BI Weekend: Nike, Carnival Earnings, EA Sale

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1:10Bloomberg Audio Studios. Podcasts, radio, news. This is Bloomberg Intelligence. With Scarlett Fu and Paul Sweeney. How do you think the Fed is looking at tariffs, the uncertainty of tariffs? Let's take a look at the sectors and how they perform. A lot of investors getting whipsawed every day by news events. Breaking market headlines. And corporate news from across the globe. Could we see a market disruption, a market event? Are people just too exuberant out there? You see some so-called low-quality stocks driving this short-term rally. Bloomberg Intelligence. With Scarlett Fu and Paul Sweeney.

1:45On Bloomberg Radio, YouTube, and Bloomberg Originals. 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 energy company ExxonMobil is cutting 3 % to 4 % of its global workforce. Plus, a look at why the AI cloud computing startup CoreWeave is signing a deal with tech giant Meta Platforms. But first, we begin with the news from the athletic footwear company Nike.

2:15This week, the company said that efforts to roll out new products, boost marketing efforts, and clear out old inventory helped ease a long-time sales slump. Nike said its sales fell 1 % on a currency neutral basis in its most recent quarter, and that was a smaller drop that investors anticipated. For the analysis, we are joined by Poonam Goyal, Senior U.S. E-Commerce and Retail Analyst at Bloomberg Intelligence. We first asked Poonam if Nike's turnaround plan is working. It's working. Nike is able to pick up momentum. Sales on a reported basis were up 1%. Inventories were down 2%. This is exactly what we wanted to see.

2:52We wanted to see inventories align with sales. So while the work isn't done and it's not over and it's not a straight line up, we do see momentum building. What they're doing is working. The new products, the innovation, the focus on wholesale, it's all coming together. There are still some pitfalls. China is still sluggish and we'll need to wait and see what happens there as well as with its Converse brand. OK, so China's definitely an issue. Converse is a work in progress. When I look at the revenue line, the top line, what I see is direct revenue fell 4%, wholesale revenue rose 7%. Just break that down for us in terms of what that means, direct revenue versus wholesale revenue.

3:31Sure. So direct revenue composes of stores, which were actually up 1%. So that shows us that the innovation and the new products which are flowing through their own stores is working. What made the DTC revenue go down 4 % was that digital was down 12%. that no surprise here, this is where they're clearing all that excess inventory. So this channel will be pressured for a couple of quarters still wholesale up 7%, a great, great number. I mean, it just shows that coming back into partnerships with Foot Locker in a more meaningful way, getting on amazon.com, all these efforts are paying off and they're where the customer is, they're gaining their shelf space back, and the customers are responding favorably.

4:12You know, the Nike brand is such a powerful brand, I think of it like Coca Cola or Apple, It's so powerful. Yet some of those American brands in China under pressure. And I'm wondering just with the geopolitics, is Nike a brand where that might be feeling some anti-American sentiment from consumers? So that has happened in the past. There have been boycotts against U.S. American brands. We don't think that's the issue yet from what we're hearing. But we do think that the issue is more product at Nike in China. So they do need to ramp up product and they do have a lot of excess inventory there.

4:46more so than they do in the U.S. today. So that's also a work in progress that they need to get through. Let's talk about profitability. Margins declined due to higher discounts and then also the higher tariffs in North America. I look at gross margin 42.2 percent last year at this time. It was more than 45 percent. Now, the 42.2 percent was better than estimated. How long is it going to take for Nike to turn that around? I think we have quite some time. They said that they do still aspire to reach double-digit EBIT margin. EBIT margins in the quarter that they just reported was only at 7.1%. So that's a long runway.

5:24We don't think it's anytime soon. And the hit from tariffs is building, not reducing. They had expected a billion dollars the last time they spoke to us, and that went to$1.5 billion in excess costs from tariffs. How much are they passing along to the retailer versus taking that in their margin? Because I mean, Nike is probably just a great example of how companies are trying to deal with the tariffs. Yes, I think they're doing this actually very smartly. They're not increasing prices on products that are under$100, but they are taking prices up on sneakers that are above that price point. So if you think about moving prices up, it's very easy to say the price of milk went up from$3 to$3.50.

