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Host 1
Indiana University is shaping the future of healthcare, advancing discoveries that become treatments for Alzheimer's, obesity and cancer and training the providers trusted to deliver them. See how IU solves what's next iu Edu Impact.
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Host 2
Bloomberg Audio Studios Podcasts, Radio news well, Big Aon is a big market story as well today, once again driving the trade, pushing semi as a group semiconductors that is higher today, led by Broadcom, whose stock jumped after OpenAI agreed to buy the company's custom chips and networking equipment in a multi year deal, part of an ambitious plan by the startup to add AI infrastructure. So we wanted to just dig a little bit deeper into it. Amy talked about it. We certainly are seeing it playing out in the market. Got a great voice though, Bailey, to walk us through it.
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Host 1
One of my favorite people, I will.
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Host 2
Say must have said Mandeep's name about five times on the call this morning.
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Host 1
Immediately was like we need to get him in studio. So perfect timing. And that's why we're joined now by Bloomberg Intelligence global head of technology research Mandeep Sing here in the studio. Mandeep, walk us through this deal. Because it feels like every other day OpenAI has a new agreement with some chip manufacturer and the terms are slightly different whether it's an ownership stake or front buying chips. What's up with this broad compact?
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Mandeep Singh
I mean they are really going after, you know, data center capacity right now and the way they are doing it is by diversifying their supplier base. So it's not just relying on Nvidia, which everyone does right now for compute, but really leveraging Broadcom, which is a custom silicon maker. So think about Nvidia giving you a generic chip where you can run your AI workloads, whether it's training or inferencing. Custom silicon is used just for the specific workload that OpenAI has to run for its proprietary model. So no one else has any benefit of using a custom silicon. Because OpenAI is not looking to sell its own chips to compete with Nvidia. It's looking to use its chips for its own ChatGPT app or any other custom app that it has developed in house. And Google is a prime example of what a custom silicon looks like because they have their own TPUs, which when you compare it to Nvidia GPUs, is more customized in nature. But it does a terrific job of running YouTube or any other AI workloads that Google wants to run on its chips. So that's what OpenAI is doing. And it has a tremendous cost advantage because it costs a lot lower than the Nvidia price tag of $30,000 on.
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Host 2
An average for a GPU TPU tensor processing unit. I should make sure I understand. What's interesting, though, is I do feel like there's this move trend to get chips that maybe don't cost as much, maybe don't use as much power, but do exactly what we need. Is that fair?
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Mandeep Singh
Yeah. I mean, look, 1 gigawatt requires up to 500 to 600,000 accelerator chips. So we're talking 0.5 to 0.6 million chips for 1 gigawatt data center. Imagine if you can save up to $5,000, how it multiplies in terms of cost savings. The real constraint right now is power. It's not as if you get a cheaper chip and you are all good. You still need the performance per watt, which is why Nvidia is so good, because it gives you 5 to 10x more performance per watt than the nearest competitor.
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Host 2
Right?
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Mandeep Singh
Exactly.
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Host 2
I want to show there's a graphic and one of our producers made it, Elizabeth Sedron. And I think, you know, we've all been looking at this. It's about OpenAI and all of the companies that they're doing deals with. And it's not even been a month, but they have done deals with Nvidia, Oracle, Core Weave, amd, now Broadcom, and again, it's just late September to mid October. So is that what this is, is just giving them a smarter supply chain and having access to what they need? Is it as simple as that?
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Mandeep Singh
Well, it's not as simple because they're going across the stacks. Think of, you know, how AI applications are deployed. You need the chip, you need the infrastructure, you need the cloud, because that's where you're doing your inferencing. So they've cut deals with different parts of the stack here, not just the chip makers, not just the power guys, also the cloud guys. So from that perspective, the core weave. Right, Core weave, exactly. And look, I mean, to my mind, they are going aggressive in terms of adding more capacity than they probably need because they think if they get market share, they get the companies or users to use their product, then they will be able to monetize and probably drive some companies out of, you know, competing with them because of the scale involved here.
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Host 1
Well, are X and Anthropic striking similar deals, or is this the Open Air show?
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Mandeep Singh
I think right now Xi must be thinking, and they are doing a $20 billion deal with some private financing. But look, when OpenAI announces a 10 gigawatt deal. We're talking 500 billion, not 20 billion anymore. So it's the numbers are getting bigger and bigger.
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Host 1
Well, is OpenAI, in this moment in time on October 13th, the most important company in the world?
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Mandeep Singh
Well, when I look at Mag7, your Broadcom is not in Mag7. It's a $1.6 trillion company. You know, OpenAI probably, you know, it's.
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Host 1
There up 10% because of this. I mean also the whole space sold off on Friday, so don't want to downplay that too much.
