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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. There's a closing bill

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Speaker 1: for this Tuesday on Wall Street, where a renewed tech

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Speaker 1: selloff dragged down stocks from mere record levels.

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Speaker 2: Bring AI anxiety is coursing through the stock market right now.

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Speaker 2: The Nasdaq one hundred fell more than one percent Tuesday

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Speaker 2: as investors pulled back from tech and tech adjacent stocksby.

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Speaker 1: I'm not sure what they make on the.

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Speaker 3: Price action today, Yeah, pairing losses, but so we're down

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Speaker 3: nine tenths of a percent on the S and P

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Speaker 3: five hundred, even more when you take a look at

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Speaker 3: the NARASAQ.

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Speaker 2: Last week was topsy turvy two after some of the

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Speaker 2: world's largest tech companies released their latest quarterly earnings reports.

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Speaker 2: An investors process the results, Apple.

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Speaker 3: Earning really beating it out of the path. When it

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Speaker 3: comes to the quarterly earning.

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Speaker 2: Microsoft having a very hard day, biggest drop since March

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Speaker 2: of twenty twenty four hundred billion dollars in market cap.

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Speaker 1: Share shares of meta platforms are surging seven and a

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Speaker 1: half percent.

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Speaker 2: These reactions might seem all over the place, but Bloomberg's

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Speaker 2: Big Tech editor Sarah Fryer says there's an underlying anxiety

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Speaker 2: that explains them all.

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Speaker 3: It's all about this existential question of are we spending

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Speaker 3: quickly enough on AI? Are we spending too quickly? And

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Speaker 3: can we afford what we're spending on this massive infrastructure

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Speaker 3: built out?

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Speaker 2: Last year, investors were willing to be patient with companies

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Speaker 2: who are taking big swings on AI, building out huge

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Speaker 2: data centers, filling them with expensive technology, and hiring lots

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Speaker 2: of pricey talent. Now investors want to see big results.

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Speaker 3: Investors are looking not just at this spending, but also

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Speaker 3: at you know, are we seeing some return on investment

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Speaker 3: and are the legacy businesses growing fast enough to support

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Speaker 3: that investment.

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Speaker 2: Sarah says, all this pressure is putting tech companies in

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Speaker 2: a bind. If they spend too much without the cash

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Speaker 2: flow or the customers to show for it, their stock

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Speaker 2: could take a hit, And if they spend too little,

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Speaker 2: they risk falling behind.

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Speaker 3: I think this is the year where the chips are

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Speaker 3: going to fall. We're going to find out if the

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Speaker 3: spending that's occurring on AI is going to result in

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Speaker 3: real change for these businesses. What are you going to

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Speaker 3: build with this investment in AI?

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Speaker 2: I'm Sarah Holder, and this is the big take from

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Speaker 2: Bloomberg News Today on the show The AI Reckoning is Coming.

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Speaker 2: Why pressure is building on tech companies to prove all

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Speaker 2: their AI investment will pay off big and soon. If

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Speaker 2: you're looking for evidence that investors are getting antsy about

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Speaker 2: all this AI spending, just look at the reaction to

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Speaker 2: Microsoft's earnings last week. The company reported what would typically

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Speaker 2: be considered solid results.

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Speaker 3: CEO Satya Nadella says total sales increased seventeen percent and

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Speaker 3: more than eighty one billion dollars in the quarter.

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Speaker 2: But when investors read between the lines, they saw a

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Speaker 2: red flag. The company said it was planning to spend

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Speaker 2: more than one hundred billion dollars this year, even as

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Speaker 2: the growth of a core business, cloud computing, had slowed.

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Speaker 2: Investors wanted out.

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Speaker 1: The Microsoft move yesterday was incredible, the second biggest drop

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Speaker 1: in market cap that we got for that stock.

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Speaker 2: Microsoft stock price tumbled ten percent the next day. In

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Speaker 2: two sessions, three hundred and eighty billion dollars in market

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Speaker 2: value was gone.

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Speaker 3: This was a dramatic one.

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Speaker 2: Bloomberg Sarah Fryar.

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Speaker 3: Microsoft actually ended up dropping the most in six years

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Speaker 3: the day following this report, which showed that their cloud

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Speaker 3: business was slowing, and therefore their mass of spending on

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Speaker 3: AI infrastructure was a little suspected. Investors were uncomfortable with that.

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Speaker 2: Investors want to make sure that other parts of Microsoft's

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Speaker 2: business continue to grow to help fund these massive investments

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Speaker 2: in AI, and they also want to see the company

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Speaker 2: find ways to put AI to use to drive even

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Speaker 2: more growth.

