Amex Expenses Surge 12% as Marketing Costs for Cards Rise

0:00So like 100 % of investors think that protection is important, but only about 70 % of advisors are like talking to their clients about that.

0:07Kunjan Sobhani:Where do you think the disconnect is happening? There's this huge differences that exist in terms of what advisors think they're talking about their clients, what clients are actually hearing. Get the news you need in just 15 minutes. Start your day with Bloomberg Daybreak, the podcast with a global view on the stories that matter. I'm Nathan Hager. And I'm Karen Moscow. Join us each morning for curated stories on current events, politics, business, and foreign relations. Plus one conversation on the day's biggest developments, all in just 15 minutes. Subscribe to Bloomberg Daybreak for a precise, thoughtful take on the stories that matter.

0:39Listen to Bloomberg Daybreak each morning on Apple, Spotify, or anywhere you listen.

0:47Kunjan Sobhani:Bloomberg 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. Alexis and I were just talking about how we're both Amex card holders. And we're trying to figure out the most economical way of transferring rewards points to your airline account and not have to pay fees. Yeah. If you find a way to do that without paying fees, please do let me know. Because it just, it varies on how much you're going to pay to do the transfer.

1:29But I feel like, you know, there's a fee for almost everything you do. You know what? You need to go on Reddit because the folks on Reddit have like broken this down to a science. I'm doing it. All the details. else. Let's bring in Ben Elliott. He's our consumer finance analyst, and he's going to talk to us about American Express earnings. And Ben, a big part of what we're seeing from American Express is how much it spends on marketing these cards to Alexis, these cards to me. And, you know, the platinum card in particular is like their big moneymaker because the fees are almost$800. That's right.

2:00Yeah. So it's sort of a, you got to spend money and make money in scenario for Amex, right? And one of the challenges they're facing right now, which you can see in the response to earnings today, is that the expenses happen right away and the benefits take a year or two to float through P &L. So one of the things that I saw that was very optimistic in the earnings was management guided towards a higher card fee growth in the third quarter, and then a higher run rate exiting 2024. And that's just because mechanically, you know, they raise people's card fees when they renew their card, right? So that's kind of on a rolling basis.

2:37And they're still raising card fees from the previous refresh of the Amex Plat. So that's going to keep rolling into P &L through next year. And that will make some of the elevated expenses look more palatable to investors, I think. Ben, how is artificial intelligence part of the American Express story right now? And did they talk about it at all on the call? They talked about it on the call. They talked about it. Quite a bit of regularity. Right now, I think the biggest impact they're seeing is they're just really a lot more efficient on the sort of the tech stack modernization effort that's been ongoing for a long time.

3:14But they would like to do things like agentic purchasing, you know, AI travel agents, things like that. And they think that that could add meaningfully to revenue and also be a big positive on the expense side. Your colleague, Nathan Dean, is our senior policy analyst in Washington, and he's been writing about how there's this credit card competition act that hasn't made its way through Congress yet, but would supposedly require banks to offer two rival credit card networks to their merchants. And that could potentially be a threat to American Express, Visa, MasterCard. Is this something that the company is worried about, is kind of working around at this point, positioning itself in any way?

3:57I don't think that they're particularly worried about it yet. I think that Nathan has some sort of tempered odds on that, but I don't know his latest odds. You know, Amex, I think, is such a sort of like lifestyle brand, value proposition driven company that, you know, if they had to, for instance, offer like a Visa or MasterCard branded card, It would impact the discount revenue sort of side of things. But I imagine that they would still try to drive users towards their Amex branded cards where they have the full economics. And they could do something like provide a more basic card on the Visa MasterCard network and provide kind of like the higher end, the real meat and potatoes of the business on their own proprietary network.

4:50And that might be an offset. And there's also, you know, all kinds of other different ways to add fees and, you know, find other revenue sources that aren't contemplated. Well, could one of those fees be, I was talking to Scarlett off mic earlier about, let's say, for instance, you have a bunch of rewards points and you want to transfer them over to an airline that you fly often. Amex does charge you, at least in my experience, to make that transfer. And I have to tell you, when you're paying, you know,$800 a year for a card, that doesn't feel too good, Ben. Yeah, I'm not sure exactly which program you're talking about.

5:25I was trying to get Miles over to Delta and was charged$99 to do it. And she's outraged. Yeah, I'm quietly outraged. I mean, that's like the flagship program. So I'm not exactly sure what scenario you're talking about. But I don't think that they would want to do something that sort of negatively impacted partners. So that's probably not the first fee that would be on the menu. But, you know, there are plenty of ways to bifurcate your audience and still provide what Amex does provide now. And then just to have like some sort of add on that meets any kind of new regulatory requirement. I like the way he put that bifurcate the audience, meaning if you upgrade to a better level, maybe you won't be subject to the fees that you just experienced.

