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Speaker 2: Speaking of technology, piece of news out, I thought it
Speaker 2: was really interesting Scarlett Microsoft saying, hey, we're not gonna
Speaker 2: have as much I guess data center capacity as we thought.
Speaker 2: We're not going to have as much as we need
Speaker 2: until maybe sometime next year. It's just another data point that,
Speaker 2: as Jay was just pointing out, there's lots of ways
Speaker 2: to play AI. Money's being spent all throughout the economy,
Speaker 2: not just the tech stack.
Speaker 3: But there's still logjams nonetheless.
Speaker 2: Yeah, still logjams nonetheless. So let's see what's going on
Speaker 2: with our good friends at Microsoft. On rog Rana joins
Speaker 2: this technology analyst for Bloomberg Intelligence. Again, what do you
Speaker 2: make of this Microsoft news anorog that they say, you know,
Speaker 2: data center crunch is going to persist into twenty twenty six.
Speaker 4: Yeah, you know, Microsoft talked about a little bit of
Speaker 4: this in the earning scoll about let's say twelve months
Speaker 4: ago and then they said things are easy or things
Speaker 4: are improving, and it does have an impact on their
Speaker 4: cloud business growth rate when things are night Now this news,
Speaker 4: I think it was an excellent article written by Bloomberg News,
Speaker 4: and you know, it gives us a lot of things
Speaker 4: to think about as to what's going to happen over
Speaker 4: the next twelve to eighteen months. We think capex could
Speaker 4: go up, we think cloud realization of the rates could
Speaker 4: go down. And you know, the AI boom is going
Speaker 4: to continue, or the AI infrastructure boom is going to continue,
Speaker 4: because if Microsoft needs more capacity, it's going to go
Speaker 4: to people like Corevive, Nevia's Oracle, They're going to go
Speaker 4: to their you know, companies that they work with to
Speaker 4: create the data centers. And then you know the downstream
Speaker 4: effect of that. So positive news for the AI infrastructure space,
Speaker 4: but maybe has an impact on Microsoft's cloud growth rate.
Speaker 3: Does it have an impact on Microsoft's well and how
Speaker 3: will that show up in the earnings when the company reports.
Speaker 4: Yeah, I think it can have an impact on their
Speaker 4: gross margins. You may see it take down. They they
Speaker 4: have said that, you know that their next financial years,
Speaker 4: the next fiscal year they're going to spend more on
Speaker 4: capex than last year, but the rate of growth is
Speaker 4: going to go down. Now they haven't given any figure,
Speaker 4: so you can drive a big truck in that particular
Speaker 4: range because they are giving themselves the flexibility to say that.
Speaker 4: One could argue that the year after that now they're
Speaker 4: you know, maybe they're going to spend even more. So
Speaker 4: that really, you know, has an impact on the entire cycle.
Speaker 4: So that means Oracle has to spend more, That means
Speaker 4: Meta has to spend more, Amazon has to spend more,
Speaker 4: and that that you know, continues this big boom of
Speaker 4: all the downstream companies. We have anything from chips to
Speaker 4: you know, data center cooling and water, et cetera.
Speaker 2: What inning on do you think we are in this
Speaker 2: AI tech build out?
Speaker 4: I think we're in a fairly early innings because unlike
Speaker 4: software coding or you could say, you know, the buildout
Speaker 4: of a new e commerce website, this one's going to
Speaker 4: take some time because every data center takes a long
Speaker 4: time to come up. I mean from breaking ground, getting permits,
Speaker 4: to getting power to actually building it and putting it together.
Speaker 4: I mean, it takes a few years for that to
Speaker 4: build out. So I do not see any reason why
Speaker 4: in five to seven years we'll still not be talking
Speaker 4: about this topic.
Speaker 3: You know, when we come back to this data center
Speaker 3: crunch for Microsoft, is this a zero sum game where
Speaker 3: it's Microsoft's loss for now in the short term as
Speaker 3: it builds these things out, and it's competitors gain. And
Speaker 3: if so, what are the names that are likely to
Speaker 3: be most able to benefit.
Speaker 4: No, I don't think it's anybody's gain in this point.
