Power Lunch - Global Tech Outage 7/19/24

Episode Date: July 19, 2024

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Welcome to Power Lunch alongside Kelly Evans. I'm Dominic Chu. As the business world is still digging out from a global computer outage, CrowdStrike shares are down 12% or so. As an update, it's sent for Microsoft operating systems was the culprit behind the big outage. We'll get more into what affected, what was affected, and the efforts to get back up and running. Coat shares down almost 12%. Now let's get a check on the broader markets. As all of the major averages are lower on the day, the Dow by about 300. 170 points right now. On the week, however, the Dow and the Russell, they're posting gains. United Health, a huge help in that effort. But the S&P and NASDAQ, both lower on the week than than NASDAQ, the worst week since category. You only have to go back to late April. All right, let's get back to today's top story, and that's the IT outage that's crippling the business world all over the world.

Let's bring in Steve Kovac for more on what happened and the chaos that ensued. You're hearing the superlatives, right, about the biggest IT. outage in the history of mankind. Oh, yeah, I mean. It's big. Yeah, yeah. And so let me go over what we know so far because we're just getting just developed. It's like left and right here.

So first of all, obviously this was the issue with severed security from CrowdStrike, which caused so many Windows PCs across the world managed by CrowdStrike security to reboot and show that blue screen of death. I just saw one backstage here on the set. Taking down operations at a slew of companies from TV networks like ours to airlines like Delta and United, banks, 911 call centers, UPS, FedEx, you name it, it's been affected. But the most important thing here, guys, is CrowdStrike says this is not a hack, not a cyber attack. CrowdStrike instead pushed an update overnight that caused this outage.

The update has since been removed and fixed has been deployed. Some folks are already seeing their systems recover, and CrowdStrike CEO, George Hertz, apologized for the outage earlier this morning on Squawk on the street. I want to personally apologize to every organization, every group, and every person who's been impacted by this. So guys, it's unclear when everything's going to be fully back online. Kurtz, by the way, also told us that not everyone's system is going to fix automatically, and you may need individual IT workers to come over and manually reboot your system. Also, Microsoft CEO Saty and Adela posting on X in just the last couple hours here,

his company is working closely with the crowd strike to bring systems back on. Also, the Department of Homeland Security told us in a statement, it's working with CrowdStrike and Microsoft to assess the outages, National Security Council, also told us its monitor to the situation. President Biden has been briefed as well. Elon Musk, by the way, he said in an ex post, he's deleting CrowdStrike from his systems, though it's not clear which of his company that applies to. Also, you can't just delete CrowdStrike. It's more simple than just removing a program. Our Laura Kalani over at CNBC.com reporting some Tesla systems, though, have been hit with the outage, potentially impacting Tesla production.

Meantime, shares of rival cybersecurity names, they've been up, Central 101, Palo Alto networks, and shares of CrowdStrike. Looks like they're down almost 12% right now. We're waiting for more updates, though, from both CrowdStrike and Microsoft about when everything is going to be back online. But the most important question, guys, is what happened?

How does it not happen again? And this is the discussion that we're going to open this show with. So, Steve, please stick around. CrowdStrike shows, again, down near their kind of towards session lows at this point, following the cascade of those IT outages that Steve just outlined. Our next guest just lowered his price target for the stock, but says no one really fully understands the scope of the disruption just yet,

calling it a quote-unquote unprecedented event for the industry. So joining us now for more is Peter Levine, Enterprise Software Analysts at Evercore ISI. Also with us is Chris Pearson, CEO of cybersecurity firm Black Cloak, Thank you all for being here with us right now. I'm going to open it up with Chris Pearson because he's a member of this industry. And just to maybe ask how deep this could go, CrowdStrike is a major player when it comes to cybersecurity, a large competitor out there. What exactly can the framing be about just how big of a deal this is, Chris? Yeah, I mean, this is going to be as big as it gets. The only barrier type of incident affecting Windows computers would be if something happened to Microsoft.

So on corporate devices, EDR, endpoint detection and response, kind of like antivirus for the corporate realm is what CrowdStrike does. In that area, CrowdStrike probably has about 50% market share for some of the largest companies globally. So when this actually happened in terms of a library update, bad update being pushed in the night, this is something that literally caused CrowdStrike to identify a file on the system as being bad, causing its. to go to a blue screen of death.

