Alphabet Plans Record Spending in Race to Win AI Customers

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break.

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's go back to big tech because we can't stay away from them for too long. We have one more Mag7 name reporting today. Amazon will be reporting. Alphabet reported yesterday, and I want to go back to that CapEx number, which just blew people's minds. $185 billion of full-year CapEx, much, much higher than what was anticipated.

1:43Mandeep Singh is our go-to guy for all things tech. He's our global tech research head here at Bloomberg Intelligence and joins us now. One trader called it Alphabet's mic drop CapEx, highlights the have versus have-nots and AI capabilities, commitments, and balance sheet. Once upon a time, spending on, you know, your future growth was a good thing. But now any kind of CapEx commitment bigger than what people anticipated is seen as negative. Well, I think in this case, the market is thinking what comes next. So for 2026, yeah, they've guided$285 billion. I mean, chances are the growth rates are going to decelerate from this point on.

2:25So 2026 will be the peak CapEx for a lot of these companies, especially in terms of growth rates. You're not going to see, you know, 50, 60 percent growth in CapEx going forward from these numbers. So that's a given. And that's why, you know, the market will be anticipatory in that sense, in terms of how that CapEx growth is going to pan out from this point on because, you know, for some of the chip makers, their growth is directly correlated to CapEx growth of the hyperscalers. So yes, this year is going to look phenomenal. But as you look past this year, you will see a deceleration. The point about I think Alphabet is really how is it reflected in their numbers?

3:07And to my mind, they've already seen a 200 basis point growth in their overall top line. So they were growing, you know, 14 to 16%. Now they are growing 18%. And so for a business with$400 billion in run rate, 200 basis points is like almost... That's real money. $8 billion, you know? So that's the ROI on all this CapEx is that$8 to$10 billion lift in top line that they're seeing across search and cloud. And cloud numbers were just monster when it comes to what they did last night, yeah. So is this AI spending, is it one time in nature or does this suggest a higher level of ongoing capex? Good question.

3:53Yeah, I mean, look, we know the public cloud businesses were data center kind of heavy in the sense you had to replace your server gear every five years. So there is a depreciation aspect to AI as well. And the fact that Alphabet has built this enterprise business, which is almost a$70 billion run rate out of their$400 billion now, it's phenomenal because that cloud business is going to accelerate. So what we saw last night, 48%, I wouldn't be surprised if they grow cloud over 50 % for the next four quarters. Simply because a lot of that data center capacity that they've been building will come online.

4:39They'll be renting a lot of that. And they're very well taking share at this point, given the numbers we have seen so far between Azure and Google Cloud. Google Cloud grew 10 % more than Azure. And it probably grew more than 20%. I mean, even if Amazon has a great quarter tonight, they probably won't print more than 25%. So there you go. You probably are seeing share shift in... Sounds like a buy on the weakness call. I mean, clearly Alphabet is the big winner among the Mag7 names when it comes to AI, up 65 % over the past 12 months, much better than Microsoft, which is down in that period. So did this set of results justify that kind of price action?

5:21Yes, the market did anticipate that. And look, there was a lot of bearishness around what ChatGPT could do to Alphabet's core search business. I mean, search grew 17%. Talking about ROI on spend, it's reflected not only in cloud, but also in core search, where the number of clicks grew 6%. Who would have thought, you know, Alphabet clicks going up when ChatGPT has 900 million monthly actives? I would have imagined pricing would hold steady for Alphabet, but not clicks growth. How are the impressions and clicks growing? It's beyond fathomable, you know, in Alphabet's case. And partly it has to do with the success of Gemini.

6:06That's 750 million standalone app users. Those are people who are going directly to Gemini beyond Google.com. So they're not just using how I use it, which is when I go to Google, the first thing that comes up is often Gemini. That's my answer. I'm done. But there's people who separately go to a Gemini app. And they are engaging for a lot longer. That's what Sundar Pichai calls that. Is Google monetizing that? I mean, they're monetizing using subscriptions. And what they're saying is we will not roll out ads anytime soon. Let OpenAI do it because that's going to interfere with the experience that people have.

