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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg

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Speaker 1: Daybreak Aisia podcast. I'm Doug Krisner. You can join Brian

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Speaker 1: Curtis and myself for the stories, making news and moving

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Speaker 1: markets in the APAC region. You can subscribe to the

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Speaker 1: show anywhere you get your podcast and always on Bloomberg Radio,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App.

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Speaker 2: Joining us is Arun Sundrum, vice President and senior equity

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Speaker 2: analyst at CFRA Research to take a closer look at Amazon. Arun,

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Speaker 2: thank you very much for joining us. So two lines

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Speaker 2: getting a lot of attention in the Amazon earnings the

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Speaker 2: seventeen percent gain in AWS sales, which we just mentioned

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Speaker 2: a big beat there, and then the somewhat weaker forecast

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Speaker 2: for the current quarter on overall sales. It would seem

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Speaker 2: to suggest that the consumer is getting a little more cautious, right.

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Speaker 3: Hey, yeah, thanks for having me. Yeah, I'm not really

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Speaker 3: worried about the cautious guidance. You know, Amazon has typically

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Speaker 3: been a company to guide conservatively over the last several quarters,

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Speaker 3: and if you look at their track record, you know

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Speaker 3: they're actually been beating very significantly compared to their guidance,

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Speaker 3: So I wouldn't I wouldn't look too much into the guidance.

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Speaker 3: I think that you know, highlight this quarter really is

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Speaker 3: on that AWS growth line of seventeen percent. You know,

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Speaker 3: that's a four point acceleration from Q four, and that's

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Speaker 3: actually more acceleration than than Microsoft and Google. So even

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Speaker 3: though Amazon has a larger cloud business with AWS, it's

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Speaker 3: also growing faster or it's growth is accelerating faster than

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Speaker 3: its peers. So in our review, this was a standout quarter.

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Speaker 3: You know, I'm a little concerned the stock is not

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Speaker 3: up as more than it is right now. I think

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Speaker 3: this is this should be a stock that's probably you know,

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Speaker 3: should be up ten to fifteen percent after hours.

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Speaker 1: Well, the data support your view because Amazon's actual results

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Speaker 1: have beaten estimates for adjust to DPS by about sixty

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Speaker 1: three percent on average. I think that's the highest margin

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Speaker 1: among the mag seven. But to the point about continued

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Speaker 1: growth in AWS, one of the things that Amazon did

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Speaker 1: say today is that the company sees an annual run

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Speaker 1: rate for AWS at around one hundred billion. That's annual,

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Speaker 1: So if you look at this quarter or the last quarter,

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Speaker 1: I should say, at twenty five billion, times four. That

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Speaker 1: gets you to one hundred billion, which basically says everything

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Speaker 1: that we saw in Q one will remain in spaces

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Speaker 1: for the remainder of the year. Doesn't that concern you

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Speaker 1: at all?

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Speaker 3: No, I mean that run ray has been increasing each quarter.

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Speaker 3: So if you look at Q four, it was AWS

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Speaker 3: was a twenty four billion dollar business. If you go

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Speaker 3: to Q three of last year's twenty three dollars billion

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Speaker 3: dollar business, so that run ray has been increasing, which

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Speaker 3: bodes well for the company. I think what's very interesting

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Speaker 3: is that Amazon said that Generative AI is running on

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Speaker 3: a multi billion dollar run rate. So if assuming AWS

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Speaker 3: is at a one hundred billion dollar run rate, you know,

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Speaker 3: a few billion dollars means that you know, jenerat of

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Speaker 3: AI is only making up maybe two to three percent

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Speaker 3: of total AWS revenues, which is very small. So you

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Speaker 3: know going forward that there's a massive opportunity in Generative AI.

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Speaker 3: So I think right now investors are already looking to

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Speaker 3: see when you know, they'll start to be at a

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Speaker 3: two hundred million dollar run rate, which you know potentially

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Speaker 3: could happen in the next seven to ten years or so.

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Speaker 2: Yeah, and if we look at margins, it seems like

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Speaker 2: Andy jasse Is is sort of taking a page out

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Speaker 2: of Mark Zuckerberg's book in looking for more efficiency, and

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Speaker 2: that's something that we really didn't see so much from

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Speaker 2: the founder. Is this a step that you that you

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Speaker 2: appreciate at your firm? And how important is it? Yeah?

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Speaker 3: I mean the margin story is really what's been driving

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Speaker 3: the stock over the last say eighteen months or so.

