Scarlet Fu (2:11)

Each and every week we provide in depth research and data on some of the 2000 companies in 130 industries our analysts cover worldwide.

Paul Sweeney (2:18)

Today we'll look at why the energy company Exxon Mobil is cutting 3 to 4% of its global workforce.

Scarlet Fu (2:23)

Plus a look at why the AI cloud computing startup Core Weave is signing a deal with tech giant Meta Platforms.

Paul Sweeney (2:28)

But first we begin with the news from the athletic footwear company Nike.

Scarlet Fu (2:31)

This week the company said that efforts to roll out new products, boost marketing efforts and clear out old inventory helped ease a long time sales slump Nike.

Paul Sweeney (2:39)

Said its sales fell 1% on a currency neutral basis in its most recent quarter. And that was a smaller drop than investors anticipated.

Scarlet Fu (2:46)

For the analysis we are joined by Poonam Goyal, Senior US E Commerce and Retail Analyst at Bloomberg Intelligence.

Paul Sweeney (2:52)

We first asked Poonam if Nike's turnaround plan is working.

Poonam Goyal (2:55)

It's working. Nike is able to pick up momentum. Sales on a reported basis were up 1%. Inventories were down 2%. This is exactly what we wanted to see. We wanted to see inventories align with sales. So while the work isn't done and it's not over and it's not a straight line up, we do see momentum building. What they're doing is working. The new products, the innovation, the focus on wholesale, it's all coming together. There are still some pitfalls. China is still sluggish and we'll need to wait and see what happens there as well as with its Converse brand.

Scarlet Fu (3:32)

Okay, so China's definitely an issue. Converse is a work in progress. When I look at the revenue line, the top line, what I see is direct revenue fell 4%, wholesale revenue rose 7%. Just break that down for us in terms of what that means. Direct revenue versus wholesale revenue.

Poonam Goyal (3:48)

Sure. So direct revenue composes of stores which were actually up 1%. So that shows us that the innovation and the new products which are flow through their own stores is working. What made the DTC revenue go down 4% was that digital was down 12%. No surprise here. This is where they're clearing all that excess inventory. So this channel will be pressured for a couple of quarters. Still wholesale up 7%. A great, great number. I mean it just shows that coming back into partnerships with Foot Locker in a more meaningful way, getting on Amazon.com all these efforts are paying off and they're where the customer is. They're gaining their shelf space back and the customers are respond favorably.

Paul Sweeney (4:28)

You know, the Nike brand is such a powerful brand. I think of it like Coca Cola or Apple. It's so powerful. Yet some of those American brands in China under pressure and I'm wondering just with the geopolitics, is Nike a brand where that might be feeling some anti American sentiment from consumers?

Poonam Goyal (4:45)

So that has happened in the past. There have been boycotts against, you know, us American brands. We don't think that's the issue yet from what we're hearing. But we do think that the issue is more product at Nike in China. So they do need to ramp the product and they do have a lot of excess inventory there. More so than they do in the US today. So that's also a work in progress that they need to get through.

Scarlet Fu (5:07)

Let's talk about profitability. Margins declined due to higher discounts and then also the higher tariffs in North America. I look at gross margin 42.2%. Last year at this time it was more than 45%. Now the 42.2% was better than estimated. How long is it going to take for Nike to turn that around?

Poonam Goyal (5:26)

I think we have quite some time. They said that they do still aspire to reach double digit EBIT margin. EBIT margins in the quarter that they just reported was only at 7.1%. So that's a long Runway. We don't think it's anytime soon. And the hit from tariffs is building, not reducing. They had expected a billion dollars the last time they spoke to us and that went to $1.5 billion in excess costs from tariffs.

Paul Sweeney (5:54)

How much are they passing along to the retailer versus taking that in their margin? Because I mean Nike is probably just a great example of how companies are trying to deal with the tariffs.

Poonam Goyal (6:03)

Yes, I think they're doing this actually very smartly. They're not increasing prices on products that are under a hundred dollars, but they are taking prices up on sneakers that are above that price point. So if you think about moving prices up, it's very easy to say the price of milk went up from $3 to 3.50. But when you're looking at a pair of sneakers, especially a new launch, no comparison. So you can go ahead and price up your new innovation and the customer may not even recognize that there was a material price increase and that customer has a little bit more flexibility to stretch their wallets at that price point.

