Caterpillar Warns Tariff Impact Bigger Than Previously Seen

0:00When your options are limited, so are your opportunities. At SIBO, the global exchange that pioneered options trading, we offer more ways to move with the market. From VIX and SPX options to global market data solutions, SIBO helps investors diversify, manage risk, and stay ahead of whatever the market does next. SIBO. Life is better with options. Your investments could be too. There are risks associated with SIBO company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers. Healthcare doesn't always work great. If you've ever waited on a refill or couldn't schedule an appointment, you get it.

0:36That's the kind of stuff Optum is changing. They're using data and technology to integrate patient care, pharmacy, and everything else. So healthcare is connected, not complicated. What's that look like? Cheaper prescriptions that are easier to get and care that looks at the whole person. How you need it. Optum is helping make healthcare work as one for everyone. Learn more at business.optum.com. Everyone's talking about how AI is transforming work, especially in sales. While the landscape shifts, one thing remains the same, the thrill of closing a deal. Whether it's a gong or a confetti machine, every team has its celebration rituals.

1:11Adio is designed for that moment. It's the agentic CRM that turns customer signals into actionable insights, helping you close deals faster with revenue agents and automations working around the clock. You'll have everything you need to scale your go-to market efforts. Elevate your wins with Adio. Start your free trial at adio.com slash iHeart. 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.

1:52or watch us live on YouTube. Dell reported fewer sales of AI servers, lower profit margins than expected. That's really taken a toll on shares. They're down about 9%. So we want someone who could break it all down for us. Let's bring in Woojin Ho, Bloomberg Intelligence Senior Technology Analyst, joining us from Princeton. Woojin, welcome back to the show. I want to start broader. So taking these results into consideration, I mean, is it showing that the AI rally has more room to run or not? I mean, what are you hearing? In terms of the AI rally in general, I mean, we saw NVIDIA's numbers and NVIDIA is actually doing quite well.

2:31I mean, if you X out the China outlook, right, the demand is still robust. And this actually flows through to Dell. If anything, the AI numbers, AI server numbers were better than expected in the quarter. And they also raised their guidance by another$5 billion. So instead of$15 billion for the year, they're expecting$20 billion for the year. And as more of these sovereign and neocloud deployments are ramping up, you know, 2026 AI server revenue should be better for Dell, given how they're positioned. So then can you try to explain why this stock is down 9 %? I mean, Dell just said it now plans to ship$20 billion of artificial intelligence servers in fiscal 2026, double what it sold last year, what is upsetting investors?

3:20Yeah, so there's a couple of things. Let's start on the AI server piece first. I've always said, and Dell will contend to it, having AI sales is a double edged sword. What you're getting in sales, you kind of lose out on gross margin. So let me give you an example. From a gross margin standpoint, traditional servers, as well as storage, combined are roughly in the 20s to 30s range. AI servers, they're closer to the mid-teens range. So from an operating margin standpoint, it actually is somewhat earnings dilutive to some degree if you sell way too much AI servers. So the 1.2 billion AI server beat, that only equated to two cents in an EPS.

4:11So what Dell has been saying for quite some time now, don't focus on operating margin because that's where they missed. Focus on the operating margin dollars. That's fantastic. But, you know, the incremental$5 billion for the year isn't going to be the big boost in EPS that people are hoping for. So, Wujan, is a big concern for investors, is that the profitability of AI servers? I mean, they run on processors from companies like NVIDIA and AMD, right, which are pretty pricey. I mean, should they be worried about that? Well, you know, the hope is, is that once we start moving away from these hyperscale and NeoCloud type of deals, right, because they're selling, you know, 50 ,000 servers plus to each of these companies, you know, they're not going to get as much, they're heavily discounted.

5:02But But if they start selling to the enterprise over time, the gross margin profile should get better and be more in line with traditional servers. Now that's going to take a couple of years to materialize. But the more important thing is if we think about it from a longer term perspective, as long as Dell is ahead of from a competitive standpoint, they should continue to win this AI game, not only on the neocloud side, but also on the enterprise side, which should help profitability longer term. But you're going to have to wait. And you know, when I did a little more digging into this earnings report, I found that Dell spent$1.3 billion on share repurchases and dividends during the quarter.

