Amazon Falls as Profit Outlook, Cloud Growth Spook Investors

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1:53Bloomberg 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. I'm looking at Amazon. Stock's down 7.2 % today. I don't know. Anytime I see Amazon trade down like that, I'm like, boy, if I were a portfolio manager, you've got to be thinking about this is a good time. It's flat year to date. So certainly underperforming the marketplace here. They put out some numbers last night, a little bit disappointing on their guidance and some questions about the cloud and kind of the growth rates there and all that kind of stuff.

2:35Pudum Goyal, she follows the company. She follows the stock. She's a senior U.S. e-commerce and retail analyst for Bloomberg Intelligence. Pudum, what did you take away from the quarter last night? Yeah, thanks, Paul. So I think, you know, the quarter had two mixed reads. The first on the retail side, things were actually pretty well. Sales grew double digits on the retail front, and that was higher than we expected. Shows that value is driving shoppers to Amazon.com's retail platform. And prices aren't going up. So shoppers are still buying, at least on Amazon.com. The second side of the story is Amazon's AWS business.

3:10And I think that's where you're seeing the sell-off come from. They were disappointing, plain and simple. We saw Microsoft and Google. They both outperformed when they reported. And Amazon was just in line on the sales side. But operating margins were much weaker, 32%. That's off of 39-plus percent in the last quarter. The guidance was also weak on the margin side. And I think that's really what's causing the stocks to slide today morning. Anyone who was watching shares post-market yesterday after their results watched them fall so much during that earnings call, during Andy Jassy's comments, what did he say that was so concerning to investors?

3:51I think it was basically that it's a slow and steady climb from here. It's not overnight, right? Amazon is not getting the benefit of the chat GPT that Microsoft is seeing. They are investing in enterprise clients, the B2B side of the cloud business, and that has plenty of growth ahead, but that growth isn't going to come overnight. It's going to come year by year. We're still very, very optimistic that Amazon has a long runway for growth here, both on the cloud and the retail side, and also advertising, which grew nicely at over 22%. So the results to us, you know, suggest a small slowdown. But we think Amazon's earnings will ebb and flow.

4:33But the path forward is still up in our mind. It's August 1st. So I guess I have to ask this question. I hate to do it because I'm a person who believes that, hey, we're only halfway through summer here. But the reality is back to school spending. What's Amazon saying here about back to school spending here? So they're not saying much yet, but back to school is clearly the second largest holiday shopping season of the year. We think given Amazon's outperformance year to date on the retail side, they will continue to draw in back to school spending. At this time, consumers want value. They think prices are going up.

5:08Prices are going up to some extent, but they haven't gone up that much, which is why retail is holding up. When you're looking for school supplies, you're going to Amazon, you're going to Walmart, you're going to where you can find value. Hunim, how much of this reaction in Amazon has to do with the fact that it was just bad timing for them, that they're facing much tougher comparisons after some of the other mega caps reported results? Comparisons are going to remain tough on the cloud side for years to come because you will continue to see growth in the double digit range. I think more of it has to do with just Amazon's results were not bad.

5:43They were pretty good. It's just they weren't as good as Microsoft and Google. And that does go back to what I said earlier. They don't get the benefit of the C2C side of cloud growth that those two competitors get. So on the retail side here with tariffs, we now have a clearer picture of kind of how the tariff situation might shake out. I got to feel like Amazon. I mean, nobody's got more buying power than Amazon. So I can't. Somebody tries to raise the prices on me. I'd be like, go take a walk. I mean, what are they saying? Yeah, I think, you know, clearly prices are going to rise slightly. Is Amazon more shielded than the rest of retail?

6:25I think absolutely yes. To your point, Paul,$700 plus billion in global GMB, 40 % of the business or less than 40 % is first part, which means that's the inventory that they own and that's the inventory where they have pricing control over. Still sizable. And therefore, they do have that buying power advantage. And they also have other offsets, right? Amazon has more than just retail in its house. It's got AWS. It's got advertising, which are very, very high profit margins. So could they eat some of that cost? Absolutely. Will they pass them along? Yes, but not on the basics, right? Retail 101, you don't raise the price of milk.

7:05You raise the price of something else. So the items that, you know, draw you to the platform, they're not going to raise the price of material either. We don't expect them to. And on the third-party side, that's not Amazon's problem. They have over 200 million sellers. You can go between the sellers. I'm sure that there will be intense competition as prices may rise there for shoppers to have choices. We have more clarity on tariffs than we did before, but there's this idea that tariff policy is still in a flux and the final framework could change. How much do you think that will impact Amazon's decision-making from this point?

7:41I think for Amazon, you know, tariffs right now, the way we look at them is they're changing. China's still on a 90-day pause, right? So we don't know where things will end up in China. And that's a very, very important country to watch for. So I'd say we're very much in flux. Vietnam, the tariffs have gone up from the 10 % pause to 20%. They're also going up in other Asian countries. India's speculated or set to be around 25%. These are these are countries where the last round of tariffs, companies had moved out of China into many of these countries. Right. So while the tariff rate is still better, right, 20 percent is still better than the 30 percent pause.

