BI Weekend: Alphabet, GM Earnings, Musk Empire

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2:11There is the possibility of a death spiral. Post-pronautom computing and AI are going to power the future. People are just buying everything with tech. Bloomberg Intelligence. With Paul Sweeney. On Bloomberg Radio, YouTube, and Bloomberg Originals. I'm Paul Sweeney. And I'm Lisa Mateo, filling in on Bloomberg Intelligence. On today's Bloomberg Intelligence show, we dig inside the big business stories impacting Wall Street and the global markets. Each and every week, we provide in-depth research and data on some of the 2 ,000 companies and 130 industries our analysts cover worldwide. Today, we'll look at why the toy maker Hasbro is raising its four-year outlook.

2:44Plus, we'll look at how General Motors is being impacted by President Donald Trump's tariffs. But first, let's begin with the tech sector. This week, tech giant Alphabet reported second quarter earnings that beat analysts' expectations. Alphabet said demand for artificial intelligence products boosted quarterly sales and now requires an extreme increase in capital spending. For more, Lisa and I were joined by Mandeep Singh, Bloomberg Intelligence Senior Tech Industry Analyst. We first asked Mandeep for his take on Alphabet's most recent earnings. The fact that they are able to grow their search business double digit at that kind of run rate,$210 billion plus.

3:20Like, think of how many incremental dollars they added just by virtue of that 11 % growth in their$210 billion business. And that is where, you know, the real strength lies with a company like Alphabet. but they are overlaying Gemini across their family of apps. AI Overviews is actually driving 10 % more queries. And AI Overviews is now used by 2 billion monthly active users. So Google search has 5 billion monthly active users. Imagine AI Overviews being used by 2 billion monthly active users. So they got the UI part right. Gemini as a standalone app has got 450 million monthly active users. Imagine if everyone started paying a$20 subscription like ChatGPT, this could become a$100 billion business in addition to search.

4:17And then YouTube, I'm not even talking about, you know, all the strength in YouTube and Waymo. So this is a powerhouse when it comes to$400 billion run rate, they will be at the end of the year. So can you explain something to me? Because when the shares dropped, because they said CapEx was a little bit more, well,$10 billion more than expected, a little bit. How is that different for an alphabet versus if Meta were to say that? That's great. So look, let's frame the CapEx. $85 billion at potentially a$400 billion revenue run rate by the end of the year. That's like a 25 % CapEx intensity. Meta, on the other hand, is already at a 40 % CapEx intensity because their CapEx will be 70 billion at a run rate of close to 200 billion.

5:05So that just goes to show Alphabet is still far lower than their peer group when it comes to the CapEx intensity. I mean, that's just the scale of the business that they are operating. And look, I do think the ROI on their CapEx is higher because Gemini's cost is much lower than all the other large bandwidth models, including Microsoft, including Meta, they do inferencing at a lower cost. And that's the advantage of having your own chip, having your own large language model that Microsoft or Meta don't have because they rely on NVIDIA chips, whereas Google does most of their inferencing from the TPU chips.

5:46So I think that just vertical integration they have, Alphabet has, gives them such a big cost advantage when it comes to running the AI infrastructure. Where's the company on the various regulatory issues outstanding? What are the one or two or three ones that we really got to focus on? And what's the market telling us? So that's the biggest risk with Alphabet. That has been the biggest drag on their multiple. And it remains because we have a catalyst next month where Judge Meta is going to make a decision on the remedies. And, you know, especially that Chrome split, that's still an overhang. Now, Now, the base case is there won't be any chrome divestiture, but we still need to learn about what are the remedies that may come about in terms of, you know, proposed by the judge.

6:31And that is where if they are asked to, you know, share search data or some other type of remedy that's going to hurt their position. I think that is the big overhang. Boy, this one could be, this one, if you have a firm view on that, you buy the stock here and there's a ton in this thing. Are people doing that? Are people making bets here? Do you think? I bet you they have to be. I mean, the narrative is still so negative. Everyone is fixated on, oh, chat GPT, my workflow has changed. Bobby Axelrod on billions would somehow figure out where this judge is going to rule and make a bet one way or the other.

7:07You know there's the Bobby Axelrods in the world out there. I agree. I think if you can figure out decisively what the judge's verdict is going to be, the multiple wise, you could see easily a 25 to 30 % multiple expansion. And numbers will go up for sure after print last night. But multiple expansion is like 25 to 30 % just on. And when is that rolling? That's coming up in August, September timeframe. Yeah. Hard to keep up with these things. I don't know how you do it, man. That's why we got him deep. That's why we have him. Wait, wait, wait. Man deep's got like a huge team, global team behind him.