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Speaker 3: You know, this was a company in twenty twenty one,

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Speaker 3: twenty two that was free cashful and negative, and now

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Speaker 3: this year they're likely going to generate about seventy billion

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Speaker 3: dollars in free cash flow, and that includes a big

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Speaker 3: step up in capital expenditures. That's really being driven by

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Speaker 3: stronger operating margins. This quarter, operating margins were about ten

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Speaker 3: point seven percent. A year ago is at just three

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Speaker 3: point seven percent. We see operating margins continuing to increase.

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Speaker 3: You know, they have I think plenty more efficiencies left

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Speaker 3: to generate in their in their retail business, their advertising business,

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Speaker 3: which is high margins, growing at a really attractive clip.

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Speaker 3: And then you know AWS, which is really their cash cow,

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Speaker 3: is off the growing at a pretty attracted clip. And

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Speaker 3: in fact, something that we haven't talked about yet, is

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Speaker 3: you know, AWS operating margins this quarter were thirty eight percent.

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Speaker 3: That's the highest in the company's history. And that was

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Speaker 3: you know, another you know, big sting that I don't

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Speaker 3: think we'll see thirty eight percent AWS margins going forward,

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Speaker 3: but that is something to call out.

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Speaker 1: It wasn't too long ago. One of the vulnerabilities of

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Speaker 1: this company was capex. I mean, there was a time

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Speaker 1: when Jeff Bezos just love to spend money to try

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Speaker 1: to build out the business. I think it's a it's

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Speaker 1: definitely a different era right now, but that doesn't necessarily

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Speaker 1: mean that Amazon has no vulnerability. What would you be

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Speaker 1: most concerned about as we move forward here and pay

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Speaker 1: attention to this company.

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Speaker 3: Yeah, I mean, one thing that I've been hearing from

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Speaker 3: investors over the last few hours or so is, you know,

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Speaker 3: is that we're in the beginning of this capex supercycle

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Speaker 3: and we're you know, not just Amazon, but you know,

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Speaker 3: really all the big tech firms are rapidly investing in

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Speaker 3: their in capex right now. But I think what's different

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Speaker 3: for Amazon is that they can invest in capex, meaning

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Speaker 3: significantly increase their CAPEX while also improving profit margins because

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Speaker 3: you know, like like we talked about earlier, you know,

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Speaker 3: profit margins were you know, you know, a few years

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Speaker 3: ago it was negative, and then you know, last year

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Speaker 3: was it was very small, and now it's it's still

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Speaker 3: continuing to grow. We talked about ten percent operating margins

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Speaker 3: this quarter, likely continue to increase this year, so they

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Speaker 3: can increase capex while also growing profit margins. Which that's

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Speaker 3: why I know, I'm not overly worried that, you know,

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Speaker 3: that capex increase this year. We're estimating capex probably up

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Speaker 3: twenty percent this year, about sixty four billion dollars, which

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Speaker 3: is significant, and you know that won't pay off immediately,

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Speaker 3: but it will pay off in the long term. But

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Speaker 3: Amazon does have a good track record of generating good

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Speaker 3: ROI office investments, so we just have to wait to

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Speaker 3: see when they will happen.

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Speaker 2: So in terms of the economy weakening, we've seen a

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Speaker 2: little bit of weakness in consumer confidence, and so obviously

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Speaker 2: Amazon is quite leveraged to the consumer through its e

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Speaker 2: commerce business and also through ad sales. Haven't really talked

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Speaker 2: about ad sales, but that's something we can talk about.

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Speaker 2: But then in a certain sense, it's insulated somewhat from

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Speaker 2: the economy by the cloud business, because it seems like

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Speaker 2: the cloud business can turn along pretty well even if

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Speaker 2: the economy weakens. So in that sort of range that

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Speaker 2: we're talking about, you know, the risks versus the benefits,

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Speaker 2: and it seems like you clearly think that the company,

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Speaker 2: you know, is sort of tilting toward opportunity other than risk.

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Speaker 4: Yeah, yeah, exactly.

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Speaker 3: Yeah. I mean, you know, Amazon's not immune to some

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Speaker 3: of the macro headwinds that we're seeing. But you know,

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Speaker 3: if if you look at you, I mean, just just

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Speaker 3: look at their e commerce business. I grew you know,

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Speaker 3: first first party e commerce sales were up seven percent

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Speaker 3: year of the year this quarter. You know, that's that's

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Speaker 3: pretty strong. I cover a lot of the other big

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Speaker 3: box retailers in the United States like Walmart, Target, you know,

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Speaker 3: no one's really growing at a seven percent clip. And

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Speaker 3: what's more interesting is that Amazon's actually also growing unit sales,

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Speaker 3: so their growth is not just coming from higher prices,

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Speaker 3: which you know, a lot of other retailers are, you know,

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Speaker 3: generating growth because of higher prices. Amazon's actually also generating

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Speaker 3: unit growth, which is very encouraging. And they're also growing

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Speaker 3: you know pretty well internationally as well, you have to remember,

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Speaker 3: you know, Amazon's still relatively young in many markets around

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Speaker 3: the world.