Scarlet Fu (6:37)

Poonam, if you are heading up on holdings or Adidas or Skechers or you know, any of the hoka, what would you be thinking looking at this set of results?

Poonam Goyal (6:48)

So Skechers I think is in a different league than Nike. It's a little bit different. It's a value play. And I think they don't compete directly like an Adidas or an an or a HOKA would with them. Adidas is doing really well on its franchise lifestyle shoes. And I think Nike, what you heard was doing well in performance. So two still very distinct categories though for AN and hoka, I think it's a little bit of a different story because running was back on. It's doing phenomenally well. And that is where HOKA and ON both took share from Nike. So I would be just, you know, a Little concerned and just make sure that I keep my game on when it comes to innovation because at the end of the day, product is what's going to drive how sales momentum will go moving forward.

Scarlet Fu (7:33)

Our thanks to Poonam Goyal, Senior US E Commerce and Retail Analyst at Bloomberg Intelligence.

Paul Sweeney (7:38)

We move next to some news in the media and entertainment space. This week we heard that Spotify CEO Daniel Ek is stepping down after two decades at the company.

Scarlet Fu (7:46)

Spotify will leave the leadership of the music streaming company in the hands of two trusted executives there. Gustav Soderstrom, chief Product and Technology Officer, and Alex Norstrom, Chief Business officer. This move will go into effect on January 1st.

Paul Sweeney (7:59)

For more, we were joined by Geetha Raghanathan, Bloomberg Intelligence analyst on US Media. We first asked Geetha to explain why CEO Daniel Ek stepping down.

Geetha Ranganathan (8:08)

Now this is, you know, one of your classic cases of the founder finally kind of establishing a really good transition plan and handing it off to his, you know, two lieutenants here. So we're having a co CEO structure. And really, I mean, the first, when I heard this, I mean, this really kind of harkens back to what Reed Hastings did with Netflix. You know, kind of left right at the peak, right when the companies, you know, everything was kind of, you know, all cylinders were firing away and left it to Greg Peters and Ted Sarandos to kind of take charge. And it seems like Spotify is in a very similar position. So they had a couple of things that had to get done this year, which was new contracts with all of the music labels. It looks like Daniel Ek has, you know, accomplished all of that. And I think he's really kind of left the company in a good position for, for its next phase of growth. And this is really, you know, a huge story in the Internet space. The possibility to get to a billion users very, very quickly. They already have about 700 million.

Scarlet Fu (9:07)

Okay. So there are almost three quarters of the way there. He's leaving on top, as George Costanza would in Seinfeld. But my question, Geeta, is you talk about the new phase of growth. How much of that will rely on continued price increases? Unlike Paul, I do subscribe to Spotify. And it's alarming how frequently the price changes come.

Geetha Ranganathan (9:28)

Yeah, and it is going to keep coming, Scott. There's absolutely no doubt about it. I mean, this whole story is kind of predicated on those price increases. Remember, though, that they never took up prices for the first 10 to 12 years and then it started coming fast and furious. Right. We had one price increase in 2023, another in 2024. We're going to have probably another one in 2026. But if you kind of look at all of the streaming services out there, you know, Spotify is of course the, the leader in audio streaming. They have a 35% global market share in terms of subscribers. You kind of look at their price, let's say in the US it's $12 for an individual plan. You compare that to, let's say the video leader, Netflix. Again I go back to the Netflix example. They're priced at $18. So I think Spotify still has quite a lot of Runway when you kind of compare it to the rest of the field. And the other thing that I like to point out here is when you're kind of subscribing to an audio service, it's typically only one service that you're subscribing to as opposed to a video service. So I think people really, you know, if they like Spotify, they're absolutely going to hold on to it at any cost. And the other thing is, you know, Spotify is adding new features all the time. So, so they are like really getting down on, you know, monetizing more and more, but it's not, they are innovating also constantly. So I think, I think people don't mind paying for it.

Paul Sweeney (10:46)

What's the biggest challenge to them on the cost side of the business?

