Power Lunch - Great Tech-Spectations: Are Hopes Too High? 10/8/24

Episode Date: October 8, 2024

Concerns are growing over big tech firms and lofty expectations for earnings. Apple and Amazon are bouncing back today after analyst downgrades yesterday.While Nvidia is gaining for a 2nd-straight day, as it hosts an AI event in Washington. So what’s the real state of tech heading into earnings season? We’ll discuss.Plus,  sports betting continues to take the gaming industry by storm, and there’s big money in play. We’ll speak to the CEO of FanDuel about that and more. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

And good afternoon, everybody, and welcome to Power Lunch alongside Morgan Brennan. I'm Tyler Matheson. Glad you could join us. Stocks are higher right now, led by the NASDAQ. But concerns continue for Big Tech. Today, Microsoft, as you see right there, downgraded by Oppenheimer, not seeming to affect the stock one bit at all. It's up $3. The worry, though, is that expectations Morgan are too high, which is what we heard yesterday when Apple was downgraded, maybe a little bit of a tilt away from the fever pitch at which tech stocks have been. performing this year. Yeah, this was interesting, too, because they basically said consensus EPS too high. Open AI set to lose $6 billion this year, and that's going to flow through to Microsoft, given its large stake as well and have an impact there. Basically, that AIs will continue to likely disappoint as we are not seeing companies pick up and adopt AI, yes. Make money out of this. Which, by the way, has been a focus for investors for quite a number of months now and after a really strong run-up with a mega-cap techs. So far this year, we are, and we've been talking about it every day, this rotation out of

mega-cap tech as you're starting to see that earnings growth deteriorate and you're starting to see it get picked up by the other 493 stocks. By the other 493, industrials, financials, and others among them. Oh, so Chinese markets. This is another one we're watching today, reopening sharply lower after a week-long holiday. Those stocks had stored on stimulus hopes, but now investors are getting a little more cautious. I suppose this is one of those cases where when you close the market for a week, week, then anxiety can build up, and maybe this is the follow-through of that. Of course, there was a lot

of enthusiasm last week when the sort of big guns trying to through the kitchen sink at its economic issues, and maybe after a week's rest, people have come back and said, maybe not quite so fast. Well, you also had some comments from some of the top officials there where they basically said, listen, we're going to take steps to support growth, but stop short of actually laying out specifically a fiscal stimulus package. We've had the monetary stimulus begin to kick in. Folks, and looking for the so-called bazooka of fiscal stimulus. And, of course, the third thing we're watching at this hour is Hurricane Milton, expected to make landfall in Florida.

Sometime tomorrow, it comes on concerns at federal aid to North Carolina after Helene was slow and insufficient and maybe inefficiently dispersed. But there you can see the proposed track. It looks like almost taking dead aim on the Tampa-St. Pete area, winds of 155 miles an hour right now. Sort of the last thing the Southeast needs right now is more drenching, but that seems like what the Southeast is in for. Yeah, I mean, your heart goes out for the folks in Tampa

and other parts of Florida and the Southeast that already have dealt with a massive, economically devastating hurricane just less than two weeks ago. It is interesting to see the reaction to this in the markets, though, because insurer is really sold off in anticipation of this yesterday. You're actually seeing names like Allstate Progressive. of move higher today. Orange Juice futures traded lower yesterday.

Those seem to be bouncing back, too, because it does seem like investors are kind of grappling with just how strong this storm is going to be. Either way, if you're on the ground, it's going to be a scary thing these next couple of days. Absolutely. Well, let's start with big tech and concerns about expectations for profit. Apple, Apple and Amazon bouncing back after falling yesterday on downgrades. Microsoft higher today as well. Invidia, a big driver of the positive sentiment, gaining for a second straight day as it hosts an AI event in D.C.

