AI spending, Microsoft layoffs: Asking for a Trend

On today's episode of Asking for a Trend, Host Josh Lipton breaks down the biggest stories and trends from the trading day.

Nvidia's (NVDA) latest earnings highlighted a major issue for the AI trade; despite beating earnings expectations, investors were disappointed as they looked for significant returns on massive capital expenditures (CapEx). RBC Capital Markets Internet Analyst Brad Erickson explains that investors are in a position where they have to put "blind faith" into AI players, knowing that it will pay off in the future. He tells Yahoo Finance, "From my perspective, like we're taking a little bit more of a measured approach, saying, 'Look, $200 billion. Think about what you need to do to maintain operating margins.' Pretty simple math of, like, are we really talking about $300, $400 billion of marginal revenue every single year? Those are big numbers."

Microsoft (MSFT) is cutting about 650 employees from its Xbox gaming unit, the latest move in a string of layoffs that have impacted the video game industry. Wedbush Securities Managing Director, Equity Research Michael Pachter points out that in Microsoft's case, these jobs are redundant, stemming from its acquisition of Activision Blizzard last year. As for the broader industry, he said hiring increased during the pandemic when people were at home playing video games. Now, these companies are "right-sizing," though Pachter thinks they may be cutting too many jobs.

Yahoo Finance Senior Reporter Alexandra Canal breaks down the biggest takeaways from Thursday's trading session. Meanwhile, Market Domination anchor Julie Hyman reviews data from the Federal Reserve Bank of America which found home ownership affordability sentiments to have fallen to an 18-year low, equal to levels last seen in 2006.

Finally, Josh Lipton covers some of the biggest after-hours movers, from Adobe (ADBE) to RH (RH).

This post was written by Melanie Riehl

Video Transcript

Hello and welcome to ask me for a trend.

I'm Josh Slip in and for the next half hour, we're going to be breaking down the trends of today that will move stocks tomorrow.

There is a lot to keep track of.

So we're focusing on what you need to know to get ahead of the curve.

And here are some of the trends.

We're going to be diving into the NAS Act and the S and P 500 extending their R to four days in a row and it's back to back gains for the dow industrials got a closer look at the market action as stocks lead the way plus a deeper dive into some of the biggest names in the sector.

And what's driving the stocks is the feds looming rate cut or this A I trade plus one industry facing tough times, video games, Microsoft laying off workers.

Sony's new playstation is getting panned and one video game maker is facing calls to go private top analysts in the sector joins me straight ahead after a deep slump to start September, the tech heavy NASDAQ has rebounded somewhat this week but concerns remain due to the uncertainty surrounding the A I trade and the possibility of a super sized rate cut from the FED sitting out at about 30% here to help us find value in tech is Brad, Erickson R BC capital markets, internet analyst, Brad.

Great to have you for and on set.

That's right.

Um I wanted to ask you about this kind of big trend that we've been talking about, which is you have these tech companies and we know Brad, they're putting a, a lot of money, a lot of investment in A I, we saw some push back, I think in the last earnings season, some investors are saying, listen, show us the return.

Then I, I did, we were talking off camera about this.

I saw Michael Dell though on X saying, you know what he was kind of comparing where we are now with A I to the early days of the internet.

And, and I think what he was saying was, you know, maybe everybody needs to take a deep breath at game changing technologies like A I, they just take a while to play out before they show their true impact.

Where are you kind of sitting in this debate?

So I think one way to look at it anyways uh would be that there's applications that are emerging, have emerged for generative A I and just A I in general that are right in front of us, we can see them today, right?

And it's easy stuff like software, uh software engineering efficiencies around that.

It's customer support, it's a lot of marketing tools.

Right?

Think of like what Meta and Google are doing.

Um There's some interesting things around online professional services and then there's sovereign A I, right.

Like countries spending money to, to, to use and, and, and exploit data that they have uh that no one else has.

Right?

Those are known and those are nice, right?

I think the the comment you were referencing on earnings though is like, that's not enough, right?

We're spending almost 200 billion dollars.

If you got like the top four or five Capex spenders on A I infrastructure, it's $200 billion and it's going up next year, uh probably by more than 10% at some point though, those investors of those companies do start to push back, force them to slow that down.

A absolutely.

I think where the the the the uh tweet you mentioned by, by Michael Dell is interesting because I think you invest if you, if you aren't gonna push back, right?

You have to adopt that view.