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Speaker 1: Before we let you go, quick question, do we get

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Speaker 1: a spin off of either AWS or Prime Video here?

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Speaker 3: I don't see that happen anytime soon. I don't think

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Speaker 3: that they will spin off that business. I think there's

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Speaker 3: a lot of synergies between AWS and their retail business

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Speaker 3: and their advertising business, and I think they'll do everything

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Speaker 3: they can to keep this, keep these businesses.

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Speaker 2: Impact all right, our own thanks very much for joining us.

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Speaker 2: Arun Sunder and vice president senior equity analyst at CFL.

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Speaker 1: Right now to another big legal story of the day.

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Speaker 1: The founder of Binance, Cheng Peng Choo, has been sentenced

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Speaker 1: to four months in prison. Jao was accused of allowing

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Speaker 1: cyber criminals and terrorist groups to freely trade on Binance,

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Speaker 1: that is the world's largest crypto exchange. Joining us for

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Speaker 1: a closer look, Ava Benni Morrison is with US Bloomberg

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Speaker 1: Legal reporter on the line from Seattle. Av A good

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Speaker 1: of you to join us. Four months in prison that

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Speaker 1: feels like a slap on the risk is that all

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Speaker 1: that prosecutors were asking for, No.

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Speaker 5: Our prosecutors were actually pushing for a lot longer. They

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Speaker 5: wanted to see Cz spend about thirty six months in prison.

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Speaker 5: That was well above what the federal sentencing guidelines stipulated

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Speaker 5: and even what pre Trial and Probation had recommended. Pre

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Speaker 5: Trial and Probation said that he should only face five

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Speaker 5: months in prison, and of course Cz and his lawyers

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Speaker 5: were pushing for no prison time whatsoever and pushing for probation.

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Speaker 5: But at the end of the day, the judge found

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Speaker 5: that this was a very serious crime on the scale

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Speaker 5: of Bank Secrecy Acts violations because of what you mentioned earlier,

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Speaker 5: this lapse meant that illicit actors like cyber criminals, terrorist groups,

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Speaker 5: drug dealers could trade on finance.

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Speaker 2: Yeah, it seems like the judge was, if not sympathetic,

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Speaker 2: was at least pleased that there was a level of

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Speaker 2: cooperation from the defendant. Can you walk us through some

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Speaker 2: of the things he did on that front that might

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Speaker 2: have led to that leniency.

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Speaker 5: Yes. Cz said that he had been cooperative with the

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Speaker 5: government's investigation, which was going on for years. They were

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Speaker 5: pouring over the operations of finance, looking at its how

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Speaker 5: it was used by US users, whether it was registered

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Speaker 5: in the US, which of course we know now that

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Speaker 5: it wasn't, and so Cz said that he was always

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Speaker 5: willing to accept responsibility for the mistakes that he made,

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Speaker 5: and he actually directed Finance, the company he founded in

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Speaker 5: twenty seventeen, to cooperate with the DOJ and to come

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Speaker 5: up with some sort of resolution to end of the

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Speaker 5: myriad of criminal and regulatory investigations that were going on. That,

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Speaker 5: of course, late last year led to Finance paying a

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Speaker 5: huge amount of four point three billion dollars to put

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Speaker 5: an end to all of those investigations.

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Speaker 1: So AVA remind us how this started. I mean, as

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Speaker 1: I recalled, he wasn't even in the United States at

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Speaker 1: the time this investigation was really heating up. Is that right?

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Speaker 5: Yes, that's right. Prosecutors had started looking at a whole

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Speaker 5: range of crypto platforms and whether they were adhering to

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Speaker 5: US financial regulations and financing the world's biggest crypto exchange

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Speaker 5: was obviously an attractive target. Cz lives in Dubai, and

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Speaker 5: he was, as I said before, cooperating with the investigation

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Speaker 5: and then instructed his lawyers to come up with some

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Speaker 5: sort of plea agreement with the DOJ. Then he has

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Speaker 5: traveled to the US voluntarily, he points out from Dubai

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Speaker 5: to America at the end of last year, and he

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Speaker 5: actually highlighted this as the fact that that should work

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Speaker 5: in his favor to avoid prison time because if he wanted,

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Speaker 5: he had the means and the time to avoid this

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Speaker 5: prosecution because Dubai doesn't have an extra the UAE doesn't

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Speaker 5: have an extradition treaty with the US.