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Speaker 3: There was a lot of scrutiny around how much have

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Speaker 3: customers taken on copilot, how much is Microsoft's integration of

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Speaker 3: AI into everyday tools resonating with customers, and if the

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Speaker 3: cloud business slows are if their growth is not as

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Speaker 3: high as expected that gives people pause.

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Speaker 2: Well, I want to talk about Meta too, because that

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Speaker 2: company is also making massive investments in AI. It's projecting

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Speaker 2: it'll spend between one hundred and fifteen and one hundred

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Speaker 2: and thirty five billion dollars in twenty twenty six, which

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Speaker 2: is nearly twice what it's spent in twenty twenty five,

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Speaker 2: which is already a record spending year for the company.

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Speaker 2: So how did an investor react to that news where

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Speaker 2: they similarly spooked?

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Speaker 3: You know, it's interesting because in this report they were

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Speaker 3: not spooked. In prior quarters, they have been spooked and

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Speaker 3: it all depends on how quickly the ad business is growing.

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Speaker 3: So in this quarter, the ad business grew quite well,

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Speaker 3: and so investors looked at that higher spending projection, which was,

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Speaker 3: as you note, a record insane, and they thought, okay,

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Speaker 3: that's fine. Meta had warned them that it was going

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Speaker 3: to be significantly higher than past years, so it was

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Speaker 3: sort of expected. But what was maybe not as expected

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Speaker 3: was how well the legacy business would perform, and specifically

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Speaker 3: how much it had been optimized by the implementation of

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Speaker 3: AI into making the algorithm better to show people posts

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Speaker 3: that they might care about, to show people ads that

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Speaker 3: are even more personalized than ever before. So it's using

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Speaker 3: AI to basically guess what people will want to see

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Speaker 3: and they're advertising, and they're also using it to make

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Speaker 3: the feed better, to make the content that you see

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Speaker 3: as you scroll more personalized. So forget about followers and following.

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Speaker 3: It is all algorithmically determined to entertain you. The more

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Speaker 3: you scroll, the more ads you see, the more effective

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Speaker 3: METASID business is. So investors saw that they thought, great,

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Speaker 3: AI must be not just contributing to their future prospects,

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Speaker 3: but with the current business we're seeing it really have

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Speaker 3: an effect on how well they can perform.

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Speaker 2: It seems like what you're describing as a tale of

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Speaker 2: two tech companies here right met Microsoft. They're both spending

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Speaker 2: a lot on AI, they're producing different results, and investors

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Speaker 2: are reacting differently. What does this tell you about where

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Speaker 2: we're at in the AI race right now?

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Speaker 3: I think that we are at this point where in

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Speaker 3: order to have a return on an investment on all

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Speaker 3: of the billions, the hundreds of billions, maybe even more

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Speaker 3: than trillion dollars that is going to be spent on

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Speaker 3: the AI build out, businesses need to become that much

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Speaker 3: more productive. They need to continue to accelerate. We need

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Speaker 3: to look at these tech businesses that have been growing

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Speaker 3: at unprecedented levels for the last two decades and expect

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Speaker 3: them to grow even faster, even more, get even bigger

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Speaker 3: in order to justify all that has been promised. AI

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Speaker 3: is such a such a dramatic industry shaking force that sure,

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Speaker 3: why not, Why couldn't they get that much more productive?

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Speaker 3: Or you could look at it and say, like everything

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Speaker 3: has already been so optimized and incrementally improved quarter over quarter,

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Speaker 3: Can this really continue? Can we really get that much

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Speaker 3: more value? Out of the businesses via AI and much

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Speaker 3: that much more value to these businesses customers, especially in cloud,

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Speaker 3: just by hosts, sting and helping them improve what they

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Speaker 3: do with these AI tools.

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Speaker 2: What about the rest of the mag seven We got

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Speaker 2: Apples earnings late last week. How did they fit into

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Speaker 2: this narrative? How much is Apple spending on AI and

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Speaker 2: how did that land with investors?

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Speaker 3: Well, I think Apple has really fallen behind on their

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Speaker 3: plan to integrate AI. Apple intelligence is not that intelligent,

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Speaker 3: and people are looking at this company that has been

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Speaker 3: such a leader in such a leader space. In other ways,

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Speaker 3: had an amazing holiday quarter with iPhone sales. They did

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Speaker 3: well in China. I mean, it was really like a

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Speaker 3: striking quarter in the traditional Apple business sense. But that

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Speaker 3: AI question is like looming over the company's future, which

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Speaker 3: is maybe why this share response to Apple's earnings was

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Speaker 3: not as celebratory as you might have expected. And they're

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Speaker 3: really going to be leaning on Google, well on Gemini

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Speaker 3: for the future of their AI business. You know, they're

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Speaker 3: saying they're going to still develop some stuff in house,

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Speaker 3: but that hasn't gone so well up to this point,

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Speaker 3: and they need help. And so I'm curious when Google

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Speaker 3: reports that we'll hear more about that Apple deal, I

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Speaker 3: guess as we probably will not, but that's something that

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Speaker 3: we're certainly going to be keeping an eye on.