Also, Foxcon's chairman telling CNBC Asia that he thinks the AI boom still has some time to go. So what is the real state of technology heading into earnings season? Ellen Hazen is chief market strategist and portfolio manager at F.L. Putnam Investment Management. Steve, let me let you kick it off here and sum up where. technology seems to fit right now. Yeah, it's really interesting. You nailed it with those two downgrades that we got over the last two days today for Microsoft, Apple for yesterday. And they're both kind of questioning this AI monetization, perhaps expectations are too high. Let me talk about the Microsoft side, because that was the one that we got today. This one's super interesting

because they're basically saying, you know, the CAPEX problem that we've been talking about for like the last two or three quarters with these hyperscalers, spending enormous amounts of money. we're expecting to see Microsoft, say, we're spending $20 billion in CAPEX in just each quarter in their fiscal year. That is crazy. And almost all of that is going towards this AI infrastructure that we talk so much about. About half of that's going to be spent on the chips, about half of that on the land and the buildings and things like that. And basically saying, you know, they're not selling anything to make up for all this CAPEX that they're spending. At the same time, I'll quote what CEO Sotom has been saying so often on these earnings calls and comments about this,

is that the demand is there. The demand for this AI compute, the demand for companies who want to start play AI startups, for example, it's not just Open AI, by the way, it's Facebook, it's a bunch of other companies operating there. So the question that they're gonna have to answer again and again and again is when do these investments actually start to pay off?

You mentioned Open AI, losing $5 billion, likely this quarter. I don't know how that actually flows to Microsoft because so much of Microsoft's investment is, In the form of credit. In the form of cloud credits, not like Microsoft wrote a huge check necessarily. So, you know, we're going to see when that all gets shaken out. One day we'll get an S-1 from Open AI and really see it.

And then on the Apple front, it's also a very similar AI story. What, when is this AI bet going to pay off for Apple? At the end of this month, we're expecting Apple intelligence to finally launch on the iPhone. That'll be our first taste of what the normal consumer thinks. But Jeffrey's downgrade yesterday said it's going to take a couple more years than a lot of the street is already thinking, simply because the hardware is not capable enough to do the coolest and best AI features that people really want to use. It's going to take a few more years for Apple to actually get the hardware out there that's capable of doing that. So the big question, I can only imagine what the analyst call is going to sound like on that Apple.

I'm not sure what consumers really want AI to do for them. I don't know. I don't either. And I stood outside. know enough to know. And that's the point, exactly. I stood outside on iPhone 16 launch day and asked so many people online, why are you here, why are you here, why are you here? No one said AI as the first answer. It's always camera, screen, battery. Yeah. So Apple really has to predict. Stick around to see as we bring in Ellen Hayeson. Ellen, I know that you are overweight equities. Excuse me. But I guess the real question is,

what about those seven equities that have made up so much of the gains so far this year? over the past year and a half. Where are you on the Magnificent Seven? You still love them? You loathe them? What? Ah, well, we love some of them and we loathe some others of them. Thanks for the question, Tyler. So as we look at the Magnificent Seven, there's no question that since 22, when they really acted in concert, and even most of 23 when they acted in concert, this year we've seen a lot of divergence with Nvidia up almost 200% this year. And of course, others like Tesla, and even Apple is struggling a little bit more.

So as we look at them, I think you need to keep a couple things in mind. Number one, where are you starting off with valuations and how faster the earnings is going to grow and how much cushion is there in the valuation if the earnings are a little shy? So I know you talked a little bit about Amazon earlier and how they might slow down a little bit. And even if they do, it'll go from, what, 25% growth to 20? So that's not so bad.

Similarly with Microsoft, the one thing I would say there, is that they're getting people to pay for co-pilot GitHub right now. Now, are they going to have to push out a little bit on some of the adoption of their regular co-pilot? Maybe. But you're still getting solid double-digit earnings growth for a pretty reasonable multiple. So I think you need to be careful. And then when it comes to Apple that you brought up, we've been underweight Apple for quite some time for a lot of the reasons that you cite,

not just because AI might take longer to be adopted, but just because the growth isn't there, right? If the growth of Apple is half or less in terms of earnings than these other companies are, and yet you're paying nearly the same multiple. So we're overweight some and underweight others. We like Microsoft here. We don't like Apple. Okay.

What do you think of Invidia, given the fact that we did get these Foxcon CEO comments that basically said this AI boom, quote, still has some time to go. And that the demand for Nvidia's new chips, the Blackwell chips, is much better than we thought, according to that chief executive. I mean, it comes on the heels of Nvidia's CEO, Jensen Huang, just last week. on CNBC's overtime talking about the demand being quote unquote insane. At some point, that's going to slow down. And when it does, it's going to be pretty ugly. But for right now, I think the demand is insane.

They're seeing very strong demand. If you look at the earnings estimates for the last several years, they just keep going up. And that's another one where you're actually paying a reasonable multiple for the earnings growth that is going to happen. And they are in the poll position, as we all know, strategically. So at some point, that will slow down. and there will be more competition, and we will need to be more careful about what we're paying for it. But for right now, we're absolutely long in video. Yeah, we also got some bullish comments from Super Micro yesterday, too, Steve.

