Chip Stocks Sink Into Bear Market Territory as AI Rally Fizzles

0:00I don't love the word retirement because I think it has negative baggage. I like the word financial independence. If you were to be financial independent, like how would you spend your time? I think that's a better way to think about the end of life stage versus quote unquote retirement.

0:15So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now, a global workforce of 300 ,000 can use AI to fill their HR questions, resolving 94 % of common questions. Not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM.

0:45Scarlet Fu:Get the news you need in just 15 minutes. Start your day with Bloomberg Daybreak, the podcast with a global view on the stories that matter. I'm Nathan Hager. And I'm Karen Moscow. Join us each morning for curated stories on current events, politics, business, and foreign relations. Plus one conversation on the day's biggest developments, all in just 15 minutes. Subscribe to Bloomberg Daybreak for a precise, thoughtful take on the stories that matter. Listen to Bloomberg Daybreak each morning on Apple, Spotify, or anywhere you listen.

1:17Scarlet Fu:Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. It feels like this week we've seen a lot as it relates to Chinese tech as well. A lot based on that. And overnight, there's a Chinese AI startup called Moonshot, which I thought the name was kind of apt. It sent jitters across markets. And this is why partly we're seeing or largely rather we're seeing an S &P and a Nasdaq that's down on the day.

1:56And that's why you're seeing the socks on a bear market because of that. And for that, we have no one else better to talk to than Mandeep Singh. He's with Bloomberg Intelligence. Mandeep, do you think this is another deep seek moment or do you think that this is something bigger changing maybe in the AI race? I would say neither. I'm of the view that every time there is a new model release, every model provider would highlight what is unique about this release. And in this case, they talk about token efficiency, the fact that they have caught up in terms of certain types of functionality that the model can provide.

2:36And look, we were in an environment where everyone is talking about how expensive it is to deploy these technologies, the LLMs. And this model seems to be good enough at a low price, which is what is catching attention. But that doesn't mean, you know, they have caught up to the frontier models that Anthropic and OpenAI have released. And so it's really a function of pricing. And to my mind, you can create news, but the actual adoption will have to wait and see.

3:10Scarlet Fu:And it speaks to the nervousness that consumers and investors have over who is prevailing in this AI race and very much feels like an AI race. Mandeep, why have we gotten to the point where even though the cutting edge development and technology is happening in the U.S., it feels increasingly like Asian markets are dictating where things go in terms of price action? Yes, I think you bring up a very good point that, you know, what's going on in Korea right now seems to be affecting, you know, the indices here and how stocks are trading. And that's part of the nervousness that you alluded to that, you know, when things go parabolic, as they did with some of the stocks, you know, for no reason whatsoever.

3:54Yes, the fundamentals have been great, but that doesn't mean, you know, things have to go up in that fashion. And that's what creates nervousness around valuations. I mean, we are seeing even news like Apple asking, you know, China for qualification of or sorry, the U.S. government for qualification of a Chinese memory name is creating a lot of downside for the U.S. memory names and, you know, your Micron and even SK Hynix. So that's the kind of environment we are in where any sort of news creates that sort of action where, you know, if stocks were trading at a high valuation, it's going to have an impact.

4:36And I think the fundamentals haven't really changed in a big way, which I think will be validated when these companies report their earnings and guide for CapEx, which I expect numbers to go up. But we are in an environment where news will have an impact on day-to-day volatility. Mandeep, do you think that this is a sign that investors should see this as a threat to U.S. AI leadership or is it just simply more competition, which is what we should expect anyway? I think the overall message here is you can't have two companies dominate the LLM race. It's never going to be good from an ecosystem perspective.

5:16They will have very high margins, which is definitely not something that all the other companies want in the ecosystem. So there is a desire to have more LLMs and cheaper pricing for these LLMs. And that's why if the option is available through open source Chinese models, people are looking into it now. And it's across the board and it's no different from any other technology trend. You want to see the cost come down as adoption goes up. That wasn't happening here. And I think that's why you are seeing so much interest in open source LLMs right now.

5:54Scarlet Fu:OK, so China with DeepSeek and now Moonshot, these developments, when we hear about it, kind of feels like it comes from out of nowhere, mainly because we haven't been following the incremental news on it. Are there other places or other companies that could surprise us in the same way where suddenly they come out with a fully formed AI model, LLM, that we didn't know about? Yeah, I mean, look at Meta announcing the Muse models and, you know, trying to become a cloud provider and selling their APIs externally. We have heard about Grok, you know, SpaceX Grok and now with the merger with Cursor, they have released a new model.

6:34So all these could be viable options in terms of using LLMs at a lower token pricing than what the frontier models are currently giving. And so that's where the competition is going to increase. But I go back to that functionality point. All these LLMs are still trailing in terms of the functionality that Fable or, you know, the OpenAI models have. So that gap needs to close and then people will route the query to the LLM that's most appropriate for that task. And you don't need the frontier LLMs for every query. And I think that's the direction we're headed.