6:05But when you're looking at a pair of sneakers, especially a new launch, you have no comparison. So you can go ahead and price up your new innovation, and the customer may not even recognize that there was a material price increase. And that customer has a little bit more flexibility to stretch their wallets at that price point. Poonam, if you are heading up On Holdings or Adidas or Skechers or, you know, any of the Hoka, what would you be thinking looking at this set of results? So Skechers, I think, is in a different league than Nike. It's a little bit different. It's a value play. And I think they don't compete directly like an Adidas or an On or a Hoka would with them.

6:44Adidas is doing really well on its franchise lifestyle shoes. And I think Nike, what you heard, was doing well in performance. So two still very distinct categories. Though for On and Hoka, I think it's a little bit of a different story because running was back on. It's doing phenomenally well. And that is where Hoka and Anon both took share from Nike. So I would be just, you know, a little concerned and just make sure that I keep my game on when it comes to innovation, because at the end of the day, product is what's going to drive how sales momentum will go moving forward. Our thanks to Poonam Goyal, Senior U.S.

7:19E-Commerce and Retail Analyst at Bloomberg Intelligence. We move next to some news in the media and entertainment space. This week, we heard that Spotify CEO Daniel Ek is stepping down after two decades at the company. Spotify will leave the leadership of the music streaming company in the hands of two trusted executives. They're Gustav Soderstrom, chief product and technology officer, and Alex Nordstrom, chief business officer. This move will go into effect on January 1st. For more, we were joined by Geetha Ranganathan, Bloomberg Intelligence Analyst on US Media. We first asked Geetha to explain why CEO Daniel Ek stepping down now.

7:52This is one of your classic cases of the founder finally kind of establishing a really good transition plan and handing it off to his, you know, two lieutenants here. So we're having a co-CEO structure. And really, I mean, the first, when I heard this, I mean, this really kind of harkens back to what Reed Hastings did with Netflix, you know, kind of left right at the peak, right when the companies, you know, everything was kind of, you know, all cylinders were firing away and left it to Greg Peters and Ted Sarandos to kind of take charge. And it seems like Spotify is in a very similar position.

8:26So they had a couple of things that had to get done this year, which was new contracts with all of the music labels. It looks like Daniel Ek has, you know, accomplished all of that. And I think he's really kind of left the company in a good position for its next phase of growth. And this is really, you know, a huge story in the internet space, the possibility to get to a billion users very, very quickly. They already have about 700 million. Okay, so there are almost three quarters of the way there. He's leaving on top, as George Costanza would in Seinfeld. But my question, Geeta, is you talk about the new phase of growth.

9:02How much of that will rely on continued price increases? Unlike Paul, I do subscribe to Spotify, and it's alarming how frequently the price changes come. Yeah, and it is going to keep coming, Scarlett. There's absolutely no doubt about it. I mean, this whole story is kind of predicated on those price increases. Remember, though, that they never took up prices for the first 10 to 12 years. And then it started coming fast and furious, right? We had one price increase in 2023, another in 2024. We're going to have probably another one in 2026. But if you kind of look at all of the streaming services out there, you know, Spotify is, of course, the leader in audio streaming.

9:39They have a 35 % global market share in terms of subscribers. You kind of look at their price, let's say in the US, it's$12 for an individual plan. And you compare that to, let's say, the video leader, Netflix. Again, I go back to the Netflix example. They're priced at$18. So I think Spotify still has quite a lot of runway when you kind of compare it to the rest of the field. And the other thing that I like to point out here is when you're kind of subscribing to an audio service, it's typically only one service that you're subscribing to as opposed to a video service. So I think people really like their, you know, if they like Spotify, they're absolutely going to hold on to it at any cost.