I mean, we keep talking about this AI trade. Is it long in the tooth? Is it still about picks and shovels? Should we be focusing more on the application layer? When do we start to see that realization as well? That's the huge question, right? And for Apple, it's selling phones. For Microsoft, I'll just bounce on what Ellen said about co-pilot. She mentioned co-pilot GitHub. That is a version of their AI assistant for computer engineers and computer coders, immensely popular. She's totally right about that. The enterprise version of co-pilot, the stuff that they're trying to sell to people at businesses and at work to go along with your Word and your outlook and your teams, that doesn't appear to be doing as well.

And that's where the bigger opportunity is. There are over 400 million people every day using Microsoft's 365 suite of applications. hack on another $30 per user per month times $400 million, you can see what their opportunity is there for them. And we just have no idea how well it's selling. We have some mushy, opaque stats from them, but it's unclear and it doesn't feel like or seem like it's selling in a significant way, at least not the way they've been presenting it and saying this is going to change the way we work and so forth. That hasn't materialized yet. So when you talk about the software level, that is where it plays with Microsoft. We talk about the hardware level, the AI

features have to be good enough on these Apple devices to drive more sales. And it doesn't seem like that's happening yet. We're going to have to wait until it actually launches the sea if that kind of ignites some more demand. Ellen, let me give you a couple of seconds to talk about a stock I know you like, and that is Netflix. Tell us why. So we always go back to earnings estimates. As you can see, Netflix earnings estimates have been going up all year. You're getting strong double-digit earnings growth. and if you look at the last quarter, they beat and raised again. They're introducing this ad tier, which, yeah, is going to be a little bit cannibalizing as some of their clients are going to go to that instead, which is a lower per month fee. But they're still dominant in the content space, and the valuation is very reasonable for what you're getting.

I don't think that the pull forward is necessarily going to be as big as some of the analysts are saying. Ellen, thanks very much for being with us. Ellen Hazen, we appreciate it. Steve. Stay with us for a moment. All right. Well, shares of meta have. been an AI winner of 66% this year in trading at record highs. But now today, the company announcing tools for business. Julia Borson has the details for us. Hi, Julia. Hey, Morgan. Today, Med is unveiling new video generative AI tools for advertisers after launching image and text generation earlier this year. Now, these new tools, including one that can expand and adjust video clips. And now there's another tool that advertisers can use to animate images. What that means is they can turn a static

image into video using meta's new tools. Now, meta says that it's following consumers. Now, 60% of time spent on both Facebook and Instagram is video. So responding to that, they're introducing a new video tab to help people better find that content. They also say they're responding to the demands of advertisers with these new AI tools. Meta announcing that more than one million advertisers and 15 million ads were created with its generative AI tool in the past month, also saying that ad campaigns made with its generative AI features resulted in a 7.6% higher conversion rate by customers. So meta shares are now up about 24% since the company reported its most recent earnings at

the end of July. Those better than expected results really showed the investments that Meta has made in AI paying off for advertisers. Now, just this past Friday, meta-debued a preview of what it's calling movie gen, new AI models to create and edit videos. Now, there are no release dates yet for those tools, but today's news shows how its long-term investment in AI bets can near-term help its ad business, which, of course, Tyler, is its bread and butter. Julie, we want to pivot to another company and another topic, and that company would be Roblox. The stock is lower today as Hindenberg research came out with a blitz. reporting report about that company, saying it inflated key user metrics, but maybe even more troubling

accusations about pedophiles using the platform to target children. Roblox says it totally rejects the claims in the Hindenburg report and says it is a safe and secure platform. Child Safety Online also at the center of a new lawsuit filed by the New York State Attorney General against TikTok. Give us the details on both of these cases, Julia. Well, just digging specifically into that TikTok news, Tyler, TikTok's effects on kids' mental health is under attack. A bipartisan group of more than a dozen state attorneys general is filing lawsuits against TikTok.