5:47That's an enviable position to be in. But do you think it's the best use of Dell's money? Well, so I think they've always been, since they came back to public and then spun off the VMware business, they've been very focused on shareholder returns, right? Now, if you think about from a valuation standpoint, you know, M &A is probably going to be something that's going to be tough for them to do. They've already learned a lesson from big M &A with the VMware deal, which is one of the reasons why they spun it out. So from a shareholder standpoint, if there's nothing that Dell can buy, I'd rather have it back in dividends and buybacks.

6:32Especially like a day like today. Well, yeah. Oh, yeah. How is Dell shaping up against its competitors, let's say like an HP or super microcomputer? Yeah, so let me take it from two standpoints, right? From Supermicro, we're thinking about it more along the lines from AI servers. Supermicro still leads the way in the AI server market. Now, one of the things that we can glean from the numbers is that Dell has been heavily discounting to win its market share. And they actually have the financial heft to do so with a strong balance sheet. Now, from an HP standpoint, this is more personal computing side.

7:12And this is another reason why the shares may be pulling back a little bit. Their PC growth, that segment only grew 1%. And in contrast, HP grew 5%. So there's a lot of questions in terms of the competitive nature for Dell versus HP on the PC market. Now, that being said, what we can glean from the guidance, the second half of this calendar year, HP should get back on track from back-to-school spending as well as Windows 11 upgrades. So I think they should do about 5 % growth in the second half of the year. And in the seconds we have left, can you tell us how Dell is stacking up against the competition, namely HP?

7:54Yeah, so from PC standpoint, HP is actually winning the game over the last couple of quarters. But it's going to be neck and neck over the next couple of years. But from an AI and a server standpoint, Dell should be fine. And in the last minute we have, where does Dell go from here? I mean, what should their focus be? Oh, I really do think it should be on the traditional server side as well as source side with AI, because they're all going to be melded into one type of business going forward. And Dell's well positioned in a longer term. Stay with us for more Bloomberg Intelligence coming up after this.

8:31When your options are limited, so are your opportunities. At SIBO, the global exchange that pioneered options trading, we offer more ways to move with the market. From VIX and SPX options to global market data solutions, SIBO helps investors diversify, manage risk, and stay ahead of whatever the market does next. SIBO. Life is better with options. Your investments could be too. There are risks associated with SIBO company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers. This is the Bloomberg Tech Minute brought to you by ChatGPT. Now with ChatGPT work.

9:08I'm Carol Masser. Globetrotters hunting for airfare bargains are in for a rude awakening, as the days of stumbling across a cheap seat on a popular flight could soon disappear. Bloomberg's Juan Ha reports that airlines from Delta to Virgin Atlantic are adopting artificial intelligence to change seat prices more quickly by weighing dozens of variables in real time, helping capture more revenue while shrinking pricing gaps that once allowed travelers to find bargain fares. Machine learning models can more accurately forecast demand by analyzing historical booking patterns, seed inventory, and seasonal trends, while also continuously tracking competitors' fares and capacity changes to update prices in near real time.

9:49The technology could lead to higher fares on busy routes as airlines pack flights closer to capacity, but may also result in lower fares on off-peak and lower-demand routes. That's the Bloomberg Tech Minute brought to you by ChatGPT. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com today by selecting Work Mode, available on Plus and Pro Plans. Everyone's talking about how AI is transforming work, especially in sales. While the landscape shifts, one thing remains the same, the thrill of closing a deal, Whether it's a gong or a confetti machine, every team has its celebration rituals.

10:29Adio is designed for that moment. It's the agentic CRM that turns customer signals into actionable insights, helping you close deals faster with revenue agents and automations working around the clock. You'll have everything you need to scale your go-to market efforts. Elevate your wins with Adio. Start your free trial at adio.com slash iHeart. 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. One of the big movers today is Caterpillar, a mover to the downside, that is.