So literally, folks, if their computers were open last night, servers, of course, always on. This literally basically bricked those devices into that blue screen of death, requiring updates to them in terms of some items removed and or manual updates. This is about as big as it gets in terms of global destruction, or global disruption caused by a IT cybersecurity company. You know, what's interesting.

I had started my career post-college on Wall Street in 1999, and just around then we were getting set for Y2K. I remember I was part of a team that had to work 24 hours a day in shifts around the Y2K New Year's celebration to make sure systems didn't crash. And now I'm reading across social media that this is what it kind of would have looked like had Y2K actually come to fruition. So Peter, when it comes to cybersecurity and the embedded nature of all of this, Just how big of a player is CrowdStrike? What kind of a market share do they have for the S&P 500 companies that use Cypress security systems compared to, say, their bigger market cap rival Palo Alto networks? Yeah, so CrowdStrike, they haven't disclosed it from our checks.

They have 30 to 50 billion endpoints where their software is deployed. And you've seen that today on the global reach. So on the core, you know, if you think about their core market, which is endpoint, they own that market. You know, hollow out knows more on the networking side. CrowdStrike owns the endpoint market. So, yeah, this is, again, I think it's way too early to predict, I think, the fallout from what this is going to look like. And we're going to see updates today this weekend and potentially on how this gets fixed and how CSOs and buyers of this technology view them going forward. Both for Peter and Chris, Peter, I'll start with you.

What happened? So it seems like it was there was an update to the to a content library, meaning there was new malware and CrowdStrike will then send this out to all their devices just for them. So the endpoints know, hey, look out for this new, you know, this new attack. And it was just the content piece that was unfortunately, you know, misconfigured. And the question then becomes it's, you know, I think investors look at it as two ways. If you've owned this stock for the past year, you've done well. The stock is still up 18% meter date. You know, George is. is viewed. Incredible reputation. He's a good executor, operator as well. But then it becomes, it's like, how did something like this go wrong? And again, like, we have to wait to see those answers. Chris, in a way, same question to you.

I mean, describe to the late person what happened. And also, how was this allowed to happen? In other words, we talked a little bit about this with the Boeing jet that had the issue in January. What was the point in the manufacturing process, so to speak, that might have allowed for this to kind of go out the way that it did? Yeah, I mean, it does bear some reflection that anti-virus companies, which once again, CrowdStrike is more antivirus for the corporate realm. It falls under that category of EDR, endpoint detection response. There have been in the past, McAfee had a bad push of a library file, you know, almost seven years ago. Things like this have happened, just not with the

global scale and kind of market consolidation that has happened. You know, you're looking at easily going to be 50% of the largest companies on the planet having an impact. So what actually happen? So there are rule engines that comprise large companies like Crowdstrike or Sentinel 1 or Carbon Black that are in that same category. Those exist all the time running on the actual device, running on the servers. Every single hour, every single night, every single day, there are library updates that happen that identify new pieces of malware, new tactics that cyber criminals are taking, and when that pattern is seen in the future, it will stop it or block it. What has happened probably behind the scenes is that a bad library entity entry happened

at Crowdstrike that essentially misidentified a known good file as being bad. And then what happened is once that file was quarantined, if it was something that was necessary to run the computer, you then have the computer unable to run, which results in the blue screen of death. Now, it is interesting. You're talking about the largest companies, the most steeped chief information security officers out there. All of them have, as anyone responsible would, a n-minus-1 type of pattern of deploying new libraries. So new libraries never, ever take effect. on day zero. They always take effect one day into the future so that those companies can make sure nothing bad has happened, nothing alters their systems. Clearly in this case, something happened where that programming, that logic, that control was not adhered to in that update process, and it was pushed on mass to everyone and caused the results that you see here today. Peter, it's Steve. And I think this kind of touches on my next question, what was just discussed

here. And that's what's the proper way to roll out an update like this? We had the CEO of Crowdstrike on a couple hours ago. And he was saying, you know, this is normally, you know, kind of contained. We do it in a cascading way. So it's easy kind of pull it back if there is a problem. That doesn't seem, though, what's happened here. It seems to have been such a broad rollout that it impacted so many people before they could finally figure out something goes wrong and stop it. Do you think this rollout of this update was done properly? I mean, clearly, it wasn't. And this was a really bad operational misstep on CrowdStrike's part.