Speaker 4: So the crunch that they are having, I bet the
Speaker 4: same thing is happening with Google, same thing is happening
Speaker 4: with Meta and Amazon. They are all going out to
Speaker 4: these third party neocloud providers to see wherever they can
Speaker 4: find capacity, and at the end of the day, whoever
Speaker 4: has any capacity left, you know they will find a
Speaker 4: customer from one of these large vendors. Because what not
Speaker 4: only what they're doing is selling products to the third
Speaker 4: parties outside their internal processes, they are actually improving it
Speaker 4: as well. Somebody like a Meta, They really are improving
Speaker 4: their ads to add business because of AI, and they
Speaker 4: need more capacity because of that as well.
Speaker 2: Earnings will be kicking off the season next week for
Speaker 2: the banks, and then we'll get the tech companies a
Speaker 2: little bit later. What are you going to be listening
Speaker 2: for anaag during this earning cycle for your tech names.
Speaker 4: It's a big tale of two cities. One side, we're
Speaker 4: going to see actual drop in discretionary spending, so any
Speaker 4: of the consulting names that they're not going to have
Speaker 4: a good time. Any of the traditional software names, even
Speaker 4: SaaS names, they're not going to have a good time
Speaker 4: because subscription growth is going to slow down. But on
Speaker 4: the other side, you know, somebody like a code Weave
Speaker 4: or an Oracle or a Microsoft, they will talk about
Speaker 4: more bookings. Oracle is not going to report in this
Speaker 4: particular running season, but a month after that, I think
Speaker 4: they will all see a good increase in the backlog
Speaker 4: or the order book. But the rest of the space,
Speaker 4: I think is going to struggle.
Speaker 3: Once upon a time, a lot of the companies benefited
Speaker 3: from the end of the year rush to use up
Speaker 3: the IT budget. You know, every company had a certain
Speaker 3: amount of money allotted to spending on IT, and a
Speaker 3: lot of times companies didn't get around using it until
Speaker 3: the fourth quarter, and then they would do so in
Speaker 3: a big rush. Do you see that happening this time around?
Speaker 4: Yes, it would happen, but only happen on the AI
Speaker 4: side of things, the non A side of the tech spending.
Speaker 4: I think that's still going to struggle. We may not
Speaker 4: have a resolution of that till the global macro environment improves.
Speaker 4: Still we have a resolution between US China trade war
Speaker 4: till we know what's happening to interest rate. I think
Speaker 4: that part of the equation is going to struggle.
Speaker 5: Stay with us. More from Bloomberg Intelligence coming up after this.
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Speaker 3: All right, let's turn now to a sector that, of
Speaker 3: course is affected by tariffs directly, and that is the
Speaker 3: auto sector. Steve Man is Bloomberg Intelligence Global Autos and
Speaker 3: Industrials research analysts, and he joins us down to talk
Speaker 3: about Stilantis Silantis.
Speaker 5: It's Chrysler, right, Paul, Jeep, Chrysler, all those good perds.
Speaker 4: Okay, I'll just get to us.
Speaker 3: Because I see Stilantis, I'm like, what company is this?
Speaker 4: I don't get it.
Speaker 3: In any case, it's third quarter shipment's climb to thirteen percent,
Speaker 3: led by rise in North America, so there is a
Speaker 3: bit of a recovery here after the carmaker has been
Speaker 3: working down inventory in the US.
Speaker 5: Steve, thanks for joining us.
Speaker 3: Let's talk a little bit about Stilantis and how sensitive
Speaker 3: vulnerable it is to President Trump's tariffs.
Speaker 5: Yeah.
Speaker 6: I think they are very sensitive to tariffs. But I
Speaker 6: think a lot of the impact on companies like Stillentis
Speaker 6: and the Detroit Trio is really their operations in Mexico
Speaker 6: and Canada. I think Trump is looking for them to
Speaker 6: actually move some of those production back into the US
Speaker 6: and employing more US workers. So, I mean, there's been
Speaker 6: a lot of rhetoric and a lot of you know,
Speaker 6: potential changes. Changes are impending, but I think for now,
Speaker 6: auto tariffs has been pretty quiet, and I don't think
Speaker 6: you know, the Trump you know, the tweets are going
Speaker 6: to impact the Detroit three.
Speaker 2: So where are we in terms of implementing tariffs on
Speaker 2: Auto's just incoming and outcoming in the US.
Speaker 5: We're already actually being loving at the moment.