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Host 2
But like they're not even public, they're not even profitable as much as we know, right?
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Mandeep Singh
No, I mean, look, so right now their gross margins would be negative if you factor in the training costs. Inferencing wise, yes, they are making some money, but clearly if you include everything and just to compare it with Google, Google has an annual cost of revenue of around 100 billion that powers all of their apps, you know, Google, YouTube, everything that they run. OpenAI's compute costs are probably north of 20 billion right now. And, and if they're adding 26 gigawatt more capacity, we are talking, you know, compute cost to multiply at least 25 fold. So from that perspective you have to ask yourself how much incremental revenue do you want to see from OpenAI to justify this? You know, 1 trillion, potentially $1 trillion in compute infrastructure spend. And that's where Google's infrastructure is so efficient that because just less than 5 gigawatt of compute gets you to over 400 billion in revenue.
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Host 2
That's pretty cool to say the least in a non financial analysis terminology. Mandeep, thank you. Always a gem. Bloomberg Intelligence Global Head of Technology Research Mandeep Singh I spend in the build out is one read on the US economy and certainly the tech economy. Now to another great read Bailey on US economic activity and we're talking about the industrial supplier Fastenal which reported earnings earlier this morning and shares, I think they were the worst performing the s and P500 at one point.
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Host 1
Yeah, right now down about 6%. And keep in mind this is a $50 billion company. So this is no small, small fish in the again in the industrial space. One of the first reads we get every quarterly earnings season missing Wall street views, broadly speaking. So interesting. What's driving that?
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Host 2
Well, let's ask the CEO Daniel Florness is with us. He is chief Executive officer of Fastenal. He joins us from Winona, Minnesota. Dan, it is great to have you talk to us about the quarter because it does seem like analysts were noting that the pricing during the quarter was weaker than expected and marks the second straight quarter of softer pricing. And maybe that's why we're seeing the stock down. What do you want to say to investors?
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Dan Florness
Well, part of the reason our stock's down is its price to perfection if you look at what it's done year to date and where the multiple has gone. But you know, we had a really good quarter. We had a double digit quarter. We hadn't seen that for a couple years. Double digit growth. Sorry. And pleased with the outcome. One of the challenges we had this year was there's a lot of fluidity around tariffs and what it means for pricing. And we will raise price to address costs in our customer supply chain. We, we really don't want to raise more than that because we believe it impairs our ability to grow as fast as we'd like. And you know, coming into the quarter we estimated, you know, X for, for impact of pricing came in a little bit less. We lowered our number for the fourth, fourth quarter. But the most important aspect is on a price cost basis, we are neutral and that's what we aspire to be. We'd rather just grow. Hmm.
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Host 1
And Dan, to your point, Fastenal, even with the pullback today, returning 22% year to date, so outperforming the S&P 500 and comparable stocks in the industrial space. But just one more question on pricing in terms of expectations, would you want to raise pricing? Like do you get the sense that consumers and customers would push back just given how you've been shifting into bigger customers spending much more money?
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Dan Florness
Yeah, customers always push back on pricing. Doesn't matter the size customer. We will, we, we are having conversations with our customer. We will be doing some price increases in Q4. I suspect we'll be doing some price increases as we move into 2026. But again, our first discussion with the customer, they understand it, they're willing to move on price. Our first discussion is always what are alternatives to this product? That maybe doesn't mean we have to raise your prices 5%. Maybe it means it only has to be 2 and we'd rather go to 2 because that's what, that's what a supply chain partner does.
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Host 1
Well then how do tariffs fit into this? Just given that according to analysts across the street, when we look at certain industries, now is when we're going to see tariffs showing up in the third quarter in guidance as it go as it relates to 2026, what are you seeing and how are you kind of attacking or addressing any pressures from tariffs?
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Dan Florness
Yeah, so for us, tariffs have been in the, in the equation since the, you know, early part of the second quarter, a little bit of the first quarter. I think in the individual that handles pricing historically, he will provide us an update once a month. He had gotten the point where he was not only providing us updates, he, he was up to video number 14 as of July that he was serving out to the field, giving them guidance into what we were seeing in our supply chain. And, and so we've been adding price as we've gone through the year and these have been discussions with customers and I hope that answers your question.
- [10:56]
Host 1
No, I think it does. But I think the big thing is, are you mitigating the impact of tariffs? Are you shifting your supply chain? Is the expectation that you can have some kind of knock on effect as it relates to pricing? If we do continue to see threats from the President going after countries like China or others, we are going to talk to one of the members of Levi's management team and they called out that they had to dial up their expectations for the impact of tariffs from other countries. So how is that impacting when you look at your supply chain and when you look at the potential for pricing impacts in 2026?