6:07And that kind of gets to the heart of it. Right, Ben? I mean, they can slice and dice this in a very, very thin slices. Yeah, everything's about the platinum. So anything they can do to drive more traffic to the platinum, I think, will in the end actually be a net positive, even if, you know, there's some sort of change in the business model and they have to serve, you know, maybe a lower FICO borrower, maybe a broader audience. I don't think it will affect the core audience who likes what they have right now. And they're happy to keep paying more for it. And just very quickly, for the American Express cardholders, like maybe those who come in on the introductory card, like the, you know, blue card, do they tend to stick with Amex?

6:42So they kind of go along with the brand and make it all the way to platinum? Yes. I think 75 % of new customers are coming onto a fee paying card already from the get go. 65 % of those are Gen Z and millennial. And the company sees a gigantic lifetime value in those consumers. And explicit goal is to get those people to spend more over their lifetime. And retention rates are crazy high. On the MX Plat, it's like almost 100%. So people basically never give up their card once they get it. Stay with us. More from Bloomberg Intelligence coming up after this. Over$100 trillion estimated to be transferred to generations in the next 25 years.

7:24It's both a risk and an opportunity because we see that only about 18-19 % of high net worth investors plan on sticking with their advisor post-transfer. This has to be a tough statistic for some to hear. People who work so hard trying to grow their net assets. They want to protect that life work and they want to make sure that it is able to transfer in a seamless way.

7:49Kunjan Sobhani:The Bloomberg This Weekend podcast. News, politics and the lighter side of Bloomberg. The great wealth transfer includes$570 billion in classic cars. I'm not in a position to be inheriting any classic cars for you. No, but my brother did inherit my non-classic car when I moved to New York. So he still has not paid me for it. Coming for you, Joey. The Bloomberg This Weekend Podcast. Subscribe today on Apple, Spotify, or wherever you listen. 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.

8:30Kunjan Sobhani:Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's talk a little bit about Intel because Intel shares are down about 4%. And Alexis, you were pointing out earlier that the outlook was good and the results looked decent. And yet the stock, however, is not responding. Yeah, I mean, like it was higher in the pre-market when I was doing the flashes on surveillance, talking about how Intel was rallying. And then once regular trading started, stock is down. All right, so let's check in with Kunjan Shobani. He is our senior semiconductor analyst joining us from San Francisco.

9:01So Kunjan, explain to us what happened between the pre-market and the start of regular trading when things looked fairly good for Intel and now clearly the market does not like everything it sees with the latest set of results.

9:15Kunjan Sobhani:I mean, from our perspective, we liked everything we saw. I mean, after quarters and quarters of facing hurdles and, you know, missteps, this was the finally the most cleanest positive quarter from a fundamental perspective. They beat on all metrics, But more important than that, they showcased a lot of confidence in the foundry progress that they're making. If I had to guess what the, you know, just a reaction a few hours since the market has opened is, could be just because some folks are not liking the higher spending, which is going to be a headwind to the free cash flow, right? So if you add on everything positive that's happening, they were finally now getting to a free cash flow, which people were liking.

9:56Kunjan Sobhani:But this additional spending is again going to put a pause. And a lot of investors have been waiting to get this positive free cash flow. But other than that, fundamentally, everything looks really good. You know, earlier we were talking with Dan Ives about this and about the hyperscalers that are going to be reporting next week. And I'm curious, is there anything they can say with regards to CapEx spending on AI that would please this market? Because you would think if they're spending too little, the market might not like it. If they're spending too much, the market doesn't seem to like it. Well, you got it spot on, right?

10:28Kunjan Sobhani:The investors and shareholders of those hyperscalers don't like it when they spend a lot of money. But the investors for the semi guys that I cover should like that higher number. In fact, I mean, if we don't get a much higher number, you know, those investors might not like for the names of NVIDIA, AMD, Intel and so forth. Because remember, the higher the capex for hyperscalers, that means the better the probability of upside for the semiconductor guys that I cover. so khanjam would you say that the u.s government owning a stake in intel has been unequivocally good for the company in the stock i mean uh i don't see any direct correlation there like they haven't done anything except for you know investment just bringing in the liquidity and the cash flow uh there's definitely that credibility that you know government likely won't let Intel fall.

11:20Kunjan Sobhani:But I think I would not give them a lot more credit for what we're seeing in this talk. It has all been execution since the new CEO coming in. And we are now seeing the fruits of that discipline and the execution finally showing up. I was looking a little more into the report and also just taking a look at what some analysts had to say. So Intel, this is their strongest revenue growth in more than 15 years. This is according to a city analyst. What and is it all AI that's driving that right now? Is it diversified in any way? Well, it's mostly AI because again, they're in the compute business, right?