7:40I mean, all he does is come on radio and TV. Do you have interns too? And they do all the work. He's got everything. He's got everything. So you mentioned YouTube before, Google's video site. How is its advertising still going? Still going strong? So look, YouTube subscriptions is what's really doing well right now. So YouTube subscription growth is north of 20%. Imagine, you know, Netflix growing 16, 17%. YouTube subscriptions actually surpassing Netflix's growth. And then you layer ads on top of that, which grew at a very healthy 13%. So ads is a$40 billion business. subscriptions is now close to, you know,$20 billion.

8:19And that is where you're seeing, you know, combined cloud plus YouTube ARR is close to$115 billion. So imagine when just these two segments growing at north of 20%. I mean, it's just a phenomenal business, these two, both cloud and YouTube. And on a standalone basis, there is so much runway for growing these two segments. Our thanks to Mandeep Singh, Bloomberg Intelligence Senior Tech Industry Analyst. We move next to consumer earnings. Earlier this week, Philip Morris posted second quarter earnings that missed analysts' expectations. The results were due to the company's Zin nicotine pouch shipments accelerating less than expected.

8:59Separately, Coca-Cola reported second quarter earnings that beat analysts' expectations. And this came as the company announced it was launching a new version of its Coke product made with U.S. sugar cane this fall. President Donald Trump had urged the company to do so. For more, Lisa and I were joined by Ken Shea, Bloomberg Intelligence Senior Consumer Products Analyst. We first asked Ken to explain why Coca-Cola is making a switch to cane sugar and if pressure from President Trump had an impact. It certainly is in sync with what Coca-Cola has been doing for a long time, and that is keeping its pulse on what the consumer wants to do.

9:30It has a lot of assets at its disposal. And a cane sugar product is not novel to Coca-Cola. I mean, it's produced in the U.S., largely more outside the U.S., but in the U.S. on a selected basis. So it's really just going to expand that. It may have been prompted to a degree by the president's tweets or whatever, but it's certainly in sync. Like I said, you know, there's an audience out there that prefers sugar based as opposed to high fructose corn syrup based full calorie sodas. And they're going to play into that. Most likely it's going to be a brand Coke extension, and it's going to be selling a premium price in selected markets to give an aura of exclusivity, I'm guessing, to command those prices.

10:17And so it just has a little more excitement. It's one of many things Coke is doing now on the innovation front. So from Coca-Cola's economic perspective, do they care which ingredient they use? Well, it depends, Paul. It depends if they can capture the premium price they're going to price it at. Cane sugar costs more than high fructose corn syrup. Corn is a heavily, heavily subsidized crop in the U.S. They built their supply chain around HFCS because of that. And most consumers, they don't really notice the difference. Some do, but by and large, they've grown that franchise very well. um but i guess you know some tourists who go to mexico and they they taste the sugar uh cane sugar coke down there and they say you know what this is really good and they want to and they want to capture the same experience in the u.s i'm going to chipotle and they do offer the mexican soda there um let me ask let me shift gears here what is a zin patch a zin patch i don't know what patch it.

11:21I think they made a pouch pouch is in pouch, a pouch, you know, it's a, it's an oral tobacco product. Actually, as it doesn't even contain tobacco, it's a synthetic product as it's laced with nicotine. That is a facsimile for tobacco, which a lot of people will say causes harm and a lot of people are right. So this is a product that, you know, people can get their nicotine buzz in a hands-off kind of way, doesn't emit smoke, doesn't offend your neighbor that you're working with. And it's done really, really well. So those are the Zin pouches that are doing really well. I thought it was Zinfandel, the wine.

11:59No kidding. I get that pouch. But I mean, it's big enough a business, Ken, that Phil Morris would call it out? oh yeah it's about eight percent of the sales i believe at this point but it's growing you know a 20 30 percent rate as opposed to cigarettes which are flat if not down um but you know icos is their smoke-free device segment which is doing very well but at the low large numbers at some point that's going to slow uh and zin is filling the gap they keep the overall volumes in a positive trend. They price these things very high. There's not a lot of competition in this space. So, you know, one of the things investors would say about the world of tobacco is because it's so consolidated, they can pass on a very high pricing.

12:46And that's what really drives the top line and, you know, the cash flows and so on. And Zinn plays very, very well into that model. And how does it fare as far as we hear about e-cigarettes, vaping, things like that? How has Philip Morris been doing competing with this category? So they have a product called Vive, which is their e-vapor product, as opposed to what they call Heat Not Burn, which has actual tobacco in it. And they would say is a more appealing alternative for smokers who are trying to quit. It's a lower margin product. It's kind of seen by Philip Morris as a kind of an entry level product.

13:24For those who are trying to move away from combustible cigarettes, they can turn to e-cigarettes, a low-cost method. And their hope is that, you know, even though it's a low-margin product, their hope is that they can get that consumer maybe at some point to trade up to their heat-not-burn product, which is, you know, a more profitable product for them. Our thanks to Ken Shea, Bloomberg Intelligence Senior Consumer Products Analyst. Coming up, we'll look at why the hotel chain Hilton lowered expectations for net income this year. You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in-depth research and data on 2 ,000 companies and 130 industries.

