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- [00:01]
Fidelity Representative
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- [00:31]
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- [01:01]
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- [02:01]
Tim Stenovec (Bloomberg Host)
Bloomberg Audio Studios Podcasts Radio News
- [02:08]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
this is a breaking news update from Bloomberg. Instant reaction and analysis from our 3,000 journalists and analysts around the world.
- [02:19]
Tim Stenovec (Bloomberg Host)
We really want to go all in on Alphabet and Tesla. We've got a great team effort to do just that. In the house with us is our Mandeep Singh. He is of course Bloomberg Intelligence, excuse me, head of Global Technology. We've also got our Keith Norton, Bloomberg News Auto Reporter. He joins us here in our Bloomberg Interactive Broker Studio along with Mandeep. And then we've got Ed Ludlow, Bloomberg Tech Host, out there in our San Francisco bureau. All right, where to start? I do want to start with you, Mandeep, only because I feel like the trade is so important. What do you make of it.
- [02:51]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
I mean great print. I think overall the results were great. Cloud 82% growth, it's 100 billion dollar run rate business now, which is phenomenal, you know, for a company like Alphabet, which was really consumer focused but backlog is probably very, I would say the whisper number was higher simply because when I look at Microsoft's backlog number, it's higher than Alphabet's and given it's growing 82% and it has got Anthropic as one of its main customers of Google Cloud, I would have expected that to go up. I mean Anthropic is signing deals left and right so why is it not showing up in the Google backlog number?
- [03:33]
Ed Ludlow (Bloomberg Tech Host)
Gemini Gemini models now process 22 billion API tokens per minute and the Gemini app has 950 monthly active users. Contextualize that mandeep for us compared to OpenAI and to Anthropic, I mean it's great.
- [03:46]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
But look, Gemini has an attach rate because of all the other properties that Google has, the search, YouTube. So for me, until analysts, they talk about usage of Gemini really taking off relative to the last quarter, it's hard for me to extrapolate that into, you know, Gemini really taking share away from a chatgpt and all these companies are reporting very high MAU numbers but it's really the usage that counts. And to my mind the 950 million is a reflection of the higher tax rate that Google has because of the distribution through search and the operating system and browser.
- [04:25]
Tim Stenovec (Bloomberg Host)
Ed, we're going to come to you in just a moment on both but I want to bring Keith Naughton in Tesla, it is a lot of technology in that one. So as we talk about all of this, what do you make of kind of some of the numbers that we got from Tesla?
- [04:36]
Keith Naughton (Bloomberg News Auto Reporter)
That's a big mess, you know, $0.33 versus $0.51. And I get that Tesla is no longer really a car play, it's, it's an AI play, is it? Well here's the problem with that Tim. The thing is, is that to fund that 25 billion in capex they have planned for this year, they need to sell a lot of cars. So they did sell well in the second quarter.
- [04:56]
Bank of America Representative
Right.
- [04:56]
Keith Naughton (Bloomberg News Auto Reporter)
But yet we're coming in low on you saw the gross margin is also below expectations. So they need money. They went negative cash flow, we expected that. They didn't go as negative as was expected so that's good. But they did go negative cash flow. So you know, you got to generate revenue and profit from the car side of the house in order to pay for the robotics and the AI and the cybercaps.
- [05:20]
Ed Ludlow (Bloomberg Tech Host)
Yeah. Ed Ludlow, come on in on this conversation. Is test Tesla in your view and based on the folks you talk to, is it still a car company?
- [05:27]
IBM Representative
Yeah.
- [05:28]
Industry Analyst / Commentator
The street wanted to see Tesla spend a lot of money, more money than they are spending currently based on the trajectory of capex to make some progress on robotaxis and robotics. And you know, looking back at the quarter was the problem that they had is even though they had record vehicle deliveries, you know they are spending on R and D. That's an impact. Stock based compensation is a big impact, Remember like talent and stock based compensation in the valley on the software and engineering side is like a really important factor. They had lower average selling prices. So you have record vehicle deliveries, but lower ASP is not gone well for them. It's such a simple story. Capital expenditures came in in line with expectations. But on the buy side, just put your money where your mouth is. Elon Musk spend more money on the AI story and it hasn't really translated but again it's just an earnings deck. The real meat of it probably comes in the call.
- [06:23]
Tim Stenovec (Bloomberg Host)
All right, so yeah, I want to bring. Well and before we, I want to bring Mandy back in your thoughts on also Alphabet here.