Washington, D.C., Attorney General Brian Schwalb, joined by New York, California, Kentucky, and New Jersey and others, is accusing TikTok of deceiving users by claiming that the app is safe for children, despite, quote, intentionally trying to addicting. young people. The suit alleging that TikTok puts teens and children at risk of depression, anxiety, sleep loss, and body dysmorphia. Now, in addition to calling TikTok digital nicotine, Schwalb accuses TikTok of operating an unlicensed money transmission business, saying that its use of coins that users can buy to send gifts to streamers is an unlicensed virtual

currency from which TikTok earns up to 50% on each transaction. Now, TikTok, TikTok, responding that it strongly disagrees with these claims, many of which it believes to be inaccurate and misleading. TikTok saying, quote, you provide robust safeguards, proactively remove suspended underage users and have voluntarily launched safety features such as default scream time limits family pairing and privacy by default for minors under 16. TikTok saying they've tried to work with the attorneys general for over two years, so they're disappointed that the AGs have taken this step. But Tyler and Morgan, this is all part of growing concerns. about the impact, not just of TikTok, but also of Roblox and other social media platforms, the impact that they're having on kids and teens in particular.

Key topics, Steve, I'm going to bring you into this conversation. I mean, my daughter was on Roblox a couple of months ago, and somebody reached out to her, and we had to shut it down. This is not an uncommon story when you talk to parents. I was talking to one of our executive producers, and she said the exact same thing. Her daughter was in a room, and sometimes they'll say, ooh, someone weird came in. And that is a lot of what's in this Hindenberg report when they're talking about these child safety issues. It's a little bit different than the addictiveness.

Instead, they're saying Roblox isn't doing enough to keep young people out of more adult experiences. For example, they said they create an account posing as a nine-year-old on Roblox, and they were able to get into some more adult-themed, sexual-themed experiences. In theory, Roblox is supposed to age-gate those, and you have to be 17 or older. in order to do that. At the same time, they also said they were able to find a bunch of usernames with names like referencing Jeffrey Epstein and other famous pedophiles like that. And so that was another alarming thing that they laid out in here, that there aren't these automated tools. Now, of course, Roblox says, you know, they are using artificial intelligence

and moderators and all this kind of stuff in order to combat this. But it clearly, at least according to Hindenburg, it's not enough. And by the way, this is not the first report of Roblox into these issues. You've experienced it personally in your own family, but it's been going on for many years now. And it's a huge problem when you have, at least according to Roblox, you know, 79 million people logging on every day. How do you monitor all that, something Facebook and all these other social networks grapple with as well? Yeah, it's a big topic. It certainly shares a Roboxer down 2.5% right now on this Hindenburg report. Julia, why is TikTok the focus of the AGs and not other social media companies. And I ask that knowing that TikTok as it exists in the U.S.

is not how it exists in China. Yes, TikTok is an entirely different thing here in the U.S. And I have to say there have been various other efforts by state AGs to tamp down on the negative impact of platforms, including SNAP. So this is not, this is just particularly focused on TikTok and its impacts. I think we also have to remember that TikTok is potentially going to be under attack by Sipheus, and there's been this whole lawsuit going on about whether TikTok should be able to operate here in the U.S. as it does today, because it is owned by a Chinese company, Biden. So there are all of these various issues around TikTok. But I think the thing about TikTok that is really at the center of this concern here, and yes, there's this thing about

the digital currency, is the addictiveness of the algorithm. And the algorithm is also at the center of this question of the Chinese ownership. Would the Chinese parent company, by dance, willing to sell TikTok and give access to this magic algorithm. And there's something about the way that TikTok continues to show you videos and shows you video after video that sort of sucks you in. That's, I think, what the center of the concern is here. And this idea that unlike, say, Instagram where you're selecting topics to follow, you're selecting people to follow, TikTok is so much just about that feed and what the

algorithm decides to show you next. And that really seems to be at the center of the concerns about mental health. I took a nibble there. Especially on young people who maybe may fall prey to it. You took a nibble there at my question, and that is what distinguishes the TikTok algorithm from, for example, the algorithm that leads you down the rabbit hole of reels and stuff on Instagram? What's different? Well, look, we can't see under the hood and see how these algorithms work, but we know that these algorithms are designed to keep you engaged. Now, Instagram as a platform, for instance, is designed for people to follow.

people that they know and connect with people they know and also follow people they don't know. TikTok is more about consuming content. Obviously, Instagram has looked to borrow a page from TikTok and has created this Reels format, which is very similar to TikTok, the short form video format. But TikTok is really about the idea that they're going to feed you videos that maybe you didn't realize you wanted to see. You have memes that go viral. And next thing you know, your teen has spend a lot of time, maybe more than they expected or even understand that they're spending watching video after video after video. And there's less of an opportunity to say, hey, maybe I've had enough here. All right. Big conversation. We covered a lot of ground. Thank you both, Julia