It's a little blind faith that like, hey, I just can't quite see that far in the future of what this is gonna do.

But I know it's gonna work.

And I think, you know, from my perspective, like we're taking a little bit more measured approach saying look $200 billion think about what you need to do to maintain operating margins.

Pretty simple math of like, are we really talking about like 3 $400 billion of marginal revenue every single year?

Those are big numbers le let's talk about some of these big tech companies that are spending a lot on A I that you cover alphabet.

You like that name.

I think outperform rights to have that.

There are some, it's interesting, Brad.

So some of your colleagues on the street uh even they have buys, right?

But I sense a little um I, I don't even wanna call it concern.

At least raising questions about what the long term, what does long term search actually look like with rising competition from names like Sam Altman over at open A I just, how are you thinking about that dynamic?

So a lot of time being spent analyzing like, hey, we've heard about Claude, we've heard about perplexity.

We've heard about Chat GP T. What is Gemini gonna look like?

Right?

There's all these competing tools.

Um Our view is is they're all gonna end up looking a lot of, you know, the same kind of thing.

Distribution is really what matters.

And so now we're talking about Apple, right?

What's gonna happen?

Chat GP T is, is apparently gonna be integrated with I Os 18 and, and you know, over the next month we'll see um what is that gonna do to Google's distribution?

That's kind of the biggest question right now.

And I think, you know, if you look at what's happened over in Europe, right?

They implemented some of these changes where users have a choice, right?

You get a phone, you get onto your browser, you have a choice of what default search engine.

Google is gonna lose a little bit on that, but not much is it also part of your optimism?

Because you just think also Google's own gen A I innovations are gonna are gonna improve the search products too.

Uh Yeah, I think, I mean, I think they already have right?

Management talks about how they actually drive engagement increases uh as they've as they've uh improved that generative A I capability.

So it has helped already I I but again, the question, I think people focusing on like whose chat bot is better is not the right way to think about it or it doesn't matter as much, it's more distribution, right?

Is their distribution gonna be impacted from some of these upcoming changes?

Let me ask you another.

I was looking across your coverage.

I have to ask you about Uber and Lyft.

I've got to ask you because you're laughing already.

I have to use Uber you about on both but everybody loves Uber.

Uber is like the video of ride sharing.

I mean, everybody, right, Lyft is more interesting because the vast majority of guys in the street, Roger Cox, they're on the sidelines.

That's what holds right.

But you have a buy on the name, just explain the thesis to me, Brad.

Well, a we like to live a little as we say.

So that's, that's the reason number one.

Now, the the simple reason is we actually do our own data tracking on, on this, on this uh space.

And what we detected about call it about nine months ago or so was for two years prior to nine months ago, Uber was consistently showing better in our data.

Nine months ago, something changed the world equalized.

And that's not to say market share equalized.

But basically that Lyft was keeping up on price and they were keeping up on pick up time.

The moment that happened, we put out a note and we said, hey, we, you know, at the time we were neutral rated, we said, hey, this is new, this has changed right?

Nine months later, you look at their performance, there's been fits and starts, but generally speaking, we do think we're on that trajectory and we continued to see it.

That's why we upgraded the stock and expectations are super, super low.

So it's like, you know, I don't, I don't need them to like throw a football over a mountain to get this thing to work.

I just need them to execute a little bit better.

Fair enough, Brad.

Great to see you.

Great to have you in studio.

Thanks for having me.

Thanks for calling all the S and P 500 NASA jump for four straight days.

Tech lean stocks higher for more on the trading day takeaways.

Let's get to Young finds his very own.

Alexander Canal.

A hey, Josh, you said S and P higher NASDAQ higher.

All coming on the heels of softer inflation, more moderating inflation numbers we saw earlier today, the producer price index coming in in line on an annualized basis 1.7 percent for the month of August.

And then we saw that July number revised and this comes one day after we saw consumer prices on a headline annual basis hit 2.5%.

That is the lowest that we've seen this number since early 2021.

So that's all fueling optimism that the Federal Reserve is going to cut interest rates by the end of their September meeting.

However, traders now anticipate just a 25 basis point cut rather than that 50 basis point cut because we still have some very sticky areas of the economy where inflation is just not moving in the direction that many want to move.

What the fed really wants to see is shelter come down more significantly.

We've seen hot month, over month core readings.

So that's all boosting optimism that it's probably going to be 25 basis points, not 50.

