Closing Bell - Closing Bell Overtime: What Bank Earnings Say About The Economy; New Stakes In The Search Engine Arms Race 04/17/23

Episode Date: April 17, 2023

Averages finished at session highs today, closing in the green. JPMorgan’s Phil Camporeale and Fidelity’s Jurrien Timmer break down what to expect ahead of this busy week of earnings. Our Steve Kovach discusses what’s at stake in the AI search wars after Alphabet shares dropped on a report Samsung may turn to Bing for its default engine. Argus Research’s Stephen Biggar on what bank earnings have revealed so far and what name is best positioned going forward. It’s been four straight weeks of gains for oil; Sadad Al-Husseini on what’s driving the move higher and where the price is headed for the rest of 2023. Meanwhile, Moderna stock fell despite some promising cancer vaccine data. Wells Fargo analyst Mohit Bansal on why there is a disconnect between the excitement companies are feeling and how investors are reacting. Plus, Deepwater’s Gene Munster on what to watch in Netflix’s earnings report tomorrow. 

A little burst of buying here in the final moments of the trading session with all the major averages ending the day higher. That is the scorecard on Wall Street, but the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort. Coming up this hour, we're going to talk to Husseini Energy founder Sadad Al-Husseini as oil comes off its fourth straight week of gains. Plus, we are 24 hours away from the kickoff of FANG earnings season with Netflix gearing up for results tomorrow after the bell. We're going to preview what to expect with Deepwater's Gene Munster. Let's get straight to our market panel as stocks do go out at the highs of the day. Joining us now, Phil Campreale from JPMorgan Asset Management Uriah Timmer from Fidelity Investments.

Good afternoon to you both. Phil, you're here on set with us. Give me your take on this little bit of activity, positive activity we saw to kick off the start of the week. So I think the market is waking up to over the past week or so that the window for a hard landing this year is closing very fast. Because what do you need for a hard landing to occur? You need, obviously, chaotic deposit outflow from that regional bank story that we feared about three weeks ago. Actually, we saw small bank deposits up last week for the first time since Silicon Valley failure. And then the other thing that you need is an overzealous Federal Reserve.

And we kind of saw snippets of that in early March when the Fed was talking about becoming more aggressive. And now the market is waking up to the fact that maybe they won't ease in the back half of the year, but that's OK because we don't have a hard landing. But the terminal rate, that rate that they stop at that we've been looking for since March of last year, is finally within sight. So we only have like one more hike left, we believe, and then they're on hold. And from an asset allocation perspective, if stock and bond volatility drop, that's a really, really supportive environment for the balanced approach.

Urien, I want to get your thoughts on this, the activity we've seen, the S&P finishing at 41.51 to kick off this new week. I mean, the other piece of the puzzle, though, is earnings, and those are really just getting started now. Yeah, so earnings season is really underway now. We had the big banks report, of course, late last week, and the numbers have been very good. And they highlight kind of this dichotomy that we've been looking at in the market, where you look at the most inverted yield curve in decades, and you wonder when that shoe is going to drop. But then you look under the hood and you look at the fact that, you know, the big banks are paying a deposit rate of zero to half a percent. And if that's how you define bank funding versus what they are lending or buying with their assets, the yield curve actually is extremely positive still.

And you can make the same argument with homeowners having refinanced their mortgages in 2020 and 21. Most of the currently outstanding stock of mortgages was originated back then when rates were at historic lows. You apply the same math to corporates refunding their debt, terming it out a few years ago. And it makes you wonder if the economy has become mostly immune to rate hikes, with the exception, of course, of some of the smaller banks or even not so small banks that we saw in the headlines a few weeks ago. So, you know, earnings, I think the market is looking at a relatively modest earnings decline that will reverse later this year. And I don't know if that's going to be the case or not, but I think that's what the market is looking at when you look at the consensus earnings estimates. And if that's the case, the market can easily look through an earnings valley

when it has the promise of at least, you know, easier liquidity conditions down the road. I don't think the market can look past an earnings abyss, but that's not what's in the price and it's not necessarily what I'm expecting. And revenues per share are still making new all-time highs, actually. Okay. But on the other hand, Bob Bazzani was just saying last hour that if you look at the VIX, maybe there's complacency. I don't get how, say, over the next six months, how do things slow down enough, right, to cool the economy down to where we don't need further hikes and inflation is under control, but not too much, right? Is that just the perfect Goldilocks scenario that isn't likely? How does that happen, Phil?