11:08Off nearly 4 % right now, it's warning investors that tariffs are expected to have an even greater impact, take an even bigger bite out of its bottom line, expected to cost Cat as much as$1.8 billion this year. Let's dig into it a little more with Christopher Ciolino. He is Bloomberg Intelligence Senior U.S. Machinery Analyst. So what is it about this report that's got investors in a tizzy? Well, you're right. I mean, tariffs will be a bigger cost headwind this year, more than Kat previously expected. And the revision really seems to be driven by additional clarifications around the Section 232 steel and aluminum tariffs and some of the reciprocal rates on India.

11:51As you alluded to, you know, Cat thinks these tariffs could be, you know, up to a$1.8 billion impact in 2025. That's up, you know,$200 million to$300 million versus their prior view, so a little bit higher. So, you know, even though that we're looking at these incremental costs this year, we think it's pretty easily digestible for Cat and probably represents, you know, the peak headwind that we'll likely see. They really haven't implemented significant cost mitigation or pricing actions yet. I suspect you'll see more of those measures in 2026, which could ultimately offset these impacts. So, Chris, is it steel and aluminum?

12:27Is that the main focus? Yeah, we think so. So we did get an update on the Section 232 tariffs for steel and aluminum that expanded the coverage to, you know, I think an additional 400 different products. So, you know, we had CAT report earlier this month and we had that subsequent update. So I think that's probably the big driver behind it. Obviously, heavy machinery companies use a lot of steel and aluminum. It's their largest input cost. So that certainly does move the needle. We're talking about headwinds, but what about tailwinds? Any of those for Caterpillar? Yeah, you know, despite some of these near-term cost headwinds, I don't think it really ultimately changes the narrative here.

13:10You know, we're still quite optimistic that earnings are going to bottom this year. There's a number of cyclical and secular tailwinds that we think are going to drive higher earnings in 26 and 27. The backlogs is sitting at a record high. We've seen very solid order trends these past, you know, four quarters. And dealer inventories remain at, you know, pretty healthy levels considering softness in the broader economy. So all of these are really positive leading indicators for Caterpillar. And Chris, you follow this company very closely. So when we have an economic slowdown, What segments of Caterpillar's business tend to hold up the best?

13:48So right now, the segment holding up the best would be their ENT or energy and transportation business. And really, I think the big driver behind that is power generation, particularly on the data center side. Those are much longer cycle products, have, you know, very extended backlogs for many years. Caterpillar's adding capacity there. So we've seen that business hold up very well. On the flip side, the more cyclical construction industries business is probably the one more harder hit. And also their resource industries business, which is a lot of mining equipment, that's been a little softer as well.

14:25But, you know, I think, you know, if we're looking at a lower rate environment moving forward, we're certainly a little bit more optimistic on some of the growth prospects in those two businesses moving forward. Stay with us for more Bloomberg Intelligence coming up after this. This is the Bloomberg Tech Minute brought to you by ChatGPT. Now with ChatGPT work. I'm Carol Masser. Globetrotters hunting for airfare bargains are in for a rude awakening, as the days of stumbling across a cheap seat on a popular flight could soon disappear. Bloomberg's Wan Ha reports that airlines from Delta to Virgin Atlantic are adopting artificial intelligence to change seat prices more quickly by weighing dozens of variables in real time, helping capture more revenue while shrinking pricing gaps that once allowed travelers to find bargain fares.

15:13Machine learning models can more accurately forecast demand by analyzing historical booking patterns, seed inventory, and seasonal trends, while also continuously tracking competitors' fares and capacity changes to update prices in near real time. The technology could lead to higher fares on busy routes as airlines pack flights closer to capacity, but may also result in lower fares on off-peak and lower-demand routes. That's the Bloomberg Tech Minute brought to you by ChatGPT. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com today by selecting Work Mode, available on Plus and Pro Plans.

