Meta and Chip Stocks Sink on AI Costs, P&G Rallies, Western Digital Reverses

Good evening. This is Trade and Ticker. Thursday, October twenty-second, twenty twenty-six. Your evening company deep dive after the close.

Today was a rough day for anything tied to A-I, and a pretty good day for almost everything else. We've got four stories tonight. First, Meta. The company beat on sales last night, but today the stock fell about seven percent, because investors zeroed in on how much cash its A-I buildout is eating, and on a new kind of stock it plans to create. Second, the chip stocks. The Philadelphia chip index fell almost seven percent, its worst day since June, led by Lam Research and pushed along by comments from Nvidia's Jensen Huang about money for the A-I buildout running short. Third, Procter and Gamble, which jumped more than five percent on solid results and helped lead a big move into safer stocks, even as it warned that oil is about to make its costs a lot higher. And fourth, Western Digital, which reported right after the bell. Its numbers and its outlook blew past forecasts, the stock jumped at first, and then it turned sharply lower. Let's get into it.

First, a quick look at the board. This was a tech selloff, not a market-wide one. The Nasdaq fell about two and six-tenths percent. That's its worst day since June. The S-and-P five hundred fell about one and two-tenths percent, its worst day since July. But the Dow finished basically flat, up about twelve points, and the Russell two thousand, the small company index, actually finished a touch higher. So the Nasdaq took the hit, and the rest of the market mostly held its ground.

You could see that split in the sectors. Technology was the worst group in the S-and-P, down more than three percent. Consumer staples were the best, up more than three percent. Utilities rose about two percent, and health care, financials, and real estate each gained around one percent. On the New York Stock Exchange, rising stocks and falling stocks were almost exactly even. That's what a rotation looks like. Money came out of the A-I winners and went into the steady stuff. And trading was busier than usual, with more shares changing hands than on an average day this past month. That tells you this wasn't a quiet drift lower. Big investors were actively moving money.

Wednesday, it was the opposite. The Nasdaq led the market higher, and chip stocks rallied. One day later, the same names gave all of that back and then some.

Two other things moved today. Oil climbed again. Brent crude rose about three and a half percent, to more than one hundred twelve dollars a barrel, a five-month high. U.S. crude rose almost two percent, to about ninety-nine dollars. The trigger was the Middle East. Iran-backed Houthi rebels launched new strikes on targets in Saudi Arabia. And bonds rallied as investors looked for safety. The ten-year Treasury yield fell below five percent for the first time since late September, finishing just under five percent. The market's fear gauge, the VIX, jumped.

There's a tension in that picture worth naming. Higher oil keeps inflation pressure alive, and traders are still betting the Federal Reserve could raise rates one more time before the end of the year. Weekly jobless claims fell again, so the job market isn't giving the Fed any reason to back off. That's the backdrop for everything you're about to hear.

Now, the four stories.

Deep dive number one. Meta.

Last night, Meta's report looked like a win. Revenue for the third quarter came in at about sixty-four-point-six billion dollars. That's up twenty-six percent from a year ago, and it beat the roughly sixty-three-point-four billion dollars analysts expected. Meta's outlook for the holiday quarter, between seventy-three and seventy-six billion dollars, was also above forecasts. The stock was higher by a few percent after hours.

Then the morning came, and investors started reading past the headline. The stock turned lower before the open, and by the close it was down about seven percent, to about six hundred forty-nine dollars a share. So what changed their minds?

The answer is cash. Meta spent about thirty-four-point-nine billion dollars on capital projects in the quarter. That's mostly data centers and the chips that go inside them. A year ago, the same number was about nineteen-point-four billion. And for the full year, Meta raised the low end of its spending forecast. It now expects to spend between one hundred thirty-five and one hundred forty-five billion dollars, up from a floor of one hundred thirty billion.

When you spend that much, something has to give. For this quarter, it was free cash flow. That's the cash a company has left after it pays for its operations and its big investments. Meta's free cash flow came in at negative two-point-one billion dollars. Meta has been a cash machine for years. This was its first quarter of cash going out instead of coming in in more than a decade.

Now, Meta isn't in trouble. It still has more than eighty-two billion dollars in cash and securities. Its ad business is growing fast. Meta showed about ten percent more ads than a year ago, and it charged about fourteen percent more for each one, and it gives its A-I systems credit for that. It's also running leaner. Meta ended September with about sixty-six thousand eight hundred employees, fifteen percent fewer than a year ago. Fewer people, far more machines. But the question investors are asking has changed. It used to be, is Meta spending too much on A-I? Now it's, how is Meta going to pay for all of it?