And again, if you look back historically, execution, it's been flawless execution, their reputation among customers, partners within the ecosystem. They are ranked top of the list, which is why you've seen the stock perform the way it has has over the past couple of years. But no, this operationally, this was a huge misstep on their part. I think that's really important. It's not just the operation things they have to get right. I mean, it's the protocol.

It's the protocol. Exactly. And it's just, look, they're supposed to protect us from these companies from cyber attacks, which so far they've been doing. Thank goodness this wasn't a real attack. But at the bare minimum, they should be able to roll out these updates without taking the system. Can you imagine in a hypothetical scenario where a smartphone user anywhere gets an automatic update

pushed to them? And then it just happens to hit every single smartphone that people have. I mean, so I'm not saying Apple. I'm just saying hypothetically, if you push something out to everybody who uses it, I mean, one little mistake, and everybody gets to be a little bit. And this happened, oh, at least a decade ago or so with Apple, they pushed out an iPhone update, and it bricked a lot of phones. It basically made them useless, and that was a huge failure.

People got fired over it. And the stock price never recovered. Yeah, exactly. Yeah, now it's only just a $3.5 trillion company now since then, but, you know, who's counting? Who's counting? All right. Steve Kovac, thank you guys very much. Peter Levine, Chris Pearson as well. We appreciate all the insights. We'll have you back again soon.

Hopefully in a better light, though. Yeah. No, but they probably hope worse. They're like the firefighters, or the police, they want to come in and fix the crime anyway. As we go to break, let's get a quick power check. On the negative side today, Travelers is down 7%. Catastrophe losses rising and hitting that stock. And on the positive side, intuitive surgical, rising 8% on a strong earnings beat. Those are some other stocks on the move today. Power Lunch will be right back. Welcome back to Power Lunch. Sox are lower across the board. The S&P and NASDAQ tracking now for a third down day in a row. And the Dow is still hanging on to a weekly gain along with the Russell 2000. So what should investors do now? Rebecca Patterson is former chief investment strategist at Bridgewater. Rebecca, welcome. It's great to see you. You too. Okay.

What do you say? They've got a glass of rosé and they say to you, Rebecca, what do I do with my stocks now? Should I be chasing the small caps? Do I worry about the election? Do I stick with my NVIDIA? What are you telling people? Well, let's start with NVIDIA and tech. I'm neutral right now.

I think that there's obviously a lot of optimism priced in. It's a very crowded trade at the same time. There's some very important structural benefits. and comparative advantages of these companies, particularly the profitability, the free cash flow that allows them to constantly reinvest in their own innovation. So I wouldn't be running away from it. And maybe you even are looking at these pullbacks as an opportunity to add if you're

not in there yet, which is hard to believe anyone out there might not be. But then beyond that, the small cap rotation, you know, it was a violent move that we saw earlier this week, 11% in basically four days. and I've been skeptical about small caps really for the last few years, largely on the back of my own view that the Fed would keep rates higher for longer. And I think part of what saw this rally happen was some better inflation that allowed the market to price in a September ease and further easing ahead. So what do you do from here to your question? I think it really is going to depend on two things. The Fed may feel inclined to cut September.

We'll see if we get the data for that. The question I have, though, is next year. market's still discounting about 115 basis points of easing next year. And the small caps are discounting that as well. So do you get that much easing? These companies need lower rates. They have relatively higher debt and more floating rate debt. The second issue is growth. You know, growth has held up relatively strong in recent months, moderating a little bit, but generally resilient. And even today, the New York Fed updated its Q3 GDP estimate to 2.7%. That's great. But there's other indicators saying we need to be cautious. If you look at jobless claims, they're noisy, but they're

ticking higher. If you look at the service sector, the latest business sentiment survey, the ISM, had both employment and new orders contracting. So there's reason to still be cautious on that growth outlook. And to me, without having the all clear on those two things, I'd be nervous chasing or adding a lot more exposure broadly to small cap. It doesn't mean there aren't selective opportunities for active managers, but I certainly wouldn't be adding the small cap index in any size yet to my portfolio. Rebecca, one of the interesting topics of conversation or even debates, if you want to characterize it as that, that I've had over multiple cocktail conversations or conversations with

investor groups or investors, is the idea of how big a pullback could be. And one of the topics that was brought up was just how much leverage there is in the system, and that it seems like in the tighter rate environment that we're in, the amount of leverage that we have in the system chasing assets like stocks is not nearly as bad as it has been in other periods that have seen bigger market declines. I wonder if you can take us through whether or not you feel as though we can have a massive market decline if there isn't as much relative leverage as, say, back in the dot-com era or even during the 2008-2009 financial crisis.