15:56Everyone's talking about how AI is transforming work, especially in sales. While the landscape shifts, one thing remains the same, the thrill of closing a deal, Whether it's a gong or a confetti machine, every team has its celebration rituals. Adio is designed for that moment. It's the agentic CRM that turns customer signals into actionable insights, helping you close deals faster with revenue agents and automations working around the clock. You'll have everything you need to scale your go-to market efforts. Elevate your wins with Adio. Start your free trial at adio.com slash iHeart. Amazon Health AI presents Painful Thoughts.

16:32Why did I search the internet for answers to my cold sore problem? Now I'm stuck down a rabbit hole filled with images of alarmingly graphic sores in various stages of ooze. I can clear my search history, but I can never unsee that. Don't go down the rabbit hole. Amazon Health AI gets you the right care fast. Healthcare just got less painful. 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. NVIDIA and AI, it was out with earnings this week and it impressed with, you know, more proof that that AI spending continues to be strong.

17:22I want to talk more about AI in the real world with Bin Ren. He is founder and CEO at the software company Sigtek. He joins us from London. Ben, thanks so much for being with us. Before we get into Sigtek and what you do with AI agents, we'll get into what all of that is. I just want your take, your thoughts on NVIDIA's earnings report this week. I think we are seeing unprecedented demand for AI services, AI inference. If you look at the, you know, not only the hyperscalers purchasing GPUs and building data centers, It keeps going up. And if you look at the consumptions of tokens by large language model providers, such as OpenAI and Google and Anthropic, it's growing at 100 % every six months.

18:11So the adoption, the usage, the consumption is all going up. The trend, there's no reason why it's going to slow down or certainly not stopping. Ben, we've heard a lot about different types of AI. Gen AI is a huge one. I mean, I know everyone's on the chat GPT or whatever, whatever else you have. But do generic AI tools, they can help out in a lot of fields. But what about financial institutions? I mean, you focus more on custom AI. Is that correct? Yeah, we focus on building entirely bespoke and custom AI agents for customers in capital markets. I think people now, hundreds of millions of people have used ChatGPT, so we all have a good idea of what a chatbot can do for us, which is extremely useful.

19:03But when it comes to businesses, there's an increasing gap between what the large language models are capable of and what actually value users in businesses are getting out of the applications using the same models. You know, the large language model capability has been improving dramatically. And frankly, probably the most improved applications, unfortunately, have been restricted to only a few areas, mainly about writing code. That has been the killer app outside chatbot. In finance, the difficulty is, actually, there are many different reasons why the application is not delivering the kind of potential we are expecting.

19:55One of the reasons is in finance, we use a lot of private data. The large language models are mainly trained on public data. Then there's the question of how to converting the vast corpus of financial documents in PDFs, in Word documents, in Excels, into the right formats that actually can be effectively used by large language models. Any error in this data conversion, document processing pipeline will immediately result in very poor qualities downstream. And in other areas in finance, we crunch numbers. And the large language models are very bad at crunching numbers, right? And it's probably the most expensive calculator we can think of.

20:46So to make large-level models work in finance, we have to provide a very wide range of financial tools. These tools can be softwares, can be APIs, can be desktop applications. Then we have to train models to use them. And there are other challenges, too. Yeah, that's why everything has to be bespoke. Ben, we keep hearing that AI is going to be a job killer. And we're already seeing it, frankly. A lot of, you know, entry level positions being taken over by AI. That means a lot of recent graduates from college are finding it even harder to find a job in unemployment amidst that demographics about 6 percent right now versus a little more than 4 percent for the rest of us.

21:31So what what how do you see the future of work looking and how does AI play a part? um i think whatever there's you know unprecedented new technology coming along so transformative and so disruptive um like ai but previously there was internet there was industrial revolution there was the invention of airplanes and cars i mean inevitably some jobs uh will be killed i guess you can say that but there will be new jobs created um i think the key here is to understand fundamentally what AI can do and what AI cannot do and what makes us, by us I mean humans, special. AI is very good at doing repetitive, non-creative work, non-creative knowledge work.