That brings us to the new stock. Along with its results, Meta said it will create a new class of shares, called Class C. These shares won't come with a vote. Starting in January, every shareholder will get one of the new Class C shares for each share they already own, so it works a lot like a two-for-one split. Meta said the new class is meant to keep its founder-led structure in place, and to give the company the ability to finance its growth.

That second part is what spooked people. A class of stock with no voting power lets Meta sell shares to raise money without weakening Mark Zuckerberg's control of the company. Wall Street now expects that big tech companies, facing higher interest rates, may sell billions of dollars of stock to fund the next round of building. When a company sells new shares, every existing share owns a smaller slice of the business. Investors don't usually like that.

The bond market sent a similar message. The price of insurance against a Meta default, through what are called credit default swaps, hit an all-time high today. That doesn't mean anyone thinks Meta is going to default. It means lenders are asking to be paid more for the risk as Meta leans harder on borrowing and spending. For a company that, not long ago, barely needed to borrow at all, that's a real change in how the market sees it.

Traders at Wells Fargo put it simply in a note. They said Meta's comments about the large amount of funding A-I needs caused the stock to roll over, and that it weighed on the whole market.

There was other baggage in the filing, too. Meta disclosed that Zuckerberg could leave California if a proposed state wealth tax passes, because he could owe a multi-billion-dollar tax bill based on his Meta shares. The company said the new stock plan helped convince him to stay. And this week, a judge in New Mexico ordered Meta to pay a twenty-five-billion-dollar penalty in a case tied to user data privacy.

So here's how to think about Meta tonight. The business is strong. Ads are growing, prices for those ads are rising, and the company's new A-I assistant, Muse, is getting early traction. Zuckerberg said more than ten million people in the U.S. and Canada have set up Muse agents in about a month and a half. But the stock isn't trading on the ad business anymore. It's trading on the bill for A-I, and how Meta will pay it. Until investors see that spending turning into new revenue, days like today may keep happening. Alphabet and Microsoft report next Wednesday, and Amazon reports next Thursday. Their spending plans will get the same hard look. And every one of them will face the same two questions Meta faced today. How much are you spending? And where is the money coming from?

Deep dive number two. The chip stocks.

If Meta raised the question of who pays for the A-I buildout, the chip stocks are where that question hurts the most. These are the companies that get paid when Meta and its peers spend. When investors worry the spending might slow, or get harder to fund, chip stocks fall first and fall hardest.

The Philadelphia chip index fell almost seven percent today. That's its biggest one-day drop since late June. A-M-D and Intel each fell about eight percent. Marvell and Sandisk fell more than eight. Micron fell about six percent, and Broadcom, Taiwan Semiconductor, and Nvidia each fell more than four.

The worst of it was in the companies that make the machines used to build chips. Lam Research fell almost twelve percent. K-L-A fell more than nine. Applied Materials fell about eight, and A-S-M-L fell almost seven.

Lam is where this started. Lam reported after the close on Wednesday, and on paper the quarter looked great. Revenue hit a record, about eight-point-two billion dollars. Its outlook for the December quarter, about eight-point-six billion dollars give or take four hundred million, was a touch above what analysts expected. So why the drop?

It was one sentence on the call with analysts. Lam's chief financial officer, Doug Bettinger, said that revenue forecast would have been a bit higher if not for some near-term supply chain constraints. In other words, Lam could have sold more, but it couldn't get enough parts to build everything customers want.

On its own, that's not terrible news. It means demand is strong. But the stock had run up a lot, and expectations were very high. When investors hear supply problems, they start to worry the next few quarters won't be as smooth as they'd hoped. And because Lam sits so early in the chain, they read it as a warning for the whole group.

Then came the second hit. In an interview on CNBC Thursday morning, Nvidia's chief executive, Jensen Huang, was asked about the smaller A-I cloud companies. These are the ones that rent out computing power, often called neoclouds. Huang said demand for them is off the charts. But he also said, quote, there's a scarcity of capital. The demand for the capital is much greater than the availability of the capital. End quote.

He was making a point about growth. These companies have the customers, he said. What they're missing is the money to fund that growth. But markets didn't take it that way. Traders at Wells Fargo wrote that Huang's comments were spooking markets, and reigniting worries that lenders' appetite for A-I risk is already full.