Yeah, no, it's a great question. I love how you both are just kind of pulling in cocktail hour in your comments there, too. It's five o'clock somewhere, Rebecca. Wishful thinking. Exactly. It's been a long week and a long day. Anyway, so with leverage, I think this is a really important point. Obviously, in the run up to 08, where we had that huge sell-off, the GFC, you had leverage among consumers, leverage among businesses, leverage in the financial sector. Today, the leverage is largely in governments. When we think about debt to GDP, that's where the excesses are. that's where the vulnerability is. And I think that plays out very differently in markets. But if I am looking for where is there some risk, one thing that I am very focused on right now is the retail investor. And you all have talked about this on air quite a lot, which I'm thrilled you are because it's so important. We're back now to levels where the retail investors role in the broader market is the biggest it's been since pre-GFC, pre-dotcom bubble. And that doesn't

mean we're going to see the same result, but it does mean it's something we have to be. to pay close attention to. They now have low or no fees. They have trading platforms that feel more like video games, and they have a lot more instruments they can use, whether it's, to your point, Dom, triple leveraged ETFs or zero-day options that allow them to trade on margin. And so to a degree, there's leverage in that part of the market right now. And I do think that is part of the reason we're seeing the volatility we're seeing on an intraday basis in single names. You know, the reaction we had earlier this week to former President Trump's Taiwan comment. I think that's a great example. He makes comments like that all the time. We know that. Doesn't mean they're going to turn into policy.

And yet the market reaction was so outsized, in my opinion. Maybe some of that was positioning ahead of the comment. But again, to me, it also feels like it could be partially driven by this retail investor who's saying, cool, I've got a zero-day option. I'm going to make a quick trade and see if I can make some money off this. And I think that is a part of it. of the market that's become much more meaningful that we have to watch carefully. That's really interesting. And I guess as a final comment, does that create opportunity then? Well, certainly, if you're a medium or longer term investor, and I think many of us are, you know, if you get pullbacks in stocks or sectors you like, you can get an opportunity

to add to buy them on sales, so to speak. And so the retail investor might give you some opportunities at the same time. They might be pushing a stock against your fundamental view for short periods of time. And then you have to decide, okay, what am I doing with this? Am I sticking to my view? Is there any fundamental change? Or is there something bigger here I might be missing? So it's the volatility that that's creating is something everyone's going to have to work through. But to your point, I do think it can create opportunities. All right, Rebecca Patterson, thank you very much. It's always good to get your thoughts. We'll see you again soon. Take care. All right. Well, Netflix's

remaining the streaming king right now, being on earnings, growing subscribers, but lower by around 1% or so we're going to lay out all of the thesis around what that Netflix story is coming up next after the break. All right. Welcome back to Power Lunch. You can see right there, stocks are broadly lower, but we are bouncing off the lows of the session. The Dow industrials down to by about 382.42 points, 40,000 282. The SMP is at 5505, down 38 points, 3 quarters of 1% decline, and the NASDAQ composite off by a similar percentage amount to 17,725. That's good for 146 point drop. going to check on Netflix with its subdued move today down about 1%. It often moves a lot after earnings. And despite some significant news on its user base, it's again muted. So let's bring in

Julia Borson now for more details on what that report really told us. It was very bullish in many people's mind and why the stock is reacting the weight that it is, Julia. That's right, Dom. So Netflix's revenue earnings and subscribers all beating expectations. The company added 8 million new subscribers versus the 4.8 million that it was expected to add. But the stock initially dropped on the warning that its third quarter revenue would fall short of analyst expectations despite having all those additional subscribers. Now underlying this warning is the idea that revenue would lack subscriber growth is the fact that the company said that advertising will not be a primary driver of revenue growth this year

or next year. Take a listen. We're on track to achieve our critical scale goal. for all of our ads countries in 2025. Clearly, we expect further growth beyond that, but that represents a great threshold to get to and then to build more scale and more attractiveness from there. So that allows us to shift more of our energy now on more effectively monetizing that rapidly growing inventory.