10:13And the other thing is, you know, Spotify is adding new features all the time. So they are like really getting down on, you know, monetizing more and more, but it's not they are innovating also constantly. So I think I think people don't mind paying for it. What's the biggest challenge to them on the cost side of the business, Keita? Music royalties. I mean, for every dollar that they make, they're paying out about 70 cents in terms of music royalties back to the labels. So it is definitely a very, you know, from that perspective, the model is hard. But one of the things that they've done very well is, you know, they've obviously renegotiated a lot of the deals, kind of tried to provide investors with a lot more visibility into the cost base.

10:59But more importantly for them, they're really trying to go away from, you know, licensed content to more owned content. So kind of going into, you know, podcasts, going into more non-music content where, again, they have a lot more leverage, you know, whether it's audio books, whether it's video podcasts, getting away from, you know, just being a core music service to more of kind of a global kind of an audio service. And they're doing that really well. And that's going to help them with their margin expansion story as they get better unit economics. Right. And introducing premium tiers on top of that, you have to unlock in order to unlock some of the more, I don't know, high profile podcasts.

11:37You then have to pay extra. Geeta, talk a little bit about AI, because I keep reading about how AI generated music is a challenge. But in what way and could it actually become an opportunity as well for Spotify? I think so. I think it is going to become an opportunity as we go. They're already actually using a lot of AI features when it comes to curation, when it comes to music discovery, when it comes to providing better features. And you just brought up the super premium tier. And a lot of that is actually going to be having like an AI DJ type of feature there for both listeners as well as music creators.

12:17So I think it is definitely going to be a good opportunity for them to present a much better product. I mean, we've already seen AI being used by a lot of the other platforms. Again, I go back to Netflix because they've done this really well in terms of having a much better algorithm now to serve up better content. And I think that's exactly what Spotify is doing in terms of its playlists as well. Where's Apple in this audio game? So just in terms of subscriber share, Paul, I mean, Spotify, as I said, leads with about 35 percent share of the market. Apple is really far behind. They have about a 10 percent share.

12:52So very, very hard for them to catch up in terms of in terms of subscribers, at least. Our thanks to Geetha Ranganathan, Bloomberg Intelligence Analyst on U.S. Media. Coming up, a look at why the video game maker Electronic Arts has agreed to sell itself to a group of investors. You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in-depth research and data on 2 ,000 companies and 130 industries. You can access Bloomberg Intelligence via BI Go on the terminal. I'm Scarlett Foo. And I'm Paul Sweeney. This is Bloomberg.

13:22This is Bloomberg Intelligence with Scarlett Foo and Paul Sweeney on Bloomberg Radio. We move next to the electronic gaming space. This week, the video game maker Electronic Arts, or EA, agreed to sell itself to a group of investors. They include a firm managed by Jared Kushner and Saudi Arabia's Sovereign Wealth Fund. The deal values EA at about$55 billion, with the investors agreeing to pay$210 per share in cash. This makes it the largest leverage buyout on record. For more, we are joined by Nathan Nadeau, Bloomberg Intelligence Technology Research Analyst. We first asked Nathan to break down the EA's recent valuation.

14:00The valuation is at a 20 % to 30 % premium versus the last recorded market cap before this deal was announced. And it seems like it is a premium deal, but actually EA has a lot going for it. It is actually launching a new Battlefield game, and there's a strong prospect for this game. And actually, the game is now in pre-release. And even then, it has already smashed all prior records set by the biggest game in that genre. And that genre is first-person shooter. And that game that has dominated that genre is Call of Duty from Microsoft. So Battlefield 6 is looking to be a successful launch. And next year, we have FIFA.

14:41And obviously, we know that EA has the biggest soccer game in the industry, and that's FIFA. What was called FIFA, but now it's called EA Sports FC. And next year, FIFA World Cup will be a special one because it will be hosted across three cities, including the U.S. and if people don't know, US is actually the biggest market in terms of revenue for all kinds of sports games. So that's the second thing going for EA that I think is going to lead to at least two rounds of consensus beats on EPS earnings per share. So I think for EA, this is actually a good deal and we can talk about the common struggles faced by game publishers and how these deals would make sense for EA as well as the investors in this context.