6:40So we'll monetize with subscriptions and they're bundling subscriptions. Stay with us. More from Bloomberg Intelligence coming up after this.

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7:58I've been looking at the Philadelphia Semiconductor Index, which tracks chip companies, and it's had a brutal couple of days. It's rebounded today off a one-month low, but you look inside the index, and Qualcomm is the biggest loser in that group, down more than 7 % at the moment. Kunjan Subhani is our senior analyst on semiconductors. And Kunjan, when you look at Qualcomm's results, Qualcomm is primarily making chips for smartphones. and this forecast that it gave is not so great. What does that tell us? Is that more a case of supply chain issues or is there just not so much demand for new smartphones?

8:35No, it's nothing to do with demand. There's two factors here. One for Qualcomm, this year was a unique year where most of their Android handset makers, so think of Samsung, think of Xiaomi, Oppo, Vivo, launched their phones earlier than they used to. So remember, the handset business is a very seasonal business. So you have up quarters when the phones are launched and really down quarters. So in the nutshell, a lot of that revenue was sort of pulled ahead of time. That's why what you saw is they beat so strongly in the current quarter. So the flip part of that is the next quarter, which is a trough quarter, is going to be even a worse trough.

9:10On top of that, what's happening is, as we are all aware of the memory crunch happening because of HBM memory in data centers and the rising memory cost, That's freaking out the Chinese OEMs, which Qualcomm is now really disproportionately exposed to compared to all other handset semis. So the guys like Apple and Samsung are probably doing fine. They have their ability to get access to memory and procure memory ahead of time. But the smaller players are not as sophisticated. So those players are freaking out and they basically have decided we are going to stop ordering a lot more chips and we are going to clear out what we have in our inventory.

9:44And that's why what we're seeing is basically the memory impacting Qualcomm's guidance. All right. So as we step back from some of the chip makers and their earnings, I'm thinking AMD and that's soft again today, Qualcomm here. What are some of the takeaways from an industry perspective are you chatting about with clients? Yeah. So, you know, the sort of the software meltdown is trying to, the fever is spreading a little bit into semis. I would not say as broad strokes. This earnings season, what we are seeing is if companies didn't come out and blow the quarter out of the quarter, out of the results and for their outlook, they are basically getting punished.

10:22A lot of that has to also remember, take into context. A lot of these companies in the last six to seven months have seen significant rallies because a lot of good expectations, especially for the AI names like AMD being priced in. So the market is now in the mood where if you're not showing me real excitement, you're sort of being ready for a little bit of a pullback. Right. They call it a show me kind of market environment. So our colleagues will be speaking with the CEO of Qualcomm, Christiano Aman. How would you grade his performance so far, Kunjan? Well, look, he's doing everything right.

10:57It's just the company is in a tough spot. Investors have been wanting them to diversify away from handsets for many years now. And since he's been the CEO, that's what his primary objective has been. They're making good strides on the auto and IoT. In fact, both of those segments had much better than expected results and outlook. But when you still think about the company now, even three, four years down the road, it's still majority, significantly a handset revenue company. So until the revenue exposure of handsets doesn't get to at least 50 % or lower, I think that sort of headwind on the company impact from handsets is going to continue.

11:35And I think Cristiano just has to keep doing what he's doing and ride this out. So Kunjan, I know most of or much of the selling in the tech space is in the software space, not in your chip sector. But when you talk to investors, when you talk to clients, how do you feel? What's their mood over the last week or so? Do you feel like they're just kind of selling in a panic, selling because, hey, I've got such a big gain. I'm taking something off the table. My fundamental view of AI has changed. What's the tone? I don't think the fundamental view has changed. i think a couple of things once you said if whatever is happening in the other sectors will impact uh this sector as well right because there is some definitely that risk of profit taking also remember getting into this year a lot of investors in my sector are trying to reposition their books right they're re-evaluating last year in semis was like look everything was doing great ai is helping everyone i think now it's becoming a more of a stock pickers market in the sector where people are really focusing deep and thinking which guys are going to be the real winners and let's focus on them but let's get off or at least take some profit off the other folks which don't seem to be the top number and one and two in the areas that they're playing you mentioned earlier how christian amon the ceo is trying to diversify qualcomm to not rely so much on smartphone makers as its main line of business um as it tries to get into the ai data center business and you know make chips that would compete with NVIDIA.

