SpaceX's Big AI Spending Puts Damper on First Earnings Since IPO

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1:32Carol Massar: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 Business Week Daily podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. The shares of SpaceX kind of bouncing around, but muted in the after hours, barely up by about half a percent right now. The company out with its first report as a publicly traded company. Revenue exceeded Wall Street's expectations, reported$7.8 billion.

2:17The company reported an operating loss, though, of$1.26 billion from its AI business. That's better than the consensus expectation. Shares have plunged since that IPO, raising more than a trillion dollars in market value from their peak. I think we'll hear a lot more on the call when it starts a little later.

2:31Carol Massar:One can certainly hope. All right, let's get to it with our team. We've got a great team to kind of go through the numbers and the results, and we're going to continue to kind of track as we get into the call. Mandeep Singh is with us right here in studio, and our Bloomberg Interactive Broker studio is Bloomberg Intelligence, global head of technology research. And out there in our San Francisco News Bureau is, of course, our own Ed Ludlow, host of Bloomberg Tech. Ed, let me just kick it off with you. What jumps out here? I know you're also on the live blog, but, you know, investors just kind of reading through right now the stock is down just about 1 % here.

3:02Yeah, I mean, overall revenue and sales came in above consensus. But you go into this saying this was the first quarterly earnings for SpaceX since they became a public company, and it will be their first earnings call. And there was a lot of acceptance that the consensus numbers out there, there was a bit of skepticism, right? They're a bit squishy because we don't have a whole lot of contemporaneous data. But it's really interesting. You know, the status quo is still that Starlink is the driver on the top line and also sort of the cash cow. But they really improved the economics of this business in the quarter of, yes, it's a rocket company, but renting compute capacity to other technology companies.

3:43You know, that has proved to be a strong business for them. There's a lot of discussion in that, in what's a very limited earnings release. Mandiv, I want to bring you in here. If you were to look at the three different segments, the reportable segments, Ed mentioned the cash cow and in terms of where the revenue is still coming from. In terms of growth, in your view, which segment is the most important? I mean, they reported a backlog number of 47.5 billion. That tells you most of the backlog is likely coming from AI. And what is not captured in this print is the Anthropic and Google deals. That's OK.

4:21That's what I was going to ask you. When you say a backlog, that means companies like Anthropic and Google coming to XAI, part of SpaceX and renting compute. That's right. Yes. And in fact, we know some of the deal terms. Anthropic will be paying SpaceX about one point two five billion dollars a month. So next quarter, when they report, there will be at least$3.75 billion from Anthropic and another probably$2 billion plus from Google when they report. So$6 billion bump just from these two deals next quarter.

4:58Carol Massar:That sounds pretty impressive. I think so. That's why that backlog number is very important, because in that$47 billion is that Anthropic deal and the Google deal. And there's one more company, I think, Reflection. Ed, what can XAI offer these firms that Mandeep mentioned that like a Google Cloud, a Microsoft Azure, an AWS, or even a NeoCloud can offer? Space that they're not currently using? So it is a commodity. A little bit. So like in Tennessee, XAI now, Space XAI set up a number of data centers in very quick order. Colossus 1, Colossus 2, and Colossus 3. and what was explained to me in great detail by sources is that once they had built all of them, they were like, okay, how do we use this ourselves?

5:47And they realized that in Colossus 1, which is a big tin can data center, they had multiple generations of NVIDIA GPUs, all mixed together. Some were Hopper generation, some were Blackwell, some were even as old as the A100 generation. And so they decided the best use of that capacity was to rent it out with attractive economics for those renting it at a premium many would say i think mandy's been over that really well in the past and for them like they run it really operationally efficiently it can be a high margin business but it was all born out of the the fact that for their own models and running them not just training later generation models they couldn't work out how to use that

6:26Carol Massar:capacity for themselves to best effect yeah i mean the worries that we've had mandy about this company and feeling like we didn't know some things. Should investors, I know we never give investment advice, but feel, all right, we're getting more information about the business that we can kind of figure out and cross with kind of where this company's going, the valuation. It means the valuation is still a little crazy, right? It is crazy, but what I think may work in their favor is this is a company that will likely have accelerating top-line growth at least for the next three or four quarters with margin improvement.