Now, Netflix is long-term bullish on its ad-supported tier pushing subscribers there by phasing out its basic ad-free plan in the U.S. and France. After phasing out that tier in the UK and Canada, in Canada in the second quarter, which it says helped increase its ads member base by 34% sequentially. T.D. Cowan with a buy rating on the stock saying, quote, we expect continued robust Avad tier growth going on to say, we expect that Netflix will phase out the basic tier in other markets further driving subscriber growth of that ad-supported streaming tier.

So Dom, now that the impact on Netflix's of Netflix's paid sharing initiative is waning, the company's future is really all about its ad potential. Julia, what can you tell us about the Netflix story as you've seen it play out with this earnings report versus what the competitive landscape is for everybody else who's in streaming right now? Well, what's so interesting about the shareholder letter, Dom, is that they talk a lot about YouTube being the competition, saying that when it comes to streaming video, there's Netflix and there's YouTube, and they're the ones that are playing at massive scale. Of course, YouTube is totally different.

Ad supported has a very, very small subscription business. YouTube is really all about the ad-supported business and not having that subscriber sort of gate that might limit the number of people who participate. They said they're really not interested in bundling with some of the other streamers because they see what Netflix offers as being broad enough that they don't need to bundle.

So trying to set themselves apart from the rest of the pack. And of course, we'll see what all the other media giants report when we get their earnings over the next couple of weeks. They come a little bit later in earnings season. Up 33% now this year. Julia, thanks very much, Julia Borson. Over to Kate Rogers now for the CNBC News Update. Kate.

Hi, Kelly. Donald Trump is expected to speak to Ukraine and President Voltaimir Zelensky on the phone today. A source confirmed the call to NBC News. It comes as questions grow about whether Trump would continue to support military aid to Kiev if he wins the presidential race. He's vowed he would have the war settled while he's still president-elect, but hasn't said how he'd do. so. Meanwhile, hundreds of firefighters took part in a funeral procession today for the retired

fire chief killed Saturday at former President Donald Trump's campaign rally. Officials say Corey Comparatore died shielding his wife and daughter when a gunman opened fire at the rally attempting to assassinate Trump. Two others were injured in the gunfire and both are listed in stable condition. And Tiger Woods missed the cut at the British Open. The 15-time major champion shot a 77 today at Royal Trune in Scotland. It's the third. third straight early exit from a major for Woods who vowed to return next year. Back over to you. All right, Kate, the Open Championship has claimed a lot of high-profile names out there among the cut people. All right, thank you very much for that. I'll have to power lunch still. We've got Republicans rallying

behind Trump, the former president hitting the ground running as he officially begins his campaign as the nominee. Meanwhile, Biden is on the sidelines with the talks of replacing him growing again. We've got the latest on that story coming up next after this. As President Biden isolates with COVID-19 in his Delaware home, the pressure on him to drop out of the presidential race is growing. Megan Kassella has been following every twist and turn in this story and saga. Megan, what's the latest? What can you tell us? Dom, it's been a big day and even a momentous last hour for the Biden team and the pressure campaign to try to get him to step aside. 32 congressional Democrats are now calling on him to bow out.

And we have new reporting just now that Vice President Kamala Harris will be addressing major Democratic donors this afternoon on a call that was just scheduled. The topic, I'm told by one source, will be, quote, the work that needs to be done to protect democracy. One attendee on that call will be Reid Hoffman, the Democratic mega donor, who has been one of Biden's most loyal supporters. Now, this latest news comes as some Democrats, and especially donors, begin to make plans for Biden's exit.

That's even as he and his campaign continued to say publicly, that he's staying in the race and that he'll be hitting the campaign trail next week. NBC News is reporting that members of the president's own family are making plans as to what an exit could look like and that allies of Vice President Kamala Harris are mapping out what a campaign for her could look like. I've also been told that ahead of this afternoon's call, donors have been openly discussing and some with some enthusiasm, getting back involved in a race that they had recently been sitting out in order to support any new candidate. Now on that front, too, Dom Harris is set to appear at a fundraiser in Massachusetts tomorrow,

alongside the actress Jennifer Coolidge and Governor Morah Healy, who I will note, is one of those officials who's been suggesting in public that she would like to see Biden bow out. Dom? So what's interesting about this is this is maybe exposing fissures within the party on the Democratic things right now, because we do have two very prominent voices, including Representative Alexandria Ocasio-Cortez in New York Bernie Sanders from Vermont, who are in essence perhaps questioning whether or not it's the right path forward to have President Biden drop out of this particular race. What exactly are you hearing about whether or not there are a unified front building with regard to that particular view?

