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I missed it. Sorry, I missed it. Next.
Tonight, we are going full-scale self-flagellation, 100% flagellation, a bonfire of second-guessing, the cultural revolution as brought to you by Jim Cramer, as the market once again exploded higher.
With the Dow gaining 341 points, the S&P jumping 1.05% to a new record high, and the Nasdaq pulling 1.64%, also to a record high.
House of Pleasure. It's time to trash myself and talk about the ones that got away. See, part of my job here, I run this charitable trust for the CNBC Investing Club. Don't hesitate to join, get the free book all signed and everything. I do it to demonstrate how a professional manages money, and I do so with an open hand. When I started this educational product more than 20 years ago, lots of people chided me saying I'd be embarrassed by my mistakes and then I'd give it up quickly. They didn't know that I am my own worst critic. There was even an article in one of the New York dailies that was taking odds about how long I could hold out, given that most money managers never like to show people what they're really doing, lest they look like fools.
Well, here I am two decades later, having been embarrassed many a time, except when it comes to the $400 million — $4 million I've given away to charity. I wish it were 400 million. Wouldn't that be something? Didn't do that. I recognize that showing you how I reason, how I execute, helps you understand how to think, or not to think, too. The CNBC Investing Club isn't based on all my mistakes. That's not true. Tonight, though, I want to walk you through something that is driving me crazy. It's these animal-spirited stocks. The ones that are just — they're making me nuts because my trust doesn't own them.
They know nothing. Me, the ones that got away. I love the fish. These are the tarpon you hooked, you reeled up, but then you failed to get them in the boat. The boat being the charitable trust. Now, you and I both see these stocks every day. They rally step by step, inch by inch. They can't stop. They can't be stopped. Fitting for this market. Almost all of them are related to the data center and the artificial intelligence revolution.
That was easy. I have 16. I'm going to talk about 16 that I was unable to land. Couldn't bring them in. When I see them go by on the crawl, that thing underneath me, I'm driven to distraction. I guess you could say I hate them. Except I really like what they do and the people who run them. It's just that when I see them flying, I can't stop kicking because I missed out. I want to buy them. But they are so far away from where I first wanted to buy them that I just have to say I'm late. Forget about them. Except that time after time it would have worked if I hadn't forgotten about them. If I had just bought them today or yesterday, the day before, a week before, a month before, whatever. Which are the tantalizing stocks that have just driven me to ruin.
Let's start with memory and storage. Yeah. The devices that hold the data. You ready? You can write them down, but they're so hot they'll burn the paper. Seagate, SanDisk, Western Digital, and Micron. I liked all these, you know, including Western Digital. At one point I owned 4.9% of that one when I was a hedge fund manager, but it made me $2 billion, even more than the $400 million I claimed I gave when I only gave $4 million. All right, Bill. Listen to me. Listen to me.
These stocks are being driven up by desperate buyers with persistent orders that take them higher every day. And now I'm going to tell you how it works. Let's say you want some SanDisk. Okay. So many — so do many other people, with the stock at say $957. You go in and you place an order like this: $957, right? SanDisk, buy me 100,000 with a $1,000 top. A half dozen buyers are actually putting in that same order at the same time you are, literally. And that's why the stock could value at 8.4% today, up 75 bucks. These orders are often put in before the market opens. It's like a train, and they don't want to miss it.
All aboard. These orders, and people don't have any quit, and that's how a stock goes up dramatically. Multiple buyers with high tops just buying and buying. Why do these memory stocks work? Simple shortages. AI needs a huge amount of memory. Nobody in this industry was ready for that level of demand. It'll take them years to build out enough production capacity to meet the demand. Next up, central processing units. CPUs needed to power agentic AI. These AI agents, the next wave of the fourth industrial revolution, can do amazing things, replacing many humans that do dirty and dangerous jobs. But they need the right semiconductors. The bottleneck here is not GPUs from Nvidia. They need better CPUs. Nvidia doesn't make them. Who does? Because you know that the agents need them. Well, that's why everyone keeps buying Intel and AMD. Silly. I shouldn't have missed those. I like them both so much. I should be wearing Post-its with their names on my forehead. Can you have some of those? I'll put them right on. Thank you. Next.