Geetha Ranganathan (10:49)

Geetha Music royalties. Well, I mean that's, you know, for every dollar that they make, they're paying out about 70 cents in terms of music royalties back to the labels. So it is definitely a very, you know, from that perspective the model is hard, but one of the things that they've done very well is, you know, they've obviously renegotiated a lot of the deals, kind of tried to provide investors with a lot more visibility into the cost base. But more importantly for them, they're really trying to go away from, you know, licensed content to more owned content. So kind of going into podcasts, going into more non music content where again, they have a lot more leverage, whether it's audio books, whether it's video podcasts, getting away from just being a core music service to more of kind of a global kind of an audio service. And they're doing that really well. And that's going to help them with their margin expansion story as they get better unit economics.

Scarlet Fu (11:45)

Right. And introducing premium tiers on top of that. You have to unlock in order to unlock some of the more, I don't know, high profile podcasts, you then have to pay extra. Geeta, talk a little bit about AI because I keep reading about how AI generated music is a challenge, but in what way? And could it actually become an opportunity as well for Spotify?

Geetha Ranganathan (12:06)

I think so. I think it is going to become, you know, an opportunity as we go. They're already actually using, you know, a lot of features when it comes to curation, you know, when it comes to music discovery, when it comes to providing better features. And they, they're already, and you just brought up the super premium tier and a lot of that is actually going to be having like an AI DJ type of a feature there, you know, for both listeners as well as music creators. So I think it is definitely going to be, you know, a good opportunity for them to present a much better product. I mean, we've already seen AI being used by a lot of the other platforms. Again, I go back to Netflix because they've done this really well in terms of, you know, having a much better algorithm now to serve up better content. And I think that's exactly what Spotify is doing in terms of its playlists as well.

Paul Sweeney (12:53)

Where's Apple in this audio game?

Geetha Ranganathan (12:58)

So just in terms of subscriber share, Paul, I mean, Spotify, as I said, leads with about 35% share of the market. Apple is really far behind. They have about a 10% share. So very, very hard for them to catch up in terms of, in terms of subscribers at least.

Scarlet Fu (13:12)

Our thanks to Geetha Ranganathan, Bloomberg Intelligence analyst on US Media. Coming up, a look at why the video game maker Electronic Arts has agreed to sell sell itself to a group of investors.

Paul Sweeney (13:22)

You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in depth research and data on 2000 companies and 130 industries.

Scarlet Fu (13:28)

You can access Bloomberg Intelligence via Big Go on the terminal. I'm Scarlet Fu.

Paul Sweeney (13:33)

And I'm Paul Sweeney. This is Bloomberg.

Scarlet Fu (13:38)

This is Bloomberg Intelligence with Scarlet Fu and Paul Sweeney on Bloomberg Radio.

Paul Sweeney (13:46)

We move next to the electronic gaming space.

Scarlet Fu (13:48)

This week, the video game maker Electronic Arts, or ea, agreed to sell itself to a group of investors. They include a firm managed by Jared Kushner and Saudi Arabia's sovereign wealth fund.

Paul Sweeney (13:58)

The deal values EA at about $55 billion, with the investors agreeing to pay $210 per share in cash. This makes it the largest leverage buyout on record.

Scarlet Fu (14:08)

For more, we are joined by Nathan Naidu, Bloomberg Intelligence Technology research analyst.

Paul Sweeney (14:12)

We first asked Nathan to break down the EA's recent valuations.

Nathan Naidu (14:16)

The valuation is at a 20 to 30% premium versus the last recorded Market cap before this deal was announced. And it seems like it is a premium deal but actually EA has a lot going for it. It is actually launching a new Battlefield game and there's a strong prospect for this game. And actually the game is now in pre release and even then it has already smashed all prior records set by the biggest game in that genre and that genre is first person shoot. And that game that has dominated that genre is Call of Duty from Microsoft. So Better Fuse 6 is looking to be a successful launch. And next year we have FIFA and obviously we know that EA has the biggest soccer game in the industry and that's FIFA, what was called FIFA but now it's called EA Sports fc. And next year FIFA World cup will be a special one because it will be hosted across three cities including the US and if people don't know US is actually the biggest market in terms of revenue for all kinds of sports game. So that's the second thing going for EA that I think it's going to lead to at least two rounds of consensus beats on EPS earnings per share. So I think for EA this is a, this, this, this is actually a good deal and we can talk about the common struggles faced by you know, game publishers and how these deals would make sense for EA as well as the investors in this context.