Well, I think to be underweight stocks here, you have to believe in a slowdown that's not priced in. Okay, so the VIX is actually reacting to rate volatility, in my opinion. Rate volatility was up 100% last year. So I think the VIX at 17 is basically, again, saying that the boogeyman in the room last year, which was this incredible rate hiking story, is just going to take a backseat this year. So I don't think it's Goldilocks. Goldilocks is the no-landing scenario. That's premature. So the no-landing, but a soft landing, John, could still be plus or minus 1% on GDP.

The unemployment rate is still so low, and inflation is still pretty hot. But I think the signal are wages, not the unemployment rate. Because you can keep the unemployment rate really low because of mismatch of supply and demand. The unemployment rate really is only going to go up if you get a hard landing. Again, not our view. The wage story and the move that wages have made, I think, is the bigger story right now than the

unemployment rate or initial jobless claims or continuing claims. I think it's the wage story. And that, I think, gets the Fed to slow down. You're in. Russell 2000, the small caps outperformed today up 1 percent. We did see the dollar strengthen a little bit, but in general, the dollar has just weakened dramatically in recent weeks. Should we be talking more about the potential of that as a tailwind to multinational stocks that are going to be reporting earnings? I do. When you look at the dollar chart, it does look like a cyclical peak, which makes sense, right? Because if the Fed is getting close to the end, whether it hikes another quarter point or not in May, if it is close to the end of

the tightening cycle, then that policy divergence that we've had between the U.S. and other countries who are either tightening less rapidly or still easing, like in the case of China and Japan, that policy divergence starts to narrow. And that's at least one driver, in my view, of the dollar. So if we have a cyclical peak in the dollar and we have a weaker dollar, then that really helps the non-U.S. side of the global markets. And when you look at the earnings estimates, you know, the expected growth rate of earnings, the U.S. numbers are still coming down. But IFA, which is non-U.S. developed, as well as emerging markets, it looks like they have made a cyclical bottom and are starting to recover. And if you look at, you know, the leaderboard so far this year for the market, The MSCI Europe index actually is one of the really stealthy winners.

So I think non-U.S., outperforming U.S. in an otherwise positive tape, I think is going to be, continue to be one of the stories for this year. Okay. We're going to leave the conversation there because we've got some earnings rolling out. Speaking of, Urien and Phil, thanks for kicking off the hour with us. J.B. Hunt numbers are out. Frank Holland has the details. Frank. Hey there, Morgan. J.B. Hunt reporting a miss on the top line and a miss on the bottom line. The big metric here is their intermodal business.

That's container shipping. J.B. Hunt is the biggest container shipper in the United States. A miss on that segment as well. You can see shares falling almost 2.5% right now. Within the report, they continue to reference volume declines across all of its segments. One big part of this business, probably the biggest, is container shipping from the West Coast ports. Of course, we've done a lot of reporting about shipments declining from the West Coast ports. Containers are generally consumer packaged goods, consumer spending obviously a lot softer.

So again, a miss on the top and the bottom line. Also a miss in its most important segment, intermodal, which is also container shipping. A lot of that coming from the West Coast ports. Shares are down now more than two and a half percent. Back over to you. All right, Frank Holland, thank you. And for now, let's turn to Alphabet, one of the biggest decliners in the NASDAQ 100 today. Samsung reportedly threatening to drop Google search for Bing on its devices in a move that would boost Microsoft's AI-fueled attack on Google's core business. That's according to a report in the New York Times. But how's Google going to respond and what's the potential impact for investors? Steve Kovac

joins us now. Steve, what do you say? Yeah, who knew, John, that one day these negotiations for who gets to be the default search engine on a Samsung phone or Apple phone would actually be interesting because Google historically has just gone in, paid gobs of money to these platforms to be the default search engine. And that increases every year as more and more revenue gets split between the companies. But now, look, this set off, apparently, according to The Times, alarm bells within Google that even the idea that Samsung would consider using Bing instead of Google, keep in mind they use Android for all their phones, that was enough to rattle Google to be like, we need to get this kind of product out into our own search. So now they have, of

course, BARD, which is being tested in a kind of limited preview. But we already heard from CEO Sundar Pichai and Google as a whole that this will eventually make its way into search. So these negotiations could get a little more tense than they have been in years past. I think what's important for investors to think about here, give me your take on this, is Google is actually paying Samsung and Apple for placement on their devices. We're just showing there on the screen the estimates are $3 billion to Samsung,

$20 billion to Apple. What Microsoft might end up doing here, Microsoft's clearly willing to pay more to displace Google, and with AI, maybe there's more of an argument that Apple and Samsung should look at this. Is Google going to have to pay more to maintain that search share, and is that going to crunch their margins? Is Google going to have to pay more to maintain that search share?