8:19And who knows what it'll be a month or two months from now. All right. Thanks so much. Thanks so much. Appreciate it. She covers all the retail for Bloomberg Intelligence, including Amazon. 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. Alex Seminova from Bloomberg News. I'm Paul Swinney. We're live here in our Bloomberg Interactive Broker Studio streaming live on YouTube as well. All right. Apple stock down 1.5 % today, down 18 % year to date.

8:54I thought their quarter last night was really good. The fastest quarterly revenue growth in more than three years. Revenue's up 9.6%. People are telling me this is a low, maybe mid-single-digit growth story. I don't know. It looked pretty darn good to me. They said China was even pretty good. And for me, one of the biggest headwinds for Apple's story has always been, how are you going to operate in China? So I thought it was a pretty solid, if not actually kind of really good quarter. Angelo Zeno, he's the pro. He'll give us the lowdown here. He's the senior vice president of equity analyst at CFRA Research.

9:24Angelo, what was your takeaway from the Apple print last night? Yeah, so thanks for having me. I think overall, to your point, the results were really good, better than I think we anticipated and anybody else out there. And again, to your point, I mean, this was probably, I think, the best growth rate we've seen since late calendar 2021. And again, with China, the return to growth, the first quarterly growth rate that we saw in two years, all kind of positives here for Apple. And I think to me that the biggest takeaway or the biggest positive on the call was actually the services number. They grew 13 % year-over-year.

9:59They actually didn't give guidance three months ago due to some fears whether it had been related to the Epic Games case or what have you. And they actually provided guidance for the September quarter as far as services is concerned. Also, about 13 % are consistent with the June quarter. So the services, we think, continues to be the key growth story and why we like it. But I will say this. as far as the guidance is concerned and what they had to say forward looking in nature, they didn't really answer or kind of alleviate the concerns out there that some of the bears have. And, you know, I'd say the biggest thing is really the fact that when they did provide guidance, it essentially assumes no changes to tariffs.

10:40And we think that's unlikely. We actually think there are going to be changes to tariffs because you're going to get something from the 232 semiconductor investigation likely in the next couple of weeks. And when you do see that, that is going to have an impact, we think, on Apple. probably their decision on what they're going to do in terms of pricing and their margin strategy. Angelo, speaking of tariffs, how sustainable is that revenue growth number that we saw? How much of it is related to a tariff-related pull-in? I mean, for the June quarter, they said it was one out of their 10 points, right?

11:09Whether or not you want to believe that is up to every individual out there. We thought that when we originally saw the print, we would have bet on the fact that it probably would have been more than that. Again, for the September quarter, the guidance of mid to high single-digit growth, where we were looking for about 3 % growth, it just seems like the growth rates, at least right now for these two quarters, they obviously attributed it to the fact that the iPhone 16 cycle is just seeing maybe better upgrades than what we saw in prior cycles. But it's just hard to imagine that's all that's happening because you didn't necessarily see those type of growth rates right in the December quarter and the March quarter when the cycle first started.

11:52So, you know, it's probably a little bit more than what they're leading us out to believe. But, you know, again, we'll get better clarity as we kind of go into the iPhone 17 cycle in the December quarter. Angela, one of the headwinds for Apple, real or perceived, I'm not sure, is the belief that they don't really have a solid AI play, AI angle to the story. A, do you believe it? Do you agree with that? and B, what do you think they should be doing on that front? No, we believe it. You know, they don't have, they're not, this is the problem, right? When you kind of look at some of these other stories across the tech space, there are much better stories as far as investing in AI.

12:34We know AI is going to be a huge disruptive trend here over the next decade and longer than that. But if you're not in this AI kind of ecosystem and, you know, you're not playing a role in the whole AI space, you know, you're missing out and investors are going to get frustrated with that. The biggest issue with Apple has been the fact that they haven't made good on their promise back in June of 2024 at the developers conference when they essentially said by this year we were going to see AI or Siri integration across that app store. And we just haven't seen it yet. What we did like last night on the call was Tim Cook seemed like he remained committed that we are going to see it at some point here over the next couple of quarters.

13:19We continue to say they've got to get this right by the time we hit the developers conference in June of next year. That's the absolute latest that they can get this AI story right. We think they will get it right. They've got all the money in the world to kind of throw at it. And whether it be done internally via partnerships or some M &A strategy, all which it seems like they were open to on the call last night, we think they'll get it right. Obviously, a lot of investors want to hear what companies are doing on AI. but does Apple actually risk losing customers if they don't come up with an AI strategy, or will they be okay with using the ChatGPT app on their phones?

13:55That's a great question. I don't know if they really risk losing customers at this point in time. I do think it's going to have a huge impact on the upgrade cycle. If you see them get this AI story right, and we see some really cool AI capabilities, integration across the app store, get these developers to really developing some really great apps out there, you're going to see consumers really start to upgrade, and Apple's going to benefit from a monetization perspective on the hardware side, and we think they're also going to be able to charge some nice features from a services perspective as well.

