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- [00:00]
Ian King
Bloomberg businessweek is brought to you by Evolving Money, a podcast that explores how cryptocurrency is the next logical evolution of the financial system. Follow the podcast, which is sponsored by Coinbase. Wherever you get your audio programs.
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- [01:22]
Podcast Host
Bloomberg Audio Studios Podcasts Radio News this is Bloomberg Business Week Daily reporting from the magazine that helps global leaders stay ahead with insight on the people, companies and trends shaping today's complex economy. Plus global business, finance and tech news as it happens. The Bloomberg businessweek Daily Podcast with Carol Massar and Tim Stanweck on Bloomberg Radio.
- [01:52]
Ian King
Nvidia is out everybody.
- [01:53]
Carol Massar
Fourth quarter revenue forecast did beat estimates the company sees fourth quarter revenue $65 billion plus or minus 2% third quarter data center revenue coming in above estimates at 50 to $51.2 billion. The estimate was for $49.34 billion. Third quarter adjusted EPS at $1.3 third quarter revenue $57.01 billion once again the company sees fourth quarter revenue of 63.7 billion to 66.3 billion. The estimate was for $61.98 billion. Third quarter data center revenue coming in as a beat $51.2 billion. Carol stock moving higher in the after.
- [02:34]
Ian King
Hours up about 2.7% and gaining in the after hours. What's a big number folks? Is that data center number because that definitely is a decent beat. Third quarter data center revenue 51.2 billion. The estimate on the street was 49.34 billion and then revenue overall the outlook for the fourth quarter revenue $65 billion plus or minus 2%. The estimate on the street is 62 billion. When we talked to Angelo Zeno, he said, listen, we got to look on the guide. It's got to be at least 61 to 62 billion dollars. While they are looking above that, Nvidia's Jensen Huang in the commentary saying Cloud GPUs are sold out. Also talking a little about expenses, operating expenses. As for the fourth quarter, adjusted operating expenses of $5 billion. That's a little bit above the street estimate, TIM, of 4.59. Investors don't seem to care, folks, because these numbers look to be pretty strong here. Gross margin 73.6%. Street was looking for 73.7%. So essentially in line, but the stock off its highs but still up about 4% here in the aftermarket.
- [03:49]
Carol Massar
I want to bring in Jay Goldberg, senior analyst, Semiconductors Electronics with Seaport Research Partners. Jay currently has a sell rating on Nvidia, a target price of $140 per share. He's the only analyst tracked by Bloomberg that has a sell rating on Nvidia. He joins us from the Bay Area. Jay, I ask you each and every quarter and I'm going to ask you again, is this print enough to get you to change your rating on the company?
- [04:18]
Jay Goldberg
No. Short answer? No.
- [04:21]
Samson (Hazelview Investments)
Okay.
- [04:21]
Carol Massar
Why not?
- [04:23]
Jay Goldberg
I mean, it was an okay quarter, quarter, decent guide. You know, I am, I, they, you know, at GTC DC two weeks ago, they put out that big, big revenue number, $500 billion over five quarters in revenue, which shocked everybody. They, I think what happened is they got more allocation from TSMC than they were expecting. So that's upside. That was more than I was expecting. But that's floating the numbers now.
- [04:51]
Carol Massar
Right.
- [04:51]
Jay Goldberg
And you start listing all the things that could go wrong with Nvidia. That's a longer list than the things that could go right. So I still think they're challenged. I still think this is, but I'll give them credit, this is a good quarter. I had actually raised my estimates last week because my checks were telling me they'd be doing pretty good. It's okay, I'll give them that. But one quarter, it's this, it's more than one quarter game here.
- [05:18]
Carol Massar
The street would seem to agree that it's a good quarter right now. Shares jumped 5% after that fourth quarter revenue outlook topped estimates. Nvidia giving that strong forecast. That's countering fears of an AI bubble. We're also seeing Carol shares of Core Weave and Nebbyous gain 4% after Nvidia earnings.
- [05:36]
Ian King
Yeah. Nvidia saying Blackwell Ultra is now our leading Architecture also talked about H2O sales insignificant in the third quarter quarter gaming revenue up on continued demand for Blackwell. Hey Jay, what I want to ask you, at least according to Bloomberg data, you have had this sell rating on Nvidia since at least April, and forgive me if it's a little bit longer, but the stock shares of Nvidia are up 71% in that time. Why do you hold on to that conviction? Because, because if anybody followed you, it wouldn't have been such a great call.
- [06:07]
Jay Goldberg
So I've, I've told my clients all along, I've never told any of my clients to short Nvidia. What I've said is this, is that Nvidia is going to underperform my sector.
- [06:16]
Ed Ludlow
Right.
- [06:17]
Jay Goldberg
And I think that has actually played out. If you, if you look at since I launched in April, you look at shares of amd, which I had a buy on for a long time and ARM and Broadcom, Nvidia has generally underperformed the AI trade. Right. And then you start looking at some of the other stocks like SanDisk and Micron, companies like that who really, really overperformed in the, because of AI in this year in video is sort of the laggard in that, in that trade. Right. And I think the head, the headwinds here just keep, keep mounting.