- [06:30]
Industry Analyst / Commentator
Yeah, I was listening very carefully to everything that Mandeep said. I mean the way that I look at it, you know, we looked at the backlog backlog Mandeep explained Gemini and the trajectory of the cloud business search is where the slight misses. And so I guess the other way of looking at it is that there's a concern out there that the core search business gets more impacted by the behavior of using a chat bot in lieu of the search engine. And so it's a slight miss. Right. That's not evidence of that. Again, a very high bar quarter for Alphabet. I just can't get over the cloud growth like Mandeep, like save me a bit like cloud growth. 82% pretty good. Like relative to what you and I talked about earlier in the week.
- [07:12]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
Yeah, look, I think overall it's hard to find any fault in the print. It's just, you know, because everyone is expecting capex to go up to 300 billion. I mean look, believe it or not, this company will have negative free cash flow next year. So from that perspective you have wild.
- [07:31]
Ed Ludlow (Bloomberg Tech Host)
Why?
- [07:32]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
Because of capex investment right now they are probably, you know, 10 to 15 billion dollars free cash flow for this year. Next year, if it goes to 300 billion there's no way they're going to be positive free cash flow. So from that perspective, despite that 24% top line growth, we are talking about a company that will have negative free cash flow at their scale. And that's where you want to see all these businesses really doing well. Right now it's cloud that's carrying all the weight. But you want to see that to Edge Point and search and YouTube and other businesses and you're not seeing, seeing
- [08:09]
Tim Stenovec (Bloomberg Host)
that kind of lift and you're laughing why? At the amount?
- [08:11]
Industry Analyst / Commentator
No, no, I take it super seriously. But like, remember when Oracle flipped negative free cash flow for the first time since the 90s, the markets melted down.
- [08:21]
Keith Naughton (Bloomberg News Auto Reporter)
Yeah.
- [08:21]
Industry Analyst / Commentator
When Amazon goes to negative free cash flow, so what? To our audio listeners, I shrugged my shoulders and made a funny face. But like, you know, the interpretation of Mandeep's analysis and the research that BI has done on this, the market's very sanguine about that. They want to see capital expenditure high. They also want to see top line growth directly evidenced as a result of the capex. But on the cash flow thing, like, everyone seems pretty calm about that.
- [08:49]
Ed Ludlow (Bloomberg Tech Host)
Mandy, when's the payoff on this spend? Is it already happening?
- [08:53]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
It's happening in a big way with the cloud business. I mean, when have you seen, you know, a company get to $100 billion new business line in a matter of, you know, three, four years. So they are seeing that in the cloud business and it's a great investment. It's just I think with Alphabet, Search is always the cash cow that funds everything. And even though the top line growth, to my mind, 17% isn't bad in terms of top line growth. It's just, I think the backlog number combined with where search would be two, three years from now, that's where you start to get a little worried. But you know, maybe they come out in the call and say, Gemini 950 million users saw engagement growth of X percent and then suddenly everyone will be okay. But you really want to see Gemini delays not carry forward. Remember, they have seen a delay in their Gemini Pro 3.5 release. Now all that is adding to the anxiety is Alphabet really falling behind when it comes to the frontier model race? Yes, they are doing very well on the cloud side. But what is it that will prevent Search from really going down or, you know, the company falling behind in the frontier model race?
- [10:10]
Tim Stenovec (Bloomberg Host)
It's interesting. You have to spend right, to build out some of these, these businesses in a big time. And that is certainly a metric in terms of how you're. You're judged. I want to go back to Tesla. Same thing, though. They want Elon to spend, to kind of do what he needs to do.
- [10:21]
Keith Naughton (Bloomberg News Auto Reporter)
Yeah, I mean, he's made some very large promises, hasn't he, about AI and about the cyber cabs who are supposed to all be riding in them by now. Right. And that hasn't happened. The launch is slower. Optimus is not being built yet out in Fremont, although he says that'll happen by the end of the year. But we've heard that before, right?
- [10:38]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
Yeah.
- [10:38]
Keith Naughton (Bloomberg News Auto Reporter)
So until he actually delivers some, you know, deliverables, some tangible results, you know, we're still relying on the car business to deliver the mail. And, you know, this report isn't showing that that's meeting expectations.
- [10:53]
Ed Ludlow (Bloomberg Tech Host)
Ed, is the case being made by investors, or by at least Elon's investments at Tesla right now that, yeah, Basics could absorb this company at some point in the near future?