22:25Humans, we are uniquely equipped to be creative and imaginative. And also, by the way, you probably know that AI is really bad at telling a joke, a good joke. And there's a reason for it. Because AI is trained to predict the next most likely word, word by word. And to deliver a good joke, the punchline has to be surprising and witty. So large language models are literally not trained to be able to tell a good joke. So all the comedians, their jobs are safe. They have to write their own stuff. They have to write their own stuff. And they have to have inspiration. They have to have new experiences, imagination and creativity.

23:10I think that's probably a good role model for the future work look like. We can spend more time on being imaginative and creative. And frankly, more intellectually satisfying and less time on things, frankly, we don't wake up and be excited about. Stay with us for more Bloomberg Intelligence coming up after this.

23:55of variables in real time, helping capture more revenue while shrinking pricing gaps that once allowed travelers to find bargain fares. Machine learning models can more accurately forecast demand by analyzing historical booking patterns, seed inventory, and seasonal trends, while also continuously tracking competitors' fares and capacity changes to update prices in near real time. The technology could lead to higher fares on busy routes as airlines pack flights closer to capacity, but may also result in lower fares on off-peak and lower demand routes. That's the Bloomberg Tech Minute brought to you by ChatGPT.

24:31Put ChatGPT to work on your most ambitious ideas and projects. Get started at chatGPT.com today by selecting work mode, available on plus and pro plans. Everyone's talking about how AI is transforming work, especially in sales. While the landscape One thing remains the same, the thrill of closing a deal. Whether it's a gong or a confetti machine, every team has its celebration rituals. Adio is designed for that moment. It's the agentic CRM that turns customer signals into actionable insights, helping you close deals faster with revenue agents and automations working around the clock. You'll have everything you need to scale your go-to market efforts.

25:11Elevate your wins with Adio. Start your free trial at adio.com slash iHeart. Amazon Pharmacy presents Painful Thoughts It's been a long bumpy road dealing with yet another bladder infection and driving to the pharmacy to pick up meds I went over a pothole and a little pee came out so now I get to stand in line with pee pee pants Next time skip the pain and get fast free delivery with Amazon Pharmacy Healthcare just got less painful

25:48You'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. Want to switch gears for a minute and talk about the sleepy summer for the housing market? Would-be homebuyers, we know they've been staying on the sidelines. They're waiting for mortgage rates to come down. They're waiting for housing prices to come down. So will they? And when? Bess Friedman, she's been looking into her crystal ball. We called her in for some help.

26:22She's CEO at Brown Harris Stevens. Bess, always good to see you. Thanks so much for joining us. So let's just start with a reality check. Are things improving? I mean, I heard that inventory was starting to beef up a little bit. So are you seeing some pockets of improvement? You know, it's interesting. Good morning. So nice to see you as well. Thanks for having me. I think we see a step forward and then a step back. And I would describe our housing market, at least through the summer, is very frustrating. People, buyers and sellers, couldn't get on the same page. You know, for buyers, things have become unaffordable.

26:57Rates are too high. Sellers aren't budging on their prices. They're taking their homes off the market. So there's been a little bit of that. And it's gradual. You know, we definitely perform better this year than we did last year. It's a better housing market. But having said that, it's going to take a little bit of time. And I know that everybody's expecting or thinking that the Fed is going to cut the Fed fund rate in September. Maybe we'll have to see how the jobs report comes out. But, you know, even that, you know, I don't know that's going to have a dramatic impact. It's going to take time for us to come to a better place where we see supply and demand intersecting.

27:38That's a healthy market. And we don't really have that. best i i have to tell you i've been kind of caught in the middle of all this i mean i was trying to find a home i've been outbid by like a hundred and seventy thousand dollars in new jersey i mean it's it was rough um so can you break it down as far as areas of the u.s right what areas are our home selling at a faster pace or or maybe what areas have more inventory i mean every real estate market is so local i'm sorry that you had that experience thank you i'm still getting over There are areas. I'll give you an example. A market that is completely on fire.