Borson and Steve Kovac. As we head to break, let's check on shares of another social media firm. Donald Trump's Truth Social on track for a four-day win streak. It's up around 18% today. Well, now about 16%. It's best day since July 15th. However, it's still way off. It's 20, 24 highs. Meanwhile, according to reporting from CNBC.com, that company's offices are in the path of Hurricane Milton, the entire state of Florida, bracing for what will be a historic and highly destructive storm. We've got more on that when Power Lunch returns. Welcome back to Power Lunch, everybody. We're continuing to watch Hurricane Milton as it is expected to make landfall, as you probably have heard in Florida sometime tomorrow. NBC News is Dana

Griffin joins us now from Naples. Dana. Hey, Tyler. So we are here at Naples Beach. And as you can see behind me, this beach is closed, but it is full of people. More people than we saw yesterday. Many coming out, several surfers in the water trying to take advantage of these unusually high waves that you normally don't get on the west side of the peninsula. I've spoken to a few people. Some live here. Some don't have asked, are you planning to evacuate? Some say they live in high enough elevations. Another family said, maybe. So we spoke with the mayor of NAPE. moments ago and she says that she would like for more people to evacuate. They started those mandatory evacuation orders for the coast around 6 o'clock this morning. She says a lot of people have not left yet, but she says there is still time. And when I asked her about what's just happening behind us here, she says this is what they do here in Florida. They expect this, but she hopes that people are heating the warnings. We've heard from several people who are preparing, whether that's getting supplies, whether that's packing up their vehicles so that they can

evacuate when the time comes. The main concern here in Naples is going to be the storm surge, which could be several feet high. We've seen several people inside garages bringing their vehicles here in local city garages to try to move to higher elevations. We've seen some local flooding just from the storm system that is currently in the area. This is not even Milton yet, but this system will move out and the Milton will start to come in and we'll start to see fill the impacts from the gusty winds to more rain in this area starting tomorrow. It's a major concern, you know, this storm, even though Naples is outside of the direct line of impact, we could still see some major impacts from that storm. And again, it is still life-threatening.

Tyler Morgan. Dana, thank you. Stay safe. Well, Hurricane Milton coming at a time when the government is still trying to provide relief following Hurricane Helene. Let's get to Emily Wilkins now for a look at the state of the federal government's response. Emily. Hey, Morgan. A key federal program to help small businesses recover from disasters is looking at its own emergency with funding expected to soon run out. This is the Small Business Administration. They have a disaster assistance program and it really provides critical aid to business owners, to nonprofits, homeowners, even some renters. But unlike FEMA, the SBA did not get an additional funding boost in that stopgap bill that Congress passed just before leaving town in September. So remember last month,

Congress allocated $20 billion to FEMA for the right. rest of the year. As of yesterday, that agency, FEMA, had allocated 210 million. But the SBA, on the other hand, is set to run out of funding in a matter of weeks. The agency estimates they have about 100 million remaining, and they're asking Congress for $1.6 billion for their disaster relief program. Even President Biden has warned congressional leaders that the situation was urgent in a letter saying that, quote, it is critical that Congress ensures that no critical disaster programs such as the SBA disaster loan program run out of funding during the congressional recess period. Speaker Mike Johnson has said he does expect Congress to pass that additional funding

once lawmakers return on November 12th, but he does not expect them to meet before then. And he has noted there's been no specific funding request from the White House at this time. Johnson will be in North Carolina tomorrow to visit areas affected by the flooding. Biden, meanwhile, is postponing a trip to Europe as Milton gathers momentum off the coast of Florida. Morgan, of course, will be watching very closely as to not just what the damage is, but what that is going to mean for how Congress needs to move. All right, Emily, thank you very much. I'll pick it up. Still to come, these back-to-back massive hurricanes likely to have long-term effects on the energy sector.