- [06:51]
Ian King
So this is, yeah, this is against looking at others in the sector is basically what you're saying. I'm pulling up the socks. I mean it's up about 57% but that's, you know, throwing in all the names together. And you're right, if I look at AMD, it definitely is up more than 100% since April call that you made. So yeah, there is some outperformance, but it is doing better than the overall sector.
- [07:17]
Jay Goldberg
Yeah, I mean the market has gone up. All of these, all these stocks have gone up a lot.
- [07:23]
Ed Ludlow
Right.
- [07:24]
Jay Goldberg
And you know, that part I'm not right about, but I do, you know, I've maintained all along that Nvidia has gotten so large there's, it's just harder and harder for them to keep these, keep delivering these outsized beats that they were giving a year or two ago. And in that context, this quarter is good, but it's not a massive blowout. Part of the problem Nvidia has is the most scrutinized stock on the planet right now. People have all kinds of checks into the entire supply chain. And so we have a pretty good idea of what they can do and how they surprise us, how they deliver more than what's already baked into the numbers is pretty challenging.
- [08:01]
Carol Massar
Any, anything in here about China that you could see it and whether or not they're getting any clarity about what they could do in China.
- [08:11]
Jay Goldberg
So I don't have the press release yet, so I haven't read through it. But I know from talking to people in the sector is no, they've, they've made, they've gotten nowhere with, with the US Government. Jensen has obviously been very vocal about that in the press lately, or he was until a few weeks ago. He's kind of stopped making comments about it because it wasn't helping him. And I think China is going to remain a problem for them. Nvidia is stuck having to walk this very fine line, right? They don't want to antagonize the US Government, they don't want to antagonize the Chinese government. And on some days that's just not possible to walk that line. So it's going to be very tough for them. They really, really need to get back into China. I think it is become a major sort of weakening in their moat and the problem is just going to grow the longer it goes on. So that's, that's to me is a big concern. It's just one that's very hard to handicap because it's political in nature.
- [09:05]
Ian King
If they were back in China, would that change your take on this company and maybe your rating?
- [09:12]
Jay Goldberg
I don't think that alone would change my rating, but it's certainly top of my list of things that could go wrong here.
- [09:20]
Ian King
And I do want to point out, just to rehash here folks, because we are talking to Jay Goldberg, senior analyst, Semiconductors and Electronics at Seaport Research Partners. He does have a sell rating on Nvidia, the only such rating for the stock listed on the Bloomberg Terminal. Nvidia shares, which are up about 3 or 4%. Just up about 2 and a half percent. Tim, they're definitely off their highs of the session. And this as the company gives a strong forecast. Our owning king reporting out giving a strong revenue forecast for the current period with sales expected to be about $65 billion in the fiscal fourth quarter quarter. The outlook, Ian reports, signals that demand remains strong for Nvidia's AI accelerators despite growing fears that the spending on such equipment isn't sustainable. And as he said, Nvidia shares at their top in the aftermarket were up about 4%. They're still up, but Tim, just up about 2.6%.
- [10:12]
Carol Massar
And looking at commentary from Jensen Huang before we hear from him later on the call and then Ed Ludlow's exclusive interview with him at 6:30pm Wall street time today. Jensen Huang in the press release saying, quote, blackwell cells are off the charts. Cloud GPUs are sold out. He also said compute demand keeps accelerating and compounding across training and inference, each growing exponentially. We've entered the virtuous cycle of AI. The AI ecosystem is scaling fast with more new foundation model makers, more AI startups, across more industries and in more countries. AI is going everywhere, doing everything all at once.
- [10:48]
Ian King
Hey, let's also bring into the conversation. We're going to keep Jay Goldberg over at Seaport Research Partners with us, but let's bring in Bloomberg Tech Btech co host Ed Ludlow, who will be speaking exclusively with Nvidia CEO Jensen Huang. That's coming your way at 6:30pm Wall street time right here on Bloomberg TV and radio. Hey Ed, investors seem to be pretty happy. It's up about 2% here. What's your immediate takeaway from these results?
- [11:16]
Ed Ludlow
Yeah, in the fiscal third quarter that they just reported, you know, it's a beat and a good one. And this was a high bar going into it. And in the outlook for the fourth quarter, you know, it's, it's a good $3 billion above consensus, $65 billion plus or minus 2%. Remember, this is always the case. There were some very bullish forecasts on the street. I think some analysts were saying that Nvidia could even surprise US with a $75 billion figure for that fourth quarter. But the great unknown is the numbers that they've just posted. How do they relate to the $500 billion or half a trillion dollar figure that Jensen Huang outlined at GTC in the last week of October? He basically said over the next six fiscal quarters just for Blackwell Rubin Systems, they see $500 billion of demand. But Nvidia doesn't give formal guidance like that. It was just a slide over his shoulder on stage. So there is going to be some mathing based on what he says on the call and hopefully in the conversation that we have to explain how in aggregate their forecast has changed for the longer term.