Speaker 6: Yeah, it's it's happening at the moment. We've heard a
Speaker 6: lot of news on and you know companies moving production
Speaker 6: back to the US. GM have moved some of their
Speaker 6: Silverado production, one of the highest profit vehicles, you know,
Speaker 6: from from Canada back to the US. So we're hearing
Speaker 6: that from four and some other automakers. You know, Hyundai
Speaker 6: is investing a lot in the US, you know, likely
Speaker 6: to move some of the production from South Korea into
Speaker 6: the US. So we are already starting to hear and
Speaker 6: see the effects of those auto tariffs.
Speaker 3: See, this might be an unanswerable question, but with companies
Speaker 3: making the moves to do that, this will take a
Speaker 3: long time. This is a multi year process, right. You
Speaker 3: don't just decide that you're going to reshore manufacturing. It
Speaker 3: happens the next day. Is just saying that you're going
Speaker 3: to do that enough to appease the administration?
Speaker 6: Well, it's it's I look at it as a two
Speaker 6: phase process. There's what I call low hanging fruits. So
Speaker 6: you know, for example, I gave earlier on the really
Speaker 6: Silverado that GYM shifted to back to the US. You know,
Speaker 6: if they have spare capacity, uh in the US, that's
Speaker 6: that's a no brainer. They can shift that back quickly.
Speaker 6: But you're absolutely right. You know, longer term, it's going
Speaker 6: to take years to kind of unravel, uh, the the
Speaker 6: North American supply chain chain to focus more in the US.
Speaker 6: It's going to take years because you know, plants take
Speaker 6: years to build, and then you also have to bring
Speaker 6: back the suppliers. The suppliers rather produce their parts near
Speaker 6: the manufacturing, near the assembly plants rather than you know
Speaker 6: other you know, uh in other countries where you know,
Speaker 6: shipping cross could cost could be very high, so it
Speaker 6: could take, if not years, a couple of decades to
Speaker 6: actually turn.
Speaker 5: That ship around.
Speaker 2: So where is Stillans is just from a positioning perspective
Speaker 2: right now relative to the other automakers out there.
Speaker 6: Yees, stillent Is has been losing quite a bit of
Speaker 6: market share on their high you know, the higher profit
Speaker 6: vehicles like the ram trucks, the jeeps, and you know,
Speaker 6: with the new CEO coming on board, you know, the
Speaker 6: shift the strategy has shifted from more of achieving cost
Speaker 6: savings from the mergers that created Silentists back in two
Speaker 6: thousand and one to more of an outreach. You know,
Speaker 6: how are we going to how are they going to
Speaker 6: answer the demands of the consumer They really want the
Speaker 6: v eight back, which is what they're doing to bring
Speaker 6: that vight heav me back, and you know I they'd
Speaker 6: also bring the mid sized cheep Cherokee back, which has
Speaker 6: been very popular with consumers.
Speaker 5: Stay with us. More from Bloomberg Intelligence coming up after this.
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Speaker 2: Let's talk about the consumer here. How's the consumer doing
Speaker 2: out there? There's lots of ways you can kind of
Speaker 2: get a sense for that. We talked to Mike Halen
Speaker 2: from Bloomberg Intelligence about how the restaurant traffic is doing.
Speaker 5: And we also can.
Speaker 2: Talk to Lindsay Dutch. She covers the consumer hardlines retail companies.
Speaker 2: She's a senior analyst of Bloomberg Intelligence.
Speaker 5: Lindsay, let's talk like, I know Dick's Sporting goods ALTA.
Speaker 5: You've got a couple of companies that.
Speaker 2: Are going to be reporting earnings coming up, and what
Speaker 2: do you expect from these companies?
Speaker 7: Yeah, thanks Paul for having me. We are taking a
Speaker 7: look at full year guidance going into the third quarter
Speaker 7: earnings and of course that important holiday shopping season, and
Speaker 7: what we've noticed is, you know, the guidance ranges are very,
Speaker 7: very wide for these retailers. It's baking in a lot
Speaker 7: of uncertainty surrounding the consumer. But when we look at
Speaker 7: the demand trends and sort of first half results, first
Speaker 7: half results were pretty solid for many of the hardline retailers,
Speaker 7: and we're seeing better demand in the beauty space, you know,
Speaker 7: better demand for electronics even and home furnishing, some categories
Speaker 7: that have really been struggling. And when I look at
Speaker 7: this guidance range, I sort of think that we might
Speaker 7: be able to trend sort of towards the middle upper
Speaker 7: half of the range if that demand can hang on
Speaker 7: through the second half into twenty twenty six.