15:26So, yeah, let's do that, because you mentioned a bunch of the titles and these are very valuable franchises. This is a top quality IP, whether it's EA Sports FC, Madden NFL, The Sims Battlefield. What does ownership by private equity, by private investors, allow EA to do that it can't do as a publicly traded company? I think it's all down to funds. So publishers, game publishers in general, have been facing two struggles. First one is gamers' attention span and playtime are increasingly getting limited. The reason is people are sticking to brands or franchises that they have played for a long time.

16:04And in fact, NewZoo published data saying that 80 % of playtime tend to go back to the 60 or so titles, leaving only 8 % of playtime for brand new IP. And this is actually in favor of EA because we mentioned those valuable IP. In fact, if we look at global unit sales, EA has four of those top 20 selling IP globally. It has four out of the 20. So that is actually a pretty enticing deal thing for companies like private equity because profit generation is key. And what this means is that EA has franchises that can bring in recurring revenue. We talked about EA Sports FC. We talked about Madden MFL.

16:48And they actually revived a new franchise, College Football. And, you know, it was one of the best-selling titles in the U.S. last year. So recurring revenue is key here. And the second struggle that I was going to go into is development cost. It's really high, especially in the U.S. So that means that Western publishers actually have a cost disadvantage when compared to Eastern developers. For example, you know, salaries for game engineers in China is more than half the level in California. and personnel cost game engineers is a huge part of developing a game. So, you know, Tencent actually launched a new game in the same genre as Battlefield 6 and that's Delta Force.

17:29It's doing really well and what that cost disadvantage is stopping EA from is continuously to push out a strong cadence of content to essentially extending the shelf life of any game and Eastern developers can do that better because of that cost edge. Our thanks to Nathan Nadeau, Bloomberg Intelligence Technology Research Analyst. We move next to some news in the energy industry. This week, the energy company ExxonMobil said it plans to cut about 2 ,000 jobs globally as part of its long-term restructuring plan. The reductions represent about 3 % to 4 % of Exxon's global workforce and are part of the company's ongoing efficiency drive.

18:05For the analysis, we are joined by Vincent Piazza, Bloomberg Intelligence Senior Equity Research Analyst of Oil and Gas. We first ask Vincent for his take on this Exxon News. Well, I think it's part of managing through the cycle, right? In prior cycles, the sector was exposed to more extreme volatility, higher highs, lower lows. The industry is trying to manage through what seems to be a rather clouded backdrop right now. So we're sitting here and you got NatGas somewhere around 330, Henry Hubb. You got WTI in the low 60s. You have OPEC bringing back on capacity and maybe even speeding up that capacity ads.

18:51You have a more clouded, broader economic backdrop across the globe. You have geopolitical issues. So lots of uncertainty. And not only Exxon, Exxon's probably going to cut somewhere about 2%, 3%, 4 % of its global workforce. Its Canadian affiliate, a much more substantial cut, roughly about 20 % over the next two years or so. You're seeing it at ConocoPhillips. You're seeing it at Chevron, even BP, the major European energy conglomerate. You're seeing it across the board. And so, Paul, as you know, when you're not growing revenue, right, you're not getting the revenue increase on price. You're not growing production because your investor base does not want to see that production growth.

19:35You are looking at very steady revenue, maybe even declining revenue. You have to manage that net back from the cost perspective and you have to support that cash flow stream. And so you're doing it via these cost cuts over a number of years, two, maybe even three years, to sort of bring that cost structure in line with the new reality of uncertainty in the marketplace to reduce that volatility. Well, there's cost cuts and then there's ExxonMobil's cost cuts. Since 2019, it's trimmed$13.5 billion in annual costs. That is more than all the other big oil companies combined. How much more room is there for Exxon to slash expenses?

20:13Well, it bought Pioneer. So it has a relatively sizable workforce in general. It doesn't necessarily mean that those cuts are going to come there. But there are ways you cut, you gain efficiency in this technological era where we have advancements across the energy value chain. You will consistently and continually seek out ways to get efficiency to bring down that cost structure and to bring unit costs in line with a very anemic outlook for global energy prices in general and also a very clouded outlook for the global economy too. So, Vince, kind of looking out, you know, one to two years, what is the view of the companies you talk to about energy prices, oil and gas?