And is that going to crunch their margins? Yeah, they might have to. But keep in mind, this is the kind of stuff that makes Samsung and Apple extremely happy, especially Apple, which keeps telling us the services story. Well, guess what? That $20 billion or the estimated $20 billion

that Google pays them, that goes right into the services bucket. So it's not even an Apple product that's generating all the sales. And yes, Microsoft does have a chance here, especially if their product ends up being better than whatever Google launches, whether that's later this year or next time. By the time these negotiations come up again, it's going to be who has the better AI search. Yeah, it might be an actual arms race and Google will have to sweeten the deal in order to get that placement that it needs. John, I would also point out that the Department of Justice and its antitrust probe into Google is looking at exactly this. They're basically saying,

Google, you are too wealthy, you're too rich, you're spending too much money to keep your dominant position. They have over 90 percent market share in search. And the idea that they're the only game in town that can afford to be the only game in search might go away, actually. This might be actually good for that DOJ case. And that's I'm wrapping my head around $20 billion estimated. And that's a revenue share. Keep in mind, Google is making more than that $20 billion, Morgan. Clearly, because if it's that lucrative just to have that positioning, then you can only imagine the ways that that search opportunity is being monetized.

Do we even actually know? Has that ever been really granularly spelled out? No, it's not. So all Google does is they report out what's called TAC, or Traffic Acquisition Costs. That's part of these payments we're talking about. Now, they'll see how much per quarter they spend overall, but they don't say, we paid Apple this many billion and Samsung this many billion, Firefox this many billion. They don't do that. They don't break it down that way, nor do the other companies say, this is how much we got from Google. But we do have an idea, at least directly, how much is being spent. And honestly, most of it goes to apple morgan all

right steve kovac thanks for bringing us that shares of google ending the day lower of course it makes me think of that incredible interview you did earlier this year uh about how lucrative it could be even just a little bit of market share for microsoft santi nadella was very careful to say google makes more money on top of windows than Microsoft does. So there you go. More to be revealed. Well, shares of State Street are sinking. One of the worst performers in the S&P today. Look at that, finishing down 9 percent, while M&T makes a move higher. One of the best performers finishing up 8 percent as regional bank earnings kick into high gear. We're going to break down what we learned today in the wake of the SVB collapse, and we're going to look ahead to results from Bank of America,

Goldman Sachs, and many more set to report this week. Overtime, back in two. A couple of regional banks are two of the biggest movers in the S&P 500 today. M&T Bank and State Street in different directions. First up, M&T, the company beating analysts' expectations on its earnings while more than doubling its net interest income year over year. State Street, worst performer in the S&P 500 today after missing estimates on both earnings and revenue. Net income fell 9% versus the same quarter last year.

Two more majors reporting tomorrow. Bank of America, Goldman Sachs before the bell. Let's bring in CNBC.com banking reporter Hugh Sun. Hugh, it's the regionals I'm really concerned about. So PNC net interest income looked pretty good for them, as I recall, and they did all sorts of disclosures about how they're not exposed to commercial real estate and whatnot, all those dangers. What do we get today? So we have a continuation of the theme, and we're really take a step back. You know, the banks are answering a question, and that question is, what happens to you when interest rates rip higher and all of a sudden there are alternatives to your boring checking account? Things like money market funds, things like the new Apple savings account that offer 4 percent interest. And so when you look at M&T, their deposits were down by about 3 percent.

So that's not great. But they overwhelmed that with better than expected NII, net interest income. And that was positive for their, you know, their EPS. Now you look at State Street, you know, it's the same question. And their deposits are down 10%. They missed their own guidance on net interest income. And as a result, they missed on the bottom and top lines. And this is, you know, this is an environment in which when you miss, you're going to be punished more than usual because of this. Is there a big, dangerous wave coming with rates presumably staying high for a longer period of time with commercial real estate and some of these other things? Are the likes of State Street or others that are going to report potentially vulnerable to that, are they able to explain their way out of that worry?

Well, I mean, I think I would look at it in kind of two different binary, which is, you know, people do get exposed. And there are there will be instances if you listen to Jamie Dimon, this is Warren Buffett, in which other banks teetering may get in trouble. I think for the vast majority of these banks, it is just a question of how profitable are they going to be going forward? And it's going to be in the re-rating of the future estimates on their profits going forward that they're being impacted. Nobody thinks that State Street's going to go away. I mean, it's a 150-year-old institution, a huge trust bank. It's got a diversified line of business. For most of these banks, it is about answering the question is, how profitable are you going forward? How well did your management navigate this interest rate environment?