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Dan Florness
We've been moving supply chain around the planet in earnest since 2017, 2018 timeframe, as our name would imply. We sell a lot of fasteners and most of the fasteners in North America come from either mainland China or Taiwan. And the automotive industry took the production there back in the 50s and 60s, actually took it to Japan and South Korea and it migrated from there. If I look at our resources, we now have a sourcing team in Shanghai, but we have a sourcing team in Bangkok. We have a sourcing team in northern India and we have worked to diversify our supplier base around the planet and a little bit more in North America, but really around the planet. So to have diversity in supply so you're not caught off guard by some price change or a tariff change. In addition to that, we've taken supply chains coming into North America, which traditionally came in through the west coast of the United States, and then we would redistribute from there. We have moved supply chains that are bringing product directly into the west coast of Canada or the west coast of Mexico, because those two countries represent about 14% of our revenue. Now you bypass the tariff, however, it's more expensive to break shipments down over in Asia and bring them in. But it's a lot less than a tariff.
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Host 2
One of the things I want to ask you, you know you talk about supply chains is the end game. Dan. We're talking with Dan Florence, he's chief executive officer of Fastenal. Is it about though largely reducing your exposure to China, which has been a pretty big one.
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Dan Florness
It's, it's reducing our customers exposure to any market, in this case China and or Taiwan, but to any market that are on the receiving end of some of the political wins and create an unstable supply base for our customer here. It happens to be China. Another month it might be a different country. Another year it might be a different country. It's diversifying your supply chain so your eggs are not all in one basket.
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Host 2
Got to be ready. So whichever customer. Yeah, whichever way the winds blow. Hey, one of the things I want to ask you just big broadly the earnings update today you talked about the industrial environment still sluggish. We've heard similar commentary on this persistent sluggishness elsewhere from manufacturers as well as caution around project delays. At what point does this become something more worrying than just sluggishness?
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Dan Florness
For us it's been sluggish since November of 2022.
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Host 2
Okay.
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Dan Florness
When we really key on what the Industrial Institute for Supply Management puts out the PMI index and that's been sub 50 which really plays into our customer base other than January and February of this year, that's been sub 50 since November of 2022. So we've been in a sluggish economy for a long time from our perspective. And other than living through the first part of it where you had customers that were downshifting, reason our growth is shining through in a different way. A, I think we're executing at a higher level but B, once you get through that downshifting now you're just even if your customers are at a subdued level, you can grow in that kind of environment and that's what's shining through in our numbers right now.
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Host 2
All right. One thing I want to ask you because as you would imagine, I don't know how much of this is pervasive in your world, but AI is like the non stop conversation that we are having. Certainly when it comes to activity and market impact, to what extent is AI maybe sucking up the oxygen in the economy? Are you seeing any signs of that or your world they're going to still need what you guys supply no matter what's going on with the AI spend and enthusiasm?
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Dan Florness
Well, first off, we have a lot of we have a meaningful improvement in our Revenue as it relates to things like data centers because we sell into a wide range of customer needs and end market needs, whether that is the actual construction. I visited many data centers being built where we have people on site there. After it's built, we're supplying into that facility with things like air handling and maintenance equipment. In the case of a customers that sell into that sector, that's actually a strong business for us right now. And then as an organization we're increasingly making use of AI in our own business and how we go to market and how we help our employees be more efficient in what they do.
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Host 1
And Dan, about 45 seconds here with with keeping in mind data center construction, where are those products sourced from? Are those also heavily sourced from China and exposed to tariffs or are they different supply chain altogether there?
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Dan Florness
You know they're it mostly a different supply source but it depends on the component. If it's facility maintenance types, products, they're coming from anywhere on the globe and so they're, they're subject to the same type of issues any product would have. But a lot of the components I know a lot of the manufacturers that we sell into, I visited one about a year ago in Michigan where they were purposely avoiding China and they're selling directly into the data centers.
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Host 2
You've been at Fastenal for a long time. You've seen different cycles. How do you describe this one? And again just got about 20 seconds. If you could be very quickly, very quick.
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Dan Florness
Oh, odd in the fact that similar what we saw in 18 but odd with the fact of it's just so damn fluid and there's so many things that occur from week to week, month to month that are outside the norm. But the fundamentals still work. All right, so serve your customer at a high level. You grow your business.
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Host 2
Love talking with you Dan Florenest. He's CEO of Fastenal. Every business starts with an idea. How can you go from daydreamer to industry leader? Amazon Business accelerates your journey with smart business buying. Get everything you need to grow in one familiar place. From office supplies to it essentials and maintenance tools. Amazon Business takes the buying experience you know and love from Amazon plus tools that help you save costs and make insights based decisions ready to bring your visions to life. Learn how at amazonbusiness. Com.