- [12:25]
Carol Massar
Okay, so Jensen, if you're watching just a little preview of the line of questioning that you may get from ed Ludlow at 6:30 Wall street time, Bloomberg Television and radio for that exclusive cover conversation. And Nvidia shares off about as of Today's close, roughly 10% from those all time highs back at the end of October. That was just around the GTC event in Washington D.C. where I know you spoke with Jensen and Justin Hotard of Nokia as well. I'm wondering really about the narrative that's emerged since then about cracks starting to form or punctures in the quote unquote AI bubble and the decline in some of the high flying stocks that we've seen of late. Does this assuage investor concerns that not all is okay when it comes to the infrastructure spend?
- [13:11]
Ed Ludlow
Yeah, you know, in video is, is down sharply since, since the all time high it hit four weeks ago. But it's also a stock that as of today's close was up almost 40% year to date, double the performance that we see of the NASDAQ 100 or the S&P 5 500. This again was a very high expectations quarter where there is also high skepticism to meet it. And to the data points that we will inevitably hear asked of Jensen is the circular financing issue because a lot of the news flow in that period of time has been about Nvidia investing in some form in the, in the frontier model labs or end users of their chips.
- [13:54]
Carol Massar
Yeah, look at, look at the anthropic news yesterday this week.
- [13:58]
Ed Ludlow
Right. You know, and in that specific case it's very hard to argue it is not circular financing because historically what Jensen Huang's argument has been is when they put an investment into an AI company, they don't require the AI company to use that capital or financing to buy Nvidia chips. They can go away and use Nvidia's money to buy someone else's chips. But in the mechanics of that anthropic deal, you know, it is a flow of capital from Nvidia into anthropic and then anthropic buying capacity that does use Nvidia chips. The other data point is depreciation, which is a real fixation of this market at the moment.
- [14:40]
Ian King
So you know, one of the things we were talking about with Jay Goldberg and we're going to get back to him in just a moment, we're letting.
- [14:46]
Carol Massar
Him, we're letting him read the press release and we're letting him actually look at the numbers right now.
- [14:50]
Ian King
But he talked about China remaining effectively online. How much of that is a problem? And I think we also heard from, was it this being kind of the first clean numbers that we're kind of getting, was that Kun job you talked about, you know, without kind of, I guess China impact or China concerns.
- [15:09]
Carol Massar
But.
- [15:10]
Ian King
And how important is China going forward to the Nvidia story?
- [15:15]
Ed Ludlow
So you know, China is potentially the biggest end market in the world for data center. And right Now Nvidia assumes zero China. You know that $500 billion or half a trillion dollar figure that I mentioned a moment ago that was given on October 28th excluded China completely. I've just put in the blog and I'm just making an observation that if you go back to August, when Nvidia gave their forecast for the third quarter that they've just released, they were very clear in explaining that this did not assume any H20 sales to China. It's interesting, but there is no mention of the word China at all in today's press release. And so now it's kind of all stripped out. But as Jensen Huang has said repeatedly, it's a really critical market. A lot of activity is there and you know, in video would like to be able to sell its technology and that market.
- [16:14]
Ian King
Jay, I want to just bring you back in. And we do see Nvidia shares climbing once again back up near that 4% mark that we saw in the aftermarket. It's up about 3.6, 3.7%. Jay, as you are going through the press release, anything that's jumping out that you think the Bloomberg audience needs to know about?
- [16:32]
Jay Goldberg
So far, nothing. I came to the same conclusion. There's nothing. There's no mention of China in here at all, which is good for now, but also concerning, it looks like their networking business, the networking side of their data center business did a little better than expected, which is great because that's high margin business. They have a really solid position there. Overall, it's a pretty clean quarter. Haven't gotten all the way through it. But I am curious to hear what Jensen's going to say about circular financing and those sorts of questions. Jensen is probably the most persuasive, charismatic CEO in semiconductors right now. And so listening to him on the quarter is always going to be interesting. I want to see how much energy he brings and how he's going to address some of those sort of stickier questions.
- [17:21]
Ian King
Hey, Ed Ludlow, come on in on this as you listen to Jay. Love to bring you into the conversation with Jay.
- [17:28]
Ed Ludlow
Yeah, I think the circular financing question is one that I've received in advance, you know, of speaking to Jensen in a couple of hours time. The other one for me is the depreciation issue. Right. You know, Nvidia commits to this annual cadence of a new generation of gpu and I think there are a lot of people out there who would really appreciate Jensen explaining the useful life cycle of any generation of GPU and How they manage that, how they convinced the big spenders in a capex context to upgrade. Is that a concern for you? Is it something that you feel is unanswered?