14:01You can access Bloomberg Intelligence via BI Go on the terminal. I'm Lisa Mateo. And I'm Paul Sweeney. This is Bloomberg.

14:21Risks associated with SIBO Company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers. Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful.

14:57Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro plans. The Big Take podcast from Bloomberg News keeps you on top of the biggest stories of the day. My fellow Americans, this is Liberation Day. Stories that move markets. Chair Powell opened the door to this first interest rate cut. Impact politics. Change businesses. This is a really stunning development for the AI world. And how you think about your bottom line. Listen to The Big Take from Bloomberg News every weekday afternoon on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

15:41You'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 Paul Sweeney. And I'm Lisa Mateo filling in on Bloomberg Intelligence. We move next to the telecommunications space. This week, Verizon Communications posted second quarter revenue that surpassed analyst estimates and the company raised its profit outlook. The results were fueled by wireless price increases and favorable tax reform. For more, Lisa and I were joined by John Butler, Bloomberg Intelligence Senior Telecom Analyst.

16:16We first asked John what's making the company so optimistic. When I look at Verizon, I think of the phrase game of the inches, right? I think the improvements here quarter in and quarter out are incrementally better. They're edging towards that acquisition of Frontier, which is really going to change the game for them. But in the meantime, they put a lot of changes in place in terms of their go-to-market strategy, how they're combating promotions coming from T-Mobile and AT &T. And on the margin, quarter in and quarter out, I just see them doing a better and better job. I think all the actions they've taken are starting to work.

17:00And so taking the long view here, I really think Verizon is improving just quarter in and quarter out. And this was another quarter where you could look at it in isolation and say, you know, it was a solid quarter, a little bit mixed on some of the metrics. But I think on balance better than last quarter and last year. John, what's kind of the positioning of Verizon in the marketplace? I've been a longtime Verizon Wireless customer since the beginning of cellular service, actually. And I guess I was initially drawn to it because I thought they had the best network, so quality. Is that still the case?

17:41Because it seems like T-Mobile's gotten a lot better in quality and AT &T. I don't know. Yeah, you know, Paul, you bring up a good point. I think there's a question mark out there as to whether Verizon still has the best network versus T-Mobile and AT &T. but I think they have a slight edge there in terms of coverage. And it's interesting. A lot of people ask me about wireless, who has the best network, who should I choose? And the one thing that people are always asked about is how's their coverage? I think coverage is very important to people. And I think when you think on that metric, in terms of that metric, Verizon delivers the bars on your smartphone probably more than T-Mobile and 18.

18:29In terms of download speeds, though, I suspect that T-Mobile probably is gaining the edge here. Now, what about prices? Did Verizon increase their prices? If so, did that help? So we did see all the carriers are increasing prices right now. As the market matures and new user growth is slowing considerably, the only way you're going to grow that important service revenue metric is by raising prices. They tend to do it on older plans. Verizon's done it over the past six months, as if you look over the past year, so has AT &T and T-Mobile. That's flowing through and it's helping to boost the service revenue.

19:14I think over time, they're adding in those little extras like device insurance and perks like added content that you can purchase at a discount through Verizon. And I think all that together is going to continue to provide a lift to service revenue. It's nothing special. Again, I'm looking forward to that Frontier acquisition where they're going to buy, you know, access to 2 million fiber broadband subscribers and 8 million fiber homes past. Because once they get Frontier under the hood, they're going to be able to bundle that wireless service with fiber. And I think that's going to help to really drive renewed subscriber growth.

20:03Our thanks to John Butler, Bloomberg Intelligence Senior Telecom Analyst. We move next to the toy industry. This week, the toy maker Hasbro reported second quarter earnings that beat analyst expectations. The company also said it's raising its full year outlook. This comes after a record quarter for Hasbro's Magic, the Gathering card game. For more, co-host Isabel Lee and I are joined by Lindsay Dutch, Bloomberg Intelligence Consumer Hardline's Senior Analyst. We first asked Lindsay to break down what we learned from Hasbro this week. A strong quarter, really a continuation from the first quarter, where all the strength is really coming from Magic the Gathering, Monopoly Go, and Hasbro's digital gaming business.

20:40What we did not learn from the release is really about the consumer and what the outlook is for toys in the second half. And that's causing a lot of uncertainty, you know, what that back half might look like. I was going to ask, how exposed is Hasbro to current consumers spending trends, like especially in the toys and entertainment area? Do we see more middle-income shoppers buying Hasbro, or what kind of consumers are you seeing? Yeah, so the toy business typically grows with GDP. It has been coming down a bit challenging over the past couple of years after the peak during COVID, when everyone was stuck at home buying a lot of toys.

