Microsoft Drops Most Since 2020 Amid Slowing Cloud Growth

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break.

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1:02Bloomberg 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. Tech stocks are really in focus. The Nasdaq Composite Index, Paul, is down two and a quarter percent. The Mag7 names began reporting yesterday, and it's really a split view here when it comes to those big, big tech names. And another one is on the docket tonight. You've got Apple reporting this evening at 4.30 p.m.

1:43Wall Street time. And, of course, we know that the latest Apple iPhone came out, so this is a huge quarter for the company. Anurag Rana is our technology analyst, and he covers all things big tech. Anurag, Microsoft here. I mean, it's north of a$3 trillion market cap company, puts up 38 % cloud revenue growth, stock down 12%. What's going on? Yeah, I think that's really what you're saying is, you know, last quarter, the growth rate of Azure was 38 or 39. This quarter was 38. They've guided to 37 to 38. And that's not good enough for investors. So I think that's really what it is. And, you know, they said it on the call that if they allocated all the GPUs to Azure, they would have grown north of 40 percent.

2:27What's happening right now within Microsoft is the cloud capacity that they have built, and they have done a very good job about it in the last 12 months. They're allocating it differently, whether it's their GitHub co-pilot, which is the coding agent or the M365 co-pilot, their Azure business, and also internally for their R &D. and that if you can only have this much capacity, you know you will realize the revenue only on the Azure side and I think that's where the mismatch is. The biggest question people are asking is, well, the CapEx is growing in the 60s but the cloud revenue is growing on the 30th.

3:01I think it's a bit silly to be very honest with you. They know what they're doing in terms of R &D for future growth but frankly from our side, 38 % growth is not a bad number. No, it's hard to hold your nose at that. But is this a company that gets worried about this kind of market reaction? Or like you said, they're confident in their strategy overall. They're going to move forward with this regardless of whatever message investors might be trying to send. No, I don't think they will change their strategy. I mean, they are doing whatever is right for the Microsoft product of families. And because you think about it this way, in seven years, by 2032, they will lose the IP that they get from OpenAI.

3:44They need their own models by then. They have to have it. So if they're going to put some R &D dollars to take care of that, so be it. I mean, I don't think that's a problem. They are, actually, even now, one of the bigger beneficiaries of all the GenAI spending that's out there, you know, it will all come back to the cloud. Whether it takes a year, two years, I don't think that's a problem from a long-term point of view. How about CapEx? We saw Meta put a huge CapEx number up there, way above where the street was forecasting. Here from Microsoft, their CapEx up dramatically as well, up 66 % from the year earlier.

4:23How do you think about CapEx? How's the market thinking about CapEx? So it depends on who's spending the CapEx. So when we think about it, the three most important companies in our view is Amazon, Google, and Microsoft, because they have really strong cloud business that can monetize it. How meta monetizes it, I don't know. And frankly, the reason for that is because they're saying they're going to drive more engagement internally with their products, but they don't have a cloud business that can monetize it. Their model is not being bought by Apple to put it in the operating system. So I have no idea what the future for that capex is, but I feel very comfortable with a capex that's driven by the three large hyperscale cloud providers because we know the business that they're in and where the monetization is going to happen.

5:09Okay, before we let you go, just a quick recap of what happened with IBM. Good enough for an almost 5 % gain. What were investors responding to? Yeah, I think it's, again, a game of low expectations. that's where the revenue growth rate was better. They came at the total revenue growth was 9%, but the software division was around 11%. So I think that's really the benefit. But think about it. ServiceNow down so big, their growth rate was in the 20s. Microsoft, same thing. So it's all a matter of relative expectations today. Stay with us. More from Bloomberg Intelligence coming up after this.

5:49you'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's been tech here uh we had a lot of tech numbers after the close uh yesterday one of the ones that just i think surprising people it was just is microsoft and we talked about that with honor agrana meta we want to talk about meta as well here. Mandeep Singh joins us, Global Tech Research Head for Bloomberg Intelligence, joining us live here in our studio. Their top line came in better than expected, gave a pretty strong forecast for the current period.

6:29So from a revenue perspective, the story seems very much on track. What'd you take away, Mandeep? Yeah, I mean, it's hard to find a business in Mag7 that's growing 30 % top line at, you know, the revenue base that Meta is at. And that probably explains why they got a green light when it comes to the CapEx increase that they had in their guide. And I mean, Mark was asked a number of questions around large angle models and what he's doing. And his answer was, I don't have a ton of clarity in terms of what those products are going to look like. All I know is we have a great team. We have all the compute.

7:06In fact, they're renting compute from third party NeoCloud providers because they feel they've got a lot of ideas and they'll be launching a lot of new products this year. So that's what got everyone excited. Right. But they didn't give any details on these new products or services. That's crazy. Stocks up seven and a half percent. Right. So I wonder, is this just he was able to to craft a better tale, a better story than he had in the quarters past? Yeah. And look, when you are raising your guide, so consensus was 25 % growth for 1Q. They said we'll do 33 % at the high end. But no details. No.