- [18:06]
Jay Goldberg
Well, I think there is this dynamic taking place where, where in video is trying very hard to prop up the Neo Clouds as alternatives to the traditional hyper hyperscalers. You'd much rather have 100 small customers than three large ones. The problem is that will eventually conflict with that annual cadence.
- [18:24]
Ed Ludlow
Right.
- [18:24]
Jay Goldberg
This whole issue about depreciation of how long a server lasts. I think people look a lot at sort of the physical life of the server, but the more important question is the economic life of the server. And if you have a new GPU coming out every year, the old ones become less valuable. And so that leads to some pretty, pretty punishing price curves for the Neo Clouds. And so Jensen and Nvidia want to constantly be coming out, coming out with new products to stay competitive and push their own sales up. But that makes it hard for these customers, the small ones, who have to also stay on that treadmill. And at some point it can't go on forever. The Neo Clouds will eventually run out of money. That's this big long term picture outlook. That's one of these things that would keep me up at night if I didn't have a sell rating on it.
- [19:16]
Carol Massar
Well, okay, so Ed, I want you to kind of go back to Jay on this because I know you've talked to Core Weave CEO quite a bit of time, quite a bit in recent months. We said that Core Weave was higher in sympathy after these Nvidia results in addition to another Neo cloud company that's out there right now, the demand is there for these Neo Cloud companies. I mean even Core, we've said just very recently it's been able to diversify away from its biggest customers.
- [19:44]
Ed Ludlow
Yeah. In the conversations that we've had with Micro and Trade said that they there is demand for the older generation technology. One sort of data point or statistic that those who are more calm about the depreciation issue would point to is utilization. So they would say right now the hopper generation of, of accelerators or GPUs is running at 100% utilization in terms of workloads. It can't be used any more than it already is as a very bullish signal that there these, these kind of obsolete sounds a funny thing to say, but These older generation GPUs are not idle. Compare and contrast with some of the secondary, secondary market data which we have limited visibility into. We don't know how strong that is and nor do we know how close attention Nvidia plays to a secondary market for older generations of chip. But 40% of revenue is the hyperscalers and depreciation is an accounting issue that they need to mark against their balance sheets. And we haven't seen it yet. So it's kind of interesting because at some point, and I ain't an accountant, but you know, basic financial journalism, it will come up.
- [21:07]
Ian King
Hold on for a second. Jay, last question. Final thoughts on this. I mean, I'm looking at the Philadelphia Semiconductor index up almost 2% in the aftermarket. A name like Broadcom is also up about 2% and again, Nvidia still up about 3.2% here after its earnings. Final thoughts. Jay, from you when it comes to.
- [21:25]
Jay Goldberg
Nvidia so I want to respond, I want to close in responding to Ed's comment about utilization. I've certainly heard data points that utilization are high in the Neo clouds, at least some of them anecdotally. But if, if utilization is so high, why do AMD and Nvidia make it a practice to backstop capacity at the Neo clouds as part of these deals? If you look across the sales process for GPUs right now, you'll see a lot of these big neoclouds have contractual terms which allow them, which basically put AMD and Nvidia in the position of backstopping or buying up excess capacity. And it seems like a little bit of disconnect to me that you need those backstops if utilization were so high. So I think there is definitely signs of froth in the neo cloud sector, not necessarily Core Weaver or Nebulous. I don't want to pick on them, but there's, there are growing signs of friction in that, in that corner of the trade and makes me cautious about the broader spectrum of things.
- [22:25]
Ian King
Ed, to be fair, I just want to bring you in on that if you have any thoughts for Jay Only.
- [22:30]
Ed Ludlow
That those that share some skepticism and want to ask difficult questions of Jensen would also point out that, you know, Core Weave is one of Nvidia's biggest equity positions or equity investments. It's also one of its biggest customers technically, and they are in a position where Core weaves under pressure from its customers to have access to the latest technology. There is a disconnect there. At some point they can't be running both the old GPUs. But again, you know, I think asking the basic question of depreciation and how Jensen Huang sees it, that that's something that we will put to him for sure.
- [23:05]
Ian King
Yeah, it definitely has to be addressed. Jake Goldberg, thank you as always. You give us so much time. We so appreciate it. Senior analyst, Semiconductors and Electronics over at Seaport Research Partners, as we've said, currently has a sell rating on Nvidia, the only such rating for the stock listed in the terminal. Sticking to his conviction. His conviction. Shares of Nvidia, by the way, still up about 3.6%. But Ed, still with us.
- [23:26]
Carol Massar
Still with us. And once again, Jade, not just the only sell rating, but that price target at 140 in shares, you know, closed today. What? You know, 160 something.
- [23:35]
Samson (Hazelview Investments)
Yeah.
- [23:36]
Carol Massar
180.
- [23:36]
Ian King
Yeah, 186.
- [23:37]
Carol Massar
186. Thank you. Go ahead.
- [23:40]
Ian King
No, Ed, as you think about, you know, your conversation, Jensen, you've had many conversations with him at different venues, different events. I don't know what are you, what is really, you think the most important thing to, to hear from? We talked about depreciation and some other things. But I'm just curious what's top of mind for you here and what you really want to hear from him?