7:09And that is the type of story that investors typically like. I mean, we just saw what Palantir did today, you know, with their quarter, partly because of that accelerating top line growth. And there is no doubt in my mind, given that$47.5 billion backlog number, SpaceX will have accelerating top line growth, at least for the next three quarters. We're speaking with Mandeep Singh, our Bloomberg Intelligence Global Head of Technology Research. Also with us, Ed Ludlow out there in San Francisco. He's the host of Bloomberg Tech. I want to remind everybody, if you have questions about SpaceX's earnings, the company's report, send us a question, Bloomberg.com slash ask radio.

7:50That's Bloomberg.com slash ask radio. It's only for Bloomberg.com subscribers. You can submit questions for us or for any of our guests this afternoon.

7:57Carol Massar:You know, I'm just looking at, you know, you pull up SpaceX, do the ticker, do, you know, CNBN. SpaceX says business growing across all three segments. SpaceX exceeds revenue estimates in the first quarter, first earnings since IPO. You know, SpaceX's first earnings offer a chance to reverse the stocks plunge. That was earlier in the day. Top of mind. Ed, come on back in, because I'm just thinking how much of what we we didn't know. So this is kind of our first real picture of a lot of what the business is about. There was speculation certainly coming off the IPO and there was numbers and there were estimates.

8:33Carol Massar:But how much of this is like, oh, OK, so this is the business, at least now? Yeah. Yeah. So what you can do is you can compare with the backward looking data we have from the IPO prospectus, the S1 and the amended versions of it. just the two ai key points because i think it's really interesting to get mandib's take on this is ai is probably inflecting a little bit faster than the street expected so the ai revenue is a 2.56 billion dollars right compare that to the first quarter which is data we got in the prospectus about 800 million so that's a quite a jump sequentially quarter to quarter and then on an adjusted ebitda basis which you know let mandib answer this one because i know how the street feels on adjusted EBITDA, but AI adjusted EBITDA did turn positive, AI specifically.

9:20And so like right now with the knowledge that all of these other business lines are futuristic, orbital data center, the space economy and enterprise AI, what they have done is move pretty quickly on their AI infrastructure business. And Mandeep's outlined the deals that they did to get there. Okay, let's just reset here a little bit because we're seeing shares of SpaceX down about 6.5 % after the company reported results. Starlink growth continues to be a revenue driver. Shares are slumping, though, as investors digest this. Mandib, what's the sort of, I don't know, from a guidance perspective, the expectations about what we'll hear on the call that's different from what's in the press release?

9:59Again, first time we've had a call for this company, so we can kind of only go with what Tesla has done in the past, but what do we expect in terms of guidance? I mean, when I look at the Starlink number, to me, that's slightly missed consensus in terms of number of subscribers. And given we talk about how that's the cash cow that's funding the other businesses, that is probably the number one question that I feel they're going to get on the earnings call. But along with that backlog, which I think will help them in the quarters, upcoming quarters, But clearly that Starlink business was slightly below consensus.

10:40I mentioned that we have Bloomberg.com slash Ask Radio as a way for our subscribers to get in touch with us and ask questions, not just to us, but to Ed and Mandeep and all of our guests. SpaceX. So a question about SpaceX coming in right now, guys. Sanjay out in Irvine, California, writes that the fact that SpaceX's valuation is already high, Does that make today's earnings more or less in line with the high expectations? I want to send that one over to Mandeep first. Valuations question. We talked with Max Chafkin earlier about the so-called Elon premium and the idea that Tesla is valued more than any other carmaker, despite the fact that, you know, in terms of revenue, it doesn't even crack the top 10.

