The Midterms Just Gave Big Tech an Excuse to Slow Down

Public.com presents The Rundown, your daily market update in 10 minutes. My name is Zaid Admani, and today is Thursday, November 5th. In today's episode, we'll break down why the midterm results might be secretly good news for big tech stocks. We'll also tell you why CVS is breaking itself up. Plus, we've got another round of rapid-fire earnings recap, including Figma, Qualcomm, Kava. and snap. Then stick around to the end of the show to find out which investment firm is becoming one of the biggest owners of AI chips in the world. We got a great show for you today. Let's go. Stocks had a huge day yesterday. The S&P 500 jumped 1.6% and the NASDAQ was up by 1.4%. And I'll even give a shout out to the Dow here. It gained 3% and normally I wouldn't care, but this was the biggest one day gain for the Dow since April of 2024. This rally came as investors digested the midterm results. Democrats took back control of the House and Senate and Wall Street seems to like the idea of a divided government. Where major policies change could be harder to get through. I'm sure oil also helped the rally yesterday. U.S. crude prices fell by 8% to around $88 a barrel as traders are betting that the election results will put increased pressure on President Trump to wind down the war in Iran. And you know, with lower oil prices, that could help ease some of the inflation pressure that's been hanging over the economy. I think the market seems to think that President Trump could be pressured to wind down some of this. Tariff incentives too, because the stocks of consumer discretionary companies like Target and Home Depot were some of the big winners yesterday. Not to mention Apple stock also jumped 5% and hit a record high. But I think the most interesting reaction yesterday was what happened to AI and tech stocks. On one hand, the hyperscaler companies like Microsoft and Amazon rallied more than 6% each. Meanwhile, you had Nvidia fall about 3% and CoreWeave dropped by By almost 10%. And I think this goes back to what I said on yesterday's show about data center construction being slowed down. Some of these new governors come in, have pledged to pause data centers, and that might be a good thing for the hyperscalers spending all their money on building data centers. In fact, I think the hyperscalers might secretly be relieved because they've been stuck in this arms race where nobody can stop spending because the other company won't. But now they've got a built-in excuse to slow down. Not to mention, if it does get harder to build new data centers, The ones that are already existing become more valuable and the hyperscalers already own a ton of them. So I think that's why the hyperscalers rallied yesterday, but the neocloud companies and the companies that supply equipment to data centers all took a hit. You know, if there's not new data centers being built, there's going to be less demand for new chips and wires and memory and everything else that goes into building a data center. Now, to be fair, this is all still really early. Campaign promises aren't the same thing as actual restrictions. We don't know yet which projects will be affected or whether projects already under construction would be protected. And there's also a tradeoff here because slowing down spending on data centers might make investors happy. But if AI demand keeps growing and companies can't get enough computing power. Well, then that could create a different problem. So I think the AI trade got a lot more interesting. And I'm really curious to see what happens over the next few months as the new governors and senators come to power. We'll continue to stay on top of all of it, along with everything else happening. So definitely get subscribed to the podcast if you haven't already. Also, if you have an extra five seconds, please consider voting in the Spotify polls, especially the one from Tuesday's episode where we asked how often you guys make a trade every month. You know, all that engagement and information would really help us out. Let's run through some headlines, starting with CVS. CVS shocked a lot of people on Wall Street yesterday when they announced plans to break up the company. See, many people might think of CVS as just like a pharmacy with six-foot receipts, but they're a massive healthcare conglomerate. On top of running 9,000 retail locations and pharmacies, they also own Aetna Health Insurance and a pharmacy benefits manager. We're going to talk more about the pharmacy benefit manager in a bit. Well, now CVS plans to break up the company into two publicly traded companies. by the first half of 2028. The first company will be called CVS Pharmacy. That's the business that most of us are familiar with, with roughly 9,000 drug stores, including the Minute Clinics inside some of those drug stores. And then the second company will be called CVS Health. That's where the insurance company Aetna will go, alongside with Caremark, the pharmacy benefits manager. And you know, this is a pretty big change in strategy for CVS. I mean, CVS just bought Aetna for roughly $70 billion back in 2018. To build a one-stop shop healthcare company. But now management seems to think that the pharmacy business and the healthcare business can make better decisions and faster decisions on their own. I also think that one major reason that CVS might be doing this is because of pressures from lawmakers on both sides of the aisle over the fact that CVS owns pharmacy locations, but also a pharmacy benefits manager. Some pharmacies have accused CVS of favoring their own stores. And by the way, if you're wondering what a pharmacy benefits manager does, think of them as a middleman for the pharmacy industry. They help insurers and employers manage prescription drug benefits, but some have accused these PBMs for the high cost of prescription drugs in the U.S. So I think that political pressure is kind of factoring into CVS's decision. So I'm really curious to see how CVS operates as two separate companies. I mean, I do think that the retail locations could come under pressure because the drugstore business only makes up about 4% to 5% of operating margins. And I imagine right now those drugstores are getting a decent number of customers thanks to Aetna and Caremark. But once they're separate companies, I mean, CVS Pharmacy is going to have to win that business on their own. Hopefully this leads to lower drug prices. So we'll see what happens. By the way, if you are an existing CVS shareholder, you will receive shares in both companies once the split is complete. Let's talk about some stocks making moves today. Happy Day! And we got a lot of earnings to get through again. AppLovin is ripping higher this morning after another monster quarter. Now, a quick