Scarlet Fu (15:42)

So yeah, let's do that because you mentioned a bunch of the titles and these are, you know, very valuable franchises. These, this is a top quality ip, whether it's EA Sports fc, Madden NFL, the Sims, Battlefield. What does ownership by private equity, by private investors allow EA to do that it can't do as a publicly traded company?

Nathan Naidu (16:02)

I think it's all down to funds. So publishers, game publishers in general have, have been facing two struggles. First one is gamers attention span and Playtime are increasingly getting limited. The reason is people are sticking to brand ST or franchises that they have played for a long time. And in fact Newzoo published a data saying that 80% of playtime tend to go back to the 60 or so titles leaving only 8% of playtime for brand new IP. And this is actually in favor of EA because we mentioned those valuable ip. In fact if we look at global unit sales, EA has four of those top 20 selling IP globally it has four out of the 20. So that is actually a pretty enticing deal thing for companies like private equity because you know, profit generation is key. And what this means that is that EA has franchises that can bring in recurring revenue. We talked about EA Sports fc, we talked about Madden MFL and they actually revived a new franchise, college football. And you know, it was one of the best selling titles in the US Last year. So recurring revenue is key here. And the second struggle that I was going to go into is development cost is really high, especially in the US So that means Western publishers actually have a cost disadvantage when compared to Eastern developers. For example, salaries for game engineers in China is more than half the level in California. And personnel cost, game engineers is a huge part of developing a game. Tencent actually launched a new game in the same genre as Battlefield 6 and that's Delta Force is doing really well. And what that cost disadvantage is stopping EA from is continuously to push out a strong cadence of content to essentially extending the shelf life of any game. And Eastern developers can do that better because of that cost edge.

Scarlet Fu (18:01)

Our thanks to Nathan Naidu, Bloomberg Intelligence Technology Research Analyst.

Paul Sweeney (18:05)

We move next to some news in the energy industry.

Scarlet Fu (18:08)

This week the energy company ExxonMobil said it plans to cut about 2,000 jobs globally as part of its long term restructuring plan.

Paul Sweeney (18:15)

The reductions represent about 3 to 4% of Exxon's global workforce and are part of the company's ongoing efficiency drive.

Scarlet Fu (18:21)

For the analysis we are joined by Vincent Piazza, Bloomberg Intelligence senior Equity research analyst of oil and Gas.

Paul Sweeney (18:27)

First ask Vincent for his take on this Exxon news.

Vincent Piazza (18:30)

Well, I think it's part of managing through the cycle, right? In prior cycles, the sector was exposed to more extreme volatility, higher highs, lower lows. The industry is trying to manage through what seems to be a rather clouded backdrop right now. So we're sitting here and you got nat gas somewhere around 330, Henry Hub, you got WTI in the low 60s. You have OPEC bringing back on capacity and maybe even speeding up that capacity add. You have a more clouded, broader economic backdrop across the globe. You have geopolitical issues, so lots of uncertainty. And not only Exxon. Exxon is probably going to cut somewhere about 2, 3, 4% of its global workforce. Its Canadian affiliate a much more substantial cut, roughly about 20% over the next two years or so. You're seeing it at ConocoPhillips, you're seeing it at Chevron, even BP, the major European energy conglomerate. You're seeing it across the board. And so Paul, as you know, when you're not growing revenue, you're not getting the revenue increase on price. You're not growing production because your investor base does not want to see that production growth. You are looking at very steady revenue, maybe even declining revenue. You have to manage that netback from the cost perspective. And you have to support that cash flow stream. And so you're doing it via these cost cuts, cuts over a number of years to maybe even three years to sort of bring that cost structure in line with the new reality of uncertainty in the marketplace to reduce that volatility.

Scarlet Fu (20:15)

Well, there's cost cuts and then there's ExxonMobil's cost cuts. Since 2019, it's trimmed 13 and a half billion dollars in annual costs. That is more than all the other big oil companies combined. How much more room is there for Exxon to slash expenses?

Vincent Piazza (20:30)

Well, it bought Pioneer, so it has a relatively sizable workforce in general. Doesn't necessarily mean that those cuts are going to come there. But there are ways you cut, you gain efficiency. In this technological era where we have advancements across the energy value chain, you will consistently continually seek out ways to get efficiency to bring down that cost structure and to bring unit costs in line with a very anemic outlook for global energy prices in general and also a very clouded outlook for the global economy, too.