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Speaker 2: Yeah, and I think his lawyers even argued that he

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Speaker 2: should get a lighter sentence because he can't serve time

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Speaker 2: in a minimum security facility because he's not a US citizen.

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Speaker 2: So that's one interesting thing. And the other thing is

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Speaker 2: has he been has he been ordered to surrender yet?

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Speaker 2: Will he be able to go back to the to

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Speaker 2: Dubai to bring his family over, or will he be

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Speaker 2: summoned immediately.

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Speaker 5: There hasn't been a date set for when he has

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Speaker 5: to surrender to the Bureau of Prisons. His lawyers and

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Speaker 5: the pre Trial and Probation Department are working that out,

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Speaker 5: but he has requested to be designated to a federal

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Speaker 5: facility here in Seattle. The way that these cases go,

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Speaker 5: and based on our experience covering these matters, that should

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Speaker 5: happen in maybe the next week to two weeks. He

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Speaker 5: seems pretty eager to just get this sentence done and

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Speaker 5: be able to return to Dubai to see his family.

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Speaker 1: How much of this prosecution, I'm curious over had to

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Speaker 1: do with the DOJ wanting to make an example out

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Speaker 1: of Jao as a way of sending a message to

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Speaker 1: the crypto industry.

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Speaker 5: I think the DOJ is very forceful suggestion that cz

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Speaker 5: fayed thirty six months in prison was definitely driven by

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Speaker 5: a want to make an example out of him to

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Speaker 5: the crypto industry. CZ is one of, if not the

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Speaker 5: most recognizable figure in this industry. He's one of the

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Speaker 5: world's richest men. He's worth about thirty six billion dollars

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Speaker 5: at the moment. So they wanted to send a strong

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Speaker 5: message no, not only to this industry but to high

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Speaker 5: level executives all across America that this might just be

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Speaker 5: a Bank Secrecy Act violation, but they will go after

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Speaker 5: it forcefully.

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Speaker 1: Avid. Thank you so much for making time for us.

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Speaker 1: I'm sure it's been a busy day for you ever.

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Speaker 1: Benni Morrison, Bloomberg Legal reporter, joining us from Seattle as

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Speaker 1: we take a look at Chiang Pang Jao Cz sentenced

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Speaker 1: today to four months in prison. He was accused of

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Speaker 1: allowing cyber criminals and terrorist groups to freely trade on

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Speaker 1: the world's largest crypto exchange finance.

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Speaker 2: Joining US now in the program is Bill Adams, chief

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Speaker 2: economist at Comerica Bank, to take a closer look at

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Speaker 2: the US economy and the predicament that the FED finds

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Speaker 2: itself in. Bill, is the FED in a predicament here?

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Speaker 4: The Fed is certainly going to be unhappy after inflation

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Speaker 4: by pretty much every measure, overshot expectations in the first

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Speaker 4: quarter of the year. You know, it's kind of harder

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Speaker 4: to find areas where inflation has behaved well in the

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Speaker 4: first quarter than areas where it's picked up. You've got

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Speaker 4: gas prices, you have food prices with the bird flu

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Speaker 4: spreading in the United States, and core inflation including home

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Speaker 4: healthcare charges and hospital charges has run hot. And then,

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Speaker 4: as you mentioned, the Employment Cost Index report out this morning,

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Speaker 4: US time as well as house price is picking up

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Speaker 4: in January and February. So really across the we've seen

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Speaker 4: persistence of inflationary pressures, and the FED is data dependent,

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Speaker 4: and these data say it's not time to cut yet.

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Speaker 1: I'm wondering where we are in terms of stagflation. Is

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Speaker 1: that something we really need to discuss more of.

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Speaker 4: We did see a slow down in economic growth in

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Speaker 4: the first quarter, but a lot of that slow down

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Speaker 4: was due to parts of GDP, parts of domestic demand

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Speaker 4: and international demand that I think are likely to be

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Speaker 4: one offs. There was a big drag on first quarter

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Speaker 4: GDP growth from businesses adding to inventories more slowly, from

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Speaker 4: a larger trade deficit, and from the government increasing spending

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Speaker 4: but increasing it less than a had in the prior quarter.