21:05Is it still going to be a challenge market here? It looks like it. It looks like it's going to be a very challenged market, especially for the WTI side, for the oil side of the equation. On natural gas, Paul, I know you and I have talked about this numerous times. you have a structural growth trajectory for natural gas here in the U.S. via export LNG, whether it's seaborne LNG or whether it's pipeline gas into Mexico to help fuel their economy as well. You have the AI buildout, which will digest significant amounts of energy, and that's beneficial for natural gas. But on the oil side, you have very anemic growth.

21:48You have your transportation fuels having to compete with alternative and renewable fuels. So there's greater competition there. The growth trajectory and the outlook for the demand side on the liquids fuels seems to be very clouded and seems to be somewhat less secure relative to the natural gas side of the house. Our thanks to Vincent Piazza, Bloomberg Intelligence Senior Equity Research Analyst on oil and gas. Staying with energy, Bloomberg Intelligence recently put out a report on its outlook for nuclear power in 2026. It's titled AI-Driven Power Demand, set to spark$350 billion build cycle.

22:29This deep dive describes why nuclear remains a favorite power source for artificial intelligence. For more, we were joined by Scott Levine, Bloomberg Intelligence Senior Energy Services Analyst. I first asked Scott to talk about what the energy industry is doing to prepare for what seems to be an insatiable need for power. Nuclear really has two very big positives going for it. Number one, it's a emissions-free power source. And the hyperscalers that are really behind the investments care about that deeply, right? And so they've favored more renewable sources here to for like wind and solar. But what those lack are 24 by 7 baseload characteristics.

23:13And for a data center to be up 24-7, that's not going to do it, right? So nuclear checks both of those boxes. And those are two very big positives. and the reasons that you're seeing folks like Microsoft and Meta come out in favor of nuclear power. And yeah. So what's the, how much does nuclear provide today in the U.S. versus where you think it might be in 25 years? Yeah. So today it's a little bit below 20 % of the grid, which we're saying will return to about, in our base case scenario, 20 % of the grid by 2050. That That may not seem like much to percentage points, right? But it will equate to or amount to a$350 billion investment to get there.

23:59So those are big numbers. And in addition to that, we're talking about adding 60 some odd gigawatts to the grid. And you can think about each full-size Nuke being one gigawatts. That's basically building 60 generating units as our base case. So those are big numbers to get you from 18 to 20 % over a 25-year period of time. I tell you, in this report that you and your team put together, Section 5, small modular reactors. That's where I wanted to go to because we've had some people come into the studio over the last few years and just talk to us about the science and the engineering and the possibilities of these small modular reactors.

24:36Tell us what they are and what role they could play going forward. Yeah. So really, none of these have been built in the U.S. yet, right? So this is very much an emerging technology play. But basically what you're talking about is taking a full-size nuke, you're driving down the highway, you see a big cooling tower, a bunch of smoke coming out the top of it. These are much, much smaller. And so the idea here would be that these are much more flexible. And so if you have more disparate data centers located throughout the country, you can power these ostensibly with these smaller units. right and we're talking about you know some of these are smaller versions of what's already in operation today which is a light water reactor and then some of these types of units are different types of technologies you have gas cooled reactors as opposed to water you have molten salt cooled reactors as opposed to water and these use different types of technologies different types of fuels still remain to be licensed and proven.

25:38So a lot of it's very much on the come. But the technology in each of those areas holds promise. So we'll see. And each of them has pros and cons, right? And so we'll see over the next five years, the technology shake out and see which ones end up being at the top of the stack for the US. But each of them have a lot of money behind them and a lot of support from a lot of deep-pocketed players. Our thanks to Scott Levine, Bloomberg Intelligence Senior Energy Services Analyst. Coming up, a look at why the cruise company Carnival raised its full-year earnings forecast. You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in-depth research and data on 2 ,000 companies and 130 industries.

26:19You can access Bloomberg Intelligence via B.I. Go on the terminal. I'm Scarlet Fu. And I'm Paul Sweeney. This is Bloomberg.