Yeah. And, of course, I think that's what was so stunning about State Street and maybe how well did your management navigate this interest rate environment? Yeah. And of course, I think that's what was so stunning about State Street, maybe why it sold off as brusquely as it did today, was the fact that it does have relatively small exposure to net interest income, and yet it missed on that metric. Still hammered today. Exactly. All right. Well, let's stay with us, because we're going to bring in Argus Research Director Stephen Biggar. Stephen, I want to get your thoughts on what we've heard from the banks so far and how that tees us up for the rest of earnings season and specifically

whether we're going to look back at Q1 as peak profitability for the banks. Yeah. Hi, Morgan. So I think there was just a collective sigh of relief with the banks. Expectations were, I think, dampened coming into the quarter. Analyst estimates were kind of reduced. There was a lot of concern about what happened with deposit flows. And, you know, now we're getting some of the results, and they're not terribly bad. Banks have described the deposit situation, I think, pretty well. And look, to your question, yeah, I think banks have a deposit conundrum here for the rest of the year. They can either chase some of these higher rates on deposit and hope to keep

more of those deposits, or they can kind of let some of them slide. And I think they have some wiggle room here because the deposit surge that happened during the pandemic is still not completely unwound. So, yeah, I think we'll get some weaker earnings. This is probably the peak quarter in terms of net interest income and margins for banks. But, you know, softer guidance, not really a crash. Yeah, I mean, so far it seems like loan growth is hanging in there right now. So far, margins across most of the banks we've heard from, and I realize it's still a small handful, but when you talk about the big banks and the regionals so

far, been pretty strong. A lot of positive commentary about the resiliency of the consumer and loan loss reserves have been about in line or maybe even better than anticipated. In terms of what's still to come, what are the names that concern you that you'd be steering clear of right now? Well, two things on the horizon. I mean, clearly, there's a lot of the Fed holds a lot of cards here, right? If they over tighten, that could lead to higher, much higher unemployment. And that historically has been very bad for for credit costs for banks.

Delinquencies go up. More unemployed means more people can't pay their bills, clearly. So that could be somewhat unwinding. And then, of course, the second thing we're looking at is commercial real estate. And banks are universally, I think, doing a very good job outlining what their exposure is here, particularly in the office space, where there's a lot of occupancy increases across the board, really across the country. And, you know, I think they have demonstrated that these are kind of manageable risks. But we do have a fair amount of exposure there, loans that will reprice or come due in the next two years.

So definitely bears watching here. They've done a lot to alleviate, I think, some of the concerns, but that is still out there as a concern. Hugh, of the names coming up, are there bellwethers that you're looking at when it comes to exposure to either consumers fleeing for better yield or just commercial real estate exposure, anything like that? Well, B of A reports in the morning, so that's topical. Look, they have a huge low-cost base of deposits. It's the primary reason that Warren Buffett loves that bank. And yet they took down NII in the last quarter. So I am curious how they navigate this. And, you know, I would anticipate that they benefit from the same trends that you saw JPM outperform on NII.

But, you know, we'll see tomorrow. Goldman Sachs, they're reporting, and I think their trading is going to be very good because we saw that at JP Morgan and Citi. But in terms of CRE, it's got to be the smaller banks just because it's such a big part of their exposure relative to their overall size versus the big banks where it's like 2%, and it doesn't really matter for them. All right. Hugh, Stephen, thank you. Thank you. Now, energy stocks getting hit today as oil pulls back. Recruite has been on an uptrend lately, moving higher for the past four weeks in a row. We're going to talk to energy

expert Sadat Al-Husseini about his outlook right after this break. House Speaker Kevin McCarthy delivering a speech on the debt limit at the NYSE today. Kayla Tausche has the details. Hi, Kayla. Hi, Morgan. Speaker McCarthy proposed new guardrails for government spending in exchange for raising the debt limit into 2024. Those proposals included returning federal spending to October 2022 levels, capping spending growth at 1 percent, and clawing back tens of billions of dollars in unspent COVID aid. McCarthy says Republicans will vote on that package in the coming weeks, but here's how he responded on CNBC when asked whether the GOP could pass it. I think I'm a sport of America because I'll get the party behind it. But more importantly,

what is wrong with sitting down on both sides and finding a responsible, reasonable way? I mean, who in America wants to continue down this path where we spend more than we bring in? Senate Majority Leader Chuck Schumer today said he and President Biden would meet with McCarthy when Republicans reached consensus. The White House called McCarthy's proposal a vague extreme MAGA wish list that will increase costs for hardworking families and said a speech isn't a plan. And as for Mr. Biden's proposal for a clean debt ceiling raise, McCarthy says that's one of his non-starters. There's two things I will not do. I will not raise taxes and I will not pass a clean debt ceiling. It just won't pass.