Speaker 3: Can that demand hang on if prices increase or the
Speaker 3: supply is limited. We're hearing again these headlines from President
Speaker 3: Trump that there could be a massive increase of tariffs
Speaker 3: on goods from China. Dick Sporting Goods, all to Beauty
Speaker 3: certainly do rely on China for their supply chain. So
Speaker 3: I'm curious whether that gets folded in.
Speaker 7: So I think when we think about the second half,
Speaker 7: I think a lot of that inventory is already in place,
Speaker 7: and there have been price increases that have occurred on
Speaker 7: that inventory. We're expecting to see that. We do think
Speaker 7: this shopper is going to come out a lot like
Speaker 7: they did last year, selective value focused, but they're still
Speaker 7: willing to spend, you know, on certain things. And I
Speaker 7: think that you know, the key draw there is, you know,
Speaker 7: anything that's new Nintendo switch to, you know, anything exclusive
Speaker 7: or like a premium type product, you know, which does
Speaker 7: skew to Addict's sporting goods. I think when I think
Speaker 7: about the risk, you know, of these headlines that we're seeing,
Speaker 7: you know, best Buy, you know, is responding to those headlines.
Speaker 7: I think if we see a big, much higher levey
Speaker 7: on goods from China, you know, that's something that they're
Speaker 7: going to have to address. In the twenty twenty six year,
Speaker 7: they have significantly reduced their exposure, you know, of those
Speaker 7: hardlines names we were talking about. Best Buy is probably
Speaker 7: the most exposed thirty three percent of cogs. But it's
Speaker 7: all indirect exposure, so it's not stuff that they're directly importing.
Speaker 7: It's just some of the inventory that they have on hand.
Speaker 2: Lindsay, the companies you cover, the hardline retailers, what's their
Speaker 2: I don't know if they have a collective view of
Speaker 2: how the consumers doing out there.
Speaker 5: What are they telling you guys.
Speaker 7: Yeah, again, I think they're what we've seen, and this
Speaker 7: is sort of going back all the way, you know,
Speaker 7: to last year's holiday season, is that newness is driving
Speaker 7: demand and that's no matter what the category. So like
Speaker 7: beauty electronics, we saw explosive demand for that Nintendo switch
Speaker 7: to But even in the sporting goods market, you know,
Speaker 7: new product or a premium type product is really drawing
Speaker 7: that consumer in, even if it's a higher price point.
Speaker 7: So consumers are definitely value focused, but they're making sacrifices.
Speaker 7: They're choosing to shop value on certain things and then
Speaker 7: they're splurging on other things. It's really hard to discern.
Speaker 7: But like I said, we've seen improvement broadly in the
Speaker 7: home furnishings category, also in electronics, and then beauty, which
Speaker 7: kind of took a leg down last year, is looking
Speaker 7: a lot better this year.
Speaker 3: We talk a little bit about these companies and their
Speaker 3: efforts to make sure that the consumer stays with them
Speaker 3: no matter what happens, even if they can go to
Speaker 3: say TJ Max and get it for cheaper, because they
Speaker 3: have these loyalty programs that tie the consumer so closely
Speaker 3: to their brand. Even as an aggregator, Dick Sporting Goods
Speaker 3: does not sell its own branded merchandise. It sells Nike,
Speaker 3: it sells New Balance, but people go back repeatedly to
Speaker 3: the store.
Speaker 4: Right.
Speaker 7: Yeah, those loyalty programs, you know, for the retailers are
Speaker 7: great because that gives them a lot of data on
Speaker 7: their their customers that shop the most with them. You know,
Speaker 7: I think this is where, you know, assortment matters and
Speaker 7: exclusives matter. So, you know, Dick's smaller peer, Academy Sports,
Speaker 7: they have not seen the growth that Dix is seeing.
Speaker 7: And it's just because they also carry Nike, but they
Speaker 7: might not carry the brand new Nike basketball sneakers for
Speaker 7: the season whereas Dix does. So the assortment you really
Speaker 7: have to dive in and look at very specifically. You
Speaker 7: know what some of these retailers have. They have to
Speaker 7: have that newest product. They have to have you know,
Speaker 7: exclusive items where you can't go elsewhere to get it,
Speaker 7: and that is really key to keeping that customer back.
Speaker 7: I also think you know, when you have a positive
Speaker 7: experience shopping at a retailer, you know you're going to
Speaker 7: go back to them as well for that customer service
Speaker 7: or whatever it is that they're providing to you that
Speaker 7: no one else can give you.
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