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Speaker 2: So, I mean, you've talked a little bit about the

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Speaker 2: positive science that investors are seeing in these earning reports.

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Speaker 2: But I'm wondering, like, does what these companies are spending

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Speaker 2: their money on matter to investors? Are their kinds of

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Speaker 2: AI investments they're more comfortable with or less comfortable with,

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Speaker 2: and what determines that.

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Speaker 3: Well, so far, the most expensive aspect of the AI

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Speaker 3: build out is the data center, and I think that

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Speaker 3: investors understand that there needs to be this massive infrastructure

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Speaker 3: build out. The problem is we might just run out

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Speaker 3: of real estate, we might run out of chips, we

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Speaker 3: might run out of water, of power.

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Speaker 2: You know. There might see more resistance to data.

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Speaker 3: Similar resistance politically to data centers. It might become a

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Speaker 3: big issue in the midterm elections. So I think that

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Speaker 3: while these deals are getting announced like this may be

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Speaker 3: the beginning of a year of reckoning, I'm like, is

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Speaker 3: that capital really possible to deploy at the rate that

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Speaker 3: companies want to deploy it? It's really difficult to imagine

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Speaker 3: that all of the promises about how much will be

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Speaker 3: spent can be spent in that timeframe.

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Speaker 2: Why investors' AI nerves have spread beyond the mag seven

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Speaker 2: that's next. We've been talking a lot about investors' anxiety

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Speaker 2: that big tech companies investments in AI won't pay off,

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Speaker 2: but they're also anxious about what will happen if they do.

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Speaker 1: Anthropic unveil a new AI powered automation tool for legal

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Speaker 1: and data services, able to read through legal briefs and

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Speaker 1: contracts with these and that sent chairs have experienced Thompson

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Speaker 1: Reuter's Legal Zoom, the London Stock Exchange Group, and other

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Speaker 1: legal software.

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Speaker 2: On Tuesday, after the AI startup Andthropic released a productivity

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Speaker 2: tool for in house lawyers, investors started dumping stocks of

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Speaker 2: legal software and publishing firms. Thompson Reuter's corporation was down

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Speaker 2: sixteen percent and Legal Zoom dot Com plummeted twenty percent.

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Speaker 2: That sparked a broader sell off across the software sector,

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Speaker 2: and Bloomberg Sarah Fryar says this could be a sign

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Speaker 2: of what's to come.

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Speaker 3: Well, we have seen some skepticism around software companies that

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Speaker 3: building software has become somewhat democratized that anyone can do

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Speaker 3: it if you have the right kind of coding companion.

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Speaker 3: And so do you really need a salesforce SAP in

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Speaker 3: any of these like big software companies that are selling

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Speaker 3: this big enterprise software? Are you really going to need

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Speaker 3: those services of these companies that have grown into large

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Speaker 3: enterprise businesses selling to corporations that want to make their

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Speaker 3: processes more efficient with their software when you can use

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Speaker 3: AI for that, or you can build your own internal

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Speaker 3: tool that might be more effective. So I think that

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Speaker 3: there's going to be a lot of skittishness as we

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Speaker 3: see AI tools hit the market around companies that make

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Speaker 3: those tools or that provide those services, whether they'll still

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Speaker 3: be necessary.

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Speaker 2: As investors and the public try to measure how big

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Speaker 2: a threat AI poses to these software companies, they're also

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Speaker 2: trying to measure how valuable the AI winners could become.

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Speaker 2: What kind of results really matter here? Like what are

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Speaker 2: investors looking for to prove all the spending is worth it?

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Speaker 3: One metric that I'm looking forward to hear more from Google.

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Speaker 3: Sometimes they say how much of their code productivity has

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Speaker 3: come from AI, And that's like something that investors look

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Speaker 3: for as as a sign of like how good is

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Speaker 3: AI coding getting Another thing that you know investors have

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Speaker 3: looked at is Meta talking about AI specifically affecting its

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Speaker 3: AD business, making the AD business way more effective, especially

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Speaker 3: considering Meta can't get the same data on mobile users

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Speaker 3: as it used to under Apple privacy rules. They've still

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Speaker 3: been able to overcome that and have an even more

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Speaker 3: effective AD business just using AI. So I think that

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Speaker 3: when investors see changes like that that are directly attributed

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Speaker 3: to AI investment, that gets them excited. And when they

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Speaker 3: see businesses deploy or say they've deployed AI and not

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Speaker 3: have that much of a change, or not even had

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Speaker 3: to hire fewer people or been more efficient, then they

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Speaker 3: get really nervous that this is all kind of a

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Speaker 3: hype cycle.