7:11Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this. I don't love the word retirement because I think it has negative baggage. I like the word financial independence. If you were to be financial independent, like how would you spend your time? And that's exactly what a lot of my clients talk about. And the term they'll use is a work optional lifestyle. I agree. Like the next gen, millennials and below are not thinking about retirement. We're thinking about let's find something that we enjoy, that we can have financial independence. I think that's a better way to think about the end of life stage versus quote unquote retirement.

7:46Scarlet Fu:The Bloomberg This Weekend podcast. News, politics, and the lighter side of Bloomberg. The most coveted cosmetic enhancement in Asia right now are elf ears. Elf ears. Yes. People are getting injections to enhance their ears. I really don't need anything else to learn to be self-conscious about. This is not something I needed to have on my radar. The Bloomberg This Weekend Podcast. Subscribe today on Apple, Spotify, or wherever you listen.

8:18Scarlet 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. I'm Isabelle Lee, sitting in for Scarlet Fu and Paul Sweeney. Both are away at the moment. Paul is at the beach, I think, and Scarlet Fu is with her TV duties. But beside me is the legendary Charlie Pellett. So I am in fantastic company. I'm very glad to be here. We got just a few minutes together, but we are going to make the most of it and let us talk about one of the most popular stocks to cover, and that is Apple.

8:53Apple. Apple, and we have no other than Mark German, Bloomberg News Managing Editor for Global Consumer Tech on Apple and all things Apple. He is what I call in my world a scoop machine because anytime I see an Apple headline, I know it has to be Mark. So Mark, first of all, we have to talk about Apple briefly or at one point surpassing NVIDIA as the most valuable company in the world. Maybe talk to us about the significance of that. What is Apple doing right? because the rest of the big tech is kind of languishing. Apple stock's been on a tear lately. I think investors might finally be reading my articles where I talk about that we're about to enter a tremendous new period for the company with so many new products, home devices, foldable iPhones, AI wearables, integrating AI deep into the hardware.

9:43Apple's a hardware company. They make basically all their money from hardware sales. If you're an Apple investor, it's a good time because they're about to make a boatload of more money. And so you'll probably have some success there on the on the days they announced. All right. I go to the Bloomberg. I look at Apple shares up 22.5 percent year to date. I look at NVIDIA by comparison up 9.9 percent. When a story like this saying Apple is now number one in terms of market cap clears the Bloomberg. What is the reaction respectively in either Cupertino or in Santa Clara? Are the folks at NVIDIA looking going, oh, my God, what a terrible day this is?

10:20Folks in Cupertino, are they going woohoo? Or is it really a case of nobody cares other than the folks who own those stocks? I think it's the latter. But if you're NVIDIA, right, this might be a little bit of a wake-up call. I mean, they were the hard-charging company making all the money with the insane revenue growth over the past couple of years. And now investors are beginning to become a little bit more skeptical over AI and how AI is being driven. I think there's a little bit more optimism for what Apple's doing because of their decision to go more on device for AI processing. And so their capex is slim compared to the competition.

10:58And I think that the lower spending that Apple is doing, I think, makes investors actually pretty excited. But again, the quality of the AI that you're getting from the cloud versus on device, there's still a big, you know, deviation there. But the gap will close at some point, I think. And then you said that Apple is set to make a boatload of money. Where will that come from? We do know that they're raising their prices across devices. Is that coming from there? Well, revenue will go up because of the price increases. I don't think the price increases are enough to slow unit sales to any significant degree.

11:31Profit, not going to change much because the offset, the price increases are designed to simply offset the memory. They're not making additional profit on that. We're talking about new iPads. There'll be a new OLED iPad, so better screen like the iPhone and iPad Pro this fall. The foldable iPhone is going to be about$2 ,500. I'm super pumped. I want to see that in real life. I can't wait. Yeah, it's going to be the biggest change to the iPhone in the product's history. So it's a really big deal, a folding phone. I'm not necessarily a skeptic with things like this, but why do I need a folding phone?

12:07Thank you, Isabel, regardless of whether it's Apple, regardless of whether it's Samsung. And is that Gen Z influence? Well, I would say you need a foldable phone like you need a hole in your head because it doesn't really make, you know, it's not really that necessary. It's sort of a technology showcase, right? It's over the top. It's very cool. I mean, when I've seen these foldable phones, I'm always looking for the line. And I don't see it. I don't see the line between the two screens. They've gotten better. And Apple is going to be pretty much industry leading in how invisible that line is going to be.

12:41One of the problems you've had with foldable phones over the past several years is durability. Apple's is not going to be as durable as, you know, the slab phone. Oh, slab phone is what you call it. The Pro Max, the 17 Pro Max, this thing is built like a tank. You can throw it across wherever. You can throw it in the pool. This thing is not going to break. It's a tank. At the same time, what you really need to understand is that Apple's mobile phone is going to be more durable than the competitive devices. Yeah. Okay, so we have around one minute left. And as Apple invests more in AI and new devices, do you think it can maintain its premium position?

