can even say that, sign on for these big hits? And is that going to have some stock impact, you think? Absolutely, yes. Because what we see in the under 30-year-old is that they churn through these services.

They go to a service. They pay for a month. It is silly that Netflix drops these popular series all on the same day. So, you know, 20-something can watch the entire season on one week. But anyway, be that as it may, they then leave and they go to HBO or whoever's content is super cool. So they're churning four or five times a year. So I do expect if you get hits for people to come to the service and watch the hits

and hopefully like forget they've subscribed, but younger people won't forget that and they'll churn out. It would be much more, it would be much better if they did what every other service does, which is sort of launch an episode every week for two or three months. And so they would get three months worth of lower churn because people would want to stay till the end of the series. Now, even though you got a buy on this, it sounds to me like you might be expecting more volatility in the stock. There are certainly lots more question marks, whether we're talking about how much they're spending on football or when they're releasing things or when they're saying that they're dropping things. How should investors think about entry points and when they get in here? Well, I think this quarter we're about to

hear on Thursday next week is sort of mission critical because we're going to get a same store subscriber growth number after password sharing has sort of anniversary in America. So that's super important. So if it turns out instead of my 2 million ads, they do 3 million ads or 4 million ads, all of the models are going to go up because we're going to say, okay, that's normalized and we were a million subs too low. So we'll take all of our subscriber estimates up. And then we just need to look at where they are happening. Are they happening in the $16 a month ARPU world, which is the US, or are they happening in an $8 ARPU world in Latin America or APAC, or it's, I think, $10 or $12 in the EU. So I think our models are sort of waiting to see, we're viewing this quarter that's about to come next week as a normalized quarter. And from that, we're going to change our discounted cash flows for like the next three years.

So I expect volatility around this quarter, either the upside or the downside. All right. Well, you warned us. You got us ready on Netflix. Laura Martin, thank you. Thank you. Up next, the CEO of Pure Storage on why the biggest values in AI might be with companies that are solving industry specific problems. And because you love overtime, you want even more of it.

Well, yes, that QR code. You should be. You got your phone. There you go. It's on the screen. You can follow us on LinkedIn. We post exclusive content there. And for now, overtime on TV. We'll be right back. Welcome back to Overtime. With major indices notching all-time highs, powered largely by tech stocks, some investors are wondering whether the productivity gains from artificial intelligence will justify the hype. Well, today, let's get up close with a tech CEO who's investing for an industry-led AI build-out. Charles Giancarlo is CEO of Pure Storage, a company with a $21 billion market cap and a stock up 85% year-to-date. He's had a long career in enterprise networking and in enterprise tech in general at Cisco, Avaya, and others. In a way, he's been training for the AI era for a long time.

Undergrad at Bradden University, he focused on two things, engineering and Latin in classics. And what I really found interesting was how people lived 2,000 years ago and how sophisticated they were and how intelligent they were 2,000 years ago. And, you know, it's really interesting that people just as intelligent and in some ways, you know, perhaps socially even more so than today, you know, how they lived and the difference between us and them only being the amount of technology and accumulated knowledge we have, not the raw intelligence. What could they have done with ChatGPT? Well, today, Giancarlo is trying to position Pure Storage for continued growth, which likely means being better at helping customers store and retrieve the massive amounts of data to train and use effective AI systems.

To help understand how to do that, Pure about a month ago invested in AI startup Landing AI, which specializes in building what it calls large vision models for specific industries. For example, Landing AI can help medical companies train their systems on medical images to read CT scans and MRIs instead of training on general Internet images. When machine learning takes place on large language models, it actually doesn't need a lot of data. Images and video require tons and tons of data. And since we at Pure Storage operate at very large scale, the ability to work with a real leader like Landing AI

to learn what it takes to be able to process large amounts of data at very, very high speed, we believe is going to be beneficial to us as a company, as leaders in the data storage space. I think Landing AI feels similarly where we can provide working together, them ability to really both economize and to accelerate the work that they do in machine learning of images. So the timeout takeaway, top model time, real value in AI is going to come to companies and systems that show their best at solving industry-specific problems. Giancarlo told me financial services and medical technology are among the most decisive early movers.

Well, banks and Netflix take center stage next week as earnings season picks up steam. But there are plenty of other names on the calendar as well. Your Wall Street look ahead is next. Plus, we'll discuss whether insurance stocks can keep rallying thanks to surging auto premiums. And don't forget, you can catch us on the go by following the Closing Bell Overtime. Earnings season kicks it up a notch beginning Monday with results from Goldman Sachs and BlackRock. Tuesday will feature Bank of America, Morgan Stanley, PNC Financial, and UnitedHealth. Wednesday brings Johnson & Johnson,

United Airlines, and U.S. Bancorp. Netflix, D.R. Horton, Abbott, Blackstone, and Taiwan Semiconductor are the big names Thursday. And to close it out Friday, American Express, Regions Financial, Halliburton, SLB, that's the company formerly known as Schlumberger, and Dow Component Travelers. Travelers. Speaking of insurance companies, those stocks have been red hot, thanks in part to soaring auto premiums, which are up nearly 20 percent from a year ago. That's according to this week's CPI data. Our Contessa Brewer has some details.

Contessa. Hi, John. Yeah, CPI puts in black and white what vehicle owners already know, that car insurance is expensive. 19.5 percent higher this June than last June and up almost a full percent from a previous month. Meanwhile, the rising rates are encouraging investors in the insurance company. Look at the ETFs here. You've got them all up roughly 15% year to date. And then the insurers themselves, the big one, Allstate, it's up about 15%. Progressive, up this year to date, 34%. But catastrophes are already hitting hard. In fact, Progressive announced just in May

alone nearly three quarters of a billion dollars in catastrophe losses. That was before hurricane season even kicked in. And those storms will likely factor into earnings for multiple insurers. That estimate of catastrophe losses, along with a prediction of lower net investment income, prompted Goldman Sachs today to change its estimate for all-state second quarter EPS from $1.92 to a loss of $1 per share. All-state stock today up a percent. You've got Progressive up three quarters of a percent. Berkshire Hathaway, which owns Geico, up one and a third. And Travelers, which you mentioned, John, reports next week up one and a third as well. The big question here is, will rates keep going up? And I think what you're going to see is as long as they can get it from the regulators, get that approval, auto insurers will keep asking for higher rates because they've

lagged so far behind. Yeah. Is it really up to the regulators? I mean, it's not the same kind of market where people just stop buying a certain brand of cereal. People have to buy our insurance, right? Yeah, that's true. And the regulation varies from state to state, but in every state, the auto insurers are a regulated industry. So there are some states where every single increase has to go before a regulator and the regulator has to yay or nay it. In California, it didn't happen for a long time and they're just now starting to catch up. All right. Well, we'll see what happens from here, both with insurance and with the market, Contessa. Thanks. And that's going to do it for Overtime.