Paul Sweeney (21:14)

So, Vince, kind of looking out, you know, one to two years, what is the view of the companies you talk to about energy prices, oil and gas? Is it still going to be a challenge market here?

Vincent Piazza (21:22)

Here? It looks like it. It looks like it's going to be a very challenged market, especially for the WTI side, for the oil side of the equation on natural gas. Paul, I know you and I have talked about this numerous times. You have a structural growth trajectory for natural gas here in the US Via export lng, whether it's seaborne LNG or whether it's pipeline gas into Mexico to help fuel their economy as well. You have the AI build out which will be a, which will dig. That's significant amounts of energy and that's beneficial for natural gas. But on the oil side, you have very anemic growth. You have your transportation fuels having to compete with alternative and renewable fuels. So there's greater competition there. The growth trajectory and the outlook for the demand side on the liquids fuels seems to be very clouded and seems to be somewhat less secure relative to the natural gas side of the house.

Scarlet Fu (22:30)

Our thanks to Vincent Piazza, Bloomberg Intelligence Senior Equity Research Analyst on oil and gas.

Paul Sweeney (22:35)

Staying with energy. Bloomberg Intelligence recently put out a report on its outlook for nuclear power in 2026.

Scarlet Fu (22:40)

It's titled AI driven power demand set to spark $350 billion build cycle. This deep dive describes why nuclear remains a favored power source for artificial intelligence.

Paul Sweeney (22:50)

For more, we were joined by Scott Levine, Bloomberg Intelligence Senior Energy Services Analyst I first asked Scott to talk about what the energy industry is doing to prepare for what seems to be an insatiable need for power.

Scott Levine (23:02)

Nuclear really has two very big positives going for it. Number one, it's a emissions free power source. And the hyperscalers that are really behind the investments care about that deeply.

Paul Sweeney (23:17)

Right.

Scott Levine (23:18)

And so they've favored, you know, more renewable sources heretofore like wind and solar. But what those lack are, you know, 24 by 7 baseload characteristics. And for a data center to be up 24 7, that's not going to do it. Right. So nuclear checks both of those boxes and those are two very big positives. And the reasons that you're seeing folks like Microsoft and Meta come out in favor of nuclear power and.

Paul Sweeney (23:48)

Yeah, so what's the. How much does nuclear provide today in the US versus where you think it might be in 25 years?

Scott Levine (23:54)

Yeah. So today it's a little bit below 20% of the grid.

Paul Sweeney (23:57)

Okay.

Scott Levine (23:58)

Which we're saying will return to about, in our base case scenario, 20% of the grid by 2050. That may not seem like much, 2 percentage points. Right. But it, you know, will equate to or amount to a $350 billion investment to get there. So those are big numbers. And in addition that we're talking about adding 60 some odd gigawatts to the grid and you can think about each full size nuke being 1 gigawatt. So that's basically building 60 generating units as our base case. So those are big numbers to get you from 18 to 20% over a 25 year period of time.

Paul Sweeney (24:37)

I tell you, I went in this report that you and your team put together section five small modular reactors. That's where I wanted to go to because I haven't. We've had some people come into the studio over the last few years and just talk to us about the science and the engineering and the possibilities of these small modular reactors. Tell us what they are and what role they could play going forward.

Scott Levine (24:55)

Yeah. So really these are. And none of these have been built in the US yet. Right. So this is very much an emerging technology play. But basically you're talking about is taking a full size nuke. You're driving down the highway, see a big cooling tower, bunch of smoke coming out the top of it. These are much, much smaller. Right. And so the idea here would be that these are much more flexible. And so if you have more disparate data centers located throughout the country, you can power these extensively with these smaller units, right. And we're talking about, you know, some of these are smaller versions of what's already in operation today, which is a light water reactor. And then some of these types of units are different types of technologies. You have gas cooled reactors as opposed to water. You have molten salt cooled reactors as opposed to water. And these use different types of technologies. Different types of fuels still remain to be licensed and proven. So a lot of it's very much on the come, but the technology in each of those areas holds promise. So, so we'll see. And each of them has pros and cons, right? And so we'll see over the next five years the technology shakeout and see which ones end up being at the top of the stack for the US but each of them have a lot of money behind them and a lot of support from a lot of deep pocketed players.