- [23:58]
Ed Ludlow
Electricity. I, it's fair to say I've had More terminal client IDs, more messages on social media, media. More people in the newsroom come up to me and say like, you know, we should probably talk about electricity and energy because, you know, we don't really have a good line of sight to whether if they can build all these data centers. And Jensen, one does have a good line of sight on that. When the data center is built, finished, ready to turn the lights on, is the electricity that, you know. And the answer is no. There's loads of deals out there, right? You guys would have done the red headline on the show today about the US or the DOE taking government ownership of nuclear reactors. But these are all deals on paper. They don't exist in the real world. I think that's really critical. The other thing is the press release says they're sold out of GPUs. I just ask him, what do you mean by sold out? Because they're ramping output. You know, their supply constrained demand is greater any given moment, their ability to supply. But to say that something is sold out is a bit confusing, to be honest. And so, you know, ask for some clarity on that.
- [25:06]
Carol Massar
Hey, before we let you go, last question. Ian King, writing that inventory, took a jump in the quarter normally at chip makers. And just remind everybody, Ian King has covered chip makers for more than 20 years. That's a worrying sign. Meaning the amount of unused product is going up. The company said it's to quote ordering to secure long lead time components, meet the demand for Blackwell and support future architecture roadmaps is a little different than what it's traditionally done.
- [25:29]
Ian King
I thought they can't meet demand.
- [25:32]
Ed Ludlow
Yeah, inventory is typically bad depending on the type of chip because it signals that you, you know, no one's building up there. The customers aren't building inventory. By the way, Ian's covered semiconductors since 1998 at Bloomberg, so. So longer than 20 years. But you know, Nvidia's argument has always been we keep telling our customers, our suppliers and our partners partners what we're doing for the next five years. That includes the memory chip makers and telematics data center server design builders so that everyone can keep pace. And the argument that they're making is that when they want to ship Blackwell accelerated computer systems at scale the gpu, it can't just be the GPU that's ready to go. You need all the other components to go with it. And you know, with the stock up, whatever it is now in after hours 4%. So I don't think anyone's worried about that inventory number.
- [26:25]
Ian King
Yep.
- [26:26]
Ed Ludlow
Days.
- [26:27]
Ian King
All right. All right, good stuff. Hey listen kiddo, we will be watching. All of us will be watching. Co host of B Tech, Ed Ludlow. As you know, catch him at 11am Wall street time every Monday through Friday, but he will be speaking exclusively this evening with Nvidia CEO Jensen Wong. That's at 6:30pm Wall street time and you can catch that on both Bloomberg Television and Bloomberg Radio, so be sure to check that one out. It is an exclusive. So he's got the conversation.
- [26:54]
Carol Massar
Stay with us. More from Bloomberg businessweek Daily coming up after this.
- [27:02]
Ian King
Bloomberg businessweek is brought to you by Evolving Money, a podcast that explores how cryptocurrency is the next logical evolution of the financial system. The program investigates how traditional finance firms are integrating crypto into their operations now that Washington has begun to pass much needed regulations. Follow the podcast, which is sponsored by Coinbase wherever you get your audio programs.
- [27:26]
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- [29:01]
Podcast Host
You're listening to the Bloomberg Business Week Daily podcast. Catch us live weekday afternoons from 2 to 5 Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube.
- [29:15]
Carol Massar
Well, Nvidia gave a strong revenue forecast for the current period with sales expected to be about $65 billion in the fiscal fourth quarter. I want to bring in Bloomberg News big tech team leader Sarah Fryer. She's also the author of no Filter, the Inside Story of Instagram. She joins us from Bloomberg's San Francisco bureau. So going into this, Sarah, there was this narrative emerging that there was concern that the a bubble, you know, if we're calling it, that maybe losing a little bit of air if we're going to stay with that metaphor. Concern about the hyperscalers capex. We saw what happened with meta platforms a few weeks ago. Is that concern gone after reports such as this is everything all fine and dandy now?
- [29:55]
Sarah Fryer
I don't think the concern is gone because I do think there are still some trends that are are, you know, as noted in my my colleague Ian King stories, somewhat worrisome, right? The fact that Nvidia is investing lot of the entities that are buying its chips. Right. So is there a way that they are indirectly ending demand for their product? There is the concern about China sales. We still don't have any forecast of sales to China despite some of the loosening of the most restrictive policies from the Trump administration. And then there's also the question of everyone trying to come up with Nvidia alternatives for their chips and some Some of the rivals starting to gain a little bit of traction. We saw a little bit from amd and then furthermore, just the idea that, you know, so much of the, some of the spending on chips on data centers depends on having the physical infrastructure to really put them to work and especially the energy making sure that there is power to make all these data centers come to life within video chip. So I think that, you know, although this is, this is a company on a tear, this is, we are in the, you know, the Nvidia economy. It is really propping up the stock market right now. It has, it has altered the financial future of a lot of the companies my team covers. But, you know, can it last longer? Probably. And that's what this report is showing. But is it inevitable that it will, you know, are all the fears in our past and we're not thinking about that anymore? Certainly not. We're going to keep looking at all those trends and making sure that we can explain to people what, what is, what is putting pressure on the future.