We'll trade some oil options in the market navigator when we return. Welcome back to Power Lunch. We have some news now on Cerebris, the AI chipmaker, trying to compete with NVIDIA. Let's get to Kate Rooney now for more. Hi, Kate. Hey, Morgan. So we are getting a report that Cerebris, the Nvidia competitor, which was set to go public and start its roadshow in the upcoming weeks, is likely to delay its IPO. This is, again, according to Reuters, they cite people familiar with the matter here. We have reached out to Cerebris, Cerebrus, rather, and have not heard back. But as I mentioned, this is an industry leader in chipmaking, one of the lucrative AI chipmakers out in the market. And it was really seen as a bellwether for the IPO market. There was a lot of of excitement around this name going public. They say here in this report that it has to do with a SIFIUS review, so that's the Committee

on Foreign Investment in the United States, says there's national security concerns or possible national security concerns, I should say, and they're looking into the investment from G42. That is a subsidiary of one of the UAE's sovereign wealth funds, and that appears to be the hang up here. They said in this report, Ruters does say here that it doesn't mean the IPO is necessarily completely called off, but it does indicate in this report that the road show, at least, will be postponed. Again, we have reached out to Siphyas, two Cerebrus, and G42 as well. We'll bring you any updates. But the latest in a delayed IPO, guys, back over to you.

All right, Kate, thank you very much. And welcome back everybody to power lunch. Let's give you a quick check on the markets. The industrials up by about a fifth of a percent or 82 points. The S&P 500 at 5738, up three quarters of a percent. And the NASDAQ up a little more than one and one-tenth percent at 1122. Meantime, crude oil prices are falling as the recent rally spurred by heightened geopolitical risk is taking a bit of a pause. Our guest today says it could be a good time to use options to trade in crude. Joining us now, Scott Nations, President of Nations indexes. Scott, what are you trying to do here?

How are you playing crude by using options? What's the trade? That's right, Tyler. I'm bearish crude oil, and the way to play this is to use options on U.S.O, the crude oil, ETF. So with USO at about 75 and a half, I'm buying the October 25 expiration. I'm going to buy a put spread by the 65, 72 half put spread. I can buy that for about $1.28. Let's break that down a little bit. In doing that, we're buying the 72 and a half strike put, and that gives us our bearish exposure. We don't expect crude oil go all the way to zero, so we're going to sell the 65

strike put to reduce the cost of the entire trade. by quite a bit. Whenever we buy a put spread, we're defining our risk, and in this case, we're defining that risk to the $1.28 cents that we pay for the spread, and we certainly don't want to just run in there in short crude oil, because we know what can happen when traders have to look at a map to figure out where the news is coming from. But while we're risking a $1.28, potential profit is $6.22 per contract. Tyler, the thesis here is that crude oil is going to fallback to the mid-60s, where it spent much of September. And I am bearish because there's relatively good geopolitical news right now, as you alluded to, President Biden is urging Israel

to not hit Iranian oil infrastructure or assets. And it seems like Israel has decided that they're not going to do that. If they attack, they're going to strike military and intelligence targets. And while that's horrible news, it's not as horrible for crude oil. Also, some good news, Hezbollah now seems to support a ceasefire in that part of the Middle East. And so some of the tensions that had been revolving around crude oil in the Middle East are easing and we're starting to see, as you point out, crude oil fall because of that. Scott, I want to clarify something on one of our graphics. The cost here was $1.28, not $128. and the maximum profit was $6.22, not $622, correct?

Well, it's $1.28, but since every contract is for 100 shares of the ETF, the total risk. Okay. Total risk would be $128 per contract. Total potential profit would be $622 per contract. Okay, good. Glad we cleared that up because I was a little lost because you were talking about $1.28 and $6.22. and I was looking at $600, and I thought there's a little discrepancy there.

Scott Nations, thank you very much. Morgan, back to you. All right, well, still to come, who would have made this bet? Earlier today, the Jets firing their head coach, a major shift for the struggling franchise. But nowadays, when it comes to a move like this, there is a lot more on the line for fans

than just bragging rights. Sports betting continues to take the industry by storm, and there is big money in play after the break. We're going to speak to the CEO. spanduel about the state of the industry. Power Lunch, we'll be right back. Welcome back to Power Lunch. I'm Pippa Stevens, and here's your CNBC news update at this hour. Israel's military issued a new evacuation warning on specific buildings in Beirut's southern suburbs this afternoon after Hezbollah said it would be an open to negotiating a ceasefire. Meanwhile, the military also said a fourth division

had begun operating in Lebanon's southwest on Monday as part of its ground operation. Colorado Supreme Court refused today to hear the case against a Christian baker who declined to bake a cake for a transgender woman. Justices dismissed it on procedural grounds and did not weigh in on free speech issues. The case which drew national attention is among several in the state, pitting LGBTQ rights against the First Amendment. And a new bill in the House of Representatives would award the 1980 Miracle on Ice Olympic hockey team with Congressional Gold Medals. The team defeated the heavily favored Soviet Union in Lake Placid, New York, for a big win that came in the midst of the Cold War. February 22nd, 2025 marks the 45th anniversary of the upset. Morgan, back to you.