14:31So that's how they can make money from an AI standpoint on both hardware and services. But maybe to your point, are consumers all of a sudden going to depart? Not necessarily, but listen, And Samsung is a formidable threat out there. They've got some decent people out there as well. They've got some really good integration with Alphabet. So we'd rather see Apple get it right and not have to necessarily worry about that issue. Angelo, 30 seconds left. I kind of like the aqua hire kind of strategy that are seen across the tech space, where companies will buy a majority stake, not the whole thing, so the regulators don't jump down their throat.

15:10Is that something Apple would consider, do you think? I mean, it doesn't seem like it's in their DNA right now. And when we kind of see some of the moves that they've made as of late, they've actually been hurt by the acquihire strategy, right, just given some of the key departures that we've seen. But, yeah, I mean, Apple's got the ability to kind of benefit from that theme. My guess is, again, they're going to have to get this AI story right. So they could use it towards their advantage. But I agree with you. I like the whole acqui-hire theme for the broader AI space ecosystem and the tech sector.

15:46All right, Angela. Thank you so much. We appreciate that. Angela Zino, Senior Vice President, Equity Analyst at CFRA Research. I mean, take a look. It's not like they don't have the money, folks. Apple's got$130 billion of cash on the balance sheet. They can borrow whatever they want. They're going to have free cash flow north of$100 billion over the next several years,$120 billion. So it's not like they don't have the cash to go all in on AI. The question is kind of what's their strategy? And that's still kind of up in the air for a lot of investors. I'm not sure we're going to get much clarity, but as Angela was saying, that needs to come.

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18:13I'm just going to quote WTI Crude Oil because I watch Landman for a season. I know all about the oil and gas businesses down$1.87,$67.38. Chevron, Exxon, they've reported some numbers here today. Let's break it all down for the big oil companies. Vince Piazza, Senior Equity, and he covers all the energy space for Bloomberg Intelligence. He's done that for decades on both the sell side and the buy side. Hey, Vince, what did you see, what did you learn from the Exxons of the world, the Chevrons of the world? Hey, so today what we definitely picked up is the view that Exxon and Chevron are closely mirroring one another.

18:52So, you know, Permian growth, Permian Basin growth for both Chevron and Exxon was there. Chevron topped out at a million barrels a day in the Permian. But going forward, that will likely sort of temper down a bit because of just the indecision around WTI and just the energy environment in general. So we'll probably see some more free cash flow flowing out of there. More importantly, though, for Chevron, Paul, the Hess deal closed. So now the hard part starts for Chevron to integrate this very large footprint after almost two years of legal hassles with Exxon. The good news here is that both parties are now partners in what is the most prolific offshore international asset that we've seen in decades.

19:58And so I think going forward, what you see here for both of these entities is the upstream side of the equation shining more of a light on the upstream side because of not only developments that they've had offshore, but also here, shorter cycle, Permian growth, which will likely provide tax flow going forward for both of these entities. Vince, one thing that stood out to me is in addition to the profit surprise, Exxon said it's keeping an eye out for more acquisitions after its$60 billion takeover of Pioneer Natural Resources. What do you think that this activity will mean for the company? Well, look, they have been very proficient in picking up pieces.

20:46First, the XTO several years ago, now Pioneer. This is not a play just for volume. It is strategic. The Permian Basin can still use some consolidation. There aren't very many pieces of size left. There are a lot of other smaller entities. So for Exxon, in order to move that needle, it would need to make a very sizable acquisition. They're still out there, and they They do have some scale. The issue here is this isn't just about volume. It's also about consolidating and expanding the resource play within the Permian. And there are a few of size in the region that would make sense, but we're not going to lead the witness and tell you what's coming up in the next couple of weeks for us.

21:40So, Vince, I think about the Chevron deal. And I know, you know, from talking to you and reading your research, a big part of that attraction for Hess being bought by Chevron was Hess had a stake in a big property or fine down in Guyana. Tell us about that, because that was a real opportunity. Yeah, I think that is the crown jewel of this acquisition. And that's what the arbitration really was about. It was about Exxon's right of first refusal to that particular asset. Of course, that decision went in favor of Chevron. Guyana is a very large asset. The Straybrook block is a very large, prolific piece.

22:25There are more than a dozen developments that will be ongoing. And that asset base will provide decades of production growth that will facilitate the short-run, short-cycle development, short-cycle production here in the U.S. in the Permian Basin for both Chevron and Exxon. So having two very large entities that understand these longer cycle, large developments, I think is a positive. And it's also a positive that both have fairly deep pockets and good experience doing these types of things. Vince, thanks so much for joining us. I always appreciate getting a few minutes of your time. Vince Piazza, he is the go-to voice at Bloomberg Intelligence for all things energy, oil and gas for Bloomberg Intelligence.

23:19And again, on the Landman front, you've got to watch it if you want to be an expert like I am now in oil and gas. I'm still learning a lot about oil and gas every day, Paul. I don't know. It's a tough life. That's one of my takeaways. I mean, that's hard. To get that stuff out of the ground is not easy. And these companies make huge investments. Again, Chevron, Exxon spending$60 billion for Pioneer. Chevron buying Hess. I mean, it's a tough business. A lot of M &A activity. They are filming season two of Landman. So it is coming. So that is cool. I'm all fired up for that there. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts.

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