- [31:51]
Ian King
The one thing I want to though, bring out Sarah, and you're, you know, there on the West Coast, San Francisco, you know, the tech community front and center. So you hear things in and around, not just in the newsroom, but just in the area. And you know, I'm looking at, you know, the concerns about, like you said, maybe this doesn't put concerns to rest, but I'm looking at, you know, in video is certainly up in the aftermarket. I'm looking at NASDAQ 100 mini futures. They're up about one and a half percent s and P500 futures are up about 9, 10 of a percent is big. It's big.
- [32:23]
Carol Massar
I look at the biggest has a big effect.
- [32:25]
Ian King
The sox is up almost 2%. There's a bunch of other names in the space. So it's, I think there was just so much fear that what if they missed those numbers and they met on the data center revenue number for the third quarter and fourth quarter revenue was upbeat in the outlook. Right. So I think does it feel like, I mean, I don't know, you know, this community just a little bit of a sigh of relief that okay, they hit these numbers, they actually did better than what the street was expecting. And maybe that puts some, some of the concerns, I don't know, under wraps for a little bit.
- [32:57]
Sarah Fryer
I think here, you know, you're asking about the perspective here in the Valley. Here in the Valley, I didn't sound like anything that there's a sense that we're just at the beginning of this grand movement that will change the world. Right. Maybe it's not even the LLM that will be the, the model that secures the future with AI. And so we're just now starting to see the applications of AI. The, you know, the payback really for all of this investment. We haven't quite solved that. You know, where, where's all this, this revenue, the actual sales to companies that are going to pay for all of the chips that Nvidia makes. We haven't really solved that problem to the tune of the billions that have been spent. But I think that here, you're asking here in the Valley, it is very much, you know, all systems go on AI there. There is not as much of a concern about whether this is a bubble. People are seeing these, these big numbers and they're thinking, you know, the world is, is about to change even further.
- [34:03]
Carol Massar
How so?
- [34:05]
Sarah Fryer
I. People are thinking about how their jobs are going to change. They're using AI very, very much in their jobs and in their personal lives. Like, you know, relying on, on AI to help them make decisions for themselves and their families. And, and I think people are eager to create products that are going to take advantage of this as a new resource. Whether that is going to dramatically lead to efficiency, more profits for the companies, given all the investment so far, it's sort of yet to be seen.
- [34:44]
Ian King
Yeah, it's just kind of interesting, right? I mean, here we are, what, almost three years in to this AI story and most people say it's just early innings on all of this, but it's hard for, right. All of us who covered, you know, booms and busts and crises. And I'm not saying that this is any of that, but it's hard not to be a little bit skeptical when you see, you know, Sarah, the spend over and over and again, the conversations around the circular financing and, you know, it's hard. Your, the logical side of your brain says, well, wait a minute, does this ultimately make sense?
- [35:16]
Sarah Fryer
Two things can be true, right? It's not necessarily either or. There can be a dramatic revolution in technology that will change our lives and there can be irresponsible spending at the same time. Right. We saw in the dot com boom, for instance, that there were a lot of companies that had very dire circumstances at the end when that bubble burst and they had to shut down. But hey, we still use the Internet. The Internet is still a thing. So what?
- [35:49]
Carol Massar
Right?
- [35:49]
Sarah Fryer
So I think we might calm.
- [35:52]
Ian King
Not so much.
- [35:54]
Carol Massar
Sorry, Sarah, go ahead.
- [35:55]
Sarah Fryer
We're not necessarily. Yeah. No, we're not necessarily talking about, you know, a bubble burst. And that means that I wasn't a thing. And we shouldn't have, we shouldn't have thought that it was going to be so big. It could be that, you know, there, there is still potential for a large financial correction down the road. But AI remains a force that changes how we do business and how we live our lives. So I think to put it in that stock of a either or is missing the larger trend.
- [36:26]
Ian King
This is why we come to you, because it's really.
- [36:29]
Carol Massar
She sees the big picture.
- [36:31]
Ian King
Yeah. And it's very balanced and thoughtful. Sara, thanks so much. Really appreciate it. Bloomberg News Big Tech team leader Sarah Fryer. She's also the author of no Filter, the inside Story of Instagram, and she is of course there from our Bloomberg San Francisco bureau.
- [36:46]
Carol Massar
Stay with us. More from Bloomberg businessweek Daily coming up after this.
- [36:53]
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- [38:57]
Podcast Host
You're listening to the Bloomberg Business Week daily podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube.