13:02What kind of capex do you anticipate Qualcomm will have to commit to? As a Qualcomm predominantly is a fabulous semi company, so they don't have or would not have a significant capex like you hear from other AI hyperscalers. Would they would have to commit to significant OPEX, which is R &D dollars if they are going into a new line of business where they need to develop newer chips, newer programs. They have acquired a company recently to do this, So they have spent some capital there. And I think they will have to really boost off their R &D, which is their OPEC spending to compete with the likes of NVIDIA.

13:37Stay with us. More from Bloomberg Intelligence coming up after this.

13:44You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Lots of earnings coming out across the tape this week. One of the busier weeks out there. One of the names is Peloton. Boy, they can just not seem to get any positive momentum going in that business. It kind of makes, for me at least, I'm like, does this company need to be public? You know, it seems like they should maybe be a private company, but I don't know.

14:15What did everyone call it? The most expensive coat rack? Coat rack. That's right. Exactly. Geetha Ranganathan, she covers Peloton as well as all of the media and entertainment names for Bloomberg Intelligence. What's the story this time, Geetha, with Peloton? They just reported some results. Yeah, Paul. So they had their biggest product refresh ever in their history last fall. They had this huge price increase that they implemented across all of their subscription offerings. And even with all that and the benefit of a holiday quarter, they basically disappointed on the sales number. And, you know, you have them kind of making all of these taking all of these cost efficiencies.

14:54You have a lot of cost cuts. They are definitely making good progress when it comes to profit. But boy, the top line is just not moving. And that's really causing a lot of fear among investors. And we always introduce you, Geeta, as our media and entertainment analyst here at Bloomberg Intelligence. Peloton makes exercise bikes, but for a while it was trying to frame itself as a media company. How reliant is it on that software, on the media side of its business? Oh, it absolutely depends on the content, Scarlett. It is the content that gave it its cult following that gives it all of those sticky, affluent customers.

15:34The problem for Peloton right now is they're just not able to move the needle. And yeah, you have all of these new features that they're adding. I mean, you have all of these AI-powered features. They've added it to their entire product lineup. They're allowing you to kind of integrate all of your health data from like Garmin and basically making it really, really comfortable for the user. But those are all really just incremental. They are not transformational. And basically, the company just coming out and saying that, you know, the upgrade cycle that they were expecting from the existing customers just hasn't happened.

16:09So, you know, you're absolutely right that this is a content company in many ways because, you know, it relies on the content. but it also needs the sales of its hardware to happen in order for people to get access to that content. And that just is not taking off. Have you ever used Peloton before? We have a Peloton in our house. Do you follow any of the instructors? Karen from the Jersey Shore rides it every single day, rides the bike and the treadmill thing in our home. You can't hide them. We don't have a basement. If you can now take a$45 pill from him and hers, why would you need all this stuff?

16:45But more so, you need to keep tone up when you're losing weight. And so they do the weight program. So we use it. We have it. We use it. But they're just not monetizing us. So, Geitha, real quickly, this is almost a time now. 1.9 billion market cap. Are people calling for this company to go private, to be sold? I mean, it just doesn't seem to work as a publicly traded company. Yeah, it doesn't, Paul. And, you know, there's been so much of chatter about whether an Apple or an Amazon should buy this company. Nothing, of course, has materialized. There's also been, you know, constant rumors about private equity maybe kind of coming in, milking it for whatever free cash flow they can get.

17:20But again, nobody really knows what's going to happen here. All right. So I guess I just don't know. You know, it's interesting because some of the trainers, they have huge followings on social media and they're selling stuff like crazy. So, Keith, does Peloton get any of the, you know, their employees, you know, social media side hustle revenue at all? No, not really. I mean, it's just, I guess it's good for the brand, but that's about it. Stay with us. More from Bloomberg Intelligence coming up after this. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m.