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Speaker 2: Sarah says. Something that can make things even more interesting

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Speaker 2: this year would be the entrance of more publicly traded

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Speaker 2: AI players. Open Ai and Anthropic are both eyeing IPOs

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Speaker 2: and Elon Musk. SpaceX had been planning one too. On Monday,

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Speaker 2: Musk announced that SpaceX will be merging with Xai, which

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Speaker 2: makes the chatbot Grock, in a deal that values the

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Speaker 2: combined company at one point twenty five trillion dollars. A

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Speaker 2: person familiar told Bloomberg that the company still has plans

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Speaker 2: for an IPO later this year.

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Speaker 3: Well, it means that if you want exposure to a

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Speaker 3: fast growing AI company, you have another option, So that

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Speaker 3: could affect the investment in Microsoft, Amazon, Google Meta. It

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Speaker 3: also means that we'll get so much more transparency about

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Speaker 3: those businesses. Those businesses have been spending like crazy, growing

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Speaker 3: like crazy. What's our plan for making money down the road?

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Speaker 3: Are they going to be making money down the road

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Speaker 3: or are they going to continue spending at that level

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Speaker 3: for such a long time. Xai need to merge with

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Speaker 3: SpaceX in part because the cost of running an AI

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Speaker 3: business is so high, so resource intensive, so talent intensive,

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Speaker 3: that honestly they need the cash flow that SpaceX has

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Speaker 3: in order to keep going, and they need the fundraising

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Speaker 3: event of an IPO. Even for the richest man in

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Speaker 3: the world, you need some money.

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Speaker 2: So is that a bad sign? What does that say?

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Speaker 3: I think it just says that either investors are going

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Speaker 3: to have to get used to businesses that just spend

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Speaker 3: way more than they make in the hopes that they

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Speaker 3: will one day have an epiphany moment, or those businesses

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Speaker 3: are going to have trouble once people see their balance sheets.

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Speaker 3: But you know their companies like Amazon in their early days,

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Speaker 3: who didn't really have a profit for a while, and Meta,

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Speaker 3: you know, they had this thesis in the beginning, and

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Speaker 3: we want to have a lot of users for this

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Speaker 3: product before we even add advertising. So it's not unheard

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Speaker 3: of in tech for a business to not make a

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Speaker 3: ton of money when they're trying to grow fast. In fact,

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Speaker 3: some people would say it's spending on growth is the

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Speaker 3: smart thing to do right now when you're trying to

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Speaker 3: be the main choice for consumers. As people are coming

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Speaker 3: on to using this product for the first time. That

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Speaker 3: doesn't mean that it's going to last forever.

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Speaker 2: We've been talking a lot about the risks and rewards

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Speaker 2: for tech companies, but the mag seven is essentially propping

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Speaker 2: up the entire stock market right now. So what are

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Speaker 2: the consequences if these bets don't pay off long term?

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Speaker 3: I think, well, we will all feel it. There are

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Speaker 3: a lot of things that are shaky about our current economy,

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Speaker 3: and there's that saying that the stock market is not

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Speaker 3: the economy. But I think a lot of people do

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Speaker 3: feel that way when they look at their four one

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Speaker 3: K when I look at their accounts, like they see

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Speaker 3: their stock's going up. And so even when everything's getting

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Speaker 3: more expensive, even when it's hard to find a job,

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Speaker 3: there's that. And it also could really affect what happens

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Speaker 3: in the midterms. We could see a reckoning there. But

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Speaker 3: you know, this is a global story. It could also

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Speaker 3: affect US versus China long term. These companies. One reason

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Speaker 3: that they've gotten such social leeway from the administration to

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Speaker 3: do what they're doing is because the US wants to

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Speaker 3: get ahead of China and AI race.

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Speaker 2: Well, so I mean, looking forward, how do you expect

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Speaker 2: twenty twenty six, Well, compare it to twenty twenty five

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Speaker 2: when it comes to AI and the AI race. How

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Speaker 2: critical will this next year be?

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Speaker 3: I think twenty twenty five was a year of announcements

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Speaker 3: of standing alongside Donald Trump at the White House and

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Speaker 3: saying we're deploying Section drabil over this many years on AI.

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Speaker 3: This is going to be a year of like, okay,

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Speaker 3: so what now, who's getting that money? Are you spending

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Speaker 3: that money? And is it going to work?

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Speaker 2: This is the big take from Bloomberg News. I'm Sarah

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Speaker 2: Holder to get more from The Big Take and unlimited

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Speaker 2: Thanks for listening. We'll be back tomorrow