All right. Pippa Stevens, thank you. Well, let's get a check now on the sell-off in China. Stocks there are getting hammered upon reopening after a week-long break. Concerns the stimulus will disappoint. But remember those stocks and U.S. listed names with China exposure are still up huge over the past month. Caterpillar, for example, it's down 2% today, but it's up 18% in a month. Casinos with exposure to China also getting hit hard today, when Las Vegas Sands and

MGM, as you can see right there on your screen, all down more than 2%. Sticking with casinos, let's get out to Las Vegas now. Our Contessa Brewer is at the Global Gaming Expo, and she is joined by the CEO of Fandul. Contessa. Morgan, thank you for that. And with me, Amy Howe, who's, it's just been a whirlwind because you came off of Investor Day with a big new announcement. announcement about the U.S. total addressable market. You said it was 1.7 times the previous estimate,

$70 billion in North America that includes Ontario. Three super states remain out of Fandals reached, California, Texas, and Florida, where it's monopolized by Hard Rock. So how do you get those states in order to reach that TAM? Well, thank you for having me. I always love being here, especially in Vegas. I mean, listen, we feel great. We're heading into Q4 with phenomenal momentum. And as you said, we're looking at a runway of a $70 billion potential market, but you don't get there without the big states, right? That assumes you have roughly 80% of the U.S. that can bet legally in sports betting and 25% in eye gaming. And you've got to find at least two of the three big states to get there. You know, listen, we learned a lot.

But you failed previously. You did. And I've been trying in California. We learned a lot. I mean, we really didn't. We learned a lot coming out of the November 22 ballot initiative. And we have been, I feel very good about where we are with the tribes, where we've been very clear publicly that we will work with and through the tribes. And it will be up to them on when and how sports betting is legalized in the state of California. Hard to put a date on that. But we feel good about those relationships right now.

Fandul remains the Goliath in the sports betting market and in I Gaming, now the number one in terms of market share operator. If you're Goliath, there are definitely operators who consider themselves David and think they can take you down. I mean, Fanatics has a massive customer base. Penn's ESPN bet is on the market, fully launched now, and has the brand power of major media. Rush Street Interactive is the little engine that could. Its stock is up way over 100% year to date. And when I asked the CEO last night, he goes, I don't need all that market share. I just need to make money.

How do you keep the edge? Well, we do both well. I mean, listen, we've had a first mover advantage in large part because of our product. And a lot of that, we talk about the flutter edge at our capital market stay. We were the first to have parlayas and same day parley as in market, but we're continuing to draw plays, right? There's a great product that we have that's in beta right now. It's called Your Way. And this effectively gives customers a significant amount of choice and flexibility, right?

So if you think about it this way, the books used to predetermine what the business. betting markets are. So I might offer a market for Derek Henry to rush for 55 yards, but maybe you think he's going to rush 75, 76, or 77 yards. You can determine that. Exactly. On offer, like you're coming out with a whole new suite of product that gives maybe people like me who find the whole thing still overwhelming in terms of choice, more choice. That's exactly right. And it's a we think, we think it's going to appeal to our early adopters who might have been, you know, come over from their favorite bookie, but also recreational users, right? If we can make it simple and intuitive, then this is a potentially a big game changer.

Morgan, you want to jump in here? Yes, thanks, Contessa, and Amy, it's great to have you on the show. Listen, you got a former Jacksonville Jaguars employee suing your company for $250 million from prison. This is after he embezzled $22 million, blew it on fantasy sports, and now argues that Fandul should have known he had a problem and not targeted him with VIP. treatment. It raises two questions. Is there new scrutiny from the company on these VIP programs? And is there also potential for more of these types of lawsuits?

