Carnival Leads Cruise Stocks Lower on Weak 3Q Outlook

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1:53Scarlet Fu:on YouTube. Carnival Cruise Lines reported some numbers a little bit disappointing. Stock trading down about 5 % here today. I think Michael Barr, Bloomberg's Michael Barr was on a Carnival Cruise Line trip last week, and he goes crazy there. We know Charlie Pellett, big cruise guy himself. So there's a lot of cruises around here in Bloomberg. Brian Negri joins us here, senior gaming and lodging analyst for Bloomberg Intelligence. Talk to us about Carnival Cruise Lines. And what did you learn on the earnings report? So, I mean, they're still looking for some yield growth, positive yield growth this year.

2:27I think the change perhaps was the war in Iran clearly had an effect. Affected gas prices, affected air travel and the perception of the ease of air travel. And some itineraries in the eastern Mediterranean. I think the big change from their perspective was how long it lasted. You know, it comes down to, I think when they last gave guidance in March, they were not expecting we'd still be talking about this into May and June. So things have gotten better in June. But I think like, you know, May was a bit of a setback in terms of the duration of a conflict. Yeah. Yep. So what are they finding about, I guess, just, you know, the typical bookings, I think, in the Caribbean and all that kind of stuff?

3:05How do they hold? How are they holding up? Because I kind of think when I think cruising, that's a big part of it. Yeah. I mean, overall, quite well. I mean, with the exception of the disruptions I talked about, we're still seeing positive yield growth, which in an uncertain economy is, I think, a good thing. They are, I believe they said 93 % booked for this year, and they've got some positive early indications for next year. So the industry is still proving to be quite resilient, notwithstanding the fact that you've got the disruption from the war itself, which was a factor. So on the fuel side, I know the airlines, by and large, do not hedge.

3:42Do the cruise companies hedge? Some of them do Carnival historically is not hedged. Some of them do have hedges. They have collars in places in the case of Carnival. You know, when we last heard their guidance, they were providing guidance based on certain expectations about Brent fuel. At the time they last spoke a couple months ago, fuel prices were above that. Now it's below that. So it's very much tied to the trajectory of this conflict. What's fuel as a part of their cost structure of a typical cruiser? Remember what the exact percentage. It's pretty big, right? It's a pretty Philly large percentage.

4:18So this is something, I mean, they've been dealing with a headwind for the last several months. May become a little bit of a tailwind on the downside. Could be. I mean, I think they went into with some assumptions about forward contracts where run prices that were, you know,$80,$90. And now as crude oil eases, it could work the other way. So certainly the relaxation or the easing of Brent fuel, even though they use bunker fuel, a certain grade of it, is a positive for them. What I noticed sitting on the beach of Aruba is the ship's engine, even when they're docked, it's running. Because I see the smoke coming out of the smokestack 24-7, I guess just to run the thing.

5:00So they burn fuel 24-7 here. So that's a big issue. Talk to us about capacity in the industry. Are we adding capacity, taking it out? So the industry overall, we're looking at something like 4-ish percent mid-single-digit supply growth. Carnival is an exception in as much as their growing capacity in 2026 by only 1%. So they've taken a much more measured approach, which I think in this environment seems quite prudent. They will be adding maybe one or two ships a year, balanced between the Caribbean and the rest of the world. But 0.9 % supply growth for them for this year is obviously quite measured.

5:37We're seeing lots of parts of the economy. The higher end doing well, the lower end not so much. And I know that the cruise lines, they have different brands, just like the hotels have different brands that cater to different income levels. Are you guys seeing that dynamic in the cruise? I don't know if we're seeing that much of a parsing between the upper and lower end with respect to cruising specifically. You're absolutely right for hotels. For a while, we referred to the K-shaped economy. And now it's more like the C-shaped economy. As Hilton CEO earmarked that with the lower end now coming back.

6:12I think for cruises, the strength has been fairly broad-based. What's really driving it, if you're in the Caribbean, it's these island destinations that help drive pricing. Interesting. Yeah. I'm going on my first cruise in October. A Viking cruise, that stock's up 40 % this year. It's doubled over the last 12 months. What's going on there? Besides having my deposit impact the earnings. That definitely helps. Yes. I think that the niche they're in, which is that luxury segment, it is a niche market, the river cruise market, and the somewhat smaller ocean cruise presence has done quite well. So that may be an example of what you're talking about, where the high-end is doing quite well.