There really is not a unified front here at all within the Democratic Party, and that's one of the biggest issues. House Minority Leader Hakeem Jeffries, to add another name to your list, was also out there this morning saying that Biden is our non-manent. It seemed to be sort of a stronger push from him than we've seen so far to say we need to sort of coalesce behind him. But it's certainly not happening. 32 congressional Democrats, that's more than one in ten members of the caucus that are coming out now. And we're expecting that number to continue to grow. It's grown significantly just throughout the day today.

So what members have to decide here is what they want to do to move forward. One thing that I've been watching and what's been interesting to me is to see this number of leaks from the Democrats, a party that has historically at least in the past couple of years, been just a little bit more locked down than Republicans have been. When there's more leaking, that means there's less agreement among different members

in the White House, in the campaign, maybe even recently within President Biden's own inner circle. So that's what we're watching. There's no unity here. All right, Megan, thank you. Very much, Megan Kessela reporting. If President Biden does step aside, could the 2020-2020 race still be competitive?

Let's ask Kim Wallace, Senior Managing Director and Head of Washington Policy Research at 22V Research. And Kim, I think it's interesting you say this election already can once again be competitive, and you're going back to the former president's speech last night. Well, hi, Kelly. Yes. It's clear two things as we come to the end of the third week since the debate, the presidential debate. One is that former President Trump was very effective in solidifying support within the Republican Party, but equally clear was that the process and his speech last night in speeches that weren't

shown in prime time, make clear that he and his camp do not feel they need to broaden their base in order to win this year. My guess is that can only be true or relevant if you consider that President Biden stays in the race. That's predicated in all the available data. In the last two weeks, public opinion surveys that were taken before, pardon me, in the first half of this month, before the assassination attempt and before the convention shows significant deterioration, down-ticket, not just in the president's race, but down-ticket in seats and states that had been considered safe for Democrats now trending towards Republicans. And, okay, so it almost seems predictable that the president would do something,

former president would do the unpredictable thing that no one wants him to do. And in other words, if that is in keeping with what did, win him the election in 2016. Is it enough to win him the election this time around? Or does it depend on whether he's running against Biden or Harris? I think it's the latter. It depends on whether he's running against someone who can reignite enthusiasm among the 2020 coalition that successfully put Biden and Harris into office. And again, the publicly available data shows that that's simply not happening. And in fact, it's getting further and further away from President Biden.

And so that leads to the, I think, the second related issue. Three months out on the Democratic side, three months out of general election on the Democratic side, are these the signs of a healthy, potentially successful momentum gaining campaign that you see from Democrats or not? And the answer is it's not. Then pressure for change is only going to increase. Kim, it's Tom, the bases, the respective bases for President Biden and former President Trump are intact and maybe even more energized since the assassination attempt. In the coming weeks and months, there is a sense that there's coalition building,

at least on both sides. President Trump basically said he's going to drill baby drill and get more oil out, and that appeals to the base. At the same time, he's going to be the keynote speaker at the Bitcoin 2024 conference this coming week. The keynote speaker, where some of the cost to attend his particular fundraiser could be in the $800,000 per person range. Is he courting other groups like cryptocurrency enthusiasts to help tip the scale because he feels

as though that's going to be a factor come November? Dom, I think it's, yes, he is, obviously. But to win for the former president, he's got to beat market share analysis. he's got to beat Biden in the places that Biden won in 2020. And my comment relates to independence who favored Biden over Trump by a net 13 points, young people and women, all of whom favored Biden over Trump in 2020. That piece of the coalition for President Biden has weakened significantly, and yet former President Trump's appeal to those people,

on those political basis doesn't seem to be very active. That's my point, is that the winning coalition in 2020 is demoralized about Biden. They are not yet showing signs of being attracted to Trump. All right. Kim Wallace, great insights there. Thank you very much. Have a nice weekend, sir. Here's well.

All right. Well, a huge week for earnings on deck coming up. We'll ask our trader, which name should be on your radar, the top of your watch list in today's three-stock lunch when we're back after this. Welcome back to Power Lunch. It's time for three-stock lunch. Today, we are looking ahead to three key names that are set to report their quarterly results over the course of the next week. Here with our trades is Scott Nations, President of Nations indices.