13:18Because we also know that smartphone growth is slowing a little. I think that Apple, if you look at it as a complete package, you look at the hardware, software, services, they still think they have the most competitive phone on the market on a global scale. I think it's the best combination of user accessibility, interface, services, things like iMessage. So I think it remains an elite product. And I don't think the phone is going away as quickly as some people do. Mark, very briefly, Isabel asked about revenue. Whenever Apple earnings hit the Bloomberg, one of the first things I look at is China revenue.

13:52Speak to us about what is happening in terms of Apple and China. I know there was some news announced about the iPhone in China. What's going on there? So Apple will finally be able to roll out its AI in China. This is the first generation version of its new AI. So the Apple intelligence that got the head of AI fired. So I don't think this is a needle mover. I don't think people in China are going to want it. But the second generation, the new Siri AI and the new Apple intelligence is pretty good. So we'll see how long it takes for that to get approved.

14:18Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this.

14:25Scarlet 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. I myself, I'm a binge watcher when it comes to Netflix, but you made a point earlier, Scarlett, that there are already many people with Netflix accounts and where do they take their growth? Yeah, well, aside from making sure that your brother or your husband is not using your account. That is true. And that's why you're seeing the stock down, as Alexis alluded, more than 9%.

14:59It's the biggest intraday decline since April 2022. And joining us now to help us make sense of this is Geetha Ranganathan, Bloomberg Intelligence Analyst on US Media. Geetha, thank you so much for joining us. Do you think that this is, that this low in growth is a short-term issue or do you think it's a sign that Netflix maybe is becoming a more mature market? Definitely, Isabel. you know, we are seeing signs of maturity across the entire landscape and definitely for Netflix as well. So, you know, moderating revenue growth is definitely a big red flag here. And we've seen the revenue growth actually come down pretty substantially, which is what I think is really spooking investors, right?

15:39Because in the first quarter, you had about 16 % revenue growth, almost 14 % for the second quarter. And now when you look at their guidance for the third quarter, it's 11.7%, which was well below what consensus was expecting. So this really, I think, feeds into that whole investor anxiety about, you know, what the catalysts are going forward for this name.

16:00Scarlet Fu:And this is not something that can be solved with more spending on content and making sure you have the latest hot show or the latest franchise, is it? Well, they actually, Scarlett, to that point, they're actually boosting content spending pretty significantly this year, almost 10 % to$20 billion. That's the highest ever that they would be spending on content. But if you look at the engagement report, which they published yesterday, yes, they do have this very broad swath of content. But at the end of the day, we're not necessarily seeing that resonate into the metric that all investors are focused on, which is engagement.

16:41Because while the total number of hours viewed did grow slightly, 2 % from last year, the viewing hours per subscriber is actually declining. And the big worry, I think, for investors is that as we get disruption from short-form video, from YouTube, from Instagram, TikTok, and all of these other social media platforms, can Netflix actually retain that engagement metric? And is it only going to slip further? so githa do you think we're heading towards a more consolidation in streaming maybe as companies chase scale and profits i think we already saw that right so netflix actually did uh go after warner brothers discovery uh streaming and studio business last year pretty aggressively until they finally lost to paramount skydance i think you know at this point yes netflix is doing little, little things, whether it's adding short form content, whether it's going into live events, whether it's doing a little bit more in gaming.

17:42But none of these are transformative enough. We need some kind of a step change catalyst here, and we're really not seeing anything. So maybe M &A, maybe some kind of a transformative partnership, maybe some kind of a big acquisition will finally move the needle for Netflix, but we have to wait and watch.

18:00Scarlet Fu:That's so interesting. And I know this is something you've written about, Geeta, this idea that Netflix now has M &A ambitions when it had kind of denied that it was looking to do that. It's always prioritized organic growth and reinvesting in its own business. What does that say about the state of the streaming wars overall that Netflix needs to buy to consolidate its grip on the market? Yeah, I mean, we're really seeing competition kind of intensifying, and we're going to see that only intensify further Scarlett once Paramount closes on its acquisition of Warner Brothers and HBO. And Netflix really needs to kind of beef up the content because obviously it's the lack of those breakout hits.

18:41Yes, they did have great content. They did have a great pipeline. Yes, we did see good growth in viewing hours, but that's just not enough as we have more and more of, it's not just competition and streaming though. That's the problem. It's competition from all kinds of platforms. You know, we talked about the social media platforms and that's really what Netflix has to kind of defend its turf against. And for that, they have to come up with bigger, better, more engaging content. And they might very well need to buy a studio for that. What about the live sports podcast and ads initiatives? How meaningful are those when it comes to driving growth?

19:19Are you bullish on them? I feel like Scarlett and I were talking about it and almost everyone has a podcast these days. Yeah, so on the margin, I think it definitely helps because, you know, at the end of the day, Netflix is, you know, something you go home to in the evening and then you're watching it. But I think with podcasts, it's something that they're trying to build on through the day, right? They're trying to build on engagement. You know, anytime you pick up your phone, you have some content that you can kind of listen to or look at. And that is really what they were trying to go after.

19:51but at the, you know, again, it's on the margin. Yes, it helps, but doesn't move the needle.

19:58Scarlet Fu:This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.