Listen, I can't comment on pending litigation right now, but what I can say, without question, one of the most important things we do as a regulated online operator is protect our customers, make sure we can identify any nefarious behavior, whether that's anti-money laundering or fraudulent practices, but also there's a responsibility that we and the industry have around responsible gaming, right? So, of course, we're communicating or complying with law enforcement, but what we are doing that black operators, black market operators are not doing is going above and beyond that. We spent $100 million across Flutter on responsible gaming, and we're working across the industry with a state-of-the-art responsible online gaming association to really make sure that we

can protect our consumers. I can't let you go unless we talk some football first. It's remarkable that you have this partnership with YouTube for the Sunday ticket. I mean, the world is just changing so dramatically. How is that working out for you, the streaming versus what you would get from a partnership with traditional media? Well, we love the partnerships with,

we're working with many of the major streaming platforms right now. And what it's really allowing us to do is give our consumers, our sports fan, access to whether it's more games through Sunday ticket, or having really authentic integrations with the live broadcast. Amazon is doing a great job. We're also able to customize a bit more. So through their first party data,

we can determine if you're a Fandle user, you haven't signed up for the platform, or maybe you don't even want to see sports betting ads, we can really start to customize. So the integrations and the access to great content is we think there's huge unlock, and we're excited to say that we're going to be partnering with Netflix this year for their two Christmas games,

which is one of their first forays into live sports. So very excited about those. It is a very lively, active scene here in Las Vegas, guys. We're enjoying all of the people around and the gambling. But boy, I've got to tell you, Morgan, Tyler, it's so loud here. It sounds loud, but it also sounds fun. Thanks very much, Contessa and Amy. We appreciate it.

Sure. Meantime, PepsiCo hired despite lowering full-year revenue outlook for the second straight quarter. The soft drink and snack giant beat earnings estimates for the third. quarter but fell short of revenue expectations. Does our trader think the shares still look sweet? We'll find out ahead. Restock lunch. Welcome back to Power Lunch, everybody. Quick check on the markets there. You see all three of the major averages a little bit high with the NASDAQ leading the way up a one and a quarter percent. In the bond market, the 10-year yield holding above 4 percent, the two-year just below that level. And to talk more about that, let's turn to Rick Santelli. Hi, Rick.

Tyler, indeed. Short-dated treasury yields have been leading the rise in yields, really, since mid-last week. That all changed today. We had a three-year note auction, the first leg of 119 billion in supply, 58 billion three-year notes. And if you look at the chart, right around 1 o'clock Eastern there on the right side of the chart, you see yields popped a bit. It wasn't a very good auction. Now, if you look at a two-day-a-threes, you can see we never traded above yesterday's high yield. You see the downward angle of that. Well, now let's add in a two-day of 10-year. and you can see a huge difference. Ten-year, long-dated treasury yields have traded above yesterday's highs.

Fifth session in a row, they have done that, but they haven't remained above yesterday's highs. So maybe losing a little bit of momentum, as many investors are having a change of heart about how Good Friday's Jobs Report was. Now I'm hearing, instead of great jobs and high wages, I'm hearing government employees reached an all-time high. Maybe it wasn't such a great report.

And if you look at tens, we are now on pace for the second session in a row of the highest closes since the end of July. Morgan, back to you. All right, Rick Santelli, thank you. For the major averages hanging on to games, although off the highs. Power lunch will be right back. All right, time for today's three-stock lunch, everybody. We're going to look at three headline movers. Shares of American Express on the decline today following a couple of downgrades.

PepsiCo, higher, reporting a third quarter result that beat Wall Street estimates, but lowering its revenue forecast as sales growth weakens. And finally, we've got your docusine. Soaring on news that the company is set to join the S&P 500, Midcap 400. Here with our trades is Ava Ados, ER shares, chief investment strategist. We're a little short on time, so we're going to cut straight to the one that is your buy here. Which is it and why? So my buy is docusine. The other two are a hold. Docusan is finally profitable. That's big news. For 20 years, it was an unprofitable company. They finally turned the corner thanks to the new management in the last one year and a half.

Their gross margin has gone from 75% to 80% the last three to four years, and they have cut their SGNA by a massive amount from 75% to 55%. And as a result, their EBITDA has increased massively again from negative 15% to positive 7%. And so even though the company is doing great, we see great future going forward. And their relative valuation is half their peers. The company was doing great during COVID. Then it dropped. Now it's about 60.

We think has great room to run going forward. Well, that is good news for that company because the product is one. I know all of us have used it one time or another. Ava Ato's, thank you very much. And thank you, everybody, for watching Power Lunch. Good to have you with us. Yeah. I'll be back at 4 p.m. on overtime.

We've got soccer legend, Carly, Lowe. Boyd.