So why don't we sit together and find ways to put us on a better path? Biden McCarthy last bet on February 1st of this year, but there is no sign of this standoff ending anytime soon, John. No sign of market worry about it either for now, Kayla. Thank you. Let's turn now to oil pulling back today, but coming off four straight weeks of gains, the longest winning streak since February 2022. China's reopening OPEC plus cuts and tight global inventories are behind that momentum. But can it continue? Joining us now is Husseini Energy founder Sadad El Husseini. Sadad, great to see you. So does limited supply protect the price of oil here or is there danger of demand weakness hitting us as the year progresses? Hi, John. No, I think the demand problem is going to be behind us. By the time we get into May, June, it'll be behind us.

The OPEC cut kicks in at the beginning of May. So we haven't felt it yet, but we will. And they're going to be watching the market very carefully. They're going to meet again every two months. So they'll be meeting again in June. If necessary, they will take additional action. The OPEC forecast itself showed that this quarter was going to be weak. And I think that was the logic behind the cut. But the same forecast, same OPEC forecast, plus the IEA, plus the EIA, all of them

show a much stronger second half of the year. So demand will fix itself in the second half. Supply will then have to react. And that's really a great opportunity, not just for OPEC, but for the whole oil industry. As you can imagine, the Europeans don't have any, so it's going to be an opportunity. So, which raises the question, the OPEC cuts, how much of this was politics versus economics if we're going to see a difference in the supply-demand equation later this year? I mean, if OPEC's cutting now, how quickly can they re-ramp production later on? Well, Morgan, I think I was very impressed with the fact of how efficiently and how well coordinated that cut happened.

It came by surprise to a lot of us. It included virtually all the OPEC players and OPEC Plus players who had additional capacity, and they were able to implement it very quickly, very agile decision. So if they see a need to go the other way, I think they'll be equally agile, equally quick. It wasn't politics, because, as I say, from lately, when I've been reading the OPEC reports, they were concerned about the second quarter being a bit weaker than some of the other organizations had been forecasting. So, Sadat, I'm just, when I look at what the markets are doing,

when I look at what the VIX is doing, when I look at what oil is doing, I just wonder, is there too much complacency? What's your downside scenario? What would cause the price of oil to drop so we can prepare in case that happens? Yeah. John, I think OPEC has been very concerned about complacency specifically. And that's why the minister, the Saudi minister, has been talking about being preemptive and proactive, he saw this shortage of demand, this fall in demand coming. And he was listening to his advisers, and he decided that this was the right time. They got together very confidentially, incidentally, considered the outlook, and made that decision almost within days.

So they're not complacent on their side. The complacency, unfortunately, is in the rest of the industry. You've got great opportunities to add capacity right now. The world is short on gas, LNG. There isn't enough refined products outside of OPEC and the Far East. And the concern about environmental issues and lack of financing has created shortfalls. That's where the complacency is, I believe. All right. Sadat, very, very, very, very quickly, $100 oil, could that be in the cards this year?

I don't think that's going to be in the card, but $90, $95, yeah. Yeah, we could get there. Okay. Sadat Al-Husseini, thanks for joining us. After the break, we're talking rockets and missiles. SpaceX scrubbing the launch of its massive starship today, plus new reporting on why U.S. chips are showing up in enemy military technology. And check out a pair of video game movers as we head to break. Angry Birds maker Rovio flying high after Sega made an offer to buy the company. And Roblox moving the other way,

falling hard after releasing downbeat user metrics for the month of March. We'll be right back. Welcome back. A close call but no launch today for SpaceX's highly anticipated Starship flight. After this morning's attempt was scrubbed thanks to an issue with a pressure valve on the giant rocket, and Elon Musk's space company shifted to what's called a wet dress rehearsal to test those launch procedures, literally get the rocket engines wet since fueling was already underway. Why this is so closely watched?

Well, it will be the first orbital test of Starship, which with nearly two times the thrust of NASA's SLS, is poised to become the most powerful rocket ever flown. And of course, it's being developed privately. When Elon Musk talks about colonizing Mars, this is the system being built to realize that vision. As NASA plans to land astronauts back on the moon, this is the spacecraft that's contracted to do it. And with bigger, newer Starlink satellites headed to Earth orbit, SpaceX will use Starship for that, too. Fully stacked, Starship and its super heavy booster stand almost 400 feet tall. The entire system is designed to be fully reusable, which we've never seen before.