Scarlet Fu (26:20)

Our thanks to Scott Levine, Bloomberg Intelligence Senior Energy Services Analyst. Coming up, a look at why the cruise company Carnival raised its full year earnings forecast.

Paul Sweeney (26:29)

You're listening to Bloomberg Intelligence on Bloomberg Radio providing in depth research and data on 2000 companies and 130 industries.

Scarlet Fu (26:35)

You can access Bloomberg Intelligence via bigo on the terminal. I'm Scarlet Fu.

Paul Sweeney (26:39)

And I'm Paul Sweeney. This is Bloomberg.

Scarlet Fu (26:49)

This is Bloomberg Intelligence with Scarlet Fu and Paul Sweeney on Bloomberg Radio.

Paul Sweeney (26:56)

We move to some news in the tech space.

Scarlet Fu (26:58)

This week we heard that the AI cloud computing startup Core Weave has signed a deal to supply Meadow with as much as $14.2 billion worth of computing power.

Paul Sweeney (27:07)

As part of the deal, Core Weave will provide Metta with access to Nvidia's latest GB300AI chips.

Scarlet Fu (27:12)

So for more we were joined by Anurag Rana, Bloomberg Intelligence Tech analyst. We first asked Anurag how this deal benefits Core Weave.

Anurag Rana (27:19)

Core Weave is basically is a company that takes all these GPUs and rents it out to people for whatever they want to use. So they do get the dips on the most latest equipment that is sold by Nvidia and then the clients can. Now I did show that Meta is buying directly from Nvidia as well, but in this case they're just going and outsourcing the entire infrastructure for an amount of $14 billion, which may be a very small piece of Meta's overall CapEx for AI infrastructure, but it's still a start that they are now leasing capacity rather than building it in house.

Paul Sweeney (27:56)

So how should we think about this in the overall growth of AI? I mean this feels like incremental spending to me. But I'm not sure if it's just shifted somewhere else. When you see announcements like this from Core Weave, how do you kind of weld it in or kind of weave it into the larger picture?

Anurag Rana (28:12)

So every company, every hyperscale cloud provider right now, whether that's Microsoft or whether that's Meta or any other company that's out there that is spending a lot on capital expenditures, on expanding their AI capabilities, they have two options. They can either build it themselves and they can go to a specialized vendor like Core Weave and rent it from them, or lease it from them. Microsoft has said that they are really into expanding their leasing capacity or capabilities down the road, which is good for companies like Core Weave. Their job is to build this, only this infrastructure and rent it out to whoever wants it.

Scarlet Fu (28:47)

My other question when it comes to Core Weave and you know, all of this, all these deals it's making with these cloud providers, is that they are also raising a lot of money. Core Weave is tapping the debt market or there's, there's, there's expectations that it may tap the debt market. Is there going to be enough demand to, to meet, you know, what, what it wants to sell?

Anurag Rana (29:11)

So here is the case. When it comes to a customer like Microsoft or Metal, which all of us know have a lot of cash flow coming in. If they have signed, let's say a five year deal, seven year deal, you kind of know that the money is good. It's much easier to raise then let's say from a brand new company that may not have that amount of cash flow coming in. So I would say, I mean, you know, one should not be concerned that Meta is not good for that money. I don't think that's going to be, you know, a concern for anybody who's giving them the bonds or the debt for that.

Paul Sweeney (29:41)

Yeah. Meta raised $29 billion in a financing package for a massive data center in Louisiana. Oracle raised $18 billion in bonds as it builds infrastructure for OpenAI. So, so the markets are open for this kind of trade? It seems like.

Scarlet Fu (29:54)

Yeah, apparently they are. And the other thing with Core Weave, of course, is that it has an increased commitment from OpenAI. It's got this big customer in Microsoft, I think makes up 71% of its revenue. How diversified is Core Weave customer base right now?

Anurag Rana (30:11)

See, when you see the core first biggest customer was Microsoft. Microsoft didn't have the capacity to run a lot of their AI workloads, so they went to Core Weave. So, you know, frankly speaking, I understand that 70%, but you know, this is an area where everybody needs capacity. So, you know, for us it is an issue, but it's not like, you know, it's not a deal breaker when it comes to the quality or even you look at the fundamentals of somebody like a Core Weave. Now what's happening is other cloud providers are going to them and say, whatever excess capacity that you have, you know, we will take that as well.