- [39:10]
Carol Massar
The US government plans to buy and own as many as 10 new large nuclear reactors that could be paid for using Japan's $550 billion funding pledge. It's part of a push to meet surging demand for electricity. Carol Our BNF team, independent analysts who provide perspectives on global commodity markets and the tech driving the energy transition, writing recently that the surge of AI is turning data centers into giant energy users.
- [39:37]
Ian King
What's in our own Mandeep Singh, when we talked about demand and what's really constraining things in terms of the build, that is the access to power and energy electricity demand here. So some background for you from AI training and services is set to quadruple within a decade, making data centers one of the fastest growing electricity users on the planet. Like, listen, this is something we've been drumming big time, I feel like over the last year or so.
- [40:00]
Carol Massar
Tim let's bring in Samson. He's managing partner and portfolio manager at Hazelview Investments. It's a real estate firm with more than $11 billion in assets under management. He joins us here in the Bloomberg Interactive Brokers studio. Sam, welcome you and the team out with the new white paper on how AI is changing real estate investment in the US Globally. We're going to get to that. But first just explain the asset breakdown of the $11 billion and really, really where you guys play in the industry.
- [40:24]
Samson (Hazelview Investments)
We play across the board. We play in private credit, we play in private equity and publicly traded real estate securities.
- [40:30]
Carol Massar
Okay. So in terms of the publicly traded real estate securities, what type of real estate it's again?
- [40:36]
Samson (Hazelview Investments)
It's, it's across the runs the gamut. It runs the gamut. So with different property types like data centers that we're going to talk about today, we're in cell towers. So another piece of the technology continuum. We're in traditional property types like hotels, office, retail apartments as well as other niche oriented sectors like single family rentals as well as, I would say senior housing.
- [41:00]
Carol Massar
So on the data center. Oh, sorry, Carol. On the data center side of things, like in recent years, how much has that grown in terms of your real estate portfolio? Portfolio, like how much has that become a priority significantly.
- [41:10]
Samson (Hazelview Investments)
It's doubled. It's doubled over the last three years. We started looking at data centers 20 years ago. The asset class was very different then than it is now. But over the last two, three years, the magnitude of data center exposure in our portfolio has gone from mid single digits to more than double digits.
- [41:30]
Ian King
So meaning what, almost 20%?
- [41:32]
Samson (Hazelview Investments)
I would say probably low double digits, 10 to 15% overall.
- [41:35]
Ian King
So your overall exposure now is 10 to 15% as data centers?
- [41:38]
Samson (Hazelview Investments)
Yeah.
- [41:38]
Ian King
Are you looking to increase that?
- [41:40]
Samson (Hazelview Investments)
We have increased it significantly already or.
- [41:43]
Ian King
You want to do it more?
- [41:44]
Samson (Hazelview Investments)
I think we're happy with where it is today. When you look at the stocks year to date, they've actually been laggards this year relative to other property types. And given what's going on with the amount of capex investing in AI, we think it's actually a good place for investors to think about allocating capital.
- [42:01]
Ian King
But is it getting to be a little bit of a glut, especially with maybe not having the access to necessary power?
- [42:06]
Samson (Hazelview Investments)
So like you said earlier, power is a challenge. Right. And power is what is that, that stumbling block for a lot of the developers that are going to go out and build new hyperscale facilities that Metta, Google, Amazon and Microsoft want to populate? You know, what we're seeing is, you know, companies are entertaining new partnerships to bring energy to data centers until they could get on the grid. So that is one of the solutions people are looking for.
- [42:36]
Ian King
Who are your data centers for?
- [42:38]
Samson (Hazelview Investments)
So our data centers run the gamut from enterprise users to those cloud service providers that I just mentioned.
- [42:45]
Ian King
Hyperscalers.
- [42:45]
Samson (Hazelview Investments)
Yes.
- [42:46]
Carol Massar
How do you make sure that when you make a data center investment, you know that that data center will be one that will have access to power?
- [42:54]
Samson (Hazelview Investments)
It's a good question.
- [42:55]
Carol Massar
The reason I bring it up is just a couple of weeks ago, our own John Gittleson and Michelle Ma had this story about data centers in Santa Clara, California, Nvidia's hometown, that have been there for a while and they're standing empty right now because they do not have hookups to the grid.
- [43:08]
Samson (Hazelview Investments)
Yeah. So there's a lot of due diligence and work that happens behind the scenes to be able to get that power from the grid to the center. You know, so when the companies that we invest in, like a Digital Realty Trust that is a 10 billion pipeline around the world, you know, they're generating 11 to 12% unlevered returns on that capital, they are spending a lot of time with the municipalities to ensure that the data center is going to be powered with the grid, with the, with the necessities they need to be able to make it function.
- [43:48]
Carol Massar
I just want to do a little sort of callback to an earlier story that we did. Carol.
- [43:53]
Ian King
Mm.
- [43:54]
Carol Massar
Stack Infrastructure was acquired earlier this year by Blue Owl capital. Has a 48 megawatt project close to the Santa Clara, California area that is also vacant still.