That's unlike any vehicle ever built before. And it is poised to launch from the tallest launch tower that's ever been built at SpaceX's Starbase in Boca Chica, Texas. So this first flight won't actually include an attempted re-landing, but it is meant to test Starship at orbital speeds. It's also meant to test that separation of that giant booster. Musk over the weekend setting expectations low, saying that if they can keep Starship from destroying the launch pad, that in and of itself would be a success. Next launch attempt, that's to be determined.

It's not going to be before Wednesday, though. And there is the possibility that it could be Thursday, which is 420, and which you might expect from Musk. Speaking of launches though, here's one that will happen no matter what. My podcast, Manifest Space. It's relaunching this week on Thursday. You can find it wherever you get your podcasts.

And as soon as this show wraps, I'm headed to Colorado Springs because I'm going to be covering the Space Symposium, one of the biggest conferences for the industry of the year out in Colorado. And we're going to be bringing you Peter Beck, the CEO and co-founder of Rocket Lab, tomorrow as well. All right. All right. Your podcast relaunching, Starship, maybe. Well, nothing's going to stop us now. All right. Semiconductors, meanwhile, a key component of both space and

military rockets. There's a new warning that U.S.-made chips are ending up in the military technology of some of America's biggest adversaries. Christina Parts-Nevelis has that story. Christina? Well, as the Russian onslaught against Ukraine rolls on, experts have found something surprising inside their weapons. American-made microchips. Two key reports show Iran, which is supplying attack drones to Russia, and homemade Russian arms are heavily dependent on U.S. manufactured technology. The research suggests domestic capabilities are limited. Independent group Conflict of Armament Research sent staff to Ukraine to trace the microelectronic components found inside Iranian-made drones used by the Russian military.

For Russian systems, I think we have a little bit more than 50 percent in general components that bear the brands of U.S.-based entities. And for Iranian systems, it is more than 80 percent. And a separate report from the Royal United Services Institute examined more than 27 different weapon systems and equipment used by the Russian military in Ukraine and found about 70 percent of the components were made by U.S. firms, including analog devices, Texas instruments, OnSemi, Intel, Microchip and two two smaller firms acquired by AMD as well as Germany's Infineon Tech. Many parts, though, are classified as dual-use,

meaning they can be sold legally overseas for commercial or consumer use as long as the firm gets a special license from the Commerce Department. Many of the components were manufactured in recent years and demonstrates how Iran and Russia may have circumvented U.S. restrictions based on both group findings. Experts suggest allies need to play a bigger role. The rubber has to meet the road. Allies need to revamp their system to ensure that the technologies aren't being exported and the United States needs to lead. All seven of the U.S. chip makers we contacted for comment said they condemned the unauthorized diversion of their products and have halted product sales to Russia

and Iran in accordance with sanctions. I mean, it's incredibly startling. It's eye-popping. It's also not necessarily surprising given that dual-use classification, which raises the question, is the Commerce Department going to clamp down a little bit more in terms of its licenses? And how are lawmakers thinking about this as we start to get into the budget, Todd? So what that's going to mean for defense policy? So it's a positive because, yes, you have American companies that are in there because they're so advanced with their chips.

They've been at the forefront for so long. They've been producing chips. And so, like you said, it seems like an obvious observation. But when we dig back—and we've interviewed so many senators, congressmen, you name it, Republican, Democrats, and no one can agree on who is to blame. You had Republican Senator Tom Cotton. He told us the Department of Commerce has been lax about export controls. Then we spoke to another representative in Connecticut, who said, you know, I don't want to blame the manufacturers.

So is it the two relaxed export controls here in the United States? Is it allies that are not participating in better tracing? And then, or is it the manufacturers that maybe are using subsidiaries or third parties to sell their products? And then from there, they sell in a process called transshipment to the likes of Iran, China, and Russia. Yeah, a tough one to solve for sure. Christina, thank you. Thank you. Well, biotech outperforming the broader market

following Merck's nearly $11 billion acquisition of Prometheus Biosciences. Up next, a top analyst on whether more M&A could lead to a biotech boom. We'll be right back. Welcome back to Overtime. We are tracking some big movers in biotech today. Merck announcing plans to buy Prometheus Biosciences for $10.8 billion or $200 per share. That stock closing higher by nearly 70%. And check out Moderna, down 8% despite positive cancer vaccine trial results, which we previewed on this show Friday.