21:19This year was supposed to be a turnaround year for toys, And then early this year, you know, we got hit with the tariff news, which created a lot of uncertainty in the business. One is, you know, we don't know how the consumer is going to react to broader price increases. And we do expect increases on toys very specifically. So companies like Hasbro and Mattel, you know, some of the biggest toy makers in the globe, you know, are really faced with that challenge. In second quarter, normally retailers already start buying their holiday inventory. That didn't happen this year. Those retailers, Walmart, Target, took a pause.

21:57So normally by now we would sort of get a sense of holiday. But because of that pullback, you know, Hasbro saw their consumer product segment see a 16 % decline in second quarter revenue because of that hold on those orders. I would have thought they would have tried to front run the tariffs here. What's the company saying about when they expect some of these retailers to place their orders? So they expect the orders to be sort of made up in the third quarter. And the challenge with that is, you know, some of those hotter toys that do sell out maybe in the early holiday shopping season, there will be very little time to sort of replenish on that end.

22:34So Hasbro did continue their production, which, you know, they do still make about 50 percent of their toy products in China. They continued in May. You know, they took some of that inventory on their books in the second quarter. That's why we saw the inventory come up there. You know, they're hoping that the retailers, you know, place more of their orders in the third quarter, you know, ahead of holiday. You know, the risk is they just don't really know what those pre-order will be. And there will be limited time for additional orders like in that that fourth quarter right before holiday. To your point, in April, the company warned that tariffs could impact profits by as much as$60 million to$180 million this year, and they did reduce their Chinese manufacturing output to less than 40 percent, or at least planned to by 2026.

23:20If they do that, will they pass on the cost to consumers, and do you think consumers will bear the brunt of that burden? Yes. So, Hasbro is using multiple mitigation strategies. They have been very focused on cutting costs. Prior to tariffs, they sort of accelerated some cost cutting at the corporate level. They will be raising prices, I think, selectively on toys. They are also just going to not sell certain toys in the U.S. if it doesn't make financial sense to do so. If they can't raise the price, consumers would not buy it at that price. So they're sort of using a mixed strategy. They had predicted tariffs to cost$60 million to$180 million on an annual basis three months ago.

24:06They sort of dropped that impact closer to the$60 million side. That's because of the lower rate on the Chinese imports. They are working to diversify the supply chain, but that will take time. The goal of less than 40 percent, that's really by 2027. So in terms of this year, you know, where their supply chain is, they're sort of locked in with that at the moment. And they kind of have to work with the price increases and sort of balancing where do I increase price and not hurt the demand even more. Our thanks to Lindsay Dutch, Bloomberg Intelligence Consumer Hardline Senior Analyst. We move next to the hospitality industry.

24:42This week, the hotel chain Hilton Worldwide lowered expectations for net income for 2025, while U.S. hotel bookings declined in the second quarter. And this comes as U.S. travel demand has faced headwinds in recent months, including lower consumer confidence and a decline in international visitors. For more, co-host Isabel Lee and I were joined by Jody Lurie, Bloomberg Intelligence Credit Analyst. We first asked Jody what we learned about Hilton from its Ernie's Call this week. I mean, I think what's so interesting is they definitely tried to provide an upbeat, optimistic view. The amount of times they talked about the thawing that after the freeze from tariffs was sort of interesting to hear.

25:17And I mean, I think it fits a little bit with the conversation that we've been having with clients is that what we've been seeing in our data is 2025 summer should still be pretty strong. But I think as we get into the latter part of the year and then into next year, it's a little bit uncertain. And I think they were trying to suggest that economic data is positive for them and will provide for additional sort of demand. But it's still a little bit, you know, it's still a little bit hazy, at least for me. And I mean, more than anything, you know, they're so focused on giving back to shareholders that.

25:55And as a credit analyst, that's not something you necessarily. Yeah, yeah. You know, Hilton's one of those companies that we say if they wanted to be investment grade, they probably could work to it yesterday and would have been investment grade five years ago. But but, you know, from from a margin standpoint, they're so much stronger than a lot of their peers. But from a leverage standpoint, they just they're happy being around three times, three and a half times. And they've indicated that they want to be a little bit higher than where they currently are. So, I mean, I think they're going to invest in organic growth and look at ways to sort of grow some of their newer brands like Spark, which they've been talking about.

26:29And the most interesting thing related to that is it seems like they're looking outside the U.S. for growth opportunities. And maybe that's a function of the fact that while they think the U.S. is still having decent momentum, perhaps they need to sort of look outside to sort of really see the growth. Where are they finding that growth elsewhere? And is that in relation to just the lower consumer confidence in the U.S. and the decline of international travelers? So then they just decided maybe looking elsewhere is better. What was the rationale behind that? So they actually talked about on the first quarter, they talked about Canada and Mexico demand.