But we have heard from fed officials that the amount of a cut doesn't really move the needle that much.

It's really about the pace of a cut so that you can all lifting the market, you can listen to fed officials.

I also listen to morose over at the general.

Right?

OK. And when Nick writes, I pay attention and I, I thought it was just interesting when Nick Slays Nate's article, when he's saying, I mean, you're right to say next week it's all about, is it gonna be a traditional 25?

You can get the super size 50.

Nick is saying it's actually kind of a close call.

And I thought that was a really interesting headline that, that may explain some of the market moves we saw today too.

It's also interesting because I feel like over the past year, we've known what the fed is going to do, right?

Likely hold rate, steady, hold rate steady.

I'm curious if we do see a 50 basis point cut rather than a 25.

How will markets react?

Because there's been this thinking that markets actually wouldn't react that well to a 50 basis point cut, but we'll have to see next week, next, take away next, take away commodities corner because commodities did rally today.

I want to take a look at gold prices hitting another record high.

We're seeing gold trade just under $2600 and ounce and gold year to date has really outperformed here up more than 25% outperforming the broader markets.

This is obviously ahead of that expected FF rate cut next week and then we've seen rising geopolitical tensions as we typically see gold operate that safe haven asset for a lot of investors, but it wasn't just gold that caught my eye today.

I also want to look at crude oil.

We saw crude finished the day up just about 3%.

Now, this comes as we've seen more crude disruption in the Gulf of Mexico due to hurricane Fran here to date.

Though crude is down about 2% at this point.

As those demand concerns really are continuing to weigh on this market at large.

So we'll see where oil prices move in the future.

That that the fact that we are below $70.

That was a technical level that a lot of Wall Street analysts were saying to watch.

We'll see where we could see crude over the long term record, us production.

We Chinese demand.

That's been the story.

Thank you all.

All right.

Coming up more layoffs and Microsoft tech giant plans on making more cuts to its staffing roster over at Xbox.

Let's come up next on asking for a trend Microsoft cutting, cutting about 650 jobs from its Xbox gaming division and what's been a tough year for the video game industry.

But there is a lot to look forward to including Sony's playstation five pro console and some much anticipated games you might be able to play on it here to help us navigate the latest trends in the video game Space is Michael Pachter, Managing Director of Equity Research at Wedbush Securities Michael.

Always great to see you my friends.

Let's get right to this headline, this report that Mike, that Microsoft is gonna be cutting about 650 jobs in its xbox unit.

I, I'm curious what you made of that headline Michael and this is more broadly, you look at the gaming industry this year, we've, you know, seen some significant layoffs.

What do you think explains that trend, Michael?

Well, Microsoft's a bit unique because they've been acquisitive.

So, you know, they bought Activision last year and uh these 650 jobs are primarily redundant corporate positions.

And again, I don't need to discount what these people do, but, you know, how many hr people do you need or legal people or marketing people.

So they're, you know, they're just consolidating the division, the Act division 8000.

So employee division into the overall Xbox division.

And these are the jobs that they found that had, you know, that were duplicated what's going on in the industry.

And we've had many, many, many more layoffs.

Uh the industry got fat during shelter in place.

So, you know, in 2020 2020 21 game revenues went crazy high and it was much like Netflix went high.

We were stuck at home while we were entertaining ourselves and everybody overstaffed, you know, kind of building more content assuming it would last forever.

It came crashing down in 23 and 24 and I think most companies are right sizing.

Uh, I actually think they're probably cutting too much and I think they'll regret it, but they're trying to be good stewards of capital and trying to manage their expenses the best they can.

And Michael, when we talk, you know, you always teach me about how the model of the video game industry is changing.

Explain that and how that could be impacting these trends as well.

You know, we're seeing, uh, maybe for the last 15 years, uh, a migration from, you know, buying a game to a paid purchase 50 60 70 bucks to ongoing in app purchases and it's not all or nothing.

Um, we still buy games but you had games like FIFA back in the day or Grand Theft Auto back in the day.

The only thing you could do is buy the game.

Now you have ultimate team that is almost as big as, as, you know, first year sales of the underlying now called E sports football club game.

And you have, you know, GT a online doing four or 500 million bucks a year, um, that keeps people engaged.

So when they stay engaged for longer than just a couple of months playing the game, they buy fewer games.

So it's kind of a self fulfilling vicious cycle where, uh, you can buy fewer new titles and you play the ones that you purchase much longer, which means you make fewer games, yet you make a lot more money.