- [11:06]
Industry Analyst / Commentator
You know, it's still the prevailing sentiment in industry and of the existing investor base on the SpaceX side that this will happen with time. Right. The financial mechanics of that are a bit of a mystery, you know, one public company backing into another. But to lots of people, you just go back to why they believe that. They believe that the joint scale makes sense to very deeply vertically integrated companies that have a shared initiative on the compute side and semiconductor side, where there is already a lot of cooperation on the engineering side. You know, to lots of people, it's just logical. We just don't have an answer for that. I found it, you know, I put it in the blog. Right. I found it amazing that, you know, but is it to be expected? There's no mention really Space X at all in the Tesla earnings deck. And the only thing is that they have a $1 billion unrealized gain from their prior equity investment in Xi, which rolled into Space X. Interesting.
- [12:06]
Tim Stenovec (Bloomberg Host)
Yeah, I do wonder too, and I want to bring this question to both Mandeep and to Keith. I mean, Mandeep, do you. You have to think about Tesla and you have to think about Space X and their role in AI and kind of where this company is going.
- [12:18]
The Hartford Representative
Right.
- [12:18]
Tim Stenovec (Bloomberg Host)
You, we've talked with you about this. I mean, you've got to kind of think about where this goes next.
- [12:23]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
I mean, to my mind, why did Google have to rent compute from SpaceX at such a high price? You know, when. When they have their own cloud, why do they say, well, maybe they can monetize it better than Space X data centers can on. On their own. So from that perspective, Google cloud business is more established. They can get a lot more out of that compute than SpaceX can. But really that's the case to be made that Google should go big in terms of capex increase because right now they're renting from SpaceX.
- [12:55]
Tim Stenovec (Bloomberg Host)
Well, the same thing though to you Keith. I mean do you increasingly think about, okay, you know, Tesla is not just going to be this car company anymore. You really have to think about the whole Elon universe.
- [13:05]
Keith Naughton (Bloomberg News Auto Reporter)
Right? And he, and he has to start showing that and just talking about that. And he also has to make promises that he can achieve and so far he's over promised and underdelivered.
- [13:16]
Tim Stenovec (Bloomberg Host)
Yeah, it's just the date always moves.
- [13:19]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
Among other things it takes his 2 gigawatts of capacity and suddenly that will be another, you know, $50 billion in revenue that SpaceX can add. So it's not that hard right now, at least in this environment, more gigawatt capacity is equal to $25 billion in revenue per gigawatt.
- [13:36]
Tim Stenovec (Bloomberg Host)
Mandeep, do you think it's odd that there's no mention, as Ed mentioned really of Space X in the Tesla results?
- [13:43]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
I mean right now these are independent companies. Why, why would they be mixing those up?
- [13:48]
Ed Ludlow (Bloomberg Tech Host)
Same boss, you know, Ish, ish. Keith, I want to play this out with you a little bit and what we were talking to Ed about and the idea of Tesla being absorbed by Space X at some point. I know there's no historical precedent for this, but you do have in some cases auto manufacturers that are part of big conglomerates.
- [14:08]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
Right.
- [14:08]
Ed Ludlow (Bloomberg Tech Host)
You know, Tata comes to mind for me. But is there, is the history mixed? Well, I mean with this sort of like a huge company that also churns
- [14:20]
Keith Naughton (Bloomberg News Auto Reporter)
out cars, Tesla as a car company is, is not really a growth story anymore. They are contracting. They had a good quarter but the previous two years they were down in car sales. And they're not even a luxury carmaker anymore. They stopped making Model S, they stopped making Model X. Their most common trade in now is a Toyota, a Toyota hybrid.
- [14:38]
Ed Ludlow (Bloomberg Tech Host)
So meaning people come with people trade
- [14:40]
Keith Naughton (Bloomberg News Auto Reporter)
in their Tesla for Toyota now. That's what's happening, Edmunds tells us today.
- [14:44]
Ed Ludlow (Bloomberg Tech Host)
Wow.
- [14:44]
Keith Naughton (Bloomberg News Auto Reporter)
People are getting out of Teslas and going into Toyota hybrids. So they're a mass market carmaker now. That's why the margins shrink. Right, you no longer in the luxury business. The most common trade out of a Tesla previously had been a luxury carmaker, a German carmaker. Now they're going into Toyota. So Tesla's Growth engine is slowing on the car side of the business and that. And so linking up with Space X could give them new ways to find revenues and to monetize the AI side of the business, which so far it has not.
- [15:17]
Ed Ludlow (Bloomberg Tech Host)
But to Keith's point, could the Cyber Cab or the, you know, the Robotaxi come to the rescue here?