11:54Kunjan Sobhani:And anyone who is in that proportional business, it's mostly AI. I think they reported a number that now 70 % of their total revenue in this quarter was AI exposed or AI related in some shape or form. But more importantly, what's driving it, the tide is lifting all boats. Everyone's enjoying that. But really what the goodness came out in this quarter was, again, their execution on the foundry end, the yields are getting better, costs are coming down. It's a supply constrained environment everywhere else and Intel has its own supply. So when they're able to bring up more volume, they're able to sell more parts and drive higher revenue and charge a lot more because, again, supply constraints.

12:32Kunjan Sobhani:So any new volume that they bring up, they're able to right now charge a lot more higher prices. Stay with us. More from Bloomberg Intelligence coming up after this.

12:44Kunjan Sobhani:you're listening to the bloomberg intelligence podcast catch us live weekdays at 10 a.m eastern on apple car play and android auto with the bloomberg business app listen on demand wherever you get your podcasts or watch us live on youtube we want to talk uh earnings next week because they're going to be dominated by the mega cap uh hyperscalers we're talking meta microsoft apple Amazon and the like and who better to do that with than Mr. Dan Ives live in our studios here in the interactive broker studio partner and senior managing director Yorkville Ives and co Dan good to see you great to see you and you you have an animal motif for those not watching on YouTube animal motif today is this a tiger tiger got a koala hat so yeah little little animal motif.

13:32I should have brought a bull maybe. I like that. Animal spirits to the conversation. We'll talk about next week in a moment because I want to talk about Intel right now. After the bell yesterday, on every metric, I thought blew it out of the water, yet Intel is down 3%. Why do you think? I think the reality is some of these knee-jerk reactions, I think, could be misleading relative to the fundamentals. Because what investors are looking at here is, what does demand look like for the AI revolution? And look, Intel has become a huge barometer. And you combine what we saw from Intel with the hyperscalers, that just gives you more confidence to what we're going to see over the next week relative to CapEx, enterprise demand.

14:15I think that's why it's very easy for investors to get caught up sometimes in what the stocks do, you know, a day after. But for Intel, I mean, they've almost become the comeback kid. They have. Yeah, they definitely have. With a big helping hand from the U.S. government, of course. And NVIDIA, yeah. And NVIDIA. Okay, so let's talk about the hyperscaler earnings that are coming up next week. Alphabet, the knee-jerk reaction there was to sell it off yesterday, down almost 7%. Today, it's making a little bit of a comeback, stabilizing up two-thirds of 1%. We've got Meta, Microsoft, Amazon, all reporting next week.

14:48Are we going to see a similar kind of outcome where they're going to increase their CapEx and the return on investment, you know, through cloud sales, for instance, is going to show that they're getting some payoff, but investors' bar is so high right now that they're not going to be rewarded for it. And I think the alphabet reaction, I think that someone would say maybe head-scratching because if you saw the cloud growth, you look what they're doing across the business, and then, of course, increasing capex. But as we've talked about, this is an arm's race. It's third inning in the AI revolution.

15:25Microsoft, Amazon, Meta, no one's going to slow capex. Could you slow it down? You get ultimately, you know, you're out of the line in terms of when it comes to capacity. I think the most important thing relative to tech earnings, to the market, to these stocks is, is demand accelerating. Our enterprise is toward what ultimately is going to be monetization and use cases. And in terms of the reactions, look, I think we've seen, you know, I think investors are definitely fickle and worrying about, we'll say, maybe patients wearing thin. But guess what? Let's say Alphabet said, we're cutting catbacks.

16:00Exactly. The market would freak out. So that's why it's one where these companies are doing everything. But they're not just spending like 1980s rock stars for no reason. They're spending because their customers are moving on the hyperscalers, on the cloud with AI. That's why they're doing it. It's sort of like you're damned if you do and you're damned if you don't, right? Because if you're not spending and keeping pace with the other big hyperscalers, well, then what are you doing? But if you're spending a lot, they're still going, what are you doing? But you're building out the Vegas Strip in 1955.

16:34Great analogy. So the point is, you get one spot on the Strip. If you pull back, guess what? You're two miles away, you're in Reno. Right. And by the way, that's how these companies are thinking. Okay, so they want to make sure they have a prime spot on the Strip. and that means they need to spend a lot of money. They also need to raise a lot of money. They've been doing that in the bond market. Are more companies going to do what Alphabet did and tap the equity market as well? I think it's going to be a tidal wave. Now, in terms of - I think it's also going to happen over the next 6, 12, 18 months because the reality is if they don't do it, despite whatever the stocks do, they know they're out of the game.