We saw that with the movie industry.

It's happening in the games industry.

Uh At the same time you got Microsoft, you know, rolling out a subscription service.

We'll see if that works, but they're certainly buying up a lot of content in order to support it.

And I think they're serious about making it into a giant business.

So ultimately, I think that succeeds and also replaces new game sales.

I wanna go on a different topic, Mi Mike, get your thoughts on this new Sony console, what they're trying to achieve with this console, Michael and whether it shows us whether it suggests really that somebody is kind of doubling down on consoles here.

Yeah, that's exactly the right term, Josh uh doubling down, you know, Microsoft and Sony are two very different companies.

So Microsoft, I think their vision of the future is that that consoles are gonna ultimately just be a specialist purchase.

You know, it's gonna be a super Fanboy purchase and most people are gonna get their games from the cloud.

So they're heading that way, Sony, I think is hanging on and managing its future strategy by looking in the rearview mirror of what got them there and they're embracing consoles now and forever.

So, of course, you know, the $549 playstation five, which is not really selling that well, isn't enough.

Let's, let's offer a $700 P Ss Five Pro that doesn't even have a hard drive.

So if you want that 770 who's gonna buy that?

You know, they're soaking the fan, boy.

So sure, the guy who has to have that is gonna buy it just like you went out and bought a 3D TV, 10 years ago.

Uh The problem is that there's no content that really justifies the purchase.

Ultimately, this thing is gonna die on a buy.

I think publishers are unlikely to embrace the PS Five Pro.

I think the market's gonna be very small, maybe 1020 million units overall.

And I don't think you're gonna be in games, you know, many games that really justify the giant purchase like that.

Uh your thoughts on two names as well, Michael, I want to get those for viewers.

E A take two.

You got buys on both specifically.

Let's drill down on a take two though.

Why is that a buy here, pick two.

really got big in the mobile game business by buying Zynga.

So they're, they're pretty successful and then, and then since they purchased the, the Zynga assets, Zynga has launched a game called Match Factory.

That's on its way to being a $500 million annual title, really crushing it there.

Uh They're big in, in, in, in app advertising, which is a big growth business and then had the biggest franchise in gaming history with Grand Theft Auto coming out next year.

So you just got a lot of momentum, uh, from a company with a relatively small market cap.

Uh, it's just, it's, I think it's heading to, you know, 3040 50% higher in the next year.

Do they integrate features of GT six into the online offering, Michael?

And when do you think that happens?

Yeah, I think that's kind of the, the, you know, worst kept secret on the planet.

Um when they launched GT A five back in 2013, you know, they launched GT A online around the same time, but the games were built separately.

This time GT A online has been in existence for over 10 years, 12 by the time they launch GT A six.

So I think that they've been incorporating features of GT A six into GT A online for the last several years.

And I think they'll unlock content for one in the other, which is good to just drive a lot of synergy between the two games.

I think ultimately, that means GT A online revenues double from about 400 million a year to about 800 million a year just by managing the two assets together.

So very, very thoughtful question.

And I think that that drives a lot of revenue and profit growth to take too Michael.

Always love seeing you brother.

Thanks for being on the show, Josh, coming up, mcdonald's extends its popular $5 value bill.

We've got to scoop on how long you can snag this offer and what's on the menu?

Stay tuned.

Mortgage rates may be coming down.

But that doesn't mean housing is getting more affordable.

That's the subject.

Today's chart of the day.

Yahoo Finance is Julie Iman joins me now with a closer look.

Yeah, even though as we reported earlier, Freddie Mac showed that 30 year fixed income mortgages that the rate had gone down to 6.2%.

So directionally going in the correct direction at the lowest level since February of 2023 but a lot goes into buying a house.

Of course, it's not just about the rate, it's about the price.

It's whether you can actually find the house and the Atlanta Fed has an index that they have put together, that measures overall housing affordability that um level still down at around um its lowest since 2006.

So still kind of kind of muddling along there at those levels.

And what does, what goes into this index?

I was looking into um their definition here, they say it measures the ability of a median income household to absorb the annual cost associated with owning a median priced home.

And if you look at as of the second quarter, federal reserve data showed the median price and there are different measures of this, but their measure was around 412,000 for the median home price in the United States median incomes, by the way, as of 2023 just over $80,000 80,600 dollars.