6:48And that's a high-end consumer, clearly more luxury-focused. So while we don't see those patterns necessarily broad-based across the sector, they are high-end, kind of river cruise-oriented luxury niche. For what I'm paying, this thing better be all-inclusive. I'm going to go back and check. I'm not going to sit there and pay for every cocktail, a glass of rosé. Vegas, real quick, 30 seconds. How's Vegas doing? Vegas is better than last year, I think, is one way to look at it. Certainly we have still see on the lower end of the market where you do see that kind of bifurcation between high and low end in Vegas.

7:24A bit more stability there where visitation is kind of flattened out. Pricing is a bit better. 2025 was a rougher year where you had tougher event comparisons and pressure on midweek leisure stays. So it's a bit more stabilized and better this year.

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9:49Scarlet Fu: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've been talking all morning and really for the last few days, Paul, about SpaceX and where this stock has been moving. It's currently up, so that four-day decline did not come to pass. It has stopped at three days for now, but it was a painful three-day slump, down about 22%, if I recall correctly. So, you know, definitely a repricing of the initial euphoria following the IPO.

10:26Yeah, having done a bunch of these equity deals, it just felt like the stock was trying to find a home here. And that's maybe like who really wants to own this thing long term and who's just playing the deal a little bit. So here we are.

10:36Scarlet Fu:All right. And of course, we know that the same time SpaceX, the company, has announced a big, big bond sale as well. Getting ready to sell investment grade bonds for the first time to refinance a bridge loan, but also, let's face it, to fund this AI build out as well. So for that, of course, we need to bring in our in-house expert on tech and bonds, and that is Robert Shiffman. He's our senior tech credit analyst here for Bloomberg Intelligence. Rob, what will you be watching for and listening for the next couple of hours here when it comes to this SpaceX bond debut? I think I already know the story.

11:10Bondholders are going to welcome SpaceX with arms wide open. You know, nobody owns this deal, right? There's hundreds of billions of AI-related tech bonds that have been issued this year. There's hundreds of billions of tech bonds outstanding. but this is an inaugural offering. So everyone's going to want a little piece. And quite frankly, the difference between how SpaceX is going to trade in the bond market versus the equity market couldn't be much different. The valuations from the equity side may seem really, really lofty. I think it's the reverse for the credit markets. These bonds are going to come wildly wide to where comparably rated investment grade names trade.

11:52And I think that's going to attract a lot of attention.

11:55Scarlet Fu:Did it surprise you that it got investment grade ratings, even though it doesn't have much of a track record, almost no track record as a publicly traded company? I mean, one of our Bloomberg News stories or other reporters have pointed out that NVIDIA was given the same rating and NVIDIA had a much longer track record as a publicly traded company than SpaceX does at the moment. No, I wasn't surprised. Quite frankly, I think the plans for the buildout have been reasonably well known. So for people who are looking at the SpaceX equity IPO, they had a really good understanding of how much money was going to be spent over the next handful of years.

12:32And quite frankly, you can't have negative free cash flow. That's 20, 30, 40 billion dollars annually without access to low cost, cheap capital. A big pool that was equities. They raised 85 billion dollars of equity, but they're probably going to need another$100 billion of debt. So if you had plans to borrow that much and thought you can do it in the junk markets, you'd be thought of as crazy. So I think this is pretty well understood. I do get it why people say, how are these ratings so high? And I think you just need to look into the future a little bit and look at the past. One is they're sitting on$100 billion of cash.

13:11Two is they're committed to IG ratings and reasonably low leverage. Three is their liquidity profile looks fantastic. They have access to huge pools of both equity and debt capital, and their burn rate, it's going to take them three or four years to even get through the amount of capital that they have today. So do you want to question where this company might be in five years and what leverage is going to look like, and are they going to be successful? I think it's a good debate, and I think when you're comping, are they an aerospace and defense company? Are they a communications company? Are they an AI tech company?

13:42All of that creates, I think, more opportunity for bondholders because the bond deal gets priced probably wider than inherently it should. There's definitely an Elon factor, a positive Elon factor in the equity markets. Is this such a thing with you credit guys who are a little bit more sober? I hear so much about how everyone in the AI world would rather just invest in equity because if they're right, there's huge upside. And with bonds, if you're right, you get paid back par. And if you're wrong, you get crushed. That's actually silly. Every basis point in the fixed income markets make a huge difference.

14:16And if you're coming at spreads that are 100 basis points wide to peers, that pays for the Elon Musk risk. I would actually argue there's Elon Musk reward. I know some people have cringed at this, but I think Elon Musk is to today's generation what Warren Buffett was to the prior generation in terms of value creation. I think the future that he sees is a lot different than what a lot of other people see. I think his ability to execute is much higher than what people are giving credit for. Quite frankly, he does get a lot of credit and it's a$2 trillion equity market cap. So, you know, for everyone who wants to poo-poo all the risk, you know, people are riding the Elon wave.