You could see it in the companies that depend on borrowed money. CoreWeave, one of the biggest of these A-I cloud providers, fell about ten percent. Nebius fell about seven percent, even after announcing a new credit line. And the selling spread past the chips into the power companies that sell electricity and equipment to data centers. G-E Vernova fell more than ten percent. Vistra fell almost ten, Bloom Energy fell more than eight, and Eaton fell about six. These stocks have been some of the biggest winners of the A-I trade, because every new data center needs a huge amount of power. Today, investors treated them exactly like the chip stocks. If the data centers don't get built as fast, or can't get funded, these companies sell less too.

Matthew Maley, chief market strategist at Miller Tabak, told Reuters the selling started with the big question about the return on all this spending. He said it's becoming more and more evident to people that it's going to take a lot longer.

That's the heart of it. For most of this year, chip stocks have been the engine of the bull market, and even after today, the group is still up a lot for the year. But it's now well off its June high. Every week, the market seems to be asking a little louder whether all this A-I spending will pay off, and when.

One fair note on the other side. Paul Nolte, a market strategist at Murphy and Sylvest, pointed out that the only part of the market really suffering today was technology. That's true. Plenty of stocks did fine. The trouble is that tech is such a big piece of the major indexes that when it falls this hard, it drags the S-and-P and the Nasdaq down with it.

What should you watch from here? Intel reports next week, and the big cloud spenders, Alphabet, Microsoft, and Amazon, report next week too. If those companies keep their spending plans high and explain how they're paying for them, that could steady the chip stocks. If anyone hints at slowing down, it could get worse.

Deep dive number three. Procter and Gamble.

While tech was falling apart, the maker of Tide, Pampers, and Gillette had one of its best days in a long time. Procter and Gamble rose about five and a half percent. And it helped lead consumer staples to the best performance of any sector in the market, up more than three percent.

Here's what P and G reported this morning. Sales for its fiscal first quarter rose four percent, to about twenty-three-point-three billion dollars. Analysts had expected about twenty-two-point-eight billion. Organic sales, which strip out currency swings and deals, also rose four percent. Core earnings came in at two dollars a share, ahead of the one dollar and eighty-eight cents analysts were looking for.

What's encouraging is how P and G got there. The growth came mostly from people buying more stuff, not just from higher prices. Beauty did especially well. Shoppers kept spending on higher-priced hair care products, even with gas and food costs pinching household budgets.

The new chief executive, Shailesh Jejurikar, said the strong start keeps P and G on track to deliver within its guidance for the year. And the company kept that guidance in place. It still expects organic sales growth of one to three percent, and core earnings of about seven dollars a share, in a range from six dollars and eighty-nine cents to seven dollars and eleven cents. It raised its outlook for total sales growth, to two to four percent, but that's only because it just closed its purchase of the supplements maker Thorne.

Now, here's the part of the story that matters well beyond P and G. The company warned that rising costs will take a bigger bite out of profit this year. It now expects higher costs for raw materials, energy, and shipping to cut about one-point-four billion dollars out of after-tax profit. Its earlier estimate was about one billion. On the call, management said that forecast assumes Brent crude around one hundred dollars a barrel. Brent finished today above one hundred twelve. P and G also said it expects those cost pressures to get materially worse over the next two quarters, and into the second half of its fiscal year.

Think about what that means. Oil isn't just a gas pump story. P and G makes things out of oil-based plastics and chemicals, and it ships them in trucks that run on diesel. When oil goes up, nearly every part of its business costs more. Art Hogan, chief market strategist at B. Riley Wealth, told Reuters this reflects rising commodity prices at most companies, and an inability to keep passing those costs on to customers, which will likely cut into margins.

So why did the stock jump? Part of it is the beat itself. Holding guidance while absorbing a much bigger cost hit is a sign of strength. But the bigger reason is where investors wanted to be today. When A-I stocks are falling, money looks for companies whose sales don't depend on the data center boom. People buy toothpaste and laundry detergent no matter what happens to chip stocks. P and G also returned about three-point-nine billion dollars to shareholders in the quarter, through dividends and buybacks. On a day like today, that kind of steady cash looks very attractive.

P and G had company. Lockheed Martin rose about seven percent after raising its sales and profit forecast for the year. Spotify jumped about eleven percent after forecasting holiday-quarter results above Wall Street's estimates. Blackstone rose more than eight percent. The private equity giant said widening credit spreads on A-I-related debt could be a chance to lock in higher returns. In other words, while the A-I borrowers were getting hit, a big lender saw an opportunity. And the railroads did well. C-S-X rose almost seven percent after beating forecasts, and Union Pacific rose more than three and a half percent.