7:48Well, that's just core advertising revenue. Core advertising. And they said this quarter, so they beat this quarter, fourth quarter's print by 200 basis points. They attributed that to, you know, all the AI ad conversions that they are seeing in the current. So without even launching an LLM or a new product, they're applying AI and GPU clusters to the existing ad stack. So it's better execution. It is execution. And they're able to do it when Pinterest, Snapchat, Reddit are not even able to grow 20%. So that's the difference between a company like Meta and what the smaller digital ad companies are doing.

8:28can that be their AI story? Or does the market longer term want to see new products? Absolutely. And what would those be? Well, AI assistant. And there were references of, you know, Meta's AI is going to look different from the leading frontier models like OpenAI or, you know, Gemini. So their standalone app, Meta AI, doesn't have any usage right now. So you compare that to a Gemini and ChatGPT, nobody uses Meta AI. But what they're saying is we'll have something different in terms of the content, what you can do with meta AI. And you have to take a leap of faith with Mark Zuckerberg. And will that be embedded in Facebook, in the gram?

9:11That's what the kids call it, the gram. Insta, it'll be embedded in those apps and that will be the use case. I mean, imagine Facebook groups. They've got so many users. If you have meta AI that actually works, how many things a user can ask a meta AI when you are, you know, reading the group notes or something like that? So it can be very conversational. And that's where the audio part, the text chatbot part, all that would be customized to the family of apps. So when it comes to the advertising business, I wonder if what Meta told us based on how it's implementing AI might inform how a Snap, a Pinterest, a Yelp or Reddit might harness that technology as well.

9:56Because you look at the share price reaction in those stocks and it's pretty mixed. Reddit is little changed, but all the other names are down. I think, I mean, there is nothing that's stopping a Pinterest or a Snap from applying AI to their ad ecosystem. So to my mind, in fact, Meta called out e-commerce specifically as a vertical where they're seeing the most traction in terms of ad convergence. And these are companies, smaller ones, Pinterest is heavily exposed to e-commerce. So to my mind, they should come out with a print where they also talk about some benefits of leveraging AI in their ad stack.

10:30Stay with us. More from Bloomberg Intelligence coming up after this.

10:37you're listening to the bloomberg intelligence podcast catch us live weekdays at 10 a.m eastern on apple car play and android auto with the bloomberg business app listen on demand wherever you get your podcasts or watch us live on youtube tesla reported numbers uh last night one of the things that jumped out at folks is tesla said it will spend over 20 billion dollars on a dramatic reshuffling of factory lines to ramp up production of cars, batteries, and robots across the half a dozen plants. So a lot going on at Tesla as usual. Let's get the latest analysis there from Steve Mann. Covers all the autos companies globally for Bloomberg Intelligence.

11:15He's down there in Princeton, home of the best Bloomberg lunch. I'll tell you that right now. Steve, talk to us about Tesla. What's going on there with Elon? How's he kind of shuffling up this company? Yeah, Paul. I think the most what stood out for me was really that the AI investments that they've made in the past few years, it's actually being converted into returns. And that visibility of that return is much better after the call. You know, they actually codified and put in black and white in their presentation, the rollout plan for the robo taxi. And, you know, they're looking to roll out into nine different cities, mostly in the south, in the first half of this year.

12:00OK, so some visibility is always great when it comes to Tesla because so much of the story driving Tesla is Elon Musk's storytelling skills and capabilities here. Tell us a little bit more about what Elon Musk said when it comes to Tesla needing to build its own semiconductor factory. I mean, we're just getting our head around the cars and the self-driving vehicles, AI, robotics, and now we're talking about chip making? Yeah, that's the Tesla business model. They are vertically integrating. They're looking at the whole supply chain, whole value chain to see where they can cut costs. But the other thing that Elon Musk mentioned is geopolitics that plays a role in why they want to build their own chips.

12:48But the other thing is there is a huge demand for chips across the board, AI chips, memory chips. We already are seeing some shortages on memory chips in the automotive supply chain. So it's not a surprise that they're going vertical. They want to ensure there's a source and they want to make sure that the technology stays in-house and they have control of that technology. Optimus Humanoids. What is that? And is that something that's going to be material for this company? Yeah, according to what the company is saying, they are making progress. They're going to launch the next version of the Humanoid robot.

13:28They're actually stopping the Model S and X production and sales. it's pretty low anyway, and converting that factory to two-million robots. But we still think it's years away. I think for it to be commercially viable and interest from the marketplace, it probably won't be until the end of the decade. But they will use some of that robot within their own factories. Steve, what about Tesla sinking another$2 billion into Elon Musk's own startup, the XAI? I mean, do people have a way of seeing whether that has a return on that investment? I mean, is it just money that goes in that one direction? Yeah, there seems to be a lot of confusion in the market, but to me, it's actually a right thing to do.