Data centers are filled with networking software and hardware. Remember, the data center is stuffed with a huge number of chips from Nvidia or AMD or Google or Amazon. More the merrier. Here you have. Are you ready? Because these ones really drive you crazy. Marvell Technology. Oh man, it doubled. Arista, Astera Labs, Sienna — they're all on fire and fuego.
Then we have the data center hardware. Dell. How did I miss Dell? Cooling infrastructure. I speak to him all the time with the — you know, with the T-shirt, whatever he wears underneath that shirt. Doesn't dress up. Doesn't matter. He's like a billionaire. Anyway, there are companies that use photonics to move signals. Coherent, Lumentum. I mean, they were both on the show. How did I miss that? Finally, there's power and the incredible bull market in Bloom Energy, which eludes me and of course drives me crazy. Okay, let's list. Now, let's talk about cross purposes. I've been buying and selling stocks for 44 years. And every single year, there's always been this winning cohort, a sector that I've missed. That means I knew the stocks were good and the companies were amazing, but I didn't pull the trigger.
Why didn't I? Okay, first, I'm a cheapskate. I don't like to buy stocks that run. Almost all these stocks run every day because the buyers are insatiable. Unlike me, there's no price they won't pay. I don't like to be too doctrinaire here. In 1992, one of my best years, my then-trader went rogue on me and decided to violate the discipline on a handful of high-flyers, like the 16 stocks I just mentioned, just like them. She would come in each morning, identify which would be the hottest stocks, the one with the most momentum, looking at the charts. She would famously, or infamously, buy the stocks with outrageous tops that could only be described as rookie behavior. Except she was a pro. Case in point, let's go to Bloom. Okay, this is exciting. Energy play can turn abundant hydrogen into electricity. Stock's up 164% year to date, including a nearly $9 move today. $229. $229. Remember that with a stock like that, I would have waited for a pullback, maybe $218, maybe $200. She would insist that my discipline in this market is really going to cost me with my attitude, my restrictions. I would never bring in Bloom Energy. So she would pick up the phone and she would want 200,000 shares, right? She'd tell the broker this. She'd say, 'Sweep the stock. Sweep the stock to 235, but you get me in those 200,000 shares or else.' That way she got it. Didn't matter what price. That's what you're seeing right now. That's what you're seeing in a lot of these trading houses. That's why these stocks do this. They're doing that kind of order. They believe in these stocks. They think we're at the very beginning of the run. They don't mind overpaying because they believe these stocks will keep climbing, climbing, and they've been right.
Me, I'm never that certain. I wish I could be, but I've always maintained that discipline trumps conviction. And my discipline means refusing to chase. But let me leave you with one other thought that maybe can justify it, or at least put it at ease with your mind. My trader would rebel at the idea that she was undisciplined. She said I was undisciplined because I wouldn't pay for the stocks that I knew were right. In a hot market, she thought you needed to have the discipline to pay up for great stocks to avoid missing them. That was the discipline. So here's what she would do. She would perform a mental exercise. She would divide high-priced stocks by 10 to show me that it's not so outlandish. Bloom Energy, Jim. All right. It's at 230. Divide it by 10. And you got a $23 stock. Would it really kill you? Would it kill you to pay $24 for a $23 stock? No, of course not. That was genius. We had an amazing year in 1992 because I divided a lot of stocks by 10. You know what I said? She's right. I'm wrong. Throw out the old rules, in with the new. It worked. In my heart, I could never really do it without her. Still can't. But here's the bottom line. If you want to buy these so-called red-hot stocks, don't be hesitant about it. As long as the bond market stays stable and you stay diversified, I think the reds can keep making you money. But you got to do this. You got to divide by 10, and maybe then it will make a lot more sense.
Hey, how about David in Louisiana? David, hey. Welcome from New Orleans and Jazz Fest. I got a question for you on an oldie but goodie, a stock that used to really high-fly, and it looks like to me it's coming back, my friend, from the dead. It's got a partnership with Nvidia, and its operating system is being utilized in all of these self-driving automobiles. I'll tell you, I looked at it, and it's BlackBerry, and I wanted your opinion on that.
We're going to have to look at that too, because I know they got vampires in New Orleans. I've been there. I've seen them, and this stock is a vampire. Here it's back to five from being down to two. You deserve — Dave in Louisiana, he deserves more than just a brush-off. We'll take a hard look at it. Ben Stodol, rhymes with photo, he'll look at it. Let's go to Tony in Florida. Tony.