11:21Valuation question about SpaceX. What do you make of it? Yeah, I mean, at$1.5 trillion, you know, for a company of SpaceX size, there is a lot embedded in that number in terms of, you know, growth expectations and how investors see margins improving. So that's why, you know, even though I feel like they will do very well over the next three quarters in terms of top line driven by AI, but at this valuation and, you know, it IPO'd at even a higher valuation. So it's always hard to keep up with the expectations. And unless you come out and show positive surprises the way NVIDIA has done that consistently, I think it will be hard for SpaceX just to kind of keep this multiple.

12:13So they really have to grow into that multiple, which I think they should be able to, given the backlog number we are seeing. I mean, all the cloud companies had backlogs of$400 billion plus, you know, when they reported. And they had an excellent quarter, all of them, you know, Google, Amazon, and Microsoft. So from that perspective, SpaceX reporting a$47.5 billion backlog, if they keep growing that, I think we'll be positive for that SpaceX story.

12:39Carol Massar:I also want to mention we're getting some additional headlines. SpaceX second quarter AI segment CapEx of 15.83 billion versus an estimate on the street of 13.09 billion. I know, Ed, you were on the live blog looking for more insight when it comes to CapEx. Yeah, no, I think they have positioned this in the CFO commentary about having a really strong liquidity position, right? They have the proceeds of the IPO and then they immediately went to the corporate debt market. And so they have$100 billion to play with. But you, again, can go back to the prospectus on how capital expenditures were tracking in the first half of this year.

13:22The consensus number, again, there's a note of caution on all the consensus numbers. because this is their first ever quarterly earnings as a public company. The expectation was they'd spend about$45,$46 billion this year. A lot of that's still to come, right? It's really key information because across those nascent business lines, Starship as a launch system, orbital data center, and then the business of actually selling AI as a software at scale, it's still going to take a lot of spending. Ed, is this report, are we getting the information? It's sort of an inside baseball question, but is the information coming at a cadence that's on par with what we get from Tesla?

14:06No. So I find this really interesting. So Tesla presents a pretty detailed shareholder deck each quarter. And it is multiple pages long. It has a lot of information. For example, the headwinds and tailwinds to the top and bottom line, the macro impacts they felt, any political impacts, their sort of forward-looking strategy as it relates to software in different markets, etc. This is a very modest release where there's zero commentary from Elon Musk, who's the CEO of SpaceX. There's zero commentary from Gwynne Shotwell, who's the president and COO and de facto runs the company. Just the CFO commentary from Brett Johnson.

14:49And it's very modest. So there's a lot still to learn. You know, there's not the same level of detail. There are fair questions like, will Elon Musk be on the earnings call? You know, we just, we have no definitive answer on that. One assumes so. What kind of role do Gwynne Shotwell and Brett Johnson play on the earnings call? Are they the stars of the show? Or is it like Tesla, where Elon's still the star of the show? We just don't know. And that's kind of fun.

15:13Carol Massar:So do we have an idea, Mandeep, of how much cash they're burning through? I mean, they are investing$15 billion plus in CapEx every quarter, and they're not generating any free cash flow as of now. I mean, the Starling business is the only one that seems to be generating free cash flow, and that seems to have missed consensus. So from that perspective, I mean, they have this challenge in terms of meeting expectations around free cash flow, unlike the hyperscalers that clearly have strong balance sheets to invest in, you know, CapEx. So from that perspective, I feel there is a ceiling to how much higher they can go in terms of CapEx increases.

16:03I do think they will raise the CapEx. But even at$60 billion run rate, how high can they go, given they don't have the balance sheet and the free cash flow that the other hyperscalers have?

16:18Carol Massar:Ed, come on in. You have a question. Yeah. So I have a question. I rely on Mandeep's expertise and his modeling. So in the first half of the year, SpaceX had about$3.5 billion of operating cash flow, but the capital expenditures for the first half of the year were like$29 billion. So you just do the operating cash flow minus the CapEx. And that gives you a sort of an approximation on the negative free cash flow, right? Overall. Am I doing the math right on that? That's right. Yeah. So I see again, like this is me doing math in my head and phone my high school teachers. It weren't my strong point, but I see, Let's say$25 billion of negative free cash flow in aggregate across those businesses in the first half.