- [44:06]
Ian King
Yeah. And I think. Was it the Journal who did a whole thing about Blue Owl and what they're doing, you know, there it's exposed.
- [44:11]
Carol Massar
Exposure. Exposure, yeah.
- [44:12]
Ian King
The data centers. Well, so I'm looking at digital realty and you say, you know, you guys have exposure Stock or the REIT, I should say datacenter. REIT is down about 10% this year, but it's definitely moved off its lows.
- [44:25]
Samson (Hazelview Investments)
Yep.
- [44:25]
Ian King
Why is it. Because what's going on?
- [44:28]
Samson (Hazelview Investments)
I think it's more emblematic of the REIT industry than it is Digital Realty Trust as a company because of rates or what I think part of it is when you look at the component of the broad equity market, that's worked really well this year. Yeah, it's been AI, it's been tech, it hasn't been real estate. So part of what swept digital realty and other tech oriented real estate investments to experience some softness in pricing has been just overall fund flows out of the asset class, not necessarily the health of the business, because the business is performing really well.
- [44:59]
Ian King
Because it was up 34% in 2023, it was up almost 32% last year. So it's been on quite a run.
- [45:04]
Samson (Hazelview Investments)
Correct.
- [45:05]
Ian King
Along with that big story that, that we've talked about nonstop.
- [45:09]
Ed Ludlow
Correct.
- [45:09]
Samson (Hazelview Investments)
And if you kind of rewind, rerun the clock. When Covid happened, there was a lot of investments that took place into the IT architecture of companies around the world to be able to get them kind of into the cloud. And then you fast forward to the end of 22, beginning of 2023, before really Nvidia came onto the scene. That's when a lot of the companies like a digital realty trust was sowing the seeds for AI data centers. And that's when we significantly increase our investment into that component of the market.
- [45:41]
Carol Massar
As far as the data center effects on the rest or the investment in data centers, those effects and AI's effects on the rest of the real estate world. I want to sort of branch out a little bit and hear from you about efficiencies when it comes to hiring practices and if that is actually leading to less of a need for office space for Workers.
- [45:59]
Samson (Hazelview Investments)
It's a good question. It's a question that a lot of folks are asking. We're not seeing that today in terms of the AI component impacting jobs and that's having less demand in office space. In fact, we're seeing the opposite. What we're seeing is companies are wanting to upgrade their space. They want to ensure that they have the best quality space in a market to attract the talent that they need to be able to deliver on their investment objectives.
- [46:24]
Ian King
So this white paper that you did, the impact of AI on public real estate, we've obviously just drilled down data centers. Is it just the data center story or is it much more than that?
- [46:34]
Samson (Hazelview Investments)
It is more than that. So like we mentioned in the white paper, cell towers, as a tangent to what's happening within data center space, if you think about mobile data consumption, that's growing at, you know, high teens, low 20s per year over the next five years, there's mobile AI apps that are being downloaded at significantly high rates over time. As more of those apps use generative AI, more of the data is going to be pushed to the edge. Cell towers are right in the fulcrum of what's happening on the edge. And we think 5G becomes a very big source of investment.
- [47:11]
Carol Massar
So what's the play there?
- [47:12]
Samson (Hazelview Investments)
American Tower, there's American Tower, there's Crown Castle, there's SBIC Communications. So there's a number of data cell tower REITs that investors can participate in in the growth of 5G.
- [47:24]
Ian King
There's also Starlink.
- [47:26]
Samson (Hazelview Investments)
There is Starlink.
- [47:27]
Carol Massar
So it's not publicly traded.
- [47:30]
Ian King
So we create a saying that as a competition to these.
- [47:33]
Samson (Hazelview Investments)
So that created a lot of news two months ago. What I would say is what we found.
- [47:38]
Ian King
Just have about 30, 35 seconds. Sorry.
- [47:40]
Samson (Hazelview Investments)
What we found is there's a lot of use for satellites in rural areas, but in dense markets, in tier one markets like we are today in New York City, satellites are not as functional as it is in terms of the latency that's needed for a lot of these applications. So we don't think it's as applicable today as it is in sort of tier three areas.
- [48:02]
Ian King
All right, good stuff. Come back soon. This is really fun.
- [48:04]
Samson (Hazelview Investments)
Thank you for having me.
- [48:05]
Ian King
Simpson, he's managing director, managing partner. Excuse me, Portfolio manager at Hazel View Investments. As we said, real estate firm with more than 11 billion in assets under management. Joining us right here in studio, this.
- [48:18]
Podcast Host
Is the Bloomberg businessweek daily podcast, available on Apple, Spotify and anywhere else you get your podcasts. Listen live weekday afternoons from 2 to 5pm eastern on bloomberg.com the iHeartRadio, Apple Tune in and the Bloomberg Business App. You can also watch us live Every weekday on YouTube and always on the Bloomberg Terminal.
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