The company's mRNA vaccine, in combination with Merck's Keytruda, sharply cut the risk of death or recurrence of some skin cancer, though the path to approval remains unclear. Let's bring in Wells Fargo Securities Analyst Mohit Bansal. Mohit, I know you don't cover Moderna specifically, but what's your take on this precipitous drop? It didn't seem like the results were that bad. MOHIT BANSAL, Wells Fargo Securities Analyst, Wells Fargo Securities Analyst, Wells Fargo Great. Thanks for having me. Yes, so we covered Merck, which is partnered with Moderna on this. And the data look really interesting because in the early stage of data you have seen 44% decline in risk of recurrence or

death. However, the point is that these data are early and the statistical plan that was designed to show benefit here was little bit a lower bar so even from the presenters it was basically they were cautiously optimistic and that's our stance as well there are some some rumblings that Keturah also underperformed that is the control arm in this particular trial and that's another reason why why investors are not as enthusiastic as as some of the companies are in this particular space. However, this is a first step, and that's why cautious optimism is probably the right word to use here.

So if you're optimistic at all, do you buy companies like this based on this kind of result? Again, I know you don't cover Moderna, so I'm not asking you about it specifically, but it still looks like this might happen. So it does look like it might happen, but in our Merck's model, we don't have a lot because this particular indication is really tiny. You're talking about early stage melanoma here. Ultimately, the real opportunity would be

that if this vaccine could actually become a bigger play in multiple cancers across the different tissues, and that's when you start to get excited about this. This is still early data. The company still has to run a phase three trial. So it is still early to be super excited about this. And of course, this is only one piece of news for a company that had a very busy day today with Merck ending the day basically flat. Prometheus, the fact that it is looking to buy this company at nearly $11 billion, it's a plan ulcerative colitis and Crohn's disease.

Want to get your thoughts on this deal and whether it portends more M&A in the space given the fact that we have seen so many biotech names sell off so dramatically in the last year or two years. Right, absolutely. And we have been saying this for more than a year now because I cover mostly large-cap biopharma, and many of my companies have this challenge where they're losing major patents in 2025 to 30 time frame

and Merck is no exception they are losing their biggest product Keytruda sometime in 2028 and 29 time frame so that was kind of something that Merck needed to do and this diversifies Merck's pipeline because Merck is a powerhouse in oncology and they have a good presence in CV or cardiovascular disease, but this is a new area for them. So for them to go out and diversify their own business and buy, this is a really good asset as well, a fairly dearest asset. So that completely makes sense in my mind. And we have been saying this about multiple of our companies because they are sitting on a lot of cash and they need to buy these growth with that cash. All right. Mohit Bansal, thanks for joining us. Up next, Alphabet. Thank you very much for having me. Pulling back on AI headlines today,

but a slew of other companies are hoping to cash in on the technology in surprising ways. We're going to look at some under-the-radar applications of artificial intelligence next. So what are the biggest business model impacts of AI and how should tech investors prepare? Well, earlier we talked about Microsoft's push to grab search share from Google, and that exemplifies one way that new technologies can shift the balance of power disruption. Here are a couple more. Microsoft, Google, Amazon, Snowflake, NVIDIA and others are all trying to use AI to spark a platform shift where software developers build the next great AI app on their infrastructure. The ones that are successful are going to drive bigger sales growth and better margins from higher consumption. And then we have the app makers themselves,

which are scrambling to build AI capabilities into their products to lower their costs and create new premium experiences. Think Duolingo with its new AI-driven conversational language learning, for example. Now, earlier today, I spoke to Vimeo CEO Anjali Sood and covered AI. She addressed the dangers of AI, but also the potential for creating the next big growth opportunity. I mean, I think the risk is that you'll get left behind. I think this is the future. There's a lot, of course, to be worried

about with AI. There's a ton of implications for how we use it, how it's regulated, how we do it responsibly. But I think being afraid of AI in our space is really not an option. We're not that far off from ultimately being able to have a type of text prompt and have something, a starting point for a video come up. Our perspective, and you'll see Vimeo play a role in that ecosystem for sure. Our perspective is that's a major accelerant for creativity. Because at the end of the day, what it does

is instead of spending so much time drafting and shooting and editing, you're able to take an idea, just an idea, and get it out as a video like that. You can watch that full interview with Anjali on CNBC Overtime's Twitter page. There's a combination of defense and offense these companies are playing. Defense to make sure their cash cows don't get disrupted by AI, but offense to figure out how their unique data can feed into an AI model and scale perhaps a new revenue stream. I mean, I just hear that. I know we've had this conversation, but I hear that. And on the one hand, yes, it's amazing, this idea that you can sort of take this idea for a video and realize it and realize it, you know, without all the skill sets and without a photography or