Paul Sweeney (30:42)

Are there other companies that are going to come public here like Core Weave, these Neo cloud companies?

Anurag Rana (30:49)

Yeah, I mean, I'm sure a lot of them are gearing up for it. Core Weave is probably the biggest one that's out there. You know, we saw Microsoft signing another deal recently with Nebius, I believe, and you know, that was a very similar arrangement where Microsoft is going to them and saying, okay, for the next several years, this is the kind of money that I or the capacity that I want from you and this is how I'm going to give you the money to fund it, basically.

Scarlet Fu (31:15)

So, Anurag, when you look at these kinds of deals and you know, $14 billion here, $10 billion somewhere else, what gets your attention in terms of, you know, I need to look into this a little bit more versus this is just one in a long string of deals that these companies will continue to sign.

Anurag Rana (31:33)

The biggest thing you want to think about is what are these companies doing these deals for? So say somebody like a Microsoft, are they giving a lot of their inference workloads or the outcome of ChatGPT running on Microsoft's workloads or are they giving model training workloads? Because there is a narrative out there in the market that the long tail of the AI revenue comes from people using apps, which we think of this as inference revenue compared to the model training revenue, which may see its ups and down depending on what kind of technological advancement we see in software development.

Paul Sweeney (32:09)

Our thanks to Anurag Rana, Bloomberg Intelligence Technology Analyst.

Scarlet Fu (32:12)

We move next to the cruise industry. The cruise company Carnival this week raising its full year earnings forecast.

Paul Sweeney (32:18)

Carnival cited a record pace for forward bookings and improving net yields, but shares of the company fell after the news.

Scarlet Fu (32:24)

For more on this, we're joined by Brian Egger, Bloomberg Intelligence Senior Gaming and Lodging Analyst.

Paul Sweeney (32:29)

First, ask Brian why investors see Carnival's earnings forecast as conservative.

Brian Egger (32:34)

I think there are two ways in which maybe they're being perceived as conservative. The one is that their yield growth guidance for the fourth quarter, while it's certainly very solid in there in the mid fours, you know, it's a little bit below consensus, maybe street got a little bit ahead of itself. The second thing is, for all their optimism about bookings and direction of yields, they are very conservative in how they're deploying capital. They've only got about 1% annual yield growth for this year, the next two years. So they're growing very effectively. But they are also very measured in how they deploy capacity. So all this is really good. But they do mention that, you know, they can afford to, they can really be judicious on expense growth because they're only growing capacity at a very modest pace.

Scarlet Fu (33:17)

Is that a bad thing to be conservative? How does Carnival compare with Norwegian or Royal Caribbean?

Brian Egger (33:22)

Yeah, so if you look at Norwegian, Royal Caribbean, they're anticipating or actually scheduling about a mid single digit called 5% ish level of annual capacity growth for, for 2026, 27, 28. You know, it's closer to 1% for Carnival, maybe 2% in 2020. So they're just taking a more conservative tack. And I think they're equally long term optimistic about their ability to penetrate the vacation market. But they're going about it in a much more measured way. And in that sense it could strike people as conservative.

Paul Sweeney (33:53)

Talk to us about capacity. I mean, if they added a couple of ships, would they sell them out?

Brian Egger (33:57)

Yeah, I mean, certainly their, their occupancy is back to pre pandemic levels. Their yield growth against that capacity increase is positive. And we've been looking at, we've seen steadily increasing yield expectations throughout 2025. And they've got the free cash flow, but I think they just want to build this out slowly, you know, maybe strike people, some people as being too slowly.

Paul Sweeney (34:17)

Hey, not for nothing, this CEO got paid a lot of money here. Josh Weinstein. 14 million in cash compensation for Calder. 24. 14 million in stock. 28 million to drive a cruise ship around. That's not too bad.

Scarlet Fu (34:29)

Nice job if you can get it right. So, so here's my question to you, Brian. How do Royal Caribbean, Norwegian Cruise and Carnival, how do they grow their market? Are they stealing from each other or is there still a big base from which to grow?