Starting off, though, with IBM. The mega-cap tech name is up around 35 percent, dating back to last year and is set to report earnings next Wednesday after the market's closing bell. Scott, Big Blue, it's been an outperformer. What's your trade here? Dom, it's a buy. You're right. It had a blue period of Big Blue for the last day. decade, but they seem to have found their way. EPS estimate, $2.27 a share.

Company's done a good job of surprising to the upside for the last two quarters, and a lot of people expect that to continue. They just acquired a cloud software company, and they're undervalued in the A.I. space, so the company has that going for it. Also, Forward PE is relatively inexpensive, at only 18.8. If there's a concern, it's that consulting revenue is going to is going to fall short. Most are thinking that software sales will make up for it, but big blue is a buy. Big blue is a buy. What about Big Red? I don't think we call them that, but Coca-Cola is next. They are of double digits this year, still a doubt component and scheduled to report before the bell on Tuesday. You like it? P.E ratio? No, that's IBM. Go ahead. Yeah, this is also a buy EPS estimate 80 cents a share.

They've done a really good job of maintaining organic growth. The market expects that, had to come in at about 8.8% versus the company's guidance of 8% to 9%. They've maintained pricing power in the face of inflation. Not a big surprise because Coke is a premium brand and not particularly expensive. One concern would be if consumers start trading down because of costs or because of inflation. Another concern would be if that organic growth doesn't hit the street's target. And it's not a cheap stock forward PE23. But with that organic growth, it is a buy.

All right. It's a buy. Two buys right now, red and blue. Finally, we have American Airlines, which logo has both of those colors in it. Those shares have been hit hard in 2024. The stock is down over 20 percent since the start of the year. And the company is still trying to recover from that global IT outage earlier today. It is scheduled to report second quarter results next Thursday before the bell. Is there anything we can say about friendly skies for America?

American Airlines is a hold, and this is a real hold, this isn't a gentleman's cell. Today's outage certainly doesn't help the company, but that's a different story, a bigger story that is not American Airlines specific. UAL and Alaskan both beat on EPS, but then guided lower this cycle. EPS estimate for American is $1.6 a share, but it's come down 20% over the last 60 days. Next quarter is expected to be just half that. So why is it a hold and not a sell? Because of a forward P of just five, it is very cheap. The thing to look for in this next earnings cycle is a revenue per available seat mile. If that falls more than 6% from a year ago level, then the company's in trouble. And this hold would become a sell. Price action is horrible, but valuation is compelling. Yeah, five times. But to your point, they have to make sure that's sustainable. Scott, thanks very much. We appreciate it. Scott Nations today.

Let's get to shares of Starbucks, which are popping higher. Kate Rogers joins us from San Francisco for that story. Kelly, that's right. Take a look at those shares of Starbucks up around 5%. Now, this is on a Wall Street Journal headline that Elliott Investment Management has built a sizable stake in the coffee giant. And the activist, the journal reports, has been pushing the coffee giant on ways to boost its stock price.

Again, that name has been challenged. Starbucks business has been challenged in recent quarters, both in the U.S. and in China. Those are its two key markets here. The report says Elliott's been engaging with the company on the situation. It is fluid and it's possible. They will reach an agreement privately soon, unclear as well if it is seeking board seats at the company. Now, reminder, Starbucks is on its third CEO in the last three years in Loxman, Narasemont,

Howard Schultz having left once again, having been in that position multiple times throughout his tenure and Kevin Johnson before him. And the company's on quite a bit of board refreshing in recent years. So it will be interesting to see what Elliott is. It is pushing for here. And as of March 31, Starbucks was not a holding that Elliott had. So this seems to be a new stake. We'll bring you any updates as we get them. Back over to you.

Love to know what they're up to. I think we have some hints from all your reporting on the troubles there lately. Kate, thanks very much. Kate Rogers. Thank you. More Power Lunch after this. Welcome back to Power Lunch. Electronic Arts, very popular college football game is back to, was back with great anticipation.

Why? Because now players can actually be paid for the use of their name, image, and likeness. Our own Steve Kovac brings us the details here. Steve, we can actually see the people. Yeah, this is a really interesting story here. It's not just about a video game, but it's about the launch of this college football 25. Used to be called NCAA the series.