videography crew to go along with it. But man, it sounds, without all the skill sets and without a photography or videography crew to go along with it. But man, it sounds disruptive to some of the current jobs that are out there. Disruptive, but also there's opportunity because if you can get a transcript more quickly, if you can get potential edit points more quickly and then produce that video faster. Hey, you can make more videos. All right. We built this city on rock and roll on AI, artificial intelligence. That didn't quite work, but I was trying to take the Jefferson Starship theme and carry it forward. I got you.

Yeah. Netflix. It's been a big winner this year, outperforming the S&P 500. Up next, tech investor Gene Munster on whether Netflix shares will keep rallying. It hasn't been rallying for the past month, but it did rally to start the year following tomorrow's earnings. Welcome back to Overtime. Netflix earnings on deck tomorrow. This comes as the company's second ever live stream for its dating reality series, Love is Blind, experienced technical difficulties and was delayed for more than an hour last night. Let's bring in Deepwater Asset Management's Gene Munster. Gene, great to speak with you. Hi, Morgan.

What are you looking for when we get Netflix tomorrow after the bell? Well, two things. There's the reported number, which is the subs, and that's $232 million. That would be up about 5% year-over-year. Pretty similar sub growth rate as we've seen in past years or past quarters for the past year. But also what we're looking for is something that's not going to be in the reported numbers and that's context related to how this password crackdown is going and separately how the ad model is progressing. As far as the password, that crackdown started basically on February 1st

and the ad model kind of kicked in in the month of November, December last year. And so we still don't have a ton of data on that. They're likely not gonna report those and they're hard metrics, but that will be in this video kind of Q&A session that they do after the call. So that's what I'm looking for is commentary around that. Now, just kind of put this all together in a very straightforward approach

is that in the December quarter, Netflix grew revenue at 2%. The street's looking for 4% growth in March, but stepping up to 7% and 12% in the back half the year. So what investors need to hear is that these other things, specifically the password initiatives and also that the ad model, they need to see and hear that those are working for the stock to continue to move higher. Yeah. I mean, those numbers sound honestly, they sound a little aggressive, especially because I would imagine with password sharing the crackdown, that's really a one time burst, I would imagine, to to the top line. It's not something that's necessarily going to continue to grow, right? Exactly. I think this is, you know, I think the key question going forward is that, you know,

this step up in growth, understandable this year, but then we start to look at 2024 and the streets looking for a similar 12% revenue growth. That to me seems a little bit out of touch with, I think, the reality of these levers that they're pulling. They have other opportunities that they're exploring that can kind of layer into that. Maybe it's live content. They get through the hiccup that they had related to Love is Blind and start layering some of that.

Maybe the gaming initiatives start kicking in. But next year, I suspect that those numbers are too high. This is still coming out some pretty big growth that Netflix had over the past couple of years. I suspect that 2024 growth is probably going to be closer to 5% to 10% versus the 12% that the street's looking for today. Gene, how much do we know about how Netflix's model responds to a strained consumer if we do get a lot tighter credit conditions and a crunch on spending on discretionary items? We know a fair amount. Historically, it's done well. And for the reason that it's just

considered cheap content, the same reason why gaming businesses tend to do well in a recession and even gym memberships tend to do well. So I think that that's probably if you think about the ledger of investing in Netflix, this has a defensible piece to it relative to do well. So I think that that's probably, if you think about the ledger of investing in Netflix, this has a defensible piece to it relative to a recession. But was that a less mature Netflix that responded so well? It was definitely less mature. But I still believe that the bang for the buck persists here. You are picking up on kind of an important distinction here, as Netflix is still pretty expensive relative to the other streaming services. Its base starts at $15, and there's many of them that are sub-$10.

But that extra incremental $5, $7, if unfortunately somebody is looking for work and spending more time at home, is probably well spent just for their mental health. Okay. Gene Munster, thanks for joining us and previewing that for us. All the major averages finishing the day higher. And then, of course, we get a flurry of earnings both before the bell and after tomorrow, including Netflix after the bell, United Airlines after the bell, and a name that I'm going to be watching in the morning as well, which is Lockheed Martin.

We talked about Google being lower today on those concerns. I would also mention Microsoft was up almost a percent. All right. Well, that's going to do it for us here at Overtime. Fast Money starts now.