So, you know, there are, again, there are other factors that go into it, but that's sort of the, the uh number writ large earlier.

We had the chance to talk to Danielle Hale about the idea of housing affordability and whether things are getting better.

Here's what she told us.

Do you think the rate pictures to improve prices on the asking side of the ledger have been relatively stable over the last year, but sales prices have continued to move up as we see more expensive homes selling and less expensive homes kind of taking longer to sell in this market environment than we've seen traditionally.

Uh So there's a bit of shift going on in what selling.

Uh and that does reflect uh the challenges that buyers of more affordably priced homes are facing.

And the other element that she talked about, which of course we're watching very closely.

Josh is what's happening in the labor market which is slowing but not deteriorating.

Notably, at least, not yet.

But that obviously it plays a big factor in whether people can afford to buy a home.

All right.

Thank you Julie.

Meanwhile, mcdonald's $5 value meal sticking around for a little longer, the fast food chain extending the offer through December in most us markets and Yahoo finances, Brooke Dipalma joins us with more.

What can you tell us Brooke Josh?

I know you're a big mcdonald's fan.

This is the news I asked you camera, what am I getting for the $5?

But, uh, the summer of value is now extending into the fall here.

And mcdonald's is keeping along with that $5 meal deal bundle that includes your mcdole or mcchicken fries, soda and, uh, and for, uh, for chicken.

That's right.

Mcnuggets.

So basically what they, what they learned is that this average check that includes a meal deal is over $10 for their $5 meal deal.

So, so consumers are adding more when they get this meal deal option.

And this is really all in the effort for mcdonald's to change the way the consumers think about the pricing of how much Donald's cost.

Joe Linger, president of the mcdonald's USA saying in the release that they're committed to keeping our prices as affordable as possible, which is why they're doubling down even more with ways to save.

They'll also have more uh in app offering similar to what they've had previously.

But this is all in place until the national value menu rolls out.

So this will be extended to December.

Many expect them to roll out a national value menu platform in early 2025.

And we do know that mcdonald's is still evaluating and planning that with franchisees right now, I'm, I'm in, you're all in, that's all I had to hear, it is interesting to think about, you know, the balancing act here because you want to bring in store traffic but also impact to margins, right?

Go ahead.

So you don't have to think about how a different impacts New York City restaurant versus say somewhere else for sure.

Uh Switching gears.

A bit store design.

Also in play, we're rolling out these, these self serve kiosk.

Yeah, we know that mcdonald's is being a big, big investor in digital concepts.

And so they're rolling out this new store format that will have both cash and credit kiosk.

So accepts both different from what we've seen before.

Now, this is less than 2% of us franchise mcdonald's franchisees testing out this concept.

They'll have no full menu boards behind the counter, but rather will promote sort of these value meals or other app in app offering that they have.

But guests can still order at, you know, the counter or rather with a employee there, they'll have printed out menus since there won't be those menus behind a say counter.

But there's no full roll out plans here.

But keep in mind this is something that mcdonald's will roll out in future restaurant designs.

But I know for a fact that I go to my local mcdonald's, I'm more enticed to order at the kiosk.

We know last October they said that 40% of their total sales are digital.

So that includes app delivery and kiosk So this is really moving forward with the time.

So to say customers are going to the kiosk, they don't really wanna talk to that employee behind the counter and say, hey, can I have that extra fries?

Maybe as much as they used to most of your stories.

Brooke?

I, I'm always hungry at the end.

Oh God, me too.

That's the thing.

The next time we do the story, it's out of mcdonald's because that, that thing may have.

Thank you.

I appreciate it.

Moving on.

Let's take a look at what's trending after our shares of Adobe, they are sliding after fourth quarter.

Revenue guidance missed expectations.

That disappointing guidance overshadowing strong third quarter results revenue for the most recent quarter rising 11% from a year ago.

Oracle shares.

They're moving higher after offering optimistic outlook.

The company saying annual revenue will rise to $104 billion in fiscal year 2029 Oracle also lifting its sales outlook for fiscal year 2026.

Topping Wall Street's expectations.

Shares of Rh are surging after hours, the home furnishings company beating analyst estimates on the top and bottom line for the second quarter.

Company also cutting its full year adjusted operating margin forecast.

That's a wrap on today's ask for a trend.

Be sure to come back tomorrow at 4:30 p.m. Eastern for all the latest market.

Moving stories affecting your wallet.

Have a great night.