refresher on what AppLovin does. They're like a mobile ad tech company. They use AI to match advertisers with app publishers. And they're starting to expand beyond just mobile gaming and go into e-commerce as well. Revenues last quarter jumped 55% to $2.18 billion that beat Wall Street estimates. But the number that caught my eye was free cashflow. AppLovin says they generated $1.4 billion in free cash. In the quarter, that's up from the $863 million in the previous quarter. Not to mention the company added $3.2 billion in their share buyback program. So, you know, everyone keeps asking where AI is going to start making money. Well, AppLovin is a good example of a company using AI to expand and improve their business to make more money. As a result, shares of AppLovin are up around 17% this morning at the time of this recording. But if you zoom out, though, the stock has had a rough year, down 60% coming into today's earnings report. Next up, we have Figma. Figma beat on earnings and raised their full-year forecast, but despite that, shares are trading lower this morning. Revenues last quarter were up 43% to $391 million, but investors are watching the cost of their AI tools. Figma's adjusted gross margins fell from 85% to 82% as they invested in AI and gave customers more AI credits without raising prices. The CFO of Figma, who we had on the show a while back, said they're potentially trading off near-term revenue to grow in the long term. The market doesn't seem to be so happy about it, though. Figma stock is down around 7% this morning at the time of this recording. And if you zoom out, Figma shares are down 40% on the year because I think investors are still worried that AI tools like ChatGPT and Claude are going to reduce the need for tools like Figma. I used to think those concerns were overblown, but... With the way chat and Claude keep getting better and adding more capabilities, especially when it comes to design. I think this might be a legit threat. All right, next up, let's talk Qualcomm. Their stock is getting smoked this morning after their earnings report. Revenues actually fell 7% year over year to $10.4 billion. But Wall Street thought the news was going to be worse, they were estimating revenues of $10.1 billion. Earnings per share did come right in line with expectations at $2.17. The issue seems to be that the smartphone business is struggling right now. Revenues from handset chips fell 26% from a year ago. Part of the problem is that rising memory prices are making phones more expensive, which is hurting demand. Apple is also replacing some Qualcomm modem chips with their own chips. Now, Qualcomm did announce a deal with SpaceX to supply the company with the Dragon Wing cellular infrastructure platform as SpaceX tries to become a cellular company. But the problem for Qualcomm is that they warned that higher supply costs will squeeze profit margins Now, there were some bright spots, though. Revenues from the automotive chips jumped 89% to nearly $2 billion. Qualcomm is also pushing into AI data centers and saying they target $5 billion in data center revenue for fiscal 2027. So Qualcomm is making progress in these newer businesses, but this quarter just shows you how much their smartphone business still matters. And as a result, shares of Qualcomm are down around 10% this morning. At the time of this recording. Next up, let's talk Kava. Shares are sliding this morning after the Mediterranean restaurant missed on sales and profits for the quarter. Revenues grew by 22% to $356 million. That was just under expectations. And sales at existing restaurants rose just 3.1%. And that was mostly because of higher menu prices and not more people coming in. Now, Kava says part of the problem for the quarter was the cyclospora outbreak. Plus, customers were just getting nervous about fresh produce. It's kind of rough when your whole menu is just bowls and salads. And the company also pointed to higher labor costs and more orders through third-party delivery apps weighing on their profit margins. The market didn't like what they heard, and shares of Kava are down around 10% this morning at the time of this recording. And finally, Snap's stock is getting hammered after reporting a disappointing quarter. Revenues in Q3 jumped 14% to $1.72 billion. But daily active users came in at 495 million. That was short of the 499 million that Wall Street expected. Not to mention ad revenue grew by just 4% versus the 6% that analysts wanted to see. CEO Evan Spiegel admitted himself that ad growth remains below our ambitions. And here's where you know Snap is in trouble. They said that starting next year, They plan to switch their main audience number from daily users to monthly users. So I think that could be another sign that daily users have stopped growing. And I think for an app like Snap, investors would prefer knowing the daily number instead of the monthly number. So you put all that together and the market just was not happy. Snap stock is down around 10% this morning at the time of this recording. And if you zoom out, the stock has lost 30% of its value this year in over 85% of its value. Over the last five years, they might have to replace Evan Spiegel, man. Like something needs to change at Snap. Let's wrap the show with a fun fact. One of the biggest owners of AI chips in the world isn't a tech company, it's actually an investment firm. The firm that I'm talking about is Apollo Global Management. They've been making some huge deals to buy AI chips over the last few months. Back in June, they led a $35 billion deal to buy Google AI chips and then lease those chips to Anthropic. And then SpaceX recently announced a deal where Apollo will buy $40 billion worth of Nvidia chips and then SpaceX will then lease those chips. And make payments over time. So while other hedge funds are buying houses in the suburbs and leasing them out to working families, Apollo is coming in and buying AI chips and leasing them out to tech companies. They've essentially become an AI landlord at this point. You know, it's a great example of how GPUs have become a financialized product. In fact, I'm pretty sure that Apollo is going to package up these lease agreements and sell them to investors. And honestly, it seems like a smart strategy. There's a ton of demand for these GPUs and they hold up their value relatively well. They are technically depreciating assets, so we'll see how long this strategy lasts. I do feel like that I've seen this movie before. Let's just hope that it ends differently this time. Well, all right, guys, that's the rundown for today. Hope you guys enjoyed today's episode. Thank you guys so much for listening, watching, and commenting. Shout out to Mike and V for all the work behind the scenes. And we'll see you guys back here tomorrow.