Hey Jim. I want to let you know that I thank you for taking my call. I've been a club member since day one, and you always help me out when I give you a call to see what I have to do. And I got another big one for you today.
All right. I'm sweating. Go ahead.
It's a health care stock. I know you said in the past it's been a good call, but with this one I'm down a little bit in the red. Should I stay with Medtronic? I'm not Medtronic, sorry. Should I stay with MRK or should I go to another company?
Okay, I've got to tell you, this rotation out of health care is one of the most breathtaking rotations. We could be talking about a half dozen drug stocks, and they would all be the same. I think that Merck is at 13 times earnings. I think — I don't think that matters at all. I think the stock could drop another five. So you want to buy some and then leave. I like to say leave room. Hey, maybe divide by 10. It's an $11 stock. Maybe it goes to 10 and a half. All right, there you go. Now, if you want to buy some red-hot stocks, I say go for it. I think that you can still make money as long as you stay diversified. But understand you're chasing, and don't go putting in outrageous tops. All right, I made money tonight. ServiceNow reported after the bell. Later, I'll run through the numbers of the top rest. And have you seen the recent resurgence in the housing stocks? What is that all about? I'll take a look at D.R. Horton, the big big daddy, and share where I come down on the stock. And I'm sitting down with the CEO of Vertiv to get a sense about where we stand on the AI infrastructure build. I'll divide that one by 10 and stay with Cramer.
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After the close, we got results from ServiceNow, the cloud software company that helps its customers automate all sorts of back-office jobs, including IT jobs. Now, this stock's been crushed by AI displacement worries, falling from just under $240 at its peak last year down to 103 as of today's close. And tonight, ServiceNow's getting slammed again after the company delivered a set of results and guidance updates that, frankly, just weren't good enough to get investors excited again, even as the company's adamant the business is business as usual, with most benchmarks better than expected. Now, earlier tonight, I had a chance to speak with Bill McDermott, the chairman and CEO of ServiceNow, about what's now becoming, I guess, a quizzical story. Take a look.
Mr. McDermott, welcome back to Mad Money.
Jim, it's great to be back with you. How have you been?
I have been fine, thank you. How about you?
I've been great. Another beat-and-raise quarter, man. We're on fire here.
Okay, so Bill, we got to figure this out. You bought a lot of stock. You bought stock personally, which was not easy because you had to cancel a program. You came in very aggressively. You are now beneath where you bought that stock. And my question is, what are people missing about ServiceNow that they used to know about ServiceNow?
Yeah, it's a really good question, Jim. You know, we're a $600 billion TAM company, so the total addressable market is massive. The RPO growth of the company, meaning the revenue and the obligations remaining with the company, are growing at 23.5%. It's amazing. And we're over $28 billion now in RPO. And our AI business, which is what it's really all about — I'm having to now put a new guide out there on the AI for this year. We're blowing past the billion. We're going to up a billion and a half, and that probably won't be enough. The bottom line is this, Jim. The more AI that happens, whether it's a hyperscaler, these fantastic language model companies, or even the systems of record that are even getting the AI memo, everything runs through ServiceNow. So ServiceNow is the rules and the rails of every major corporation in the world. And so as AI takes off, it's a tailwind for ServiceNow. And the capital markets have been talking about terminal value in terms of not knowing where that exists for software-as-a-service companies, which, first of all, is ridiculous for scale ones like us. But I think we're answering that question decisively. Our business is doing great, and it's all about AI. And we agree, and we're not scared. Right, the language models are —
I don't want — I don't want McDermott scared. That would worry me. Now I'm thinking maybe the problem is the operating margin guidance of 31.5%, below the 32%, and lowered from the previous guidance. Could that be it? Could that be what people looking at it are saying — that AI is good, but you know what, it does lower their margin performance?