It's hotly anticipated, though, after electronic arts stopped making the game over a decade ago. That was, of course, because of so many legal issues with student athletes and whether they should be paid for using their name, image, and likeness. But following a Supreme Court case just a few years ago,

student athletes, as we know, they can get paid for use of their name, image, and likeness, and everything for commercials or posting on social media, and now to video games. Well, here's the deal how this one works. Student athletes who opt into the game are going to be paid $600 each, plus they get a free copy of a deluxe version of the game. That's worth another $100. Some of the bigger college stars also will be able to get paid more to promote the game on their social media accounts. But electronic cards, they're not saying how much those deals are worth. worth. But it doesn't sound like a lot of money, and maybe it isn't, but EA is paying more than

11,000 players as of today to be included in the game. So do the math there, it's over $6 million EAs paying out and kind of spreading the wealth among so many people. Look, it's expected to be a big cash cow for electronic arts too, given it's the first in the series since 2013, and it's been getting solid review so far. And according to electronic arts just today, 2.2 million people played the game in an early access version and another 600,000 have been playing via an electronic arts play trial. JPMorgan analysts this week estimated the game will do $275 million in sales. That would be about 5 million copies, plus another $200 million in sales for digital purchases players can make within the game as they play online. All of this, though, is possible because

student athletes can finally get paid, guys. What's interesting about this, I had a conversation with LPGA superstar Roseang, who at Stanford was one of the pioneers in terms of name, image, and likeness. She signed deals with Callaway, Adidas, when she was still in college. You wonder whether not this is a huge paradigm changer, because now they can see what the monetization is actually like with regard to using these. And if you're a big star like Electronic Arts is doing here, if you're one of the top tier players in Arch Manning, for example, with someone like that, you have the opportunity to make some serious money by promoting the game and being in commercials being on the cover, finally, that's allowed now, things like that. That's really big.

And then, you know, some people are ever to talk about it to the story about, they're like, $600, that's nothing. That's so, but you got to keep in mind, that's 11,000 players on there. Most of those players probably won't get as much playtime as some others. So they got to pick a number somewhere. And I'm just thinking back to when I was 17, 18, 19 years old, I would have loved to get a check for 600 bucks. That would have been, I would have felt like a millionaire. That's a lot of beer you can buy at the bar. At 16, Steve? No, no, college age.

By the way, I just tweeted out the link to that Roseng interview because she speaks a lot about the NIL dynamic. And it's very fascinating. Some people think, if the Nick Savings of the world, think it's ruining everything. I'm with Nick. I'm with Nick. Yeah. But they'll take the 600. I think this is a good thing, though.

They'll take the 600 bucks. Thank you, Steve. Remember, you can always hear us on our podcast. Listen and follow to Power Lunch wherever you go, and we will be right back. Welcome back. We only have two minutes left in the show. Several more stories to get through. Elon Musk rubbing salt and Microsoft's wounds today after their technical failures with CrowdStrike. The ex-owner posting a laughing emoji in response. And to CrowdStrike, Dom, saying he's uninstalling it from his system. And we don't know which companies are part of that whole process, but it's certainly something to watch as well right now. So we'll keep an eye on that. All right. Well, back-to-school spending is already kicking into high gear. Walmart maintaining a strong advantage, according to multiple analysts. Additionally, many think Target is. is losing serious ground. This is a big battle and back to school is a key battleground. A few months ago, people told us it was going to be a bad back to school season. So I'll be curious if we could, retail sales has been better lately. I also wonder if Prime Day in July

drew forward a lot of demand. It may, absolutely. All right, well, speaking of spending at retailers, don't try to pay by check. Target is the latest retailer to stop accepting personal checks as a form of payment at checkout. Only 15% of adults said they actually wrote a few checks a month in 23. According to a recent report by Go Banking Rates, do you use checks? When we have to pay someone like for a service? I still pay certain bills with just checks. It seems odd they have your routing and checking number. And my signature. Yeah, they need to get rid of that from the bottom. I think that's how it works. And the WNBA may be missing out on a prime showcase moment ahead of tomorrow's All-Star game.

Tonight's three-point contest does not include Phenom, Caitlin Clark or last year's record center, Sabrina. How do I say it, Paul? Thank you. Both declined to participate. Ionescu. be heading to Paris with Team USA. But controversially, Clark was left off the team. I don't know. I watch more basketball if those guys are on the court. There's as much girl drama in the WMBA as there was for me playing basketball in middle school. All right.

Well, that does it for us here. Have a great weekend, guys.