- [15:23]
Industry Analyst / Commentator
You know there is a. They stopped the snacks in the period, right? Those were higher margin, higher price point vehicles. So like what keeps outlining is completely correct. People forget the business model. And actually what I would say the biggest tone shift in the deck, it's just a document, is that this is Tesla, the sort of complicated compute industrial robotics company. You know, that's the kind of in aggregate takeaway from it. The Robotaxi business plan is multifaceted. Cybercab is a vehicle that Tesla purpose produces and operates within a proprietary ride hailing fleet itself, itself, but also plans to sell the consumer. Makes not a lot of sense to a lot of people. But there's also like the Airbnb model where you as an existing Tesla owner submit your vehicle to the fleet. So when you're not using it, it goes out and operates in the ride hailing fleet like an Uber. But it's your vehicle that you own. And what's not clear is the economics of that mixed fleet. People just don't understand it. And Tesla hasn't really explained it since they first made the proposal. So that doesn't answer your question, Tim. But that's the problem with this print. The quarter gone was bad and there's not a lot of evidence that the future is underway.
- [16:32]
Tim Stenovec (Bloomberg Host)
All right, I want to go back to Alphabet, if I may. Tesla still under pressure, selling off a bit after the market trade here. Alphabet's been bouncing around. So I want to go back to you, Mandy, because I'm looking at our live blog, our markets Live blog, and they're pointing out most of its biggest businesses were ahead of Alice expectations, with the exception of Search, which was a touch below. What is it that you think we need to hear on the call? Is it about what's happening, what's going on with spending? Like the outlook here more?
- [17:02]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
I mean, the world of AI is measured in terms of token consumption. And even though they gave a token consumption metric around API usage going to 22 billion from 16 billion last quarter, so that's a nice uptick, but really on the whole you want to see see them continue to grow that token consumption across the family of apps. And I think that's where you will see the usage of the model, how much Gemini is getting used. So token consumption along with that Capex guide, to me those are the two key metrics.
- [17:35]
Ed Ludlow (Bloomberg Tech Host)
Do we have metrics on AI overview versus traditional Google search?
- [17:39]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
They do talk about how much is that?
- [17:41]
Ed Ludlow (Bloomberg Tech Host)
Does that matter to you?
- [17:42]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
I mean, I care more about the aggregate. Even if there are some offsets that they are moving some of the traffic to AI overviews and AI mode. At the end of the day, it's the time spent on Google family of apps. That's what.
- [17:55]
Ed Ludlow (Bloomberg Tech Host)
Okay, so that's okay. Ed, come on back in here. I don't think we've talked to you about this, which is sort of the little incremental updates that Alphabet is making to. I don't want to call it family of apps because I don't want to confuse Meta. But it's like, you know, Google's Gmail having this sort of like AI inbox or you being able to ask Google Maps questions that are more conversational and I. Does that move the needle in your view? Do analysts talk about that making this stuff more engaging? Because Inbox is great for me.
- [18:27]
Industry Analyst / Commentator
You know, I, I'm not deflecting. I really. I would go to Mandeep on this, but it's not the consumer that moves the needle. Right? You know, look at what they did say 90% of the Fortune 100 are using the Gemini Enterprise. According to the statement, Gemini models process 22 billion API tokens per minute. You know, this is the token economy. That's how we're judging success of the utilization of different eyes that the Frontier Labs and the hyperscalers are developing. That's in the enterprise. You know, it has very little to me to, to. To see the needle move on. On the existing suite of software that Google Ads, just like Microsoft's having a very hard time telling me that 365 has anything to do with the AI story and then boosting cloud sales. It just doesn't.
- [19:14]
Ed Ludlow (Bloomberg Tech Host)
Yeah, that's a good point. I mean Mandeep, but if a lot of consumers are sort of interacting with Google's AI through these tools that they've used for years, then certainly that makes it more engaging.
- [19:25]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
It does.
- [19:25]
Ed Ludlow (Bloomberg Tech Host)
But like Ed said, maybe doesn't move the needle.
- [19:28]
Mandeep Singh (Bloomberg Intelligence Head of Global Technology)
I mean, to my mind right now, because the LLM companies don't have a freemium models with ads, the consumer side is somewhat shielded and the battleground is really the enterprise side to Ed's point, because that's where the consumption is measured around tokens. And you are seeing that backlog really come to fruition. But the consumer side is important in the sense all the Internet platforms leverage the data to make the platforms better. That's why Google has been so successful over the years. So if you lose the engagement on the consumer side over time, it's going to affect how good your product is. And that's where people moving their queries to ChatGPT or Claude will have an impact. Because right now Google has that monopoly 90% it used to have. I don't think that's the case anymore. But that's how the platform got so much better. The search box got so much better is because of the usage. So I wouldn't underestimate the usage on the consumer side.
- [20:40]
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- [21:09]
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- [21:41]
Fidelity Representative
How is this $47?
- [21:44]
Industry Analyst / Commentator
Alright, we're gonna need a plan here.
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