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Speaker 4: And I'm not so concerned about those as drivers of

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Speaker 4: a slowdown over the business cycle. If you look at

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Speaker 4: the parts of domestic demand that are most closely linked

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Speaker 4: to the cycle, that's real final sales to private domestic

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Speaker 4: purchasers that increased to a three point one percent annualized

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Speaker 4: pace in the first quarter, which is really still quite robust.

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Speaker 4: So I think the real concern right now is just

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Speaker 4: that inflation continues to run hot and the economy, to

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Speaker 4: my mind, has not slowed enough to bring inflation back

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Speaker 4: under control. And I think the FED is going to

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Speaker 4: see that again as a mandate to keep their foot

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Speaker 4: on the break for a time being.

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Speaker 2: You know one thing I'm a little curious about. We've

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Speaker 2: had a lot of attention given to artificial intelligence in

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Speaker 2: terms of supporting earnings to a certain degree from companies,

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Speaker 2: But what about the economy. Have you been looking at

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Speaker 2: all at whether or not artificial intelligence actually does anything

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Speaker 2: for the economy.

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Speaker 3: This is a.

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Speaker 4: Tricky topic for macroeconomists because it's probably going to slow

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Speaker 4: up in the broad measures of the economy. Think GDP

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Speaker 4: employment productivity with a long lag. The area where we

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Speaker 4: are starting to see the impact of AI is on

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Speaker 4: business surveys, so the Fed's Beige Book as well as

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Speaker 4: other business surveys that capture qualitative data about businesses what

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Speaker 4: they say they're doing with innovation and employment. You see

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Speaker 4: several mentions in the latest Beage Book of businesses that

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Speaker 4: have managed to reduce the size of their software development

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Speaker 4: teams by adopting AI tools. One business mentioned in the

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Speaker 4: base book has shifted to using AI to develop their

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Speaker 4: marketing materials, and none of their customers have complained yet,

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Speaker 4: so they're sticking with that, no longer paying a marketing

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Speaker 4: services company for those services. So I think you do

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Speaker 4: see adoption in some parts of the economy in fits

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Speaker 4: and starts. It's not adding up to enough yet to

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Speaker 4: move the needle on overall productivity, but I think it's

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Speaker 4: going to accelerate from here.

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Speaker 1: So yesterday we saw the Treasury ramping up its estament

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Speaker 1: for federal borrowing in the current quarter. Are you worried

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Speaker 1: at all about the deficit rising?

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Speaker 4: I think the deficit is putting upward pressure on interest rates,

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Speaker 4: and one way of thinking of that is with the

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Speaker 4: federal government federal government running a deficit of five to

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Speaker 4: six percent of GDP this year, there's a lot of

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Speaker 4: domestic demand coming out of public spending, and that means

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Speaker 4: that monetary restraint is more than it would be if

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Speaker 4: fiscal policy were in a more neutral stance. So I

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Speaker 4: think it's a contributor to why the Fed has been

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Speaker 4: able to keep interest rates high yet the domestic economy

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Speaker 4: is held up well, and so.

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Speaker 6: That that is the one of the causes of the

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Speaker 6: headwinds for capital intensive businesses, like the slowdown we've seen

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Speaker 6: in multi family housing starts in the last few months.

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Speaker 2: And just finally, for your take on inflation, it's very

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Speaker 2: confusing in some ways because if you look at shelter,

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Speaker 2: it seems like rents being down a little bit is

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Speaker 2: not reflected in the data that's currently out, and that

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Speaker 2: there's a long lag there and there are a lot

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Speaker 2: of different things moving in there. Now with the employment

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Speaker 2: cost index up, you know, we worry about that. Do

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Speaker 2: you actually think that disinflation is still in place or no?

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Speaker 4: I think we do see signs of disinflation in a

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Speaker 4: somewhat cooler labor market, and especially in a slower pace

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Speaker 4: of turnover in the quits rate and in the hire's rate,

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Speaker 4: which is in the job openings in labor Turnover survey

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Speaker 4: which we'll get in about twelve hours in the United States,

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Speaker 4: and with people jumping jobs last, that means that the

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Speaker 4: bigger wage increases that workers see when they switch to

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Speaker 4: a new employer are a smaller share of the overall

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Speaker 4: pie of wage increases.

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Speaker 2: All right, Bill, thanks so much for joining us. Bill Adams,

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Speaker 2: Chief Economist, co America Bank.

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Speaker 1: This has been the Bloomberg Daybreak Asia podcast, bringing you

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Speaker 1: the stories making news and moving markets in the Asia Pacific.

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