14:55Scarlet Fu:Okay. So the bond market is giving Elon Musk the benefit of the doubt. It sounds like, does the bond market give any other CEO, founder, company that same level of benefit? Well, the difference between SpaceX and the rest of these other AI companies, you know, we've said this so many times before, is the other names are basically the Mount Rushmore credits. You know, they're AA's and AAA's. So they inherently have built-in credibility because they have so much financial flexibility. So what if Amazon borrows another$100 billion or if Alphabet borrows, you know,$150 billion? The balance sheet's going to be fine.

15:31Here, you know, you're starting with a company that doesn't have a lot of EBITDA. It's big negative free cash flow. doesn't have this long, long track record of success. So ultimately what happens, listen, spreads are at historically tight levels. Everyone is looking for the next basis point to outperform. If you price something right, it's going to sell. These bonds look like they're going to be priced dramatically wide to triple B alternatives. So even if the long-term you think there's real question marks in the short term, you're going to try to get bonds. You're going going to buy bonds now and ask questions later.

16:08And I think that's going to support this deal.

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16:48If you're actively involved in your portfolio, you probably catch yourself repeating the same actions, buying the dip, manually sweeping idle cash, putting on a hedge. On public, you can now create AI agents that handle all these tasks on your behalf. Just describe what you want to do in plain English. Like, if the VIX hits 25, buy a put option on the S &P 500. Or, if my cash balance goes above$20 ,000, move the excess into my direct index. You approve of the workflow and your agent handles the rest. Monitoring the market, watching for your conditions, and executing your strategies exactly as defined.

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18:27Scarlet Fu: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. All right. Well, we talked a little bit about SpaceX and it's a company that we kind of can't ignore given the market debut it had over the last couple of days. And Mandeep Singh is here with us. He is our go to guy in all things tech. He is our global tech research head here at Bloomberg Intelligence. Mandeep, you look at what is happening with SpaceX, and Paul put it really well in that it's just kind of trying to find its place.

19:06Scarlet Fu:People are trying to figure out what the right price looks like for a company like this after all the fanfare and then, you know, the flushing out maybe of some of the early investors. What do you see as the most enduring narrative for this company now that it's just over a week into its life as a publicly traded company? Well, I think clearly during the roadshow, people got really excited about the orbital data centers and the space launches. But we know they don't generate any revenue right now. And I think people are coming to the realization that this requires a lot more upfront capital, which is why they are doing that bond issuance.

19:46And then there will be some equity issuance to close out the cursor acquisition. So they will be adding, you know, 3 % more stock to close out that deal. And look, if you are an investor in this company who is getting diluted right now, it's reasonable to say some people, you know, aren't there for the long term. And there is a shakeout that's going on. And we'll figure out who wants to believe in the company long term because this is not a free cash flow or a stock buyback story anytime soon. All right, switching gears to Google here. Get some AI dudes are departing Google. I mean, should Google be worried about this?

20:29Some of their talent leaving? I think so. I mean, the fact that the market cap dropped by$250 billion probably is an exaggeration. So it just goes to show they probably should have paid these guys anything to retain them. But look, when it comes to frontier models, there is no doubt that Anthropic is ahead. even OpenAI has been releasing their models at a faster pace. And this space is all about leapfrogging your competitors when it comes to the model intelligence layer. I mean, Anthropics, Mythos release, everyone is freaking out in terms of the capabilities of the model to the extent that the government has blocked access.

21:11Why? Because they're at the frontier of intelligence. So does Google have an equivalent model? No. The answer is no. And when will they be releasing it? We don't know, which is why they will end up losing talent because everyone now believes Anthropic is at the frontier and Anthropic seems to be gaining a lot of talent. It's always been a talent driven technologies, you know, but it feels more blood bloody than

21:38Scarlet Fu:ever has, right? I mean, in terms of the pecking order of companies that have their pick for talent, Anthropic, you point out, is at the top. Is OpenAI still up there? I mean, OpenAI has lost a little bit of its momentum to Anthropic. Where does SpaceX rank? Where does, you know, the hyperscalers, where did they land? And that's a great question. So which is why that acquisition of Cursor was so timely? I know the stock is dropping last three days, but had it not been for the Cursor acquisition, I bet you the stock would be under$100. So Cursor really did make a difference in terms of, one, getting that coding agent use case and, you know, giving a narrative that they can scale this and also the talent.