18:01Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Another area of movement is in the world of luxury. Estee Lauder put out some results. Market doesn't like it. The stock's down 22 % here. Let's check in with Deb Aiken. She covers all the luxury good companies for Bloomberg Intelligence. She's based in our London office. Boy, what did Estee Lauder have to say here that so spooked the market, Deb? I think that, you know, if we think about two years where they've been turning around the U.S. and all of a sudden for the americas they came in flat with the u.s doing a little bit better but the latam side pulling somewhat on results and the expectation for q3 and q4 is quite subdued a better 4q to come so this was a 2q report where actually they beat on the top line they beat a little bit on margin and they raised their eps but it all kind of sits eps sits mid or four cents below mid consensus range on EPS.

19:09So, although it was a beat, it wasn't transformational. And so, we have, yeah, we have the Americas. We have also the fact that Europe is a little bit kind of stabilized, subdued. And then when you think about the China market, which was one of their big transition markets, they are expecting for the second half, single digit growth. They've had some good mid-growth in the first half, but you still have a big issue with travel retail. So, when you consider North America and what's happening with department stores and them transitioning there to about 30 % of the portfolio overall and into more multi, and then you have some retailers in travel retail out of China, actually changeovers in retailers, which is conflicting and causing issues with their supply chains.

20:00It isn't an easy story for the next few months ahead. And the stock rallied massively ahead of results, up 30 percent over the three months. Yeah. And if you expand that to over the past 12 months, the stock had surged 80 percent, more than 80 percent. So there's a lot built into the optimism here with this new CEO. Is the worst then behind the company, Deb? I mean, given what we heard, Sure, the results were not good enough to keep the stock moving higher. But have, you know, have the restructuring costs really been priced in and it's sunnier skies ahead? I think so, yes. But I don't think it's going to be as quick as some expected.

20:36If we think about the market overall, the beauty market and what the CEO said and he reiterated it, they're looking for about 3 percent growth in the beauty market this year. and others such as L 'Oreal will say that the market should grow around 4 % plus. And that's because they, L 'Oreal and some others, have a higher exposure into high-end fragrances, which are faster growth versus Estée Lauder. But aside from that, you probably get that, you know, the idea from Estée Lauder for the full year is not to 3 % on constant currency. And they're hoping to get to the top end of that. But that would mean that they're kind of running a little bit behind the market still.

21:21But that's because they have high travel retail and not so much exposure as peers on the fragrance side. So, where valuation sits right now, it's built an expectation that this 1.2 to 1.6 billion restructuring cost, which is on track, does come through and that everything cleans up through fiscal 27. The company is shifting to annual estimates only, which I think the U.S. market in particular won't like. guidance only, you know, to try and prevent volatility. But when it isn't a clear road ahead, that's often needed to be able to really understand quarter by quarter what's happening. So I think there are pros and cons to this to this company overall.

22:01And I can understand why it's down today. What is Estee Lauder saying about the market in China? And what are they saying about Chinese consumers in general? Where are they shopping? Are they coming to Europe? Are they coming to the U.S.? Are they staying in Japan and China? Japan, no. China, South Korea is taking some share and some kind of domestic move out of China. There's a little bit of transition into Europe. But overall, the way that Estee Lord used to account for their travel retail in Europe, and they shifted it so it's separated with China separate and then Asia. And within Asia, you have the travel retail business.

22:41So it's very clear what's happening over there. So China is picking up its mid-single-digit growth, but it's still down where it was versus two years ago. There's still a lot of repair to do. And that's, you know, the story from so many of these companies. But certainly for Estee Lauder, and I think we'll feel a bit of this pain also for L 'Oreal. They have high exposure to travel retail in China, and that isn't coming back. Hainan is solid. Macau, not so much. The Chinese aren't shopping in Japan, partly because they're asked to shop at home and because there were big comps from one or two years ago.

23:20And particularly for Estee Lauder, too, in Americas, they've already done so much with third parties, which I should mention, on digital with Amazon and others, and they're going to be comping against that as well, so it makes it hard there. This is the Bloomberg Intelligence Podcast. available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.