14:17Because first of all, Grok, which is part of XAI, it's already in their vehicles, operating in their vehicles as a navigational assistant. And then as RoboTaxi rolls out, I think they want to personalize those RoboTaxi. And Grok through XAI is the perfect tool to do that, system to do that. So, you know, if Tesla is going to use the services from XAI, I think they need to pay for it. So$2 billion investment into XAI makes sense. Stay with us. More from Bloomberg Intelligence coming up after this.

14:58You'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. You're looking for an AI stock. How about this one? Bet you didn't think about this one. Caterpillar got an earnings boost from selling power generation equipment to AI data centers in its fourth quarter. Stocks trading up today. It's hitting a 52-week high. How about that? Chris Cialino, he covers Caterpillar and all those other construction companies, manufacturing companies, senior U.S.

15:35machinery analyst for Bloomberg Intelligence. So, Chris, I bet you didn't think early in your career that Caterpillar would be a tech play. Talk to us about their quarter. Yeah, no, certainly not. And, you know, it was one of the I think the top performers last year in the market and certainly off to a good start this year. quarter with quarter was solid you know beats both on the top and bottom line really driven by higher than expected volume in their power and energy business as you alluded to but I think the the real standout and the takeaway this quarter was really the unprecedented order and backlog growth that we saw now we came into the quarter with backlog already sitting at a record level but we saw orders increase more than 70 percent which drove nearly a 30 percent increase sequentially in the backlog.

16:21And what's encouraging, it seems that it's pretty broad base. It's not just the data centers and AI. It's construction starting to contribute, mining starting to contribute. So you're really starting to see a lot of momentum starting to build, moving into 26 as we get these, not only the cyclical recovery start to materialize, but also the secular tailwinds kind of converging here. So it sounds like a number of different drivers. And do they all move to their own timeline in terms of that cycle? You know, they're all kind of hitting their stride at the same time? Yeah, I think as we go into 26, you are starting to see those cycles converge.

16:58The more cyclical mining and construction businesses have kind of been bouncing along trough for a couple of years now. We're finally starting to see some stronger order activity and activity momentum building on the non-res and even on the residential side in North America. Mining, you're starting to hear of some more projects on copper and gold. And then obviously they can't add capacity fast enough when it comes to power generation. They're going to be more than doubling their large engine capacity through the end of the decade. So that's more of a supply constraint as we look here, at least in the near term.

17:34Chris, so when you talk to institutional investors about your group, do people just buy the group, i.e. machinery, construction, and when the cycles are coming together and then sell them when they're not? Or do I have to be real bottoms up on individual companies? You know, it varies, and I think it is becoming a little bit more bottom up. Historically, for example, trucks, right? You'd always buy when truck orders were at their worst and bottoming. That's a short cycle business. You'd kind of pile into those names at that point in time. Ag is a little bit idiosyncratic in terms of how those cycles work and a little bit detached from your traditional economic cycles in that it's more driven by crop prices and farmer incomes.

18:16And then construction equipment, certainly a more cyclical GDP type play. But what you're seeing now is you're starting to see some divergence between those names that have the data center AI exposure like the Caterpillars and the Cummins of the world. And those have really outperformed over the last 12 months because of their exposure where a lot of the other machinery names just aren't as levered to the data center play. How exposed is Caterpillar to tariffs? I mean, there are some tariffs in place and there's, on a daily basis, threats of new tariffs being put in place. Yeah, if you want to pick apart one negative in the quarter, it was the tariffs.

18:55They did come in a little bit higher than we expected, and it continues to weigh on margins, particularly in the construction and mining businesses. Tariffs in aggregate were roughly $1.7 billion headwind in 2025. That's going to step up in 2026 to about$2.6 billion. We've really seen Caterpillar kind of hesitant to push price to start to offset these. I think that's really been a concerted effort to try to gain market share, particularly as we are in a softer part in the cycle. I think pricing is going to become much more of a contributor as we look into 26. Right now, they're guiding to about a 2 % contribution on the pricing side.

19:33But I won't be surprised to see that go a little bit higher, particularly as some of their end markets start to recover.

19:42Those front loaders, dump trucks, all that kind of stuff. Where do they actually manufacture this stuff? All over the world, right? They are the largest equipment producer globally. They have a pretty extensive manufacturing footprint here in North America, but it is a very global business. And they certainly have a market leadership position in most of the products that they sell. I know we'd like to look at Caterpillar as kind of this barometer for global GDP because it's so exposed to all over the world. Did the company say anything in regards of what it is anticipating for growth for this year, like hotspots and maybe slower parts of the world?

20:20Yeah, so they put out back in November at their analyst day, a five to seven percent revenue CAGR target through the end of the decade. They're kind of guiding us to 26 being kind of towards the top end of that range. So think, you know, 7 % plus type growth. We actually think that might end up being a little conservative, just given the strength that we're seeing in the order book, just given that the backlog continues to sit at a record level. So we have really extended production visibility here for 2026. So I actually think that outlook could be a little bit conservative, particularly as we continue to see a lot of their end markets come off the trough.

20:57This 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.