Brian Egger (34:41)

There's definitely a penetration opportunity back up for a second on Carnival. You know their goals to become investment grade. So part of the conservatism I think you're seeing, which may be a head scratch.

Scarlet Fu (34:50)

Thank you.

Brian Egger (34:50)

That's investment grade and I think that's probably priority one, shifting some of the enterprise value from bondholders to equity holders. That being said, yes, they see opportunity to grow a relatively underpenetrated overall Vacation market. But they're going about it with kind of balance sheet being front and center, if that helps at all.

Paul Sweeney (35:10)

Yeah, the only thing I know about the cruise business is what I learned from Disney who got into the business 15, 20 years ago and it's been a great business for them. How do you stratify the cruise market now? I'm going to be the very, very top mind you. But how does the cruise industry kind of stratify itself self?

Brian Egger (35:27)

Yeah, I mean I think they, I think convincingly argue that they are relatively affordable form of vacation gets the packaged product. The value is very good for the consumer but it runs across different tiers from luxury side, you know, Seabourne Windstar, Oceania, Region seven Seas to the more mass market like Carnival Cruise Line. Right. So they run the gamut but the overall spectrum tends to be generally, you know, relatively affordable. And part of that package vacation product, people buying cruises beforehand, buying stuff on the cruise with a good share of leftover, that works to their favor.

Scarlet Fu (36:02)

How brand loyal are cruising fans? I mean if you are a Carnival person, are you a Carnival person for life?

Brian Egger (36:09)

Yeah, there's certainly some brand loyalty and remember they've, they've got kind of as an industry they've. Companies got two goals. One is to drive bookings for their particular brand and they do that through new hardware with all the bells and whistles. The other is to drive the overall awareness of the value of cruising relative to other forms of vacationing. And so you know, they've kind of got that dual mandate.

Paul Sweeney (36:31)

So you're sitting on the Jersey shore Sunday afternoon around 5.

Scarlet Fu (36:35)

So if you're Paul Sweeney sitting on. Okay, go ahead.

Paul Sweeney (36:38)

All this every Sunday during the summer you see this massive cruise ship coming out of New York Harbor. I think it's the Star of the seas.

Brian Egger (36:45)

Yeah, that's a new one thing's massive.

Paul Sweeney (36:48)

And they filled that thing up.

Brian Egger (36:50)

Just remember that's a Royal Caribbean ship. But I will point out that one of the things Carnival is pointing to is they've reached a 13% return on invested capital this year. They're getting to that double digit return base that they targeted. Their argument would be that they fill it up, they get good pricing and relative to their investment, they're getting solid low teens returns on incremental invested capital with an opportunity to take that higher. So as long as they can get that return, I think they can convincingly say we're getting there. But obviously in the case of Carnival through relatively conservative capital deployment.

Paul Sweeney (37:24)

Star of the sea, icon of the seas. They have a massive passenger capacity with the ability to hold over 7,600 passengers and a large crew. For somebody who doesn't like people like me, that's a tough sell.

Brian Egger (37:38)

It's not the misanthropes favorite vacation activity but you know they, they do get good economies by serving those fuels and yeah.

Paul Sweeney (37:45)

How big those things are.

Scarlet Fu (37:46)

Well, I'm always talking with my friend who suggests that instead of retiring to a nursing home or retirement community, just go on a cruise trip.

Paul Sweeney (37:53)

I've heard that too. You know. You know who's a big cruiser is Charlie Pellet and he doesn't like cruise the Caribbean. He always cruises like adventurous places. Yeah, like I'm going, I'm cruising to Turkey and I don't know, Antarctica.

Brian Egger (38:05)

The exotic itineraries. Yes, that's what Charlie People pay a premium for those. Yeah.

Scarlet Fu (38:09)

Thanks there to Brian Egger, Bloomberg Intelligence, Senior gaming and lodging Analyst.

Paul Sweeney (38:12)

That's this week's edition of Bloomberg Intelligence on Bloomberg Radio providing in depth research and data on 2,000 companies in 130 industries.

Scarlet Fu (38:19)

And of course you can access Bloomberg Intelligence via Bigo on the terminal. I'm Scarlet Fu.

Paul Sweeney (38:24)

And I'm Paul Sweeney. Stay with us. Today's top stories and global business headlines are coming up right now.

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