The thing to watch with P and G is whether costs start showing up in its prices. If the company raises prices to cover oil, shoppers may start trading down to cheaper brands. And if oil keeps climbing, the cost warning that P and G just gave could become the big theme of this earnings season for consumer companies.

Deep dive number four. Western Digital.

This is the one that landed right after the closing bell, and it's a perfect example of how jumpy the market is about anything tied to A-I.

Western Digital makes hard drives, the big, high-capacity drives that store data in cloud data centers. A-I has been very good for this business. The companies training and running A-I models need huge amounts of storage, and the demand for those drives has been bigger than what manufacturers can make. That's given companies like Western Digital and Seagate real power to raise prices.

Today's numbers showed that clearly. Revenue for the quarter came in at about four-point-three-eight billion dollars. That's up fifty-five percent from a year ago, and well above the roughly four-point-one-four billion dollars analysts expected. Adjusted earnings were four dollars and sixty-four cents a share. Analysts were looking for about four dollars and ten cents.

The profit margins are what really stand out. Western Digital kept about fifty-eight cents of gross profit from every dollar of sales, on an adjusted basis. A year ago, it kept about forty-four. Its operating margin was about forty-nine percent. Those are numbers you usually see from software companies, not from a business that makes physical drives. It also generated about one-point-four billion dollars in free cash flow in the quarter, and it raised its dividend by seventeen percent.

Then came the outlook, and it was even better. For the current quarter, Western Digital expects revenue of about five-point-one billion dollars, give or take one hundred million. That would be sixty-six to seventy-two percent higher than a year ago. It expects adjusted earnings of about five dollars and eighty cents a share, and gross margins of sixty to sixty-one percent. Both the revenue and earnings forecasts were well above what Wall Street had modeled. Put simply, Western Digital is telling you its next quarter should be even bigger than the one it just reported, and that it expects to keep more profit from every sale.

The chief executive, Irving Tan, said fiscal twenty twenty-seven is off to a strong start, with results exceeding expectations, driven by robust customer demand and disciplined execution.

So the stock went up, right? At first, it did. Shares jumped about four percent in the first minutes after the report. But that gain didn't last. The stock gave it all back and turned sharply lower in after-hours trading, as the A-I selling from the day kept going.

Keep in mind where the stock was coming from. Western Digital fell more than six percent during regular trading today, before the report, along with the rest of the storage group. Seagate fell almost eight percent, and Sandisk fell more than eight. Seagate was lower again after hours, following Western Digital down, even though it hasn't reported yet. After a huge run this year, Western Digital had already been pulling back hard for weeks. And this has happened before. The company has beaten forecasts again and again, and the stock has still fallen after several recent reports. When a stock has gone up this much, a beat isn't always enough. Investors want to know how long this can last.

That's the real debate around Western Digital. The bulls say storage demand from A-I is just getting started, the company has long-term agreements with its big customers, and new drive technology coming next year should push margins even higher. The bears say this is a cyclical business, and that the boom depends on the same A-I spending that markets spent all day today questioning. If the cloud giants and the A-I cloud companies ever pull back, drive orders could drop fast.

Tonight, the business answered every question you could ask. The stock is answering a different one. It's the same one we heard about Meta and Lam: how long will the A-I money keep flowing? Watch how Western Digital and Seagate trade at the open tomorrow. If the stock holds its ground after this kind of report, it would be a sign the selling is running out of steam. If it keeps falling, it tells you the market just isn't in the mood to reward A-I winners right now, no matter how good the numbers are.

Before we wrap, two quick notes. Tesla fell about three percent today. Investors focused on its plans to spend more heavily in the next couple of years, on robotaxis, its Optimus robots, and a new chip plant, even though it cut this year's spending. And SpaceX fell about nine percent, giving back more than half of Wednesday's jump.

So here's the picture after the close. The A-I trade had a very bad day. Meta showed how expensive the buildout has become, and how it may have to raise money to pay for it. Lam and Jensen Huang raised questions about supply and funding. And the chip index had its worst day in four months. But the rest of the market held up. The Dow finished flat, small companies finished higher, and safe havens like P and G, utilities, and Treasury bonds all rallied.

Here's what to watch into tomorrow. First, Western Digital and the storage stocks, and whether a blowout report can stop the selling. Second, oil, with Brent above one hundred twelve dollars and the Middle East still heating up. And third, whether the chip stocks find a floor, or whether today's selling spills into a second day.

We'll be back in the morning with futures and the day's catalysts before the opening bell. Enjoy the rest of your night. Thanks for listening. I'm Trade and Ticker.