17:15Now, investors, how are they going to react to that? I would argue, see, if you look at Meta, Meta's last quarter was basically increase CapEx, dog ate the homework. They didn't show it. Alphabet, they are showing it. Microsoft, penalty box, prove me moving from Nadella. Each one's almost become idiosyncratic relative to how they're treated. But the reality is investors are going from CapEx to monetization. That's the phase we're in. But it's still early in terms as it's all playing out. And for the first time in 30 years, the U.S. is ahead of China when it comes to tech. Apple is a different animal from the other companies we were just talking about.

17:54And every day I feel like they're saying we're going to revamp another product in our lineup, again, geared towards AI. So what can they possibly say that's new when they come out with earnings next week? Look, for Apple, they finally now have an AI strategy. It's not just talk. And we talk about, we saw WWDC. It's not anthropic. It's not open AI. They don't need to be that because they have the install base of 2.5 billion iOS devices, 1.5 billion iPhones. For them, okay, it's really about giving investors update on the deployment of the AI strategy and then giving some sort of sense in terms of what this iPhone 17, it has been a surprise upgrade cycle.

18:37And I think that's something you saw even on the AT &T numbers. and it's very important for this broader market. What's happening to the stock, investors are realizing Apple is basically, they're going to be the toll collector on the consumer AI highway, no matter which way. But do we need a foldable Apple phone? That's my question, Dan. And again, Keen's talked about that and I think, I know he's waiting for it, but I think it's going to come by next year. It's not going to fall out of your pocket that way. It'll be bulkier, but it won't fall out. Stay with us. More from Bloomberg Intelligence coming up after this.

19:16Kunjan Sobhani: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. We want to talk about charter communications because this stock, taking it on the chin today, down about 6.5 % after its quarterly earnings report. You want to dig in a little more with Geetha Ranganathan, U.S. media analyst for Bloomberg Intelligence, and she joins us from our Princeton, New Jersey office. Geetha, always good to see you. I guess the top line here is they did it again, revenue declining once again at Charter as subscriber growth continues to slide.

19:59What else in this report did Wall Street not like? Thanks so much, Alexis, for having me. So really, this story is, you know, we've seen this movie before and just the story just keeps getting worse and worse every quarter. So, you know, Charter, as you may know, is going to very soon be the largest broadband provider in the United States after it closes on its Cox deal, which will happen in the next couple of weeks time. And really the story for this company has been this persistent loss in broadband subscriptions. And what Wall Street did not like this quarter was that not only did we see a deterioration in those subscribers trends, which was losses much worse than what we had initially projected.

20:44But also along with that, we are seeing this tremendous pressure on broadband ARPU, which is causing declines in EBITDA. And so just, you know, as you kind of think about the growth outlook for this company over the next few years, there is just no turnaround in sight. And that is making investors extremely nervous. Now, there were there were bright spots here. No, I mean, they did add, I guess, subscribers on the mobility end of things. How is that going? Yes. So, you know, this is a story that we're seeing across a lot of the cable providers. So both Charter and Comcast introducing their mobile product, which is Spectrum Mobile and Xfinity Mobile.

21:24And we've seen a lot of success with this. And really what these cable providers have done very creatively is that they're bundling their mobile solutions with broadband. Really, the big picture here is they're trying to retain those broadband subscribers as well as attract new ones by bundling in mobile. And, you know, people kind of like that so that you do have quite a few, you know, new subscribers kind of signing on. because if you actually look at the market out there, the wireless market, Spectrum Mobile is priced very, very competitively, much more competitively than the big three. And that is what is helping them kind of gain subscribers.

22:00But remember, they have about 10 to 12 million subscribers versus we're comparing it with Verizon and AT &T and Timo, which have hundreds of millions of subscribers. So again, it's small potatoes, but yes, there are some bright spots. What about some of its competitiveness? I guess we heard from Comcast this week, quite a different story, but then I guess you could also argue Comcast is a lot more diversified than a charter communications. Yeah, so actually for Comcast, it's kind of ironic, Alexis, because they've always been punished because they were not a pure play cable company. They had this media operation with NBC, which they never really got credit for.

22:43And actually, in order to kind of simplify the story and get more value for their media business, they announced that they will be separating out those media operations, which will happen sometime in 2027. But you have the cable business that has really come under tremendous pressure. And we're seeing that both, you know, with Comcast as well as Charter. Comcast is slightly better because, again, they have that diversification, as you pointed out, with media. But cable valuations, if you just track them over the past four years, Alexis, I mean, they've basically gone down by 50 percent. So right now we are under five percent historical lows.

23:19And the problem is that the story is not getting any better. So with the emergence of Starlink and the possibility of having much greater competition in the broadband landscape, you know, the story just gets so much more complicated and muddied for both Comcast and Charter. I'm just looking at that service area. Charter Communications provides a service across 41 states, including much of New York, California, Texas, Florida. And I'm taking a look at the stock right now, Geetha, down about 69 % year to date. I mean, is it a possibility here that Charter Communications either tries to sell off some parts of the business or just gets bought out in the next couple of years?