No, actually, Jim, it's good news because we closed Moveworks, VZA, and now Armis. So the half-a-point headwind on the margin is only because we just took Armis into the company. It was actually supposed to be a point. The efficiency already took it to a half a point, and in the next three or four months that'll be right back on track with the acceleration of our operating margins and our free cash flow. So you're talking about a company here, ServiceNow, that is going to be operating at the rule of 60 very soon, between our revenue growth and our free cash flow margin. And what I think is most important for your viewers and great investors, because you attract the best, Jim —
— is that this is one of the few stories in the entire world where you could have a company talking about operating at the rule of 60, a growth like this, which is unbelievable, and a total AI leader, and one that all the other AIs have to run through, including the language models, all the great AI in the world. And it is great — it thinks, but workflow acts, and that's where we come in. So we are going to price our platform based on an expanding user base, but half of our revenues already is based on the consumption of all of this AI innovation. And one of the new developments, Jim, that you should know is the language models are great, and the elastic pricing is also the way they price, and there's no safe zone for that. So all this Wall Street talk about seat-based is going away and so forth — we hope it does, because there's so much more money to be made on the consumption or the value derived from AI.
You absolutely pivoted correctly. I got an idea. I was thinking that when you talked about — you said the rule of 50 — is it possible that they're no longer considering the importance of the rule of 50? You and I know how important that is. I've always added the gross margin and the growth rate, come up with a great idea about how to analyze stocks. Has my great idea come out of fashion? Is my great idea saying, you know what, it's going to lead you wrong? Because I felt in the last quarter you did that, and it moved the stock up, and I was wrong. The stock moved down. I'm wondering where the rule of 50, 60, 70, 80 has gone out of fashion, Bill. And we're looking at the other side of history.
You know, Jim, there's some things that'll never go out of fashion. And it's called revenue minus expense equals profit. And the more business that you do and the more money you make, the better it is for shareholders. You know, Warren Buffett used to say that in the short run, the market is like a voting machine, but in the long run, it's like a weighing machine. And we're totally ready to be weighed against any brand in the world. We take on all comers, and our company's only getting stronger and stronger. You know, an investor called me this morning and wished me luck on the earnings call today, which will happen soon. And he said, you know, the best place for the Trump accounts for babies that are born in the United States would be to invest in ServiceNow. And it's comments like that just make us so strong, so powerful, and so full of life. And remember, every language model company — OpenAI, Anthropic, etc., Gemini — great Gemini announcement today — they're all going through ServiceNow. We are the ERP of IT for every digital transformation across the world. All these companies need to work with us. We like working with them too, because the customer is the benefactor. I had a great CIO in my board meeting yesterday, and she said, you know, Bill, it's actually diminutive, the fraction that I pay to ServiceNow of my IT budget, and everything in my company goes through ServiceNow. And we actually analyzed if I could possibly replace it with a language model — a la Jim taking on the terminal value issue — but it would actually be more than 10 times the price, with actually no certainty, because everything there is based on the elasticity of tokens.
I root for those companies, but I think if you want the rules, the rails, and the platform that's going to transform your company, you're going to need ServiceNow.
Okay. Now, of course, the Trump accounts have to be invested in the S&P 500. We can't pick individual stocks. Again, just to focus on what people might be missing. Are there people who will say, you know what, I'm used to really huge beats — different lines of business, used to huge subscription revenue guides, huge beat in operating margin, huge beat in free cash flow — they're not giving me those huge beats that they used to. Is that because of AI?
No, actually, the AI is what is the tailwind behind our growth trajectory and the bright future that we have. And I believe strongly when we took on Moveworks, we merged it with our employee experience business. It did 5x the revenue that it ever did before, and it did it in the first quarter.
Now you're talking about identity management, where we're managing human and non-human identity. These agents are not humans. They work really hard 24 by 7, but somebody's got to manage them.
And we give you the visibility, the rules, the regulations by which these agents have to run in a major corporation. And now Armis, Jim, this is big. Armis is in nine out of the 10 biggest companies in the world, managing operating technology. Think IoT, networks, devices, shadow IT.
So this is new revenue coming into the stream for the shareholders. The average is great. At the same time, I just got a last question. I got to ask: 75 basis point headwind from delayed closings in the Middle East. How many have been closed since the end of the quarter?
What are you talking about? Deals in the Middle East.
That you said, yeah, caused a problem. I wanted — look, since this was the quarter ended, I know you're a closer. Have we gotten closer to closing these?
And everything is fine. The Middle East is opening up in talks again. We are actually back to doing business. People are out, and they're going to their office buildings again. It'll be fine.