17:06Yeah, I mean, look, I think what you will see is the cloud rental business is going to be a lot better margins. So that's the part that when you do the first half calculations and annualize it, you're expecting maybe there will be negative$50 billion for the full year. But my guess is that cloud rental business is going to be positive in terms of the margin profile. Now, it's not going to be as high as the hyperscalers. So hyperscalers, as we have seen this quarter, they have mid 30 % margins when it comes to their cloud businesses. In the case of SpaceX, even in a best case scenario, that AI segment would have low to mid-teens margins.

17:54But at least it's positive. So from that perspective, if you see AI business at the end of the year around a$25 billion run rate with low to mid-teens margins, then it will offset some of that negative$25 billion burn that you've seen for the first half. And that's where I think there's a good story to tell in terms of margin improvement driven by that cloud rental business. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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20:45Carol Massar: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. Wayfair, investors, man, are pushing this stock up big time today. Shares surging 31 % as we speak after the home furnishings retailers hit sales with the U.S. grew at their fastest clip since 2021, helped by a growing number of brick-and-mortar stores, which has been a new initiative for them over the last few years. and growing. And also, sales growing helped out by demand for some of its higher-end brands.

21:25Yeah, the stock up 17 % year-to-day. Earlier today, as much as 32 % intraday highs, the most going back to April of 2020. Some perspective, the stock's still down, Carol, 66 % from that peak. That was back in March of 2021. But today, soaring higher.

21:41Carol Massar:Yeah, big time. So we're delighted to have back with us, joining us once again, Kate Gulliver. She's the Chief Financial Officer and Chief Administrative Officer. We like to remind everybody that Kate oversees finance, legal talent, real estate, corporate affairs at Wayfair. She has a full plate. So delighted once again to find some time for us. She's in Boston where the company is Boston. Kate, good to have you here. Congratulations. Killer quarter. Thank you. Talk to us about the momentum. Well, I mean, I think you just said it, right? It's nice momentum over many quarters now. And so I think what you're seeing is really the sort of multitude of initiatives that we've laid out, the consistency of that playthrough and, you know, building momentum there.

22:24And that reaction is a result of those factors. So, you know, that U.S. revenue growth of nearly 9%, the highest in the post-COVID period, the flow through to really solid contribution margin, high EBITDA margin, and then, you know, best free cash flow that we've had since Q2 of 2020. And so all of the things that we have been working on to drive and improve that customer experience continue to come together, help us gain share, and we're flowing that through quite nicely. Who are the customers who are buying right now? Because when you hear a superlative like, you know, most since post-pandemic days, you think to yourself, OK, well, well, who are the customers who have who have the money right now to be buying this stuff?

23:07It's a great question. And we actually went on the call. We went into a little bit of detail around Paragold, which is our luxury brand. You know, it's of our sort of family of brands that plays at the highest end of the market. And we do see really nice momentum there. We said that was growing north of 30 percent. Right. So you do see nice momentum in the higher end segment, the top part of that K-shape, if you will, in the K-shaped economy. That said, Paragold is only a little over$400 million. So when you think about the overall Wayfair business, the Wayfair.com brand, that mass market brand, has to also be performing well to get to that 9 % comp.

23:45And so what we're seeing there is ongoing share gain. And we think that's from programs like our Wayfair Rewards program, programs like the stores, which, Carol, you had the opportunity to see, programs like our Wayfair Verified. The combination of those things is helping us both attract and retain these customers and have them engage more and more.

24:06Carol Massar:Tell us about the stores. My understanding is that more than 50 % of store customers are new. But tell us about – that's a big investment, Kate. We've talked about it. I did go there. I was kind of blown away by the size and the scope of it. You guys continue to add stores, but tell us about, you know, we kind of marveled over how everybody had pushed back on brick and mortar for years. And so interesting, you know, that you're a guy that you're finding success with it, but tell us how this is really moving the needle for you. Yeah, it's a great, it's a great call out. I think